10-K 1 FORM 10-K 1 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required). For the fiscal year ended December 31, 1994. Commission file number 1-10706 Comerica Incorporated Comerica Tower at Detroit Center 500 Woodward Avenue, Detroit, Michigan 48226 313-222-4000 Incorporated in the State of Delaware, IRS Employer Identification No. 38-1998421. Securities registered pursuant to Section 12(b) of the Act: - Common Stock, $5 par value - Rights to acquire Series C Preferred Stock, no par value These securities are registered on the New York Stock Exchange. Securities registered pursuant to Section 12(g) of the Act: - 10.125 percent Subordinated Debentures due in 1998 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. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, but will be contained in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. At February 13, 1995, the registrant's common stock, $5 par value, held by nonaffiliates had an aggregate market value of $3,025,547,004 based on the closing price on the New York Stock Exchange on that date of $27.375 per share and 110,522,265 shares of common stock held by nonaffiliates. For purposes of this Form 10-K only, it has been assumed that all common shares held by the Trust Department of Comerica affiliated banks and by the registrant's directors and executive officers are held by affiliates. At February 13, 1995, the registrant had outstanding (exclusive of treasury shares) 116,773,798 shares of its common stock, $5 par value. DOCUMENTS INCORPORATED BY REFERENCE: 1. PARTS I AND II: Items 1-8--Annual Report to Shareholders for the year ended December 31, 1994. Item 9--Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1995. 2. PART III: Items 10-13--Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 1995. 2 PART I ITEM 1. BUSINESS GENERAL Comerica Incorporated ("Comerica" or the "Corporation") is a registered bank holding company incorporated under the laws of the State of Delaware, headquartered in Detroit, Michigan, and was formed in 1973 to acquire the outstanding common stock of Comerica Bank (formerly Comerica Bank-Detroit), a Michigan banking corporation ("Comerica Bank"). As of December 31, 1994, Comerica owned directly or indirectly all the outstanding common stock (except for directors' qualifying shares, where applicable) of seven banking and forty-nine non-banking subsidiaries. At December 31, 1994, Comerica had total assets of approximately $33.4 billion, total deposits of approximately $22.4 billion, total loans (net of unearned income) of approximately $22.2 billion, and shareholders' equity of approximately $2.4 billion. At December 31, 1994, Comerica was the second largest bank holding company headquartered in Michigan in terms of both total assets and total deposits. BUSINESS STRATEGY Comerica's business strategy focuses on five core businesses in four geographic markets. Those businesses are corporate banking, consumer banking, private banking, institutional trust and investment management, and international finance and trade services. Corporate banking incorporates highly specialized units servicing a full range of company sizes with both credit and non-credit products. Consumer banking provides deposit, credit and fee-based products to individuals needing financial services but whose income or wealth do not make them prospects for private banking services. Private banking is oriented to servicing the financial needs of the affluent market as defined by individual net income or wealth. Institutional trust and investment management activities involve providing companies, municipalities and other entities a wide spectrum of investment management products and trust products such as master trust, master custody, and corporate trust services, as well as administering and serving as trustee for employee benefit plans. International finance and trade services offer importers and exporters trade financing, letters of credit, 1 3 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES foreign exchange and international customhouse brokerage and freight forwarding products. The core businesses are tailored to each of Comerica's four primary geographic markets: the Midwest (currently Michigan and Illinois), Texas, California and Florida. The Midwest is the only market in which all five core businesses are currently pursued. In California and Texas the primary focus is on corporate banking and private banking activities. In Florida the primary focus is on private banking. ACQUISITIONS AND JOINT VENTURE On September 8, 1993, Comerica, Pacific Western Bancshares, Inc., a Delaware Corporation and bank holding company ("PAC WEST"), Pacific Western Bank, a California state chartered bank and wholly owned subsidiary of PAC WEST ("PWB"), and Comerica California Incorporated, a California corporation, bank holding company and wholly owned subsidiary of the Corporation ("COM CAL"), entered into an Agreement and Plan of Reorganization and Merger providing for, among other things, the merger of COM CAL into PAC WEST with PAC WEST being the surviving corporation under the charter and bylaws of COM CAL and the name "Comerica California Incorporated." The merger of COM CAL into PAC WEST was completed on March 30, 1994 and was accounted for as a purchase. PAC WEST shareholders received common stock of the Corporation valued at approximately $121 million. At December 31, 1993, PAC WEST had assets of approximately $1 billion. PWB merged into Comerica Bank-California on June 30, 1994. On April 4, 1994, Comerica, Michigan National Corporation, a Michigan corporation and a bank holding company ("MNC"), Lockwood Banc Group, Inc., a Michigan corporation, wholly owned subsidiary of MNC and a registered bank holding company ("Lockwood") and Lockwood National Bank of Houston, a national banking association and wholly owned subsidiary of Lockwood ("LNB") entered into a Stock Purchase Agreement whereby Comerica purchased from MNC all of the issued and outstanding stock of Lockwood and LNB. The purchase was completed on August 4, 1994 for a purchase price of approximately $44 million in cash. At June 30, 1994, Lockwood had assets of approximately $318 million. Comerica contributed the stock of LNB to Comerica Texas Incorporated its wholly owned bank holding company in Texas. LNB merged into Comerica Bank-Texas on December 16, 1994. On October 4, 1994, Comerica, University Bank & Trust Company, a California bank ("UBT") and Comerica Interim Incorporated, a California corporation and wholly owned subsidiary of Comerica ("Interim") entered into an Agreement and Plan of Reorganization and Merger providing for, among other things, the merger of UBT into Interim with UBT being the surviving corporation. Subsequent to the merger of UBT into Interim, UBT may, at the Corporation's election, be merged into a subsidiary of the Corporation. UBT shareholders will receive approximately 2.7 million shares of Comerica common stock. The transaction is subject to regulatory approval and is expected to be completed in the spring of 1995. As of December 31, 1994, UBT had total assets of approximately $460 million. On November, 2, 1994, Comerica and Munder Capital Management, Inc., a Delaware corporation and registered investment adviser located in the Detroit, Michigan metropolitan area ("Munder"), entered into a Joint Venture Agreement providing for the combination of the investment advisory businesses of Munder and two investment advisory subsidiaries of Comerica: Woodbridge Capital Management, Inc. ("Woodbridge") and World Asset Management, Inc. ("World"). As of December 31, 1994, the joint venture became effective with the formation of a partnership, Munder Capital Management, that succeeded to the investment advisory businesses of Munder, Woodbridge, and World. Munder now holds a majority interest in Munder Capital Management, and Comerica holds a minority interest. SUPERVISION AND REGULATION Banks, bank holding companies and financial institutions are highly regulated at both the state and federal level. As a bank holding company, Comerica is subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "Act"). Under the Act, the Corporation is prohibited, with certain exceptions, from acquiring or retaining direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging in activities other than those of banking or of managing or controlling banks, other than subsidiary companies and activities which the Federal Reserve Board determines to be so closely related to the business of banking as to be a proper incident thereto. Comerica Bank is chartered by the State of Michigan and is supervised and regulated by the Financial Institutions Bureau of the State of Michigan. Comerica Bank-Texas is chartered by the State of Texas and is supervised and regulated by the Texas Department of Banking. Comerica Bank-Midwest, N.A. and Comerica Bank-Ann Arbor, N.A. are chartered under federal law and subject to supervision and regulation by the Office of the Comptroller of the Currency. Comerica Bank-California is chartered and regulated by the State of California. Comerica Bank & Trust, FSB is chartered under federal law and subject to supervision and regulation by the Office of Thrift Supervision. Comerica Bank-Illinois is chartered by the State of Illinois and is regulated by the State of Illinois Commissioner of Banks and Trust Companies. Comerica Bank, Comerica Bank-Illinois, Comerica 2 4 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES Bank-Midwest, N.A. and Comerica Bank-Ann Arbor, N.A. are members of the Federal Reserve System. State member banks are also regulated by the Federal Reserve Bank and state non-member banks are also regulated by the Federal Deposit Insurance Corporation. The deposits of all the banks, except for Comerica Bank & Trust, FSB, are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation to the extent provided by law. The deposits of Comerica Bank & Trust, FSB, are insured by the Savings Association Insurance Fund to the extent provided by law. Comerica is a legal entity separate and distinct from its banking and other subsidiaries. Most of Comerica's revenues result from dividends paid to it by its bank subsidiaries. There are statutory and regulatory requirements applicable to the payment of dividends by subsidiary banks to Comerica as well as by Comerica to its shareholders. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the Riegle/Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was signed into law. This Interstate Act effectively permits nationwide banking. The Interstate Act provides that one year after enactment, adequately capitalized and adequately managed bank holding companies may acquire banks in any state, even in those jurisdictions that currently bar acquisitions by out-of-state institutions, subject to deposit concentration limits. The deposit concentration limits provide that regulatory approval by the Federal Reserve Board may not be granted for a proposed interstate acquisition if after the acquisition, the acquiror on a consolidated basis would control more than 10 percent of the total deposits nationwide or would control more than 30 percent of deposits in the state where the acquiring institution is located. The deposit concentration state limit does not apply for initial acquisitions in a state and in every case, may be waived by the state regulatory authority. Interstate acquisitions are subject to compliance with the Community Reinvestment Act ("CRA"). States are permitted to impose age requirements not to exceed five years on target banks for interstate acquisitions. States are not allowed to opt-out of interstate banking. Branching between states may be accomplished either by merging separate banks located in different states into one legal entity, or by establishing de novo branches in another state. Consolidation of banks is not permitted until June 1, 1997 provided that the state has not passed legislation "opting-out" of interstate branching. If a state opts-out prior to June 1, 1997, then banks located in that state may not participate in interstate branching. Interstate branching is also subject to a 30 percent statewide deposit concentration limit on a consolidated basis, and a 10 percent nationwide deposit concentration limit. The laws of the host state regarding community reinvestment, fair lending, consumer protection (including usury limits) and establishment of branches shall apply to the interstate branches. De novo branching by an out-of-state bank is not permitted unless the host state expressly permits de novo branching by banks from out-of-state. The establishment of an initial de novo branch in a state is subject to the same conditions as apply to initial acquisition of a bank in the host state other than the deposit concentration limits. Effective one year after enactment, the Interstate Act permits bank subsidiaries of a bank holding company to act as agents for affiliated depository institutions in receiving deposits, renewing time deposits, closing loans, servicing loans and receiving payments on loans and other obligations. A bank acting as agent for an affiliate shall not be considered a branch of the affiliate. Any agency relationship between affiliates must be on terms that are consistent with safe and sound banking practices. The authority for an agency relationship for receiving deposits includes the taking of deposits for an existing account but is not meant to include the opening or origination of new deposit accounts. Subject to certain conditions, insured saving associations which were affiliated with banks as of June 1, 1994, may act as agents for such banks. An affiliate bank or saving association may not conduct any activity as an agent which such institution is prohibited from conducting as principal. If an interstate bank decides to close a branch located in a low- or moderate-income area, it must comply with additional branch closing notice requirements. The appropriate regulatory agency is authorized to consult with community organizations to explore options to maintain banking services in the affected community where the branch is to be closed. To ensure that interstate branching does not result in taking deposits without regard to a community's credit needs, the regulatory agencies are directed to implement regulations prohibiting interstate branches from being used as "deposit production offices." The regulations to implement its provisions are due by June 1, 1997. The regulations must include a provision to the effect that if loans made by an interstate branch are less than fifty percent of the average of all depository institutions in the state, then the regulator must review the loan portfolio of the branch. If the regulator determines that the branch is not meeting the credit needs of the community, it has the authority to close the branch and to prohibit the bank from opening new branches in that state. 3 5 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES When the interstate banking provisions become effective in one year, Comerica will have enhanced opportunities to acquire banks in any state subject to approval by the appropriate federal and state regulatory agencies. When the interstate branching provisions become effective in June 1997, Comerica will have the opportunity to consolidate its affiliate banks to create one legal entity with branches in more than one state should management decide to do so, or to establish branches in different states, subject to any state opt-out provisions. The agency authority permitting Comerica affiliate banks to act as agents for each other in accepting deposits or servicing loans should make it more convenient for customers of one Comerica bank to transact their banking business at a Comerica affiliate in another state provided that operations are in place to facilitate these out of state transactions. DIVIDENDS Each state bank subsidiary that is a member of the Federal Reserve System and each national banking association is required by federal law to obtain the prior approval of the Federal Reserve Board or the Office of the Comptroller of the Currency, as the case may be, for the declaration and payment of dividends if the total of all dividends declared by the board of directors of such bank in any year will exceed the total of (i) such bank's net profits (as defined and interpreted by regulation) for that year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). Under the foregoing dividend restrictions, at January 1, 1995 Comerica's subsidiary banks, without obtaining governmental approvals, could declare aggregate dividends of approximately $153 million from retained net profits of the preceding two years, plus an amount approximately equal to the net profits (as measured under current regulations), if any, earned for the period from January 1, 1995 through the date of declaration. Dividends paid to Comerica by its subsidiary banks amounted to $293 million in 1994 and $311 million in 1993. FIRREA Recent banking legislation, including the Financial Institutions Reform and Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), has broadened the regulatory powers of the federal bank regulatory agencies. Under FIRREA, a depository institution insured by the Federal Deposit Insurance Corporation (the "FDIC") can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. FDICIA In December 1991, FDICIA was enacted, substantially revising the bank regulatory and funding provisions of the Federal Deposit Insurance Act and making revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. Regulations establishing the specific capital tiers provide that, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10 percent, a Tier 1 risk-based capital ratio of at least 6 percent, a Tier 1 leverage ratio of at least 5 percent, and not be subject to any specific capital order or directive. For an institution to be adequately capitalized it must have a total risk-based capital ratio of at least 8 percent, a Tier 1 risk-based capital ratio of at least 4 percent, and a Tier 1 leverage ratio of at least 4 percent (and in some cases 3 percent). Under these regulations, the banking subsidiaries of Comerica would be considered to be well capitalized as of December 31, 1994. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are 4 6 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Under FDICIA, the FDIC is permitted to provide financial assistance to an insured bank before appointment of a conservator or receiver only if (i) such assistance would be the least costly method of meeting the FDIC's insurance obligations, (ii) grounds for appointment of a conservator or a receiver exist or are likely to exist, (iii) it is unlikely that the bank can meet all capital standards without assistance and (iv) the bank's management has been competent, has complied with applicable laws, regulations, rules and supervisory directives and has not engaged in any insider dealing, speculative practice or other abusive activity. FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and other standards as they deem appropriate. Because such standards have been proposed but not yet finalized, management is unable to assess their impact. FDICIA also contains a variety of other provisions that may affect the operations of depository institutions including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC. Under regulations relating to the brokered deposit prohibition, Comerica Bank is well capitalized and may accept brokered deposits without restriction. FDIC INSURANCE ASSESSMENTS Comerica's subsidiary banks are subject to FDIC deposit insurance assessments. On January 1, 1994, a permanent risk-based deposit premium assessment system became effective under which each depository institution is placed in one of nine assessment categories based on certain capital and supervisory measures. The assessment rates under the system range from 0.23 percent to 0.31 percent of domestic deposits depending upon the assessment category into which the insured institution is placed. Based on the current FDIC proposal, it is probable that such assessments will decrease in the future. Any decrease in assessments could have a positive impact on Comerica's results of operations. COMPETITION Banking is a highly competitive business. The Michigan banking subsidiary of the Corporation competes primarily with Detroit and outstate Michigan banks for loans, deposits and trust accounts. Through its offices in Arizona, California, Colorado, Florida, Indiana, Illinois, Ohio and Texas, Comerica competes with other financial institutions for various types of loans. Through its Florida subsidiary, Comerica competes with many companies, including financial institutions, for trust business. At year-end 1994, Comerica Incorporated was the second largest bank holding company located in Michigan in terms of total assets and deposits. Based on the Interstate Act as described above, the Corporation believes that the level of competition in all geographic markets will increase in the future. Comerica's banking subsidiaries also face competition from other financial intermediaries, including savings and loan associations, consumer finance companies, leasing companies and credit unions. EMPLOYEES As of December 31, 1994, Comerica and its subsidiaries had 11,239 full-time and 2,259 part-time employees. 5 7 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES ITEM 2. PROPERTIES The executive offices of the Corporation are located in the Comerica Tower at Detroit Center in Detroit, Michigan. Comerica and its subsidiaries occupies 15 floors of the building, which it leases through Comerica Bank from an unaffiliated third party. This lease extends through January 2007. As of December 31, 1994, Comerica Bank operated 310 offices within the State of Michigan, of which 228 were owned and 82 were leased. Seven other banking affiliates operate 146 offices in California, Florida, Illinois and Texas. The affiliates own 58 of their offices and lease 88 offices. One banking affiliate also operates from leased space in Toledo, Ohio. In addition, the Corporation owns an operations and check processing center in Livonia, Michigan, a ten-story building in the central business district of Detroit that houses certain departments of the Corporation and Comerica Bank, and a four-story building in Auburn Hills, Michigan, that houses a mortgage subsidiary of Comerica Bank and certain other departments of the Corporation and Comerica Bank. In 1983, Comerica entered into a sale/leaseback agreement with an unaffiliated party covering an operations center which was built in Auburn Hills, Michigan, and now is occupied by various departments of the Corporation and Comerica Bank. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Comerica Incorporated is traded on the New York Stock Exchange (NYSE Trading Symbol: CMA). At January 31, 1995, there were approximately 16,472 holders of the Corporation's common stock. Quarterly cash dividends were declared during 1994 and 1993 totaling $1.24 and $1.07 per common share per year, respectively. The following table sets forth, for the periods indicated, the high and low sale prices per share of the Corporation's common stock as reported on the NYSE Composite Transactions Tape for all quarters of 1994 and 1993. All of the prices are adjusted for the January 4, 1993 two-for-one stock split.
Dividend Dividend* Quarter High Low Per Share Yield 1994 Fourth $28.250 $24.125 $.32 4.9% Third 31.250 27.750 .32 4.3 Second 30.875 25.125 .32 4.6 First 28.250 25.250 .28 4.2 1993 Fourth $29.000 $25.125 $.28 4.1% Third 31.500 26.875 .28 3.8 Second 35.250 27.625 .26 3.3 First 33.375 28.750 .26 3.3
* Dividend yield is calculated by annualizing the quarterly dividend per share and dividing by an average of the high and low price in the quarter. 6 8 FORM 10-K CROSS-REFERENCE INDEX: COMERICA INCORPORATED AND SUBSIDIARIES Certain information required to be included in Form 10-K is also included in the 1994 Annual Report to Shareholders or in the 1995 Proxy Statement used in connection with the 1995 annual meeting of shareholders to be held on May 19, 1995. The following cross-reference index shows the page location in the 1994 Annual Report or the section of the 1995 Proxy Statement of only that information which is to be incorporated by referenced into Form 10-K. All other sections of the 1994 Annual Report or the 1995 Proxy Statement are not required in Form 10-K and should not be considered a part thereof.
1995 1994 Proxy Annual Statement Report Section -------------------------------------------------------------------------------------------------------------------- PART I ITEM 1. Business........................................................................................... 61 ITEM 2. Properties...............................................................,......................... 66 ITEM 3. Legal Proceedings.................................................................................. 52 ITEM 4. Submission of Matters to a Vote of Security Holders--no matters were voted upon by security holders in the fourth quarter of 1994 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 66 ITEM 6. Selected Financial Data............................................................................ 18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 18 ITEM 8. Financial Statements and Supplementary Data: Comerica Incorporated and Subsidiaries Consolidated Balance Sheets..................................................................... 38 Consolidated Statements of Income............................................................... 39 Consolidated Statements of Changes in Shareholders' Equity...................................... 40 Consolidated Statements of Cash Flows........................................................... 41 Notes to Consolidated Financial Statements......................................................... 42 Report of Independent Auditors..................................................................... 57 Statistical Disclosure by Bank Holding Companies: Analysis of Net Interest Income--FTE............................................................ 20 Rate-Volume Analysis--FTE....................................................................... 21 Analysis of Investment Securities Portfolio--FTE................................................ 28 Analysis of Investment Securities and Loans..................................................... 27 Allocation of The Allowance for Loan Losses..................................................... 28 Loan Maturities and Interest Rate Sensitivity................................................... 27 Summary of Nonperforming Assets and Past Due Loans.............................................. 31 Cross-border Outstandings....................................................................... 26 Analysis of The Allowance for Loan Losses....................................................... 23 Maturity Distribution of Domestic Certificates of Deposit of $100,000 and Over.................. 29 Historical Review--Statistical Data............................................................. 60 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure--none PART III ITEM 10. Directors and Executive Officers of the Registrant................. Election of Directors; Executive Officers; Compliance with section 16(A) of the Securities Exchange Act of 1934 ITEM 11. Executive Compensation............................................. Compensation of Executive Officers ITEM 12. Security Ownership of Certain Beneficial Owners and Management..... Identification of Certain Security Holders,Security Ownership of Management ITEM 13. Certain Relationships and Related Transactions.................... Transactions of Directors, and Executive Officers with the Corporation; Compensation Committee Interlocks and Insider Participation
7 9 FORM 10-K CROSS-REFERENCE INDEX: COMERICA INCORPORATED AND SUBSIDIARIES
PART IV 1994 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Annual Report ITEM 14. (a) The following documents are filed as a part of this report: 1. Financial Statements: The financial statements are filed as part of this report and are listed under Item 8 in the Form 10-K Cross-reference Index on page 67. 2. All of the schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instruction, the required information is contained elsewhere in the Form 10-K, or the schedules are inapplicable and therefore have been omitted. Exhibits: Exhibit Document* Number 3.1 Restated Certificate of Incorporation of Comerica Incorporated, as amended ****** 3.2 Amended and restated bylaws of Comerica Incorporated ****** 4.1 Rights Agreement between Comerica Incorporated and Comerica Bank** 4.2 Issuing and Paying Agency Agreement between Comerica Bank, as Issuer and Comerica Bank, as Agent 10.1 Comerica Incorporated Long-term Incentive Plan*** 10.2 Summary of Comerica Incorporated Annual Incentive Compensation Plan*** 10.3 Comerica Incorporated Plan for Deferring the Payment of Directors Fees*** 10.4 Benefit Equalization Plan for Employees of Comerica Incorporated 10.5 Comerica Incorporated's Directors Retirement Plan**** 10.6 Manufacturers National Corporation's 1987 and 1989 Stock Option Plans for Key Employees***** 10.7 Manufacturers National Corporation's Executive Incentive Plan**** 10.8 Manufacturers National Corporation's Key Employee Retention Plan**** 10.9 Form of Management Continuation Agreement between registrant and listed officers, October 1987*** 10.10 Form of Director Indemnification Agreement between Comerica Incorporated and its directors, dated April 1987***** 10.11 Employment Continuation Agreement with Eugene A. Miller**** 10.12 Comerica Incorporated Deferred Compensation Plan****** 11. Statement regarding Computation of Per Share Earnings .......................... 46 13. The required portions of the registrant's 1994 Annual Report to Shareholders 21. Subsidiaries of the Corporation 23. Consent of Ernst & Young LLP (b) No reports on Form 8-K were filed by the Corporation during the last quarter of 1994. Signatures ...................................................................................... 69
* This copy of the 1994 Annual Report and Form 10-K does not include any exhibits. Copies of the listed exhibits will be furnished to shareholders upon request. Requests should be directed to Comerica Incorporated, Corporate Secretary, 500 Woodward Avenue, Detroit, Michigan 48226-3391. ** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1987--Commission File Number 0-7269. *** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1991--Commission File Number 0-7269. **** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1992--Commission File Number 0-7269. ***** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1989--Commission File Number 0-7269. ****** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1993--Commission File Number 0-7269. 8 10 FORM 10-K: COMERICA INCORPORATED AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 and 15(d) 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 in the City of Detroit, State of Michigan on the 17th day of March, 1995. COMERICA INCORPORATED Eugene A. Miller Eugene A. Miller Chairman and Chief Executive Officer Paul H. Martzowka Paul H. Martzowka Executive Vice President and Chief Financial Officer Arthur W. Hermann Arthur W. Hermann Senior Vice President and Controller (Chief Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 17, 1995. BY DIRECTORS E. Paul Casey James F. Cordes J. Philip DiNapoli Max M. Fisher John D. Lewis Patricia Shontz Longe, Ph.D. Wayne B. Lyon Gerald V. MacDonald Eugene A. Miller Michael T. Monahan Alfred A. Piergallini Alan E. Schwartz Howard F. Sims 9 11 EXHIBIT INDEX
Exhibit Number Document ------- -------- 4.2 Issuing and Paying Agency Agreement 10.4 Benefit Equalization Plan for Employees of Comerica Incorporated 13 The required portions of the registrant's 1994 Annual Report to Shareholders 21 Subsidiaries of Comerica Incorporated 23 Consent of Ernst & Young, LLP 27 Financial Data Schedule
EX-4.2 2 EXHIBIT 4.2 1 EXHIBIT 4.2 ISSUING AND PAYING AGENCY AGREEMENT by and between COMERICA BANK, as Issuer and COMERICA BANK, as Agent Dated as of June 17, 1994 Relating to Medium-Term Bank Notes 2 ISSUING AND PAYING AGENCY AGREEMENT Issuing and Paying Agency Agreement dated as of June 17, 1994 (the "Agreement") by and between COMERICA BANK, a Michigan banking corporation (the "Issuer"), and COMERICA BANK, a Michigan banking corporation (together with its successors and assigns, the "Agent"). The Issuer intends to authorize and issue from time to time, Medium-Term Bank Notes in fully registered form in an aggregate principal amount at any one time of up to $4,000,000,000 (the "Notes") for which the Agent by this Agreement will be designated issuing, paying and calculation agent. The Issuer has appointed Kidder, Peabody & Co. Incorporated, CS First Boston Corporation, Salomon Brothers Inc, Lehman Brothers, Inc., and Morgan Stanley & Co. Incorporated, as the selling agents for the Notes (the "Selling Agents") pursuant to that certain Distribution Agreement dated of even date herewith between the Issuer and the Selling Agents (the "Distribution Agreement"). Now, therefore, in consideration of the mutual covenants contained herein, the Issuer and the Agent agree as follows: Section 1. Appointment of Agent. The Issuer hereby appoints the Agent to act, on the terms and conditions specified herein, as issuing and paying agent and calculation agent for the Notes and the Agent accepts such appointment subject to the terms of this Agreement. Section 2. Defined Terms. Capitalized terms defined in the forms of Fixed Rate Note and Floating Rate Note attached hereto as Exhibits A and B, respectively, and used without definitions in this Agreement shall have the respective meanings herein assigned therein. Section 3. Global Notes: The Depository Trust Company. Notwithstanding anything herein to the contrary, all Notes shall be represented by one or more global Notes registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), and beneficial ownership of such Notes will be represented and maintained in book-entry form on the books of DTC. Section 4. Note Form: Signature. The Issuer from time to time will furnish the Agent with an adequate supply of Notes to be used as global notes, which will have the Note number, principal amount, Maturity Date, Original Issue Date, Initial Redemption 3 Date and redemption prices and the information called for by clause (a) of Section 6 hereof left blank. The Agent shall furnish the Issuer with a receipt for the blank Notes so delivered. Each Note will be signed manually or by facsimile by an officer or officers of the Issuer duly authorized to sign the Notes and will be substantially in the form of Exhibit A or B attached hereto (as applicable). Notes shall have a maturity of between nine (9) months and fifteen (15) years from date of issue, and shall be issued in minimum denominations of $1,000,000 and larger denominations in integral multiples of $1,000. The Agent shall take reasonable steps to assure the safekeeping of the blank Notes. In addition, the Issuer will, from time to time, provide the Agent with an adequate supply of CUSIP numbers which will be assigned by the Issuer and the Agent to each global Note issued. Section 5. Administrative Procedures. The Agent hereby acknowledges receipt of a copy of the Administrative Procedures attached as Exhibit A to the Distribution Agreement (the "Administrative Procedures") and each of the Agent and the Issuer hereby agrees to abide by and perform the obligations specified for them in such Administrative Procedures as if they were set forth herein and made a part hereof and agree that, if the terms hereof shall conflict with the terms of the Administrative Procedures, the terms of the Administrative Procedures shall govern. Section 6. Completion, Authentication and Delivery of Notes. (a) The Agent shall receive instructions from an authorized representative listed on Exhibit C hereto of the Issuer offering Notes (which Exhibit may be amended from time to time by written notice from the Issuer) (each an "Authorized Representative") by written instructions via the telecopier regarding the completion and delivery of some or all of the Notes. Such instructions shall include the following information (the "Purchase Information") with respect to each Note and shall be provided no later than 11:00 a.m. on the trade date: (i) the name of the person in whose name a Note is to be registered (the "Registered Owner") which shall, until the amendment of this Agreement, be Cede & Co., as nominee of DTC; (ii) the taxpayer identification number of the Registered Owner; (iii) the principal amount; (iv) the Interest Payment Dates; (v) the Regular Record Dates; (vi) the Annual Redemption Percentage Reduction; (vii) the Holder's Optional Repayment Date(s); 2 4 (viii) the Maturity Date; (ix) the Original Issue Date and trade date; (x) if applicable, the Initial Redemption Date; (xi) the Annual Redemption Percentage Reduction; (xii) the Initial Redemption Percentage; (xiii) the Default Rate; (xiv) each Selling Agent's commission or, if the Notes are being purchased directly by a Selling Agent, original issue discount; (xv) the amount of the proceeds to be paid to the Issuer or its designee; (xvi) the Total Amount of OID, Yield to Maturity, Short Accrual Period OID, and Method Used to Determine Yield for Short Accrual Period; (xvii) delivery instructions; (xviii) the Selling Agent; (xix) the CUSIP number to be assigned to each Note; (xx) If the Note is a Fixed Rate Note, the Interest Rate; (xxi) If the Note is a Floating Rate Note, the following information: (A) the Interest Rate Basis; (B) the Initial Interest Rate; (C) the Spread and/or Spread Multiplier; (D) the Index Maturity; (E) the Interest Rate Reset Period; (F) the Interest Rate Reset Dates; (G) the Interest Payment Period; 3 5 (H) if applicable, the Maximum Interest Rate; and (I) if applicable, the Minimum Interest Rate; (J) the Alternate Rate Event Spread; (K) the Alternate Rate Spread; and (L) the Calculation Dates. (b) Upon the receipt of such instructions and the information set forth in subsection (a) above, the Agent will confirm by telephone to an Authorized Representative of the Issuer offering the Note (other than the Authorized Representative who sent the instructions by telecopier) the principal amount of the Notes to be so issued on the date specified in such notice and: (i) complete each Note as to the information called for by this Section 6; (ii) record each Note in the note register maintained by the Agent pursuant to Section 14 hereof (the "Note Register"); (iii) cause each Note to be manually authenticated by any one of the authorized signors of the Agent duly authorized for such purpose; and (iv) prior to 4:00 p.m. on the trade date, the Agent shall enter a Pending Deposit Message through DTC's Participant Terminal System in accordance with the Agent's agreement with DTC set forth in the Letter of Representations of even date herewith from the Issuer and the Agent to DTC (the "Letter of Representations"). (c) If any Note has been countersigned by one of the Agent's authorized signors who was duly authorized for such purposes at the time of execution but who is not so authorized at the time said Note is to be paid, the Agent is authorized to and will pay the Note notwithstanding that the authority of said authorized signors has been terminated. Section 7. Delivery of Global Notes. (a) By 10:00 a.m. on the Original Issue Date, DTC will credit any Notes to be issued to the Agent's participant account at DTC. The Agent will, by 2:00 p.m. on the Original Issue Date, enter a Same Day Funds Settlement ("SDFS") deliver order instructing DTC to debit the Agent's account and credit the Note to the Selling Agent, if a Selling Agent sold the Note and, if applicable, debit the Selling Agent's 4 6 settlement account for the amount of the principal of the Note less the Selling Agent's commission. The transfer of funds from the Selling Agent to the Agent (if applicable) will be done by 4:45 p.m. on the Original Issue Date in accordance with the SDFS procedures in effect on such date. (b) With respect to a Note (or portion thereof), if the Agent does not issue the SDFS deliver order described in the preceding sentence, or if for any reason the purchaser of such Note fails to pay the purchase price and the Selling Agent returns such Note to the Agent, the Agent may deliver a withdrawal message instructing DTC to debit such Note (or portion thereof) from the Agent's account. Following the processing of any withdrawal message by DTC, the Agent will adjust its records to reflect the cancellation of such Note (or portion thereof). Section 8. Proceeds of Sale of Notes. Proceeds received by a Selling Agent in payment for Notes shall be paid by such Selling Agent to the Issuer. The Agent shall have no liability whatsoever to any party if a Selling Agent fails to pay the Issuer of the Notes for such Notes in whole or in part, for any reason, unless such failure is caused by the failure of the Agent to comply with the Issuer's instructions as set forth in Section 6 and Section 7 above. Section 9. Payment of Interest. Interest payments on each Note will be made on the Interest Payment Dates provided for in such Note, and in each case, at maturity (together with principal). Notwithstanding the foregoing, if the Original Issue Date occurs either on an Interest Payment Date or between a Record Date and the next succeeding Interest Payment Date, the first payment of interest on any such Note will be made on the Interest Payment Date following the next succeeding Record Date. Interest with respect to Fixed Rate Bank Notes will begin to accrue on the Original Issue Date and will be calculated on the basis of a 360-day year of twelve 30-day months. Interest with respect to Floating Rate Bank Notes will begin to accrue on the Original Issue Date and will be calculated by the Agent in accordance with the provisions set forth in the form of each such Note, for the applicable Interest Rate Basis specified on the face of each thereof, and this Agreement. Subject to the receipt of funds as provided in Section 13 hereof, all interest payments on any Note will made by wire transfer to such account as has been appropriately designated to the Agent by the holder entitled to such payments. Section 10. Payment of Principal. Subject to receipt of funds as provided in Section 13 hereof, the Agent shall pay the principal amount together with accrued interest on any Note upon maturity, repayment or redemption ("Final Payout"). Upon maturity of any Note, the Agent shall make a Final Payout upon presentation and surrender to the Agent of the appropriate Note by the registered holder. If the registered holder elects to have any Note repaid, the Agent shall make a Final Payout upon presentation and surrender to the Agent of the appropriate Note by the registered holder, along with a completed Option to Elect Repayment. Finally, if an Issuer elects to redeem any Note, the Agent shall make a Final Payout to the registered holder if the Issuer provides written notice of 5 7 redemption to the Agent. Principal and interest due on a Note at Maturity or upon repayment or redemption will be paid in immediately available funds against presentation and surrender of the Note by the registered holder at the office of the Agent at Comerica Bank, 411 West Lafayette, 4th Floor, Detroit, Michigan 48226, Attn: Corporate Trust Department. The Agent will mark the Note "CANCELED" and remit it directly to the Issuer. Section 11. Information Regarding Amounts Due. Promptly following each Record Date, the Agent will furnish the Issuer a list of interest payments to be made on the following Interest Payment Date for each Note and in total. The Agent will provide to the Issuer by the fifteenth day of each month a list of the principal and interest to be paid on Notes maturing in the next succeeding month. Section 12. Calculation of Interest: Reference Banks and Dealers: Other Information Regarding the Notes. (a) The Agent shall, in its capacity as calculation agent (the "Calculation Agent"), calculate, on or prior to each Calculation Date, the Interest Rate applicable to each Floating Rate Note, and promptly cause to be forwarded to the Issuer the following information (as appropriate) regarding the Interest Rate so calculated for such Floating Rate Note: (i) Interest Rate Basis; (ii) Spread and/or Spread Multiplier; (iii) the existing Interest Rate; (iv) Index Maturity; (v) the Interest Reset Date on which the new Interest Rate will take effect; (vi) the Interest Determination Date; and (vii) if applicable, the reference banks, commercial paper dealers or government securities dealers used in the calculations. All determinations of Interest Rates by the Calculation Agent shall, in the absence of manifest error, be conclusive for all purposes and binding on holders of the Notes. (b) At the request of the holder of any Floating Rate Note, the Calculation Agent shall provide to such holder, if determined, the Interest Rate then in effect for such Note, and, if determined, the Interest Rate which will become effective as of the next Interest Reset Date. 6 8 (c) The Issuer from time to time shall appoint reference banks, commercial paper dealers or government securities dealers as required by Floating Rate Notes and the Issuer shall notify the Calculation Agent as to the reference banks, commercial paper dealers or government securities dealers so appointed. The Calculation Agent shall not be responsible to the Issuer or any third party for any failure of any reference bank, commercial paper dealer or government securities or as a result of the Calculation Agent having acted (except in the event of gross negligence, wilful misconduct or bad faith) on any quotation or other information given by any reference bank, commercial paper dealer or government securities dealer. (d) The Agent shall provide to the Issuer reports, semiannually, with respect to Note issuances and outstandings. The Agent shall use reasonable efforts to provide its customary reports upon request by the Issuer and to the extent that such reports are available. Section 13. Deposit of Funds. The Issuer shall, by 9:30 a.m. on each Interest Payment Date, pay to the Agent an amount in immediately available funds sufficient to pay all interest due on the Notes on such Interest Payment Date and shall, by 9:30 a.m. on each Maturity Date, or date fixed for redemption or repayment, of any Note, pay to the Agent an amount in immediately available funds sufficient to pay the principal of any Note maturing or being redeemed or repaid on such date and interest accrued thereon to such Maturity Date or date of redemption or repayment. Section 14. Registration: Transfer. (a) The Agent shall maintain a note register (the "Note Register"), in which it shall register the names, addresses and taxpayer identification numbers of the holders of the Notes and shall register the transfer of Notes. The Agent, upon request, shall permit the Issuer to inspect the Note Register during the Agent's normal business hours. (b) Transfers of book-entry Note(s) will be accomplished by book entries made by DTC and, in turn, by participants acting on behalf of beneficial transferrers and transferees of such Note(s). (c) Exchanges of global Notes will be made by the Agent, from time to time, to consolidate any outstanding global Notes with terms which are identical except for the Original Issue Date and the initial CUSIP number assigned to such Notes. Any such exchanges will be made upon at least 30 days notice to DTC and the CUSIP Service Bureau. On the specified exchange date, the Agent will exchange the similar global Notes for a new global Note and adjust its records to reflect such exchanges. 7 9 (d) In connection with any registration or transfer of Notes, the Issuer and the Agent may require payment of a sum sufficient to cover any applicable tax or other governmental charge. Section 15. Persons Deemed Owners. Prior to due presentment of a Note for registration or transfer, the Issuer, the Agent and any agent of the Issuer or the Agent may treat the person in whose name such Note is registered as the absolute owner of such Note for the purpose of receiving payments of principal and interest, if any, on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer nor the Agent shall be affected by notice to the contrary. Section 16. Mutilated, Lost, Stolen or Destroyed Notes. ln case any Note shall become mutilated or destroyed, lost or stolen, the Issuer in its discretion may execute and upon its request the Agent shall authenticate and deliver a new Note of like tenor and principal amount having a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of and substitution for the Note destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Issuer and to the Agent such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and to the Agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Agent may authenticate any such substituted Note and deliver the same upon the written request or authorization of an officer of the Issuer. Upon the issuance of any substituted Note, the Issuer may require the holder thereof to pay a sum sufficient to cover any expense connected therewith. In case any Note which has matured or has been redeemed or is within thirty days of maturity or redemption shall become mutilated or be destroyed, lost or stolen, the Issuer may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) if the applicant for such payment shall furnish the Issuer and the Agent with such security or indemnity as may be required by them to save each of them harmless, and, in the case of destruction, loss or theft, evidence to the satisfaction of the Issuer of the destruction, loss or theft of such Note and of the ownership thereof. All applications under this Section shall be processed by the Agent. Section 17. Return of Unclaimed Funds. Any money deposited with the Agent and remaining unclaimed for two years after the date upon which the last payment of principal or interest on any Note to which such deposit relates shall have become due and payable, upon the request of the Issuer, shall be repaid to the Issuer by the Agent, and the holder of any Note entitled to receive payment thereof shall thereafter look only to the Issuer for the payment thereof and all liability of the Agent with respect to such money shall thereupon cease. The substance of the provisions of this Section 17 shall be set forth in the text of each Note, as applicable. Section 18. Cancellation of Unissued Discharge. Upon the written request of the Issuer, the Agent shall cancel and return to the Issuer all unissued Notes in its 8 10 possession at the time of such request. Section 19. Reliance on Instructions. The Agent shall not incur any liability to the Issuer in acting hereunder on instructions from an Authorized Representative of the Issuer contemplated hereby which the Agent believed in good faith to have been properly given. Section 20. Information Furnished by the Agent. Upon the reasonable request of the Issuer, given in writing at any time and from time to time, the Agent shall promptly provide the Issuer with information with respect to Notes issued hereunder to the extent such information is reasonably available. Section 21. Compensation. Expenses and Indemnification. The Agent shall be entitled to reasonable compensation for its services pursuant to its current fee schedule, and to reimbursement for any expenses reasonably incurred. The Issuer shall be entitled to notice of any change in Agent's fee schedule. Section 22. Miscellaneous. 22.1 Term of Agreement. (a) This Agreement will automatically terminate upon the final maturity of the Notes issued hereunder, and may be terminated by either party upon giving thirty (30) days written notice to the other parties. (b) Notwithstanding any provision to the contrary, upon termination of this Agreement, all obligations of the Agent hereunder shall cease and any funds held by the Agent for payment hereunder shall be returned to the Issuer. 22.2 Communications. All communications delivered under this Agreement shall be in writing (including telex, telecopy or similar writing), unless otherwise provided, and shall be delivered to such party as set forth below: If addressed to the Issuer: Comerica Bank 500 Woodward Avenue Detroit, Michigan 48226 Attention: Robert C. Shrosbree Telephone Number: (313) 222-9350 Telecopier Number: (313) 222-9480 If addressed to the Agent: 9 11 Comerica Bank 411 W. Lafayette 4th Floor Detroit, MI 48226 Attention: Corporate Trust Department Telephone Number: (313) 222-4380 Telecopier Number: (313) 222-2985 or such other address, telecopier or telephone number as such party may hereafter specify for such purposes. Each notice will be effective when received at the address above. 22.3 Entire Agreement. This Agreement contains the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or implied, between the parties relating to the subject matter hereof, except for agreements relating to compensation of the Agent. 22.4 Benefits. Nothing herein, express or implied, shall give any person, other than the Issuer, the Agent, and their respective successors and assigns, any benefit of any legal or equitable right, remedy or claim hereunder. 22.5 Amendment: Waiver. This Agreement may be amended at any time by the mutual consent of the parties. 22.6 Successors and Assigns. Subject to Section 22.1 hereof, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and assigns of each of the Issuer and the Agent. 22.7 Severability. If any clause, provision or section hereof shall be ruled invalid or unenforceable by any court of competent jurisdiction, the invalidity or unenforceability of such clause, provision or section shall not affect any of the remaining clauses, provisions or sections hereof. 22.8 Execution in Counterparts. This Agreement may be executed in counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 22.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. 22.10 Signature by Telecopier. Counterpart copies of this Agreement may be signed by all parties and exchanged by telecopier. Counterpart copies so signed and exchanged shall be fully binding. Counterpart originals of this Agreement may concurrently 10 12 be manually signed by all parties and shall be exchanged by U.S. Mail or express service at the earliest possible date. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. ISSUER Attest: COMERICA BANK /s/ ROBERT C. SHROSBREE /s/ PAUL H. MARTZOWKA _________________________________ By:_______________________________ EXECUTIVE VICE PRESIDENT AND CHEIF FINANCIAL OFFICER Its:______________________________ AGENT Attest: COMERICA BANK /s/ ROBERT C. SHROSBREE /s/ M. KARAN ________________________________ By:_____________________________ VICE PRESIDENT Its:____________________________ 11 13 EXHIBIT C 1) Ronald Marks 2) Mike Cameron 3) Paul Martzowka 4) Mike Michalak 5) Any of the officers or employees designated by the above referenced officers. 12 EX-10.4 3 EXHIBIT 10.4 1 Exhibit 10.4 BENEFIT EQUALIZATION PLAN FOR EMPLOYEES OF COMERICA INCORPORATED PREAMBLE Comerica Incorporated maintains the Comerica Incorporated Retirement Plan and Manufacturers National Corporation formerly maintained the Manufacturers National Corporation Pension Plan. In June of 1992, Manufacturers National Corporation merged into Comerica Incorporated. Effective as of December 31, 1993, the Manufacturers National Corporation Pension Plan was merged into the Comerica Incorporated Retirement Plan. Effective as of October 28, 1980, Comerica Incorporated established the "Comerica Incorporated Nonqualified Retirement Income Guarantee Plan", the purpose of which is to restore benefits not available to participants of the Comerica Incorporated Retirement Plan due to tax law limitations. Manufacturers National Corporation established the "Benefit Equalization Plan For Employees of Manufacturers National Corporation" effective as of January 1, 1983 in order to restore benefits not available to participants of the Manufacturers National Corporation Pension Plan due to tax law limitations. Due to the merger of the Manufacturers National Corporation Pension Plan into the Comerica Incorporated Retirement Plan the raison d'etre for the Benefit Equalization Plan For Employees of Manufacturers National Corporation disappeared. As a consequence, the Board of Directors of Comerica Incorporated approved the merger -1- 2 of the Comerica Incorporated Nonqualified Retirement Income Guarantee Plan into the Benefit Equalization Plan For Employees of Manufacturers National Corporation, the renaming of the latter plan as the Benefit Equalization Plan For Employees of Comerica Incorporated and the amendment and restatement of such plan as renamed to provide as set forth herein. -2- 3 Section 1. Purpose and Effective Date. The sole purpose of this Plan is to assure that Participants who have a vested right to receive benefits under the Qualified Plan will receive the same value of benefits they would receive but for the limitations on contributions and benefits contained in ERISA and Sections 401(a)(17), 415 and 416 of the Code, and, also, but for the nonrecognition under the Qualified Plan of deferred incentive compensation under the Manufacturers Incentive Compensation Plans. This Plan is not intended to and shall not be construed so as to provide any Participant receiving benefits under the Qualified Plan, and where applicable, this Plan, with benefits which, in the aggregate, either have a greater or lesser value than the benefit which would result from the calculation made under the applicable provisions of the Qualified Plan without giving effect to the benefit limitation provisions of ERISA and the Code and regulations promulgated thereunder, or the nonrecognition of compensation deferred under the Manufacturers Incentive Compensation Plans. The provisions of this restated Plan shall be effective as of December 31, 1993. -3- 4 Section 2. Definitions. The following words and phrases, wherever capitalized, shall have the following meanings respectively: A. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. B. "Company" means Comerica Incorporated, a Delaware corporation. C. "ERISA" means the Employee Retirement Income Security Act of 1974 (Public Law 93-406), as from time to time amended. D. "Manufacturers Incentive Compensation Plans" means the following plans: (i) the Manufacturers National Corporation Executive Incentive Plan; (ii) the Manufacturers National Corporation Trust Investment Incentive Plan; (iii) the Manufacturers National Corporation Institutional Trust Sales and Servicing Plans; (iv) the Manufacturers National Corporation Private Banking Sales and Servicing Plans; (v) the Manufacturers National Corporation incentive plans for: Foreign Exchange Trading, Mergers and Acquisitions, and Commercial Mortgage Banking Services; and (vi) any similar incentive compensation plans formerly maintained by Manufacturers National Corporation for employees of its business units as determined by the Company's Employee Benefits Committee. E. "Participant" means an individual who at the time in question is participating in the Plan pursuant to Section 3. -4- 5 F. "Plan" means the plan set forth herein which is to be known as the "Benefit Equalization Plan For Employees of Comerica Incorporated." G. "Qualified Plan" means the Comerica Incorporated Retirement Plan (1994 Amendment and Restatement). -5- 6 Section 3. Eligibility and Participation. Any participant of the Qualified Plan whose benefits thereunder are limited by the provisions of Sections 401(a)(17), 415 and/or 416 of the Code or by the nonrecognition under the Qualified Plan of compensation deferred under any of the Manufacturers Incentive Compensation Plans shall automatically participate in and accrue benefits under this Plan. -6- 7 Section 4. Amount of Benefits. The benefits payable under this Plan shall equal the excess, if any, of: (a) the benefits which would have been paid to such Participant for his or her life only at normal retirement under the Qualified Plan if the provisions of such plan were administered and benefits paid without regard to the special benefit limitations added to such plan to conform it to Sections 401(a)(17), 415 and 416 of the Code, and including in the benefit calculation compensation of the Participant which was deferred under the Manufacturers Incentive Compensation Plans and which is not otherwise recognized under the Qualified Plan, over (b) the benefits which would be payable to such Participant for his or her life only at normal retirement under the Qualified Plan; such excess then to be converted to its actuarial equivalent (as that term is defined in the Qualified Plan) to account for (i) the benefit commencement date of the benefit under this Plan, using the early retirement pension reduction factors set forth in the Qualified Plan, and (ii) the payment method determined pursuant to the following paragraph and computed in each case on the assumption that the assets in the Qualified Plan are sufficient to pay all vested benefits. (If the benefit commencement date under this Plan is earlier than the earliest date upon which benefits are payable to such Participant under the Qualified Plan, then such excess -7- 8 shall be further reduced by 5/12 percent for each month or fraction thereof from the commencement of the benefit under this Plan until the date on which such Participant would attain age 55.) Calculation of the amount of benefits under this Plan shall disregard the method of payment selected by the Participant under the Qualified Plan. The method of payment under this Plan shall be in the form of a 50% joint and survivor annuity with the Participant's spouse as the joint annuitant. The benefit under this Plan shall be calculated using the age of the joint annuitant (if any) at the date benefits commence under this Plan. If the Participant has no spouse, then the benefit under this Plan shall be paid in the form of an annuity for the life of the Participant. Nothing herein shall restrict the right of the Company to amend the Qualified Plan and the computations under this section shall be made according to the terms of the Qualified Plan in effect at the time the benefits first become payable. -8- 9 Section 5. Payment of Benefits and Establishment of Trust. A. Payment of benefits under this Plan shall commence on the first day of the month next succeeding the day on which the Participant terminates employment with the Company. B. The Company may establish a Trust to be entitled "Trust for the Benefit Equalization Plan for Employees of Comerica Incorporated" with Comerica Bank of Detroit, Michigan as Trustee. If the Company establishes a Trust, the Company intends, but is not obligated to, fund the Trust with an amount which, on the same actuarial basis employed with respect to the funding of the Qualified Plan, is expected to provide funds equal to the sum of the expected benefits under this Plan. The Company shall augment the funds in the Trust from time to time as required. The assets of the Trust shall at all times be subject to levy by the Company's general creditors and Participants of this Plan shall have no greater right to the Trust assets than other unsecured general creditors of the Company. -9- 10 Section 6. Rights of Employees. A. Except to the extent provided in Section 7 below, no employee or spouse or beneficiary of an employee shall at any time have any vested rights to receive the benefits provided by this Plan. B. No right or interest of any Participant in the Plan shall be assignable or transferable, otherwise than by will or the laws of descent or pursuant to a beneficiary designation, nor shall such right or interest be subject to any lien directly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge and bankruptcy. -10- 11 Section 7. Amendment and Discontinuance. The Company expects to continue this Plan indefinitely, but reserves the right to amend or discontinue it if, in its sole judgment, such an amendment or discontinuance is deemed necessary or desirable. In the event the Company does amend or discontinue this Plan, the Company shall be liable for any benefits that shall have accrued under this Plan to those persons who are eligible under Section 3 as of the date of such amendment or discontinuance, such accrued benefits to be determined as though the employee had terminated employment at the date of such amendment or discontinuance. -11- 12 Section 8. Administration. A. This Plan shall be administered by the Employee Benefits Committee of the Company as an unfunded plan which is not intended to meet the qualification requirements of Section 401 of the Code. The Committee shall have full power to construe and interpret the Plan, and the Committee's decisions in all matters involving the interpretation and application of this Plan shall be conclusive. The claims procedure of the Qualified Plan shall apply to this Plan. B. The Plan shall at all times be maintained by the Company and administered by the Committee as a plan wholly separate from the Qualified Plan. -12- 13 Section 9. Additional Benefit. In addition to the purpose of Section 1 of this Plan, this Section shall, for individuals who are (or may be later) specifically named by resolution of the Board of Directors of the Company, increase the benefit determined under Section 4(a) of this Plan by including in the benefit calculation all of the individual's service with the Company (and its predecessors) from the date of the individual's initial participation in the Qualified Plan until the individual's retirement date and disregarding any breaks in service occurring before January 1, 1990; provided, however, that each named individual shall be entitled to an additional benefit derived from this Section only if the individual's employment with the Company continues until or after the date he or she attains age 62. Each individual who is specifically named by resolution of the Board of Directors to be entitled to the benefit established by this Section shall receive such benefits upon the condition that during the period such individual is entitled to payments of deferred compensation under this Section, he will not directly or indirectly enter into or engage in any banking or related businesses in the geographic area served by the Company either as an individual on his own account, as a partner or joint venturer, as an employe or agent, or as an officer or director of a competing organization. The Compensation Committee of the Board of Directors of the Company may, in its sole discretion and by way of a resolution of -13- 14 the Committee, waive or modify the age 62 employment requirement and the noncompetition requirement for any named individual as well as any other restrictions imposed on the individuals by the provisions hereof. Any additional benefit derived from this Section shall be treated as a benefit payable under Section 4 for the purpose of Sections 4, 5, 6, and 7 of this Plan. -14- EX-13 4 EXHIBIT 13 1 EXHIBIT 13 SUBSIDIARY DATA: COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31 California* Florida Illinois* Michigan Texas (dollar amounts in millions) 1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY Total interest income $ 121 $ 65 $ 10 $ 7 $ 113 $ 103 $ 1,658 $ 1,430 $ 222 $ 195 Total interest expense 32 13 4 2 39 35 742 547 65 54 Net interest income 89 52 6 5 74 68 916 883 157 141 Provision for loan losses 7 7 -- 1 4 5 35 53 8 4 Securities gains -- -- -- -- -- -- 3 2 -- -- Noninterest income (excluding securities gains) 17 6 8 8 11 11 460 383 42 43 Noninterest expenses 68 36 16 12 63 59 822 785 129 127 Provision for income taxes (credit) 14 6 (1) -- 3 3 149 131 20 16 Net income (loss) 17 9 (1) -- 15 12 373 299 42 37 YEAR-END BALANCES Total assets $1,975 $ 1,151 $ 159 $ 109 $ 1,502 $ 1,410 $27,005 $24,913 $ 3,454 $ 3,108 Total earning assets 1,705 1,031 143 97 1,373 1,307 25,129 23,093 3,004 2,813 Total loans 1,291 823 125 84 1,135 1,057 17,685 15,659 1,977 1,659 Allowance for loan losses 30 13 2 2 15 15 241 236 37 35 Total deposits 1,409 693 79 65 1,015 1,011 17,418 16,690 2,621 2,557 Total borrowings 308 348 64 29 319 244 7,738 6,397 492 238 Medium- and long-term debt -- -- -- -- 250 -- 3,697 1,309 2 2 Common shareholder's equity 234 104 15 13 159 151 1,652 1,626 324 298 DAILY AVERAGE BALANCES Total assets $1,796 $ 988 $ 137 $ 89 $ 1,459 $ 1,408 $25,455 $22,124 $ 3,227 $ 2,991 Total earning assets 1,555 900 126 79 1,345 1,297 23,825 20,501 2,870 2,677 Total loans 1,152 733 107 61 1,088 985 16,183 15,123 1,780 1,601 Total deposits 1,303 626 68 63 1,011 1,080 16,526 16,431 2,487 2,568 Total borrowings 269 258 53 11 287 175 7,070 3,844 416 127 Medium- and long-term debt -- -- -- -- 154 -- 2,403 917 2 7 Common shareholder's equity 199 100 14 13 156 145 1,673 1,665 307 275 STATISTICAL DATA Return on average assets 0.95% 0.93% (0.90)% 0.25% 1.00% 0.88% 1.47% 1.35% 1.30% 1.24% Return on average assets (excluding purchase accounting) 1.22 1.09 (0.04) 0.91 1.17 1.06 1.49 1.38 1.50 1.36 Return on average equity 8.59 9.20 (8.60) 1.72 9.35 8.55 22.35 17.94 13.68 13.44 Return on average equity (excluding purchase accounting) 16.06 12.84 (0.69) 12.28 12.73 12.44 23.67 19.31 18.58 17.20 Average equity to average assets 11.09 10.11 10.42 14.65 10.69 10.33 6.57 7.53 9.52 9.19 Tier 1 capital 9.91 10.54 12.31 10.37 10.76 10.85 7.45 7.64 10.41 11.63 Total capital 11.17 11.79 13.57 11.64 11.94 12.11 10.98 10.75 11.66 12.89 Tier 1 leverage 7.80 8.62 7.51 7.56 9.32 9.22 6.34 6.52 7.88 8.83 Number of employees (full-time equivalent)+ 775 314 109 105 687 708 9,936 10,209 1,570 1,334 * Amounts include loans participated to the Michigan bank. + Michigan number includes employees working in states other than California, Florida, Illinois and Texas.
17 2 TABLE 1: SELECTED FINANCIAL DATA
Year Ended December 31 (dollar amounts in millions, except per share data) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS SUMMARY Total interest income $ 2,092 $ 1,783 $ 1,933 $ 2,268 $ 2,282 Net interest income 1,230 1,134 1,121 1,050 927 Provision for loan losses 56 69 111 105 100 Securities gains 3 2 6 5 2 Noninterest income (excluding securities gains) 464 460 405 380 346 Noninterest expenses 1,059 1,038 1,092 945 848 Net income 387 341 240 280 248 PER SHARE OF COMMON STOCK Primary net income $ 3.28 $ 2.85 $ 1.99 $ 2.41 $ 2.25 Fully diluted net income 3.28 2.85 1.98 2.38 2.23 Cash dividends declared 1.24 1.07 0.96 0.92 0.87 Common shareholders' equity 20.46 18.99 17.38 16.30 14.52 YEAR-END BALANCES Total assets $33,430 $30,295 $27,556 $28,989 $26,815 Total earning assets 30,606 27,852 25,131 26,594 24,414 Total loans 22,209 19,100 18,215 17,269 16,503 Total deposits 22,432 20,950 21,200 21,142 20,699 Total borrowings 8,303 6,861 3,963 5,522 4,016 Medium- and long-term debt 4,098 1,461 741 306 331 Common shareholders' equity 2,392 2,182 2,058 1,898 1,583 DAILY AVERAGE BALANCES Total assets $31,451 $27,236 $26,510 $26,365 $24,332 Total earning assets 29,038 25,012 24,510 24,374 22,351 Total loans 20,211 18,307 17,447 16,622 15,477 Total deposits 21,325 20,721 20,913 20,785 19,381 Total borrowings 7,527 4,105 3,275 3,380 2,924 Medium- and long-term debt 2,708 1,087 414 323 348 Common shareholders' equity 2,313 2,136 1,957 1,741 1,485 RATIOS Return on average assets 1.23% 1.25% 0.91% 1.06% 1.02% Return on average common shareholders' equity 16.74 15.94 12.10 15.90 16.47 Dividend payout ratio 37.47 36.82 45.51 33.73 31.95 Common shareholders' equity as a percent of average assets 7.35 7.84 7.38 6.60 6.11
18 3 HIGHLIGHTS Net income was $387 million, or $3.28 per share, for 1994, compared to $341 million, or $2.85 per share, for 1993. In 1992, net income was $240 million, or $1.99 per share, including a $92 million ($0.77 per share) after-tax restructuring charge related to the merger with Manufacturers National Corporation (Manufacturers) in June 1992. (Return on Assets Graph) Return on average common shareholders' equity (ROE) was 16.74 percent in 1994, compared to 15.94 percent in 1993 and 12.10 percent in 1992. Return on average assets was 1.23 percent in 1994, 1.25 percent in 1993 and 0.91 percent in 1992. In the second quarter, the board of directors increased the quarterly dividend 14 percent to $0.32 per share. Total cash dividends declared per common share were $1.24 in 1994, compared to $1.07 in 1993 and $0.96 in 1992. Total average assets increased 16 percent in 1994 to $31.5 billion. This increase was due primarily to acquisitions and growth in the commercial loan and investment securities portfolios. Average common shareholders' equity was $2.3 billion in 1994, an increase of 8 percent from 1993. In March 1994, the Corporation acquired the $1 billion Pacific Western Bancshares (Pacific Western) in San Jose, California, for $121 million of common stock. Additionally, in August 1994, the Corporation acquired the $332 million Lockwood Banc Group (Lockwood) in Houston, Texas, for $44 million in cash. Both transactions were treated as purchase combinations for accounting purposes. In December 1994, the Corporation and Munder Capital Management (Munder) in Troy, Michigan, entered into a joint venture combining the Corporation's investment management subsidiaries with Munder to form a money management firm with $30 billion in assets under management, operating under the Munder name. The Corporation holds a minority interest in the partnership. The Corporation entered into an Agreement and Plan of Merger in October 1994 to acquire the $460 million University Bank & Trust in Palo Alto, California, for approximately $70 million of common stock. The acquisition is expected to be completed in the first half of 1995, subject to regulatory approvals, and is anticipated to be accounted for as a purchase. EARNINGS PERFORMANCE NET INTEREST INCOME Net interest income on a fully taxable equivalent basis (FTE) is the difference between interest earned on assets, including certain yield-related fees, and interest paid on liabilities, with adjustments made to present yields on tax-exempt assets as if such income was fully taxable. In 1994, FTE net interest income provided 72.9 percent of the Corporation's net revenues, compared to 71.6 percent in 1993 and 73.8 percent in 1992. (Net Interest Income Graph) Total FTE net interest income increased 8 percent during the year, while the net interest margin decreased 33 basis points to 4.32 percent. The decline in the margin was due principally to the addition of fixed rate securities late in 1993 and early in 1994. These purchases were funded by higher costing non-core deposit liabilities. This has resulted in a slightly liability sensitive position, reducing the margin during the recent rising rate environment. In 1994, average purchased funds increased by $3.4 billion to $7.5 billion. 19 4 TABLE 2: ANALYSIS OF NET INTEREST INCOME-FTE
1994 1993 1992 ------------------------- ------------------------- -------------------------- Average Average Average Average Average Average (dollar amounts in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------------------ Commercial loans $ 9,598 $ 709 7.38% $ 8,473 $ 556 6.56% $ 7,753 $ 542 6.98% International loans 1,107 62 5.58 897 45 5.04 710 41 5.70 Real estate construction loans 403 32 7.85 441 29 6.63 503 35 7.00 Commercial mortgage loans 2,916 248 8.52 2,629 213 8.10 2,368 202 8.54 Residential mortgage loans 2,175 162 7.46 1,979 169 8.57 2,297 219 9.53 Consumer loans 3,795 358 9.44 3,697 369 9.98 3,625 400 11.03 Lease financing 217 14 6.48 191 14 7.34 191 17 8.89 ----------------------- ----------------------- ---------------------- Total loans (1) 20,211 1,585 7.84 18,307 1,395 7.62 17,447 1,456 8.34 Investment securities available for sale (2) 3,044 168 5.50 n/a n/a n/a n/a n/a n/a Taxable securities 4,498 276 6.15 4,893 305 6.23 4,579 356 7.77 Securities exempt from federal income taxes 462 49 10.51 619 64 10.25 794 82 10.35 ----------------------- ----------------------- ---------------------- Total investment securities held to maturity 4,960 325 6.55 5,512 369 6.70 5,373 438 8.16 Interest-bearing deposits with banks 552 22 3.96 814 28 3.41 1,017 45 4.43 Federal funds sold and securities purchased under agreements to resell 116 5 4.06 135 4 2.99 399 15 3.67 Trading account securities 5 -- 1.67 12 1 6.76 78 3 3.99 Mortgages held for sale 150 11 7.31 232 15 6.38 196 14 7.34 ----------------------- ----------------------- ---------------------- Total earning assets 29,038 2,116 7.28 25,012 1,812 7.25 24,510 1,971 8.04 Cash and due from banks 1,532 1,490 1,322 Allowance for loan losses (322) (311) (291) Accrued income and other assets 1,203 1,045 969 ----------------------- ----------------------- ---------------------- Total assets $ 31,451 $27,236 $26,510 ======================= ======================= ====================== NOW accounts $ 1,805 30 1.66 $ 1,657 37 2.23 $ 1,470 42 2.83 Money market deposit accounts 4,787 143 2.99 4,723 129 2.73 4,553 152 3.34 Savings deposits 2,536 53 2.08 2,494 67 2.67 2,181 72 3.31 Certificates of deposit 5,681 239 4.21 6,161 254 4.13 7,245 372 5.14 Foreign office deposits (3) 1,816 78 4.28 1,306 43 3.29 1,668 69 4.11 ----------------------- ----------------------- ---------------------- Total interest-bearing deposits 16,625 543 3.26 16,341 530 3.24 17,117 707 4.13 Federal funds purchased and securities sold under agreements to repurchase 2,817 121 4.31 1,586 47 3.01 1,553 53 3.44 Other borrowed funds 2,002 79 3.92 1,432 41 2.88 1,308 46 3.52 Medium- and long-term debt 2,708 148 5.46 1,087 63 5.77 414 30 7.18 Other (4) -- (29) -- -- (32) -- -- (24) -- ----------------------- ----------------------- ---------------------- Total interest-bearing sources 24,152 862 3.57 20,446 649 3.18 20,392 812 3.98 Noninterest-bearing deposits 4,700 4,380 3,796 Accrued expenses and other liabilities 286 274 327 Preferred stock -- -- 38 Common shareholders' equity 2,313 2,136 1,957 ----------------------- ----------------------- ---------------------- Total liabilities and shareholders' equity $ 31,451 $27,236 $26,510 ======================= ======================= ====================== Net interest income/Rate spread (FTE) $ 1,254 3.71 $1,163 4.07 $1,159 4.06 ======= ====== ====== FTE adjustment (5) $ 24 $ 29 $ 38 Impact of net noninterest-bearing ======= ====== ====== sources of funds 0.61 0.58 0.67 ----------------------- ----------------------- ---------------------- Net interest margin (as a percent of average earning assets) (FTE) 4.32% 4.65% 4.73% ======================= ======================= ======================
(1) Nonaccrual loans are included in average balances reported and are used to calculate rates. (2) All investment securities available for sale are taxable. (3) Includes substantially all deposits by foreign depositors; deposits are in excess of $100,000. (4) Net interest rate swap income. If swap income/expense were allocated, average rates on total loans would have been 7.75% in 1994 and 7.42% in 1993; average rates on medium- and long-term debt would have been 5.10% in 1994 and 5.94% in 1993. The impact of swap income/expense on 1992 average rates is not meaningful due to the merger with Manufacturers in June 1992. (5) The FTE adjustment is computed using a federal income tax rate of 35% in 1994 and 1993 and 34% in 1992. n/a-Not applicable 20 5 Total FTE net interest income increased to $1,254 million in 1994, compared to $1,163 million and $1,159 million in 1993 and 1992, respectively. Average earning assets rose 16 percent in 1994, positively impacting net interest income, although only partially offsetting the impact of margin compression caused by the rising cost of funds. The higher earning assets were concentrated primarily in loans. Earning asset yields were relatively flat compared to last year, although commercial loans, whose yields typically move more quickly with interest rate changes than consumer and residential loans, experienced higher yield growth. Total FTE net interest income in 1993 was flat compared to 1992 due to the offsetting effects of nominal growth in average earning assets and declining yields on some asset categories where high levels of prepayments were experienced. Average loans as a percent of average earning assets increased to 73 percent in 1993 from 71 percent in 1992. The net interest margin in 1993 was impacted positively by lower costing purchased funds which provided funding to replace investment deposit run-off. Net interest margin risk typically is related to several events, including loan and deposit spread compression. For Table 3: RATE-VOLUME ANALYSIS-FTE
1994 / 1993 1993 / 1992 ----------------------------------------- -------------------------------------- Increase Increase Net Increase Increase Net (Decrease) (Decrease) Increase (Decrease) (Decrease) Increase (in millions) Due to Rate Due to Volume* (Decrease) Due to Rate Due to Volume* (Decrease) ------------------------------------------------------------------------------------------------------------------------------------ Interest income (FTE) Commercial loans $ 70 $ 83 $ 153 $ (33) $ 47 $ 14 International loans 5 12 17 (5) 9 4 Real estate construction loans 6 (3) 3 (2) (4) (6) Commercial mortgage loans 11 24 35 (10) 21 11 Residential mortgage loans (22) 15 (7) (23) (27) (50) Consumer loans (20) 9 (11) (38) 7 (31) Lease financing (2) 2 -- (3) -- (3) ---------------------------------------- -------------------------------- Total loans 48 142 190 (114) 53 (61) Investment securities available for sale (27) 195 168 n/a n/a n/a Taxable securities (5) (24) (29) (75) 24 (51) Securities exempt from federal income taxes 2 (17) (15) -- (18) (18) ---------------------------------------- -------------------------------- Total investment securities held to maturity (3) (41) (44) (75) 6 (69) Interest-bearing deposits with banks 4 (10) (6) (10) (7) (17) Federal funds sold and securities purchased under agreements to resell 2 (1) 1 (3) (8) (11) Trading account securities (1) -- (1) 2 (4) (2) Mortgages held for sale 2 (6) (4) (1) 2 1 ---------------------------------------- -------------------------------- Total interest income (FTE) 25 279 304 (201) 42 (159) Interest expense NOW accounts (10) 3 (7) (9) 4 (5) Money market deposit accounts 12 2 14 (28) 5 (23) Savings deposits (15) 1 (14) (14) 9 (5) Certificates of deposit 5 (20) (15) (73) (45) (118) Foreign office deposits 13 22 35 (14) (12) (26) ---------------------------------------- -------------------------------- Total interest-bearing deposits 5 8 13 (138) (39) (177) Federal funds purchased and securities sold under agreements to repurchase 21 53 74 (7) 1 (6) Other borrowed funds 15 23 38 (8) 3 (5) Medium- and long-term debt (3) 88 85 (6) 39 33 Other (1) 3 -- 3 (8) -- (8) ---------------------------------------- -------------------------------- Total interest expense 41 172 213 (167) 4 (163) ---------------------------------------- -------------------------------- Net interest income (FTE) $ (16) $ 107 $ 91 $ (34) $ 38 $ 4 ======================================== ==================================
*Rate/volume variances are allocated to variances due to volume. (1) Net interest rate swap income. n/a--Not applicable 21 6 instance, the spread between prime and market rates, and core deposits and market rates, tends to compress during rising rate periods, as was the case during the second half of 1994. Actions taken during the year minimized this risk of compression in interest rates. The Corporation practices a conservative asset and liability management policy which is more fully explained on page 31 of this financial review. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is the amount necessary to adjust the allowance for loan losses to an amount which represents management's assessment of the losses inherent in the Corporation's loan portfolio. The allowance for loan losses is based on the application of projected loss ratios to the risk-ratings of loans, both individually and by category. Projected loss ratios incorporate such factors as recent loss experience, current economic conditions and trends, trends in past due and nonaccrual amounts, risk characteristics of various categories and concentrations of loans, geographic dispersion of borrowers, and transfer risks. The provision for loan losses was $56 million in 1994, compared to $69 million and $111 million in 1993 and 1992, respectively. The reduction in the provision from the prior years is due to lower levels of charge-offs as well as continued improvement in the quality of the loan portfolio. (NET LOANS CHARGED GRAPH) The adequacy of the allowance for loan losses is reviewed on a quarterly basis. At December 31, 1994, the allowance for loan losses was $326 million, an increase of $27 million since year-end 1993. As a percent of total loans, the allowance was 1.47 percent at year-end 1994, compared to 1.56 percent at December 31, 1993. The allowance for loan losses as a percent of nonperforming assets increased to 160 percent at December 31, 1994, from 143 percent at year-end 1993. The Corporation's estimated allocation of the allowance for loan losses is shown on page 28. The $36 million increase in the unallocated allowance reflects the continued trend of improved credit quality in the loan portfolio. The allowance allocated to international loans declined $15 million from year-end 1993 as a result of the reclassification of Brady bonds (Latin American debt secured by U.S. Government securities) to debt securities. Net charge-offs decreased to $48 million in 1994, compared to $78 million in 1993 and $99 million in 1992. The ratio of net loans charged off to average total loans decreased to 0.24 percent in 1994 from 0.43 percent in 1993. The commercial loan, commercial mortgage and consumer loan portfolios all contributed to these declines due to a continued emphasis on maintaining high credit standards for each loan customer as well as favorable economic conditions in our markets. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) Nos. 114 and 118 which address the accounting and disclosure requirements for impaired loans. These standards will be adopted January 1, 1995, and will not impact the Corporation's financial statements. NONINTEREST INCOME Noninterest income remained relatively flat, totaling $467 million in 1994, compared to $462 million and $411 million in 1993 and 1992, respectively. Excluding the effects of acquisitions in 1994 and a $24 million gain on the sale of land in 1993, noninterest income increased $15 million. Income from fiduciary activities was $122 million in both 1994 and 1993, primarily as a result of low growth in market values of assets under management throughout the year in both institutional and personal trust as well as a decline in the customer base. Trust assets totaled $77 billion at December 31, 1994, compared to $78 billion at year-end 1993. Discretionary funds declined slightly to $27 billion at year-end 1994 from $29 billion at December 31, 1993. Discretionary funds are trust assets over which the Corporation has investment management authority. 22 7 TABLE 4: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended December 31 (dollar amounts in millions) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 299 $ 308 $ 279 $ 265 $ 342 Allowance of institutions and loans purchased/sold 19 -- 17 6 5 Loans charged off Domestic Commercial 25 36 47 47 50 Real estate construction 1 1 4 8 8 Commercial mortgage 17 20 8 9 16 Residential mortgage -- 1 1 2 1 Consumer 40 52 60 59 44 Lease financing -- -- 1 1 1 International -- -- -- -- 99 ----- ----- ----- ----- ----- Total loans charged off 83 110 121 126 219 Recoveries Domestic Commercial 15 18 9 15 15 Real estate construction -- -- 1 -- -- Commercial mortgage 5 2 1 2 3 Residential mortgage -- -- 1 1 -- Consumer 14 12 10 9 9 International 1 -- -- 2 10 ----- ----- ----- ----- ----- Total recoveries 35 32 22 29 37 ----- ----- ----- ----- ----- Net loans charged off 48 78 99 97 182 Provision for loan losses 56 69 111 105 100 ----- ----- ----- ----- ----- Balance at end of period $ 326 $ 299 $ 308 $ 279 $ 265 ===== ===== ===== ===== ===== Ratio of allowance for loan losses to total loans at end of period 1.47% 1.56% 1.69% 1.62% 1.60% Ratio of net loans charged off during the period to average loans outstanding during the period 0.24% 0.43% 0.57% 0.58% 1.18%
TABLE 5: NONINTEREST INCOME
Increase (Decrease) Increase (Decrease) ------------------- ------------------- Year Ended December 31 1994/1993 1993/1992 ---------------------- ------------------- ------------------- (dollar amounts in millions) 1994 1993 1992 Amount Change Amount Change ----------------------------------------------------------------------------------------------------------------------------------- Income from fiduciary activities $122 $122 $114 $ -- --% $ 8 7% Service charges on deposit accounts 124 120 113 4 3 7 6 Customhouse broker fees 41 40 38 1 2 2 5 Revolving credit fees 41 36 34 5 15 2 5 Securities gains 3 2 6 1 75 (4) (69) Other 136 142 106 (6) (5) 36 35 ---------------------- --------------- ---------------- Total noninterest income $467 $462 $411 $ 5 1% $ 51 12% ====================== =============== ================
23 8 TABLE 6: NONINTEREST EXPENSES
Increase (Decrease) Increase (Decrease) ------------------- -------------------- Year Ended December 31 1994/1993 1993/1992 ---------------------- ---------------- -------------- (dollar amounts in millions) 1994 1993 1992 Amount Change Amount Change ------------------------------------------------------------------------------------------------------------------------ Salaries $ 455 $ 434 $ 427 $ 21 5% $ 7 2% Employee benefits 94 95 89 (1) (1) 6 6 ----------------------- ------------ ------------- Total salaries and employee benefits 549 529 516 20 4 13 2 Net occupancy expense 99 96 86 3 3 10 11 Equipement expense 68 62 57 6 8 5 9 FDIC insurance expense 44 44 45 -- (1) (1) -- Telecommunications expense 27 21 17 6 31 4 20 Merger, integration and restructuring charge 7 22 128 (15) (68) (106) (83) Other 265 264 243 1 -- 21 9 ----------------------- ------------ ------------- Total noninterest expenses $1,059 $1,038 $1,092 $ 21 2% $(54) (5)% ======================== ============= =============
Future investment management activity will be conducted through the new partnership formed by the combination of the Corporation's investment management subsidiaries and Munder Capital Management. Munder was a strong and proven firm which achieved superior and consistent long-term investment performance throughout a variety of market environments. The new Munder Capital possesses considerable investment capability emphasizing a wide variety of products, competitive investment returns and a high level of customer service. (Noninterest Income Graph) Service charges on deposit accounts increased to $124 million in 1994, compared to $120 million in 1993 and $113 million in 1992. Excluding the impact of acquisitions, service charge income declined slightly. The lower fees were the result of higher earnings credit allowances, partially offset by new service charge fee schedules implemented in the last half of the year. Revolving credit fees increased to $41 million in 1994, compared to $36 million and $34 million in 1993 and 1992, respectively. Acquisitions accounted for nearly 60 percent of the $5 million increase in 1994. An increase of $255 million in bankcard loans outstanding also contributed to the rise in fee income, reflecting consumer confidence in the current favorable economic environment and consumer bankcard promotions introduced in the last half of the year. These increases were partially offset by lower interchange fee income due to a reduction in interchange rates. Other noninterest income decreased $6 million from 1993, due mainly to large nonrecurring components within noninterest income in the prior year. In 1994, the Corporation recognized $7 million in gains on sales of international loans and a $7 million gain on the sale of originated mortgage servicing rights (OMSRs). In addition, amortization of purchased mortgage servicing rights (PMSRs) dropped to $4 million in 1994 from $22 million in 1993, reflecting lower levels of mortgage prepayments as interest rates began to rise during the year. In 1994, the Corporation intensified efforts in the sales of mutual funds and insurance annuities. Fees related to these activities increased to $8 million in 1994 from $2 million a year ago. Significant nonrecurring components of other noninterest income in 1993 included a $24 million gain on the sale of land adjacent to an operations center, a $5 million gain on the sale of Brazilian debt, and a $3 million gain on the sale of stock warrants. These gains were partially offset by lower mortgage servicing income due to a change in the accounting method for PMSRs. There were no significant nonrecurring components in other noninterest income in 1992. 24 9 NONINTEREST EXPENSES Noninterest expenses were $1,059 million in 1994, compared to $1,038 million in 1993 and $1,092 million in 1992. Excluding acquisitions, noninterest expenses would have decreased by approximately $21 million, or 2 percent. Contributing to this decline was more than $60 million in merger, integration and restructuring expenses incurred in 1993. Over half of these costs were recorded in various expense categories. By the end of 1994, expenses reflected the full $145 million of cost savings anticipated from the merger with Manufacturers in June 1992. Total salaries expense increased 5 percent in 1994, compared to a 2 percent increase in both 1993 and 1992. Excluding the impact of acquisitions, salaries increased only 2 percent to $441 million during the year. This nominal increase was primarily due to merit increases offset by a significant decline in overtime and temporary-help as systems conversions related to the merger with Manufacturers were completed. The addition of approximately 700 employees from acquisitions contributed to an overall increase in the number of full-time equivalent employees of 407 from 1993. Employee benefits declined slightly to $94 million in 1994, compared to $95 million and $89 million in 1993 and 1992, respectively, due primarily to lower pension expense which was partially offset by acquisitions. Pension costs decreased by $4 million while acquisitions added $4 million to total employee benefits. Declining pension expense in 1994 resulted from slower salary growth assumptions and the establishment of a single pension plan that revised benefits to prospective retirees. The increase in employee benefits expense in 1993 was primarily due to the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postretirement Benefits." The discount rate used in determining the projected pension benefits obligation will increase in 1995 from the current 7.5 percent to 8.5 percent, while salary growth assumptions will remain constant. However, the Corporation estimates that 1995 pension expense will not significantly change from 1994 as a result of these factors. Net occupancy and equipment expense on a combined basis totaled $167 million in 1994, compared to $158 million and $143 million in 1993 and 1992, respectively. Without the impact of acquisitions, net occupancy and equipment expense would have increased by only $2 million, or 1 percent, from last year as a result of higher depreciation expense related to 1994 facility improvements in two operation centers and 1993 computer and systems upgrades. Federal Deposit Insurance Corporation (FDIC) insurance expense has remained constant since 1992. The FDIC risk-related premium system correlates the assessment rate to a bank's risk-based capital levels. Each subsidiary bank's capital level qualified for the lowest assessment rate of 23.0 cents per $100 of deposits. The FDIC has proposed a significant decrease in the assessment rate for late 1995. (Noninterest Expenses Graph) A charge of $7 million in 1994 for merger, integration and restructuring reflects costs related primarily to severance and the Munder transaction. The additional staff reductions are incremental to those identified in the Manufacturers merger and will translate into savings exceeding the original target of $145 million. Charges in 1993 and 1992 relate to the Manufacturers merger. At the end of 1994, there was no remaining liability related to the prior years' Manufacturers merger charges. Consultant fees were $9 million in 1994, a decrease of 45 percent from 1993. This decline is the result of the completion of remaining merger-related investments in systems conversions and technology upgrades during the year. Net amortization of intangible assets, excluding purchased mortgage servicing rights, was $23 million in 1994, compared to $20 million in 1993 and 1992. Included in the 1994 expense was an additional $3 million of goodwill amortization related to 1994 acquisitions. 25 10 INCOME TAXES The provision for income taxes was $195 million in 1994, compared with $148 million in 1993 and $89 million in 1992. The effective tax rate, derived by dividing the provision for income taxes by income before income taxes, was 33.5 percent in 1994, 30.3 percent in 1993 and 26.9 percent in 1992. The increase in the effective rate over the prior year is the result of lower relative levels of tax-exempt interest income. BALANCE SHEET AND CAPITAL FUNDS ANALYSIS Total assets were $33.4 billion at year-end 1994, which represented a $3.1 billion increase from December 31, 1993. On an average basis, total assets increased to $31.5 billion in 1994 from $27.2 billion in 1993. This increase was funded primarily by purchased funds and deposits which rose on average $3.4 billion and $604 million, respectively. EARNING ASSETS The average balance of domestic commercial loans, led by the commercial and commercial mortgage loan categories, increased by $1.4 billion from 1993, or 12 percent. This growth, along with an increase of approximately 64 percent in commercial loan commitments to extend credit, can be attributed to effective marketing efforts, continued strong demand for commercial loans and acquisitions. Average international loans increased $210 million due to expanded customer relationships and a focus on Latin American countries making economic recoveries. This growth consisted largely of loans originated to facilitate trade with limited cross-border risk. The Corporation's cross-border exposure to any one country has not exceeded 0.75 percent of assets from 1992 to 1994. In 1994, Mexican cross-border exposure totaled $211 million, down 6 percent from a year ago. This exposure is evenly divided between major banks and corporate customers with significant exports who will benefit from the peso devaluation through increased volume and expanded margins. The Mexican loan portfolio is structured to limit cross-border risk and to perform under the recent volatility in financial markets. Average residential mortgage loans increased $196 million as a result of the purchase of two mortgage loan portfolios during 1994. The $98 million growth in average consumer loans was the net effect of increases in average installment loans and bankcard loans of $107 million and $21 million, respectively, offset by a $30 million decrease in revolving credit loans. Average installment loans were higher, primarily due to expanded market share in Texas, California and Florida related to marine and recreational vehicle loan products, as well as continued growth in fixed rate home equity loans. Increased bankcard loans reflect a new promotional campaign for bankcard products introduced in the last half of 1994. Average revolving credit loans declined as customers shifted away from home equity open-end lines of credit toward fixed rate home equity closed-end loans in response to the rising interest rate environment. Average investment securities totaled $8.0 billion in 1994, compared to $5.5 billion in 1993, due to a $2.8 billion increase in average U.S. Government and agency securities offset by decreases of $157 million in average state and municipal securities and $152 million in average other securities. U.S. Government and agency securities are comprised of FNMA, GNMA and FHLMC mortgage participation securities, while other securities consist primarily of collateralized mortgage obligations. The Corporation invested significantly in these securities in early 1994 to balance interest rate sensitivity and preserve net interest margin. The tax-exempt portfolio of state and municipal securities continues to decrease as the securities are called or mature. The reduced tax advantages of these types of securities deter additional investment. The decline in other securities during the year was mainly a result of calls, maturities and payments received on collateralized mortgage obligations. Total investment securities available for sale increased to $2.9 billion, compared to $2.3 billion at December 31, 1993. Securities classified as available for sale include floating rate bonds, certain types of collateralized mortgage obligations and 30-year fixed rate pools of government-backed mortgages with remaining lives exceeding 15 years. This category of securities represents investments which may be liquidated if certain economic conditions or interest rate environments were to materialize in the foreseeable future. The net increase in available for sale securities in 1994 was primarily the result of the addition of approximately $700 million in U.S. Government and agency mortgage-backed securities in the first half of the year, and $400 million of U.S. Treasury notes scheduled for maturity in 1995, as well as the reclassification of $92 million of Brady bonds from loans to investment securities. The after-tax net unrealized holding gain or loss on available for sale securities is reported as a separate component of shareholders' equity and totaled a $55 million loss in 1994 and a $27 million gain in 1993. 26 11 TABLE 7: ANALYSIS OF INVESTMENT SECURITIES AND LOANS
December 31 (in millions) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------- Investment securities available for sale U.S. Government and agency securities $ 2,674 $ 2,164 $ n/a $ n/a $ n/a State and municipal securities -- -- n/a n/a n/a Other securities 232 158 n/a n/a n/a ------- ------- ------- ------- ------- Total investment securities available for sale 2,906 2,322 n/a n/a n/a Investment securities held to maturity U.S. Government and agency securities 4,462 3,232 3,824 3,542 3,680 State and municipal securities 422 513 693 889 937 Other securities 86 233 646 1,275 1,179 ------- ------- ------- ------- ------- Total investment securities held to maturity 4,970 3,978 5,163 5,706 5,796 ------- ------- ------- ------- ------- Total investment securities $ 7,876 $ 6,300 $ 5,163 $ 5,706 $ 5,796 ======= ======= ======= ======= ======= Commercial loans $10,634 $ 9,087 $ 8,213 $ 7,568 $ 7,608 International loans Government and official institutions 18 143 156 156 159 Banks and other financial institutions 660 671 323 148 195 Other 517 322 257 245 83 ------- ------- ------- ------- ------- Total international loans 1,195 1,136 736 549 437 Real estate construction loans 414 437 471 521 499 Commercial mortgage loans 3,056 2,700 2,666 2,315 2,088 Residential mortgage loans 2,436 1,857 2,126 2,462 2,379 Consumer loans 4,215 3,674 3,836 3,654 3,316 Lease financing 259 209 167 200 176 ------- ------- ------- ------- ------- Total loans $22,209 $19,100 $18,215 $17,269 $16,503 ======= ======= ======= ======= =======
n/a - Not applicable TABLE 8: LOAN MATURITIES AND INTEREST RATE SENSITIVITY
After One December 31, 1994 Within But Within After (in millions) One Year* Five Years Five Years Total ------------------------------------------------------------------------------------------------------------------------- Commercial loans $ 7,565 $ 2,450 $ 619 $10,634 Commercial mortgage loans 721 1,853 482 3,056 International loans 940 231 24 1,195 Real estate construction loans 231 156 27 414 ------- ------- ------- ------- Total $ 9,457 $ 4,690 $ 1,152 $15,299 ======= ======= ======= ======= Loans maturing after one year Predetermined interest rates $ 2,035 $ 744 Floating interest rates 2,655 408 ------- ------- Total $ 4,690 $ 1,152 ======= =======
* Includes demand loans, loans having no stated repayment schedule or maturity, and overdrafts. 27 12 TABLE 9: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1994 1993 1992 1991 1990 -------------------- ------------------- ------------------- ------------------- -------------------- December 31 Percent Percent Percent Percent Percent (dollar amounts Allocated of Total Allocated of Total Allocated of Total Allocated of Total Allocated of Total in millons) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans ----------------------------------------------------------------------------------------------------------------------------------- Domestic Commercial $119 48% $123 48% $120 45% $ 81 44% $ 53 46% Real estate construction 6 2 4 2 9 2 12 3 10 3 Commercial mortgage 35 14 26 14 37 15 20 14 20 13 Residential mortgage 2 11 3 10 6 12 1 14 2 14 Consumer 60 19 60 19 59 21 55 21 42 20 Lease financing 1 1 1 1 2 1 2 1 2 1 International 3 5 18 6 39 4 54 3 74 3 Unallocated 100 -- 64 -- 36 -- 54 -- 62 -- --------------- ---------------- --------------- -------------- --------------- Total $326 100% $299 100% $308 100% $279 100% $265 100% =============== ================ =============== ============== ===============
TALBE 10: ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO--FTE
Maturity+ Weighted -------------------------------------------------------------------------- Average December 31, 1994 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Maturity (dollar amounts ------------------ --------------- --------------- ---------------- -------------- Market (Yrs./ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yeild Value Mos.) ------------------------------------------------------------------------------------------------------------------------------------ Available for sale U.S. Treasury $ 415 4.20% $ 39 5.67% $ 1 6.85% $ -- --% $ 455 4.33% $ 455 1/1 U.S. Government and agency -- -- 2 6.47 132 6.60 2,085 6.19 2,219 6.21 2,219 21/0 Other bonds, notes and debentures 3 6.10 2 -- 1 7.91 168 7.40 174 7.39 174 26/2 Federal Reserve Bank stock and other invest- ments* -- -- -- -- -- -- -- -- 58 -- 58 -- -------------- --------------- -------------- -------------- -------------- ------ Total investment securities available for sale 418 4.22 43 5.71 134 6.62 2,253 6.28 2,906 5.99 2,906 Held to maturity U.S. Treasury 15 5.55 24 6.97 -- -- -- -- 39 6.42 39 1/3 U.S. Government and agency 1 8.76 166 6.24 317 6.83 3,938 6.39 4,422 6.42 4,099 13/3 State and municipal securities 75 10.51 235 10.63 79 10.94 33 11.50 422 10.74 436 4/1 Other bonds, notes and debentures 7 11.41 23 6.44 4 7.99 53 6.56 87 6.97 85 17/0 -------------- --------------- -------------- -------------- -------------- ------ Total investment securities held to maturity 98 9.78 448 8.59 400 7.66 4,024 6.44 4,970 6.79 4,659 -------------- --------------- -------------- -------------- -------------- ------ Total investment securities $ 516 5.25% $ 491 8.34% $ 534 7.39% $6,277 6.38% $7,876 6.49% $7,565 ============== =============== ============== ============== ============== ======
*Balances are excluded in the calculation of total yield. +Based on final contractual maturity. 28 13 TABLE 11. MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
December 31 (in millions) 1994 ------------------------------------------------------------------------ Three months or less $ 1,126 Over three months to six months 36 Over six months to twelve months 19 Over twelve months 142 ------- Total $ 1,323 =======
OTHER EARNING ASSETS Short-term investments in interest-bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell provide a range of maturities under one year to supplement corporate liquidity. The Corporation's deposits were either with foreign banks' international banking facilities located in the U.S. or with banks in developed countries. Federal funds sold offer earnings opportunities and provide a vehicle to control the reserve position and serve correspondent banks. On an average basis, these short-term investments declined $281 million during 1994 due to decreases in bank time deposits of $262 million and other temporary investments of $19 million. The Corporation's liquidity level was reduced as a result but remains within corporate guidelines. Mortgages held for sale decreased by $239 million in 1994 after increasing $96 million in 1993. This decrease reflects the decline in refinancing activity throughout 1994 as residential mortgage interest rates rose. DEPOSITS AND BORROWED FUNDS At December 31, 1994, total deposits increased $1.5 billion, or 7 percent, to $22.4 billion. This increase was the result of acquisitions made during the year. Without these acquisitions, deposits would have increased less than 2 percent, reflecting the continued trend of interest-sensitive customers shifting away from deposits toward alternative investments, including mutual funds. Total deposits decreased $250 million, or 1 percent, during 1993. Changes in the average mix of deposits also reflect a rising interest rate environment in 1994. Average certificates of deposit decreased $480 million as depositors shifted maturing certificate of deposit balances into more liquid savings and demand deposit accounts in anticipation of further increases in interest rates. These shifts, in addition to acquisitions made in 1994, resulted in increases of $320 million in average noninterest-bearing deposits. Foreign office deposits also increased $1.1 billion to $2.4 billion at December 31, 1994. Average earning asset growth also was funded by short-term borrowings. On an average basis, federal funds purchased increased $1 billion, while treasury tax and loan notes rose $327 million and securities sold under agreements to repurchase increased $196 million. To satisfy additional funding requirements, the Corporation issued $3.4 billion of medium-term notes during the year. The interest rate associated with the notes creates a funding source with maturities ranging from nine months to 15 years and durations that are similar to deposit liabilities. Subordinated notes support acquisition activity and help maintain the bank's total capital ratio at the level that qualifies for the lowest FDIC risk-based insurance premium. Further information on the Corporation's medium- and long-term debt is included in Note 9 to the consolidated financial statements on page 45. CAPITAL Common shareholders' equity totaled $2.4 billion at December 31, 1994. This represents an increase of $210 million, or 10 percent, from $2.2 billion at year-end 1993. The increased equity represents the net result of several factors: earnings retention of $242 million, treasury shares of $121 million issued for acquisitions and $5 million of common stock issued for employee stock plans. These items were partially offset by the repurchase of 2.8 million shares into treasury for acquisitions and a change of $83 million in unrealized losses on available-for-sale securities. The Corporation's capital ratios exceeded the minimum levels prescribed by the Federal Reserve Board, as shown in the following table.
CAPITAL RATIOS December 31 (dollar amounts in millions) 1994 1993 ------------------------------------------------------------------------------- Tier 1 (core) capital Shareholder's equity $ 2,392 $ 2,182 Less: Goodwill and other disallowed intangibles 214 132 Less: Unrealized gains and (losses) (55) 27 --------- -------- Total tier 1 capital $ 2,233 $ 2,023 ========= ======== Tier 2 (supplemental) capital Qualifying subordinated debt $ 648 $ 530 Eligible allowance for loan losses 326 299 --------- -------- Total tier 2 capital $ 974 $ 829 ========= ======== Total capital $ 3,207 $ 2,852 ========= ======== Assets Risk-weighted assets (net) $ 27,466 $ 24,623 Average quarterly assets (net) $ 32,197 $ 28,743 Risk-based ratios Tier 1 (minimum-4.0%) 8.13% 8.21% Total (minimum-8.0%) 11.68% 11.58% Tier 1 leverage (minimum-3.0%) 6.93% 7.04%
29 14 At December 31, 1994, all of the Corporation's banking subsidiaries exceeded the minimum ratios required of a "well capitalized" institution as defined in the final rule under the Federal Deposit Insurance Corporation Improvement Act of 1991. The common dividend payout ratio was 37.5 percent in 1994, compared to 36.8 percent in 1993. The board of directors currently targets a payout ratio of 30 to 40 percent but will continue to reassess this target in light of changing market and industry conditions. ASSET QUALITY NONPERFORMING ASSETS The Corporation's accounting and classification policies regarding nonaccrual loans reflect the importance of recognizing troubled loans early. Depending on the loan type, consumer loans are directly charged off when deemed uncollectible, which is typically no later than 180 days past due. Loans other than consumer are placed on nonaccrual status when management determines that principal or interest may not be fully collectible, but no later than when the loan is 90 days past due on principal or interest unless it is fully collateralized and in the process of collection. Loan amounts in excess of probable future cash collections are charged off at the time the loan is placed on nonaccrual status to an amount that represents management's assessment of the ultimate collectibility of the loan. Interest previously accrued but not collected on nonaccrual loans is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. (Nonperforming Assets to Loans and Other Real Estate Graph) Nonaccrual loans at December 31, 1994 totaled $162 million, a 5 percent increase from year-end 1993. Excluding acquisitions, nonaccrual loans would have decreased, reflecting continued improvement in the quality of the loan portfolio and favorable economic conditions in our markets. The following nonaccrual loan table indicates the percentage of nonaccrual loan value to original contractual value and demonstrates the conservative and prompt nature of the corporate charge-off policy.
NONACCRUAL LOANS December 31 (dollar amounts in millions) 1994 ------------------------------------------------------------------------------- Carrying value $ 162 Contractual value $ 221 Carrying value as a percentage of contractual value 73%
The decrease of $10 million in other real estate owned (ORE) during 1994 primarily represents the net result of sales along with write-downs of properties which was partially offset by the addition of $11 million relating to three separate loans and $15 million from acquisitions. Loans past due 90 days decreased $7 million during 1994 primarily due to increased payments made by customers on delinquent credit card, installment and student loan account balances. In addition to the nonaccrual loans and the loans past due 90 days or more at December 31, 1994, there were loans totaling $319 million where possible financial problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present contractual repayment terms. These loans are specifically considered in management's evaluation of the adequacy of the allowance for loan losses. CONCENTRATION OF CREDIT The only significant industry concentration at December 31, 1994 is loans to companies and individuals involved with the automotive industry, including suppliers, manufacturers and dealers. These loans totaled $3.6 billion, or 16 percent of total loans at December 31, 1994, compared to approximately $3.0 billion, or 16 percent of total loans at year-end 1993. Of these amounts, floor plan loans to automobile dealers were $986 million at December 31, 1994 and $789 million at December 31, 1993. All other industry concentrations individually represent less than 5 percent of total loans at year-end 1994. 30 15 TABLE 12: SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS December 31 (dollar amounts in millions)
1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------- Nonperforming assets Nonaccrual loans Commercial loans $ 89 $ 71 $ 75 $ 62 $ 74 International loans -- -- -- -- 13 Real estate construction loans 17 19 28 47 44 Real estate mortgage loans (principally commercial) 56 64 120 101 53 ----- ----- ----- ----- ----- Total nonaccrual loans 162 154 223 210 184 Reduced-rate loans 2 5 1 -- 14 ----- ----- ----- ----- ----- Total nonperforming loans 164 159 224 210 198 Other real estate 40 50 49 46 57 ----- ----- ----- ----- ----- Total nonperforming assets $ 204 $ 209 $ 273 $ 256 $ 255 ===== ===== ===== ===== ===== Nonperforming loans as a percentage of total loans 0.74% 0.83% 1.23% 1.22% 1.19% Nonperforming assets as a percentage of total loans and other real estate 0.92% 1.09% 1.50% 1.48% 1.54% Allowance for loan losses as a percentage of total nonperforming assets 160% 143% 113% 109% 104% Loans past due 90 days-domestic $ 39 $ 46 $ 100 $ 54 $ 66
Although there is a loan concentration to the automotive industry, the Corporation has successfully operated in the Michigan economy during several downturns in the auto industry. There were no automotive industry-related loans larger than $500 thousand on nonaccrual status as of year-end 1994. In addition, there were no significant automotive industry-related charge-offs during the year. Loans to highly leveraged companies are not a significant element of the loan portfolio representing less than 4 percent of total loans. COMMERCIAL REAL ESTATE LENDING Approximately 72 percent of the Corporation's real estate construction loans have balances of less than $1 million. These relatively small loans are made to longtime customers in local markets with satisfactory project completion experience. The real estate construction loan portfolio contains approximately 387 loans, the largest of which has a balance of approximately $9 million. The commercial mortgage loan portfolio also consists of relatively small loans to longtime customers. Approximately 45 percent of the commercial mortgage portfolio relates to owner-occupied properties. Of the 7,831 loans in the portfolio, 91 percent have balances under $1 million, and the largest loan is less than $28 million. Additionally, the Corporation's policy requires the loan-to-value (LTV) ratio to be 75 percent or less for all commercial mortgage and real estate construction loans. This policy is well within the regulatory limits. The geographic distribution of real estate construction and commercial mortgage loans is also an important determinant in evaluating credit risk. The following geographic distribution table indicates the diversification of the Corporation's real estate construction and commercial mortgage loans throughout the markets served by the Corporation. GEOGRAPHIC DISTRIBUTION
December 31, 1994 Real Estate Commercial (in millions) Construction Mortgage -------------------------------------------------------------------------------------------- Michigan $ 201 $ 1,937 California 105 329 Texas 70 273 Illinois 6 255 Florida 17 54 Other 15 208 ----- ------- Total $ 414 $ 3,056 ===== =======
ASSET AND LIABILITY MANAGEMENT The asset and liability portfolios are managed to ensure adequate liquidity and to control interest rate risk exposure. Management seeks to minimize the risk of a reduction in net interest income that could result from fluctuations in market interest rates. This process is carried out through regular meetings of executive and senior management representing various areas of the Corporation including finance, lending, investment and deposit gathering areas. 31 16 INTEREST RATE SENSITIVITY No single interest rate risk measurement system satisfies all objectives. As a result, a combination of techniques are used to manage interest rate risk, including simulation analysis, asset and liability repricing schedules and duration of equity. These interest rate risk measurement reports are reviewed regularly by the Corporation's Asset Liability Policy Committee. While most assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require adjustments to more accurately reflect their repricing behavior. Assumptions based on historical pricing relationships and anticipated market reactions are made to certain core deposit categories to reflect the elasticity of the changes in their interest rates relative to the changes in market interest rates. In addition, estimates are made concerning early loan and security repayments. Prepayment assumptions are based on the expertise of portfolio managers along with input from financial markets. Consideration is given to current and future interest rate levels. These adjustments provide a more accurate picture of the Corporation's interest rate risk profile. Net interest income is frequently evaluated under various balance sheet and interest rate scenarios. The results of this analysis provide the information needed to assess the proper balance sheet structure. As market interest rates approach expected turning points, management adjusts the interest rate sensitivity of the Corporation. This sensitivity is measured as a percentage of earning assets. The Corporation's operating range for interest rate sensitivity, before elasticity adjustments, is between an asset sensitive position of 5 percent and a liability sensitive position of 10 percent. However, the elasticity adjustment made to the bank's core deposits adds asset sensitivity to the balance sheet. Accordingly, on an elasticity-adjusted basis, the operating range allows for an asset sensitive position of 10 percent and a liability sensitive position of 5 percent. The schedule on page 33 shows the interest sensitivity gap as of year-end 1994 and 1993. The report reflects the contractual repricing and payment schedules of assets and liabilities, including an estimate of all early loan and security repayments which adds $1.3 billion of rate sensitivity to the 1994 year-end gap. In addition, the schedule identifies the adjustment for the price elasticity on certain core deposits. The Corporation had a one-year liability sensitive gap of $1.6 billion, or 5 percent of earning assets, as of December 31, 1994. Restated for core deposit elasticities, the gap is $391 million liability sensitive, or 1 percent of earning assets. This compares to a $1.1 billion liability sensitive gap or $332 million asset sensitive elasticity-adjusted gap on December 31, 1993. The Corporation's gap remained in a somewhat neutral position throughout the year, reflecting little change from year-end 1993 levels. Management views this position as reasonable and, looking forward, does not anticipate any material change by year-end 1995. However, a reasonable amount of flexibility exists that will permit, if warranted, an increase in the amount of asset sensitivity by year-end 1995. An unexpected change in the pace of the economy's recovery, whether domestically or internationally, could translate into a materially different interest rate environment than currently expected. A system is maintained where management evaluates "base" net interest income under what is believed to be the most likely balance sheet structure and interest rate environment. This "base" net interest income is then evaluated against interest rate scenarios that are gradually taken up and down 200 basis points from the most likely rate environment. In addition, adjustments to asset prepayment levels, yield curves and overall balance sheet mix and growth assumptions are made to be consistent with the particular interest rate environment. The measurement of risk exposure at year-end 1994 for a 200 basis point rise in short-term interest rates identified approximately $37 million of net interest income at risk during 1995. If, on the other hand, short-term interest rates decline 200 basis points, the Corporation would stand to add $54 million of net interest income. Corporate policy limits adverse change to no more than 5 percent of our most likely net interest income forecast. In either case, the Corporation is within the policy guideline. LIQUIDITY Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or acquisition of additional funds. In order to satisfy funding and liquidity requirements, the Corporation has a $4.5 billion medium-term note program. Under this program our banks in Michigan and Illinois can issue senior debt with maturities ranging between nine months and 15 years. The Michigan bank can issue up to an additional $1 billion of short-term senior notes. At year-end 1994, unissued debt related to the two programs totaled $2.1 billion. Liquid assets totaled $5.2 billion at December 31, 1994. In addition, $1.6 billion was available from a collateralized borrowing account with the Federal Reserve Bank at year-end 1994. Purchased funds at December 31, 1994, excluding certificates of deposit with maturities beyond one year, approximated $7.8 billion. 32 17 TABLE 13: SCHEDULE OF RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 1994 December 31, 1993 Interest Sensitivity Period Interest Sensitivity Period --------------------------- --------------------------- Within Over Within Over (dollar amounts in millions) One Year One Year Total One Year One Year Total ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ -- $ 1,823 $ 1,823 $ -- $ 1,601 $ 1,601 Short-term investments 487 34 521 2,344 108 2,452 Investment securities 3,173 4,703 7,876 2,881 3,419 6,300 Commercial loans (including lease financing) 9,225 1,667 10,892 7,820 1,476 9,296 International loans 1,182 13 1,195 1,096 40 1,136 Real estate related loans 3,748 2,159 5,907 2,906 2,088 4,994 Consumer loans 2,206 2,009 4,215 1,732 1,942 3,674 ------- -------- --------- ------- -------- ------- Total loans 16,361 5,848 22,209 13,554 5,546 19,100 Other assets 313 688 1,001 241 601 842 ------- -------- --------- ------- -------- ------- Total assets $20,334 $ 13,096 $ 33,430 $19,020 $ 11,275 $ 30,295 ======= ======== ========= ======= ========= ======== LIABILITIES Deposits Noninterest-bearing $ 470 $ 4,787 $ 5,257 $ 1,090 $ 3,849 $ 4,939 NOW 57 1,777 1,834 296 1,487 1,783 Savings -- 2,432 2,432 -- 2,453 2,453 Money market 4,565 -- 4,565 4,644 27 4,671 Certificates of deposit 4,494 1,417 5,911 4,375 1,361 5,736 Foreign office 2,433 -- 2,433 1,367 1 1,368 ------- -------- --------- ------- -------- ------- Total deposits 12,019 10,413 22,432 11,772 9,178 20,950 Short-term borrowings 4,206 -- 4,206 5,376 24 5,400 Medium- and long-term debt 3,248 850 4,098 736 725 1,461 Other liabilities (13) 315 302 1 301 302 ------- -------- --------- ------- -------- ------- Total liabilities 19,460 11,578 31,038 17,885 10,228 28,113 Shareholders' equity (55) 2,447 2,392 28 2,154 2,182 ------- -------- --------- ------- -------- -------- Total liabilities and shareholders' equity $19,405 $ 14,025 $ 33,430 $17,913 $ 12,382 $ 30,295 ======= ======== ========= ======= ========== ========= Sensitivity impact of interest rate swaps $(2,578) $ 2,578 -- $(1,363) $ 1,363 $ -- Sensitivity impact of unsettled swap and security purchases -- -- -- (886) 886 -- ------- -------- --------- ------- -------- ------- Interest sensitivity gap (1,649) 1,649 -- (1,142) 1,142 -- Gap as a percentage of earning assets (5)% 5% -- (4)% 4% -- Sensitivity impact from elasticity adjustments (1) 1,258 (1,258) -- 1,474 (1,474) -- ------- -------- --------- ------- -------- ------- Interest sensitivity gap with elasticity adjustments $ (391) $ 391 -- $ 332 $ (332) -- Gap as a percentage of earnings assets (1)% 1% -- 1% (1)% -- ======= ======== ========= ======= ======== =======
(1) Elasticity adjustments for NOW, savings and money market deposit accounts are based on historical pricing relationships dating back to 1985 as well as expected future pricing relationships. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of customers and to manage its own exposure to fluctuations in interest and foreign exchange rates. Off-balance-sheet instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated balance sheets. The FASB issued SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," in October 1994. This Statement requires additional disclosures about derivative financial instruments--futures, forwards, swaps, option contracts and other financial instruments with similar characteristics. Disclosures pursuant to SFAS No. 119 are provided in Notes 17 and 20 of the consolidated financial statements, along with information on other off-balance-sheet financial instruments. 33 18 TABLE 14: OFF-BALANCE-SHEET DERIVATIVES PORTFOLIO
December 31, 1994 December 31, 1993 ------------------ ------------------ Notional Fair Notional Fair (in millions) Amount Value Amount Value -------------------------------------------------------------------------------------------------------- RISK MANAGEMENT Interest Rate Swaps Variable rate asset designation: Generic receive fixed $ 50 $ -- $ 550 $ 18 Amortized receive fixed 297 (17) -- -- Index amortized receive fixed 1,936 (133) 1,883 24 Fixed rate asset designation: Generic pay fixed 185 (1) 600 (13) Medium- and long-term debt designation: Generic receive fixed 675 (83) 496 14 Generic pay fixed 25 -- 25 (2) Basis 475 -- 50 -- Other (1) 400 (2) 1,229 17 ----------------- ---------------- Total risk management derivatives $4,043 $(236) $4,833 $ 58 CUSTOMER INITIATED Foreign exchange contracts 501 1 224 1 Other (2) 376 (1) 162 1 ---------------- ---------------- Total customer initiated derivatives $ 877 $ -- $ 386 $ 2 ---------------- ---------------- Total derivative financial instruments $4,920 $(236) $5,219 $ 60 ================ ================
(1) Includes interest rate forward and futures contracts, interest rate caps written and purchased, foreign exchange contracts, commitments to purchase securities, commitments to sell loans, and international swap agreements. (2) Includes interest rate caps written and purchased and interest rate swaps. The preceding table shows the Corporation's off-balance-sheet derivatives portfolio. The notional or contract amounts of derivative financial instruments, which represent the extent of involvement in such transactions, are not reflected in the consolidated balance sheets. Notional amounts are used to determine the contractual cash flows to be exchanged and generally are not actually paid or received, except for certain contracts such as forward and futures. Notional amounts also are not indicative of the potential for gain or loss associated with the credit or market risks inherent in such transactions. Consequently, the actual market or credit exposure for all derivative instruments is significantly less than the notional amount. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR RISK MANAGEMENT PURPOSES The Corporation uses both balance sheet instruments, such as U.S. Treasury securities, and off-balance-sheet derivative financial instruments primarily as an end-user to manage interest and foreign exchange rate risk. Interest rate risk arises in the normal course of business due to an imbalance in the rate sensitivity and repricing or maturity characteristics of on-balance-sheet assets and liabilities. The Corporation seeks to manage these risk exposures without significant impact on balance sheet leverage and liquidity. The Corporation's use of derivatives takes place predominately in the interest rate markets and mainly involves interest rate swaps, both amortizing and non-amortizing. Other derivative financial instruments which may be used in connection with risk management activities include interest rate caps and forward and futures interest and foreign exchange rate contracts. Income and expense on interest rate swaps and other derivatives used to manage the interest rate sensitivity of on-balance-sheet assets and liabilities are recognized in net interest income. Index amortizing swaps are interest rate swaps whose notional principal decreases at a rate that varies with the level of a specified index in accordance with a predetermined schedule. The majority of these swaps are indexed to short-term interest rates. Notional amounts of index amortizing swaps generally decline more rapidly as interest rates fall; conversely, notional amounts decrease more slowly as rates increase. As of December 31, 1994, index amortizing swaps had an average expected life of approximately 2.2 years with a stated maturity that averaged 2.6 years. The notional amounts of generic interest rate swaps do not change for the life of the contract, and amortizing swaps which are not tied to an index generally decline 34 19 TABLE 15: ANALYSIS OF DERIVATIVES NOTIONAL AMOUNTS
Risk Management Customer Initiated --------------------------------------- ----------------------------------- Foreign Interest Exchange (in millions) Rate Swaps Other(1) Total Contracts Other(2) Total ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1992 $ 2,346 $ 531 $ 2,877 $ 163 $188 $ 351 Additions 2,320 3,312 5,632 49,001 18 49,019 Maturities/amortizations (1,062) (2,369) (3,431) (48,940) (44) (48,984) Terminations -- (245) (245) -- -- -- ------- ------- ------- -------- ---- -------- Balances at December 31, 1993 $ 3,604 $ 1,229 $ 4,833 $ 224 $162 $ 386 Additions 2,075 2,607 4,682 43,833 262 44,095 Maturities/amortizations (2,036) (3,234) (5,270) (43,556) (32) (43,588) Terminations -- (202) (202) -- (16) (16) ------- ------- ------- -------- ---- -------- Balances at December 31, 1994 $ 3,643 $ 400 $ 4,043 $ 501 $376 $ 877 --------------------------------------- -----------------------------------
(1) Includes Interest rate forward and futures contracts, interest rate caps written and purchased, foreign exchange contracts, commitments to purchase securities, commitments to sell loans, and international swap agreements. (2) Includes interest rate caps written and purchased and interest rate swaps. TABLE 16: UNREALIZED GAINS AND LOSSES ON DERIVATIVES
Unrealized Unrealized Net Unrealized (in millions) Gains Losses Gain (Loss) ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994 Risk management Interest rate swaps $ 4 $(238) $(234) Other (1) -- (2) (2) Customer initiated Foreign exchange contracts 5 (4) 1 Other (2) -- (1) (1) -------- ----- ----- Total $ 9 $(245) $(236) ======== ===== ===== December 31, 1993 Risk management Interest rate swaps $ 61 $ (20) $ 41 Other (1) 18 (1) 17 Customer initiated Foreign exchange contracts 3 (2) 1 Other (2) 1 -- 1 -------- ----- ----- Total $ 83 $ (23) $ 60 ======== ===== =====
(1) Includes interest rate forward and futures contracts, interest rate caps written and purchased, foreign exchange contracts, commitments to purchase securities, commitments to sell loans, and international swap agreements. (2) Includes interest rate caps written and purchased and interest rate swaps. 35 20 TABLE 17: EXPECTED MATURITY OF DERIVATIVES
(dollar amounts in millions) 1995 1996 1997 1998 1999 2000-2014 Total ------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS Generic Receive Fixed Notional amount $ 75 $ 50 $ 50 $ -- $ -- $ 550 $ 725 Weighthted average: Receive rate 3.71% 8.00% 9.35% -- % --% 7.69% 7.41% Pay rate 5.69% 5.13% 5.69% -- % --% 6.01% 5.89% ------ ------ ------ ----- ----- ------ ------ GENERIC PAY FIXED Notional amount $ 148 $ 60 $ -- $ -- $ 2 $ -- $ 210 Weighted average: Receive rate 5.67% 6.46% --% --% 6.83% --% 5.91% Pay rate 7.49% 7.56% --% --% 8.73% --% 7.52% ------ ------ ------ ----- ----- ------ ------ AMORTIZING RECEIVE FIXED-GENERIC Notional amount $ 97 $ 23 $ 84 $ 100 $ -- $ -- $ 304 Weighted average: Receive rate 4.75% 4.60% 4.75% 4.75% --% --% 4.74% Pay rate 5.66% 5.59% 5.66% 5.66% --% --% 5.65% ------ ------ ------ ----- ----- ------ ------ AMORTIZING RECEIVE FIXED-INDEX Notional amount $ 205 $ 170 $1,029 $ 96 $ 110 $ 326 $1,936 Weighted average: Receive rate 5.54% 5.57% 5.16% 5.88% 6.10% 5.63% 5.40% Pay rate 5.91% 5.89% 5.71% 5.91% 6.23% 5.92% 5.82% ------ ------ ------ ----- ----- ------ ------ BASIS Notional amount $ 475 $ -- $ -- $ -- $ -- $ -- $ 475 Weighted average: Receive rate 6.01% --% --% --% --% --% 6.01% Pay rate 5.80% --% --% --% --% --% 5.80% ------ ------ ------ ----- ----- ------ ------ OTHER DERIVATIVE INSTRUMENTS (1) Notional amount $ 900 $ 128 $ 226 $ 7 $ -- $ 9 $1,270 ------ ------ ------ ----- ----- ------ ------ Total notional amount $1,900 $ 431 $1,389 $ 203 $ 112 $ 885 $4,920 ====== ====== ====== ===== ===== ====== ======
(1) Other derivative instruments include interest rate forward and futures contracts, interest rate caps written and purchased, foreign exchange contracts, commitments to purchase securities, commitments to sell loans, and international swap agreements. Average rates are not meaningful for these instruments. 36 21 on a straight-line basis until the stated maturity. Basis swaps are contracts that allow the Corporation both to receive or pay amounts based on LIBOR, prime or Treasury bill rates. The table on page 36 summarizes the remaining expected maturities and weighted average interest rates to be received and paid on all interest rate swaps as of December 31, 1994. A key assumption in the calculation of this information is that rates remain constant at December 31, 1994 levels. Customer Initiated Derivative Financial Instruments The Corporation also provides various derivative products to accommodate customers' business needs. Customer initiated derivatives activities mainly involve the following: (1) entering into foreign exchange contracts with customers seeking to minimize exposure to foreign exchange rate risk and (2) offering interest rate caps and interest rate swaps to customers seeking to manage exposure to interest rate risk. Notional amounts of customer initiated foreign exchange contracts entered into as of year-end 1994 and 1993 were $501 million and $224 million, respectively. Foreign exchange contracts entered into with customers are typically offset immediately by establishing other foreign exchange positions. Therefore, market risk exposure for these positions is minimal. As of December 31, 1994 and 1993, the notional amounts of interest rate caps sold to customers were $369 million and $132 million, respectively. The notional amounts of interest rate swaps entered into with customers totaled $7 million and $30 million at year-end 1994 and 1993, respectively. Although management may enter into offsetting interest rate swap agreements to minimize exposure to risk on customer-related swaps, interest rate caps sold to customers are not necessarily offset with other derivative transactions. However, corporate policy limits the activity involving such derivatives. PARENT COMPANY Bank regulatory agencies limit the amount of dividends subsidiary banks can pay to the Corporation's parent company. This, in turn, could limit the Corporation's ability to pay dividends to shareholders. During 1995, the subsidiary banks can pay dividends of up to $153 million plus current net profits without prior regulatory approval. At December 31, 1994, total assets of the Corporation's parent company, excluding the investment in subsidiaries, were 86 percent of total liabilities. OTHER MATTERS As disclosed in Note 18 of the consolidated financial statements on page 52, a lawsuit was filed on July 24, 1990, by the State of Michigan against a subsidiary bank involving hazardous waste issues. The Corporation's motion for summary judgment was granted, and the State of Michigan has filed an appeal which is still pending. Management believes that even if the summary judgment is not upheld on appeal, the results of this action will not have a materially adverse effect on the Corporation's consolidated financial position. However, depending upon the amount of ultimate liability, if any, and the consolidated results of operations in the year of final resolution, the legal action may have a materially adverse effect on the consolidated results of operations in that year. 37 22 CONSOLIDATED BALANCE SHEETS: COMERICA INCORPORATED AND SUBSIDIARIES
December 31 (in thousands, except share data) 1994 1993 ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,822,313 $ 1,600,695 Interest-bearing deposits with banks 378,873 1,026,473 Federal funds sold and securities purchased under agreements to resell 46,000 1,091,789 Trading account securities 4,332 3,600 Mortgages held for sale 91,547 330,667 Investment securities available for sale 2,906,296 2,322,101 Investment securities held to maturity (estimated fair value of $4,659,317 in 1994 and $4,030,492 in 1993) 4,970,165 3,977,450 ------------ ------------- Total investment securities 7,876,461 6,299,551 Commercial loans 10,633,808 9,086,757 International loans 1,195,328 1,135,585 Real estate construction loans 413,987 437,481 Commercial mortgage loans 3,056,337 2,699,861 Residential mortgage loans 2,436,445 1,856,822 Consumer loans 4,214,716 3,674,256 Lease financing 258,625 209,185 ------------ ------------- Total loans 22,209,246 19,099,947 Less allowance for loan losses (326,195) (298,685) ------------ ------------- Net loans 21,883,051 18,801,262 Premises and equipment 437,757 399,123 Customers' liability on acceptances outstanding 33,632 38,212 Accrued income and other assets 855,936 703,501 ------------ ------------- Total assets $ 33,429,902 $ 30,294,873 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits (noninterest-bearing) $ 5,257,396 $ 4,939,234 Interest-bearing deposits 14,741,438 14,642,834 Deposits in foreign offices 2,433,482 1,367,811 ------------ ------------- Total deposits 22,432,316 20,949,879 Federal funds purchased and securities sold under agreements to repurchase 2,594,189 450,092 Other borrowed funds 1,611,219 4,950,507 Acceptances outstanding 33,632 38,212 Accrued expenses and other liabilities 268,823 263,969 Medium- and long-term debt 4,097,943 1,460,556 ------------ ------------- Total liabilities 31,038,122 28,113,215 Common stock--$5 par value Authorized--250,000,000 shares Issued--119,294,531 shares in 1994 and 1993 596,473 596,473 Capital surplus 525,052 524,186 Unrealized gains and losses on investment securities available for sale (55,039) 27,473 Retained earnings 1,390,405 1,155,280 Less cost of common stock in treasury--2,382,333 shares in 1994 and 4,423,603 shares in 1993 (65,111) (121,754) ------------ ------------- Total shareholders' equity 2,391,780 2,181,658 ------------ ------------- Total liabilities and shareholders' equity $ 33,429,902 $ 30,294,873 ============ =============
See notes to consolidated financial statements. 38 23 CONSOLIDATED STATEMENTS OF INCOME: COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31 (in thousands, except per share data) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $1,577,329 $1,388,169 $1,445,350 Interest on investment securities Taxable 446,307 307,354 356,299 Exempt from federal income tax 30,645 40,124 54,457 ---------- ---------- ---------- Total interest on investment securities 476,952 347,478 410,756 Trading account interest 70 640 3,012 Interest on federal funds sold and securities purchased under agreements to resell 4,717 4,050 14,619 Interest on time deposits with banks 21,858 27,744 45,065 Interest on mortgages held for sale 10,998 14,772 14,387 ---------- ---------- ---------- Total interest income 2,091,924 1,782,853 1,933,189 INTEREST EXPENSE Interest on deposits 542,727 529,802 706,873 Interest on short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 121,390 47,817 53,422 Other borrowed funds 78,546 41,216 45,998 Interest on medium- and long-term debt 147,942 62,719 29,742 Net interest rate swap income (28,808) (32,239) (24,292) ---------- ---------- ---------- Total interest expense 861,797 649,315 811,743 ---------- ---------- ---------- Net interest income 1,230,127 1,133,538 1,121,446 Provision for loan losses 56,000 69,000 111,562 ---------- ---------- ---------- Net interest income after provision for loan losses 1,174,127 1,064,538 1,009,884 NONINTEREST INCOME Income from fiduciary activities 121,755 122,280 113,895 Service charges on deposit accounts 123,626 120,125 113,099 Customhouse broker fees 40,662 39,926 38,010 Revolving credit fees 41,190 35,707 34,059 Securities gains 3,461 1,978 6,320 Other noninterest income 135,943 142,486 105,791 ---------- ---------- ---------- Total noninterest income 466,637 462,502 411,174 NONINTEREST EXPENSES Salaries and employee benefits 548,607 528,658 516,341 Net occupancy expense 98,885 95,736 86,041 Equipment expense 67,319 62,401 57,398 FDIC insurance expense 44,276 44,593 44,629 Telecommunications expense 27,304 20,788 17,270 Merger, integration and restructuring charge 7,000 22,000 128,000 Other noninterest expenses 265,278 264,289 242,344 ---------- ---------- ---------- Total noninterest expenses 1,058,669 1,038,465 1,092,023 ---------- ---------- ---------- Income before income taxes 582,095 488,575 329,035 Provision for income taxes 194,853 147,937 88,603 ---------- ---------- ---------- Net Income $ 387,242 $ 340,638 $ 240,432 ========== ========== ========== Net income applicable to common stock $ 387,242 $ 340,596 $ 236,819 ========== ========== ========== NET INCOME PER COMMON SHARE Primary $3.28 $2.85 $1.99 Fully diluted $3.28 $2.85 $1.98 Primary average shares 118,160 119,569 119,113 Cash dividends declared on common stock $145,098 $125,411 $107,788 Dividends per common share $1.24 $1.07 $0.96
See notes to consolidated financial statements. 39 24 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY: COMERICA INCORPORATED AND SUBSIDIARIES
Redeemable Unrealized Total Preferred Common Capital Gains Retained Treasury Shareholders' (in thousands, except share data) Stock Stock Surplus and (Losses) Earnings Stock Equity ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT JANUARY 1, 1992 $ 37,605 $304,164 $508,841 $ -- $1,110,404 $ (25,324) $1,935,690 Net income for 1992 -- -- -- -- 240,432 -- 240,432 Cash dividends declared Preferred stock -- -- -- -- (3,613) -- (3,613) Common stock -- -- -- -- (107,788) -- (107,788) Purchase of 89,383 shares of common stock -- -- -- -- -- (5,635) (5,635) Issuance of common stock under employee stock plans and for conversion of debentures -- 5,055 28,077 -- (357) 2,097 34,872 Amortization of deferred compensation -- -- 1,179 -- -- -- 1,179 -------- -------- -------- -------- ---------- --------- ---------- BALANCES AT DECEMBER 31, 1992 37,605 309,219 538,097 -- 1,239,078 (28,862) 2,095,137 Net income for 1993 -- -- -- -- 340,638 -- 340,638 Cash dividends declared Preferred stock -- -- -- -- (42) -- (42) Common stock -- -- -- -- (125,411) -- (125,411) Purchase of 4,720,117 shares of common stock -- -- -- -- -- (128,848) (128,848) Retirement of treasury stock -- (4,105) (17,730) -- (505) 22,340 -- Issuance of common stock under employee stock plans and for conversion of debentures -- 3,780 3,118 -- (6,725) 13,616 13,789 Stock split -- 287,579 -- -- (287,579) -- -- Amortization of deferred compensation -- -- 701 -- -- -- 701 Redemption of preferred stock (37,605) -- -- -- (4,174) -- (41,779) Adjustment for change in accounting method, net of income taxes -- -- -- 27,473 -- -- 27,473 -------- -------- -------- -------- ---------- --------- ---------- BALANCES AT DECEMBER 31, 1993 -- 596,473 524,186 27,473 1,155,280 (121,754) 2,181,658 Net income for 1994 -- -- -- -- 387,242 -- 387,242 Cash dividends declared on common stock -- -- -- -- (145,098) -- (145,098) Purchase of 2,810,564 shares of common stock -- -- -- -- -- (76,280) (76,280) Issuance of common stock: Employee stock plans -- -- 373 -- (3,161) 7,702 4,914 Acquisition of Pacific Western -- -- -- -- (3,858) 125,221 121,363 Amortization of deferred compensation -- -- 493 -- -- -- 493 Change in unrealized gains/(losses) on investment securities available for sale -- -- -- (82,512) -- -- (82,512) -------- -------- -------- -------- ---------- --------- ---------- BALANCES AT DECEMBER 31, 1994 $ -- $596,473 $525,052 $(55,039) $1,390,405 $ (65,111) $2,391,780 ======== ======== ======== ======== ========== ========= ==========
( ) Indicates deduction. See notes to consolidated financial statements. 40 25 CONSOLIDATED STATEMENTS OF CASH FLOWS: COMERICA INCORPORATED AND SUBSIDIARIES
Year Ended December 31 (in thousands) 1994 1993 1992 ------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 387,242 $ 340,638 $ 240,432 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 56,000 69,000 111,562 Depreciation 59,819 54,473 52,788 Merger, integration and restructuring charge (19,733) (10,258) 37,618 Net (increase) decrease in trading account securities (732) 105,779 (95,095) Net (increase) decrease in mortgages held for sale 239,120 (95,955) (75,115) Net (increase) decrease in accrued income receivable (43,495) (2,888) 59,615 Net increase (decrease) in accrued expenses (31,845) 15,967 (104,096) Net amortization of intangibles 29,667 42,967 32,741 Other, net 27,948 (121,850) 94,079 ----------- ----------- ----------- Total adjustments 316,749 57,235 114,097 ----------- ----------- ----------- Net cash provided by operating activities 703,991 397,873 354,529 INVESTING ACTIVITIES Net decrease in interest-bearing deposits with banks 647,600 295,042 120,643 Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 1,045,789 (1,005,157) 2,324,632 Proceeds from sale of investment securities available for sale 3,001 -- -- Proceeds from maturity of investment securities available for sale 565,445 -- -- Purchases of investment securities available for sale (1,150,178) -- -- Proceeds from sale of investment securities held to maturity -- -- 214,110 Proceeds from maturity of investment securities held to maturity 1,429,966 3,316,794 3,437,288 Purchases of investment securities held to maturity (2,197,840) (4,320,627) (3,304,872) Net increase in loans (other than loans purchased) (2,224,057) (927,971) (601,532) Purchase of loans (257,043) (23,868) (59,175) Fixed assets, net (78,454) (79,305) (39,474) Net (increase) decrease in customers' liability on acceptances outstanding 4,580 (12,548) 4,444 Net cash provided by (used for) acquisitions 58,626 -- (56,220) ----------- ----------- ----------- Net cash provided by (used in) investing activities (2,152,565) (2,757,640) 2,039,844 FINANCING ACTIVITIES Net increase (decrease) in deposits 304,768 (249,639) (717,097) Net increase (decrease) in short-term borrowings (1,056,522) 2,178,890 (2,013,389) Net increase (decrease) in acceptances outstanding (4,580) 12,548 (4,444) Proceeds from issuance of medium- and long-term debt 3,550,000 1,005,000 450,000 Repayments and purchases of medium- and long-term debt (912,613) (280,541) (13,931) Proceeds from issuance of common stock and other capital transactions 5,407 9,395 33,057 Purchase of common stock for treasury (76,280) (128,848) (5,635) Redemption of preferred stock -- (41,779) -- Dividends paid (139,988) (124,306) (80,472) ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,670,192 2,380,720 (2,351,911) ----------- ----------- ----------- Net increase in cash and due from banks 221,618 20,953 42,462 Cash and due from banks at beginning of year 1,600,695 1,579,742 1,537,280 ----------- ----------- ----------- Cash and due from banks at end of year $ 1,822,313 $ 1,600,695 $ 1,579,742 =========== =========== =========== Interest paid $ 862,563 $ 665,297 $ 887,232 =========== =========== =========== Income taxes paid $ 171,851 $ 109,557 $ 115,835 =========== =========== =========== Noncash investing and financing activities Loan transfers to other real estate $ 26,598 $ 38,955 $ 20,784 =========== =========== =========== Conversion of debentures to equity $ -- $ 5,095 $ 1,348 =========== =========== =========== Treasury stock issued for acquisition $ 121,363 $ -- $ -- =========== =========== =========== Loan transfers to investment securities $ 91,538 $ -- $ -- =========== =========== ===========
See notes to consolidated financial statements. 41 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: COMERICA INCORPORATED AND SUBSIDIARIES NOTE 1--ACCOUNTING POLICIES The accounting and reporting policies of Comerica Incorporated and its subsidiaries conform to generally accepted accounting principles and prevailing practices within the banking industry. The following is a summary of the more significant accounting and reporting policies. CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of all significant intercompany accounts and transactions. The historical consolidated financial statements have been restated to include the accounts and results of operations for acquisitions accounted for as pooling-of-interests combinations. For acquisitions of subsidiary banks using the purchase method of accounting, the assets acquired and liabilities assumed have been adjusted to fair market values at the date of acquisition, and the resulting net discount or premium is being accreted or amortized into income over the remaining lives of the relevant assets and liabilities. Goodwill representing the excess of cost over the net book value of identifiable assets acquired is amortized on a straight-line basis over periods ranging from 10 to 30 years. Core deposit intangible assets are amortized on an accelerated method over 10 years. MORTGAGES HELD FOR SALE Mortgages held for sale are carried at the lower of cost or market. Market value is determined in the aggregate. SECURITIES Investment securities held to maturity are those securities which management has the ability and positive intent to hold to maturity. Investment securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities that fail to meet the ability and positive intent criteria are accounted for as securities available for sale, and stated at fair value with unrealized gains and losses, net of income taxes, reported as a component of shareholders' equity. Trading account securities are carried at market value. Realized and unrealized gains or losses on trading securities are included in noninterest income. Gains or losses on the sale of securities are computed based on the adjusted cost of the specific security. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation, computed on the straight-line method, is charged to operations over the estimated useful lives of the properties. Leasehold improvements are amortized over the terms of their respective leases or the estimated useful lives of the improvements, whichever is shorter. ALLOWANCE FOR LOAN LOSSES The allowance is maintained at a level adequate to absorb losses inherent in the loan portfolio. Management determines the adequacy of the allowance by applying projected loss ratios to the risk ratings of loans both individually and by category. The projected loss ratios incorporate such factors as recent loss experience, current economic conditions, the risk characteristics of the various categories and concentrations of loans, transfer risk problems and other pertinent factors. Loans which are deemed uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance. NONPERFORMING ASSETS Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market rates due to a serious weakening of the borrower's financial condition, and other real estate which has been acquired primarily through foreclosure and is awaiting disposition. Loans generally are placed on nonaccrual status when principal or interest is past due 90 days or more and/or when, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable. Other real estate acquired is carried at the lower of cost or fair value, minus estimated costs to sell. When the property is acquired through foreclosure, any excess of the related loan balance over fair value is charged to the allowance for loan losses. Subsequent write-downs, operating expenses, and losses upon sale, if any, are charged to noninterest expenses. PENSION COSTS Pension costs are charged to salaries and employee benefits expense and funded consistent with the requirements of federal law and regulations. POSTRETIREMENT BENEFITS Postretirement benefits are recognized in the financial statements during the employee's active service period. Prior to 1993, the Corporation's practice was to expense these benefits when paid. 42 27 DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swaps, interest rate caps, and forward and futures contracts used to manage the Corporation's exposure to interest rate risk are accounted for on an accrual basis. Therefore, the net income or expense arising from these instruments, including premiums paid or received, is recognized over the life of the contract as an adjustment to interest expense. Gains and losses on early terminations of risk management derivatives are included in the carrying amount of the related assets or liabilities and amortized as yield adjustments over the remaining terms of the assets or liabilities. Foreign exchange contracts, interest rate caps and interest rate swaps initiated by customers are accounted for on a mark-to-market basis. Therefore, the market values of these instruments are reflected in the consolidated balance sheets and both realized and unrealized gains and losses are recognized currently in noninterest income. INCOME TAXES Provisions for income taxes are based on amounts reported in the statements of income (after exclusion of nontaxable income such as interest on state and municipal securities) and include deferred income taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. STATEMENTS OF CASH FLOWS For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption, "Cash and due from banks." LOAN ORIGINATION FEES AND COSTS Loan origination and commitment fees are deferred and recognized over the life of the related loan or over the commitment period as a yield adjustment. Loan fees on unused commitments and fees related to loans sold are recognized currently as other noninterest income. NOTE 2--MERGER AND ACQUISITIONS In connection with the merger with Manufacturers in 1992, the Corporation incurred a charge of $128 million ($92 million after-tax) principally as a result of the planned reduction of 1,800 positions in the combined entities; properties and equipment costs associated with writing off duplicate facilities and computer systems; and advisory fees. An additional pre-tax charge of $22 million ($14 million after-tax) was incurred in the fourth quarter of 1993 for ongoing merger and integration costs. During the years ended December 31, 1994, 1993 and 1992 Comerica made the following acquisitions: Transactions accounted for as purchases:
FMV of FMV of Assets Liabilities Purchase Intangibles (in millions) Acquired Assumed Price Recorded ---------------------------------------------------------------------------------------------- During 1994 Pacific Western Bancshares $ 1,029 $ 908 $ 121 $ 70 Lockwood Banc Group 332 288 44 27 During 1992 Hibernia National Bank in Texas 841 785 56 11 ----------------------------------------------------------------------------------------------
Transactions accounted for using the pooling-of-interests method:
Common Shares Issued ------------------------------------------------------------------------------------ During 1993 NorthPark National Corporation 2,677,706 Sugar Creek National Corporation 892,976 ------------------------------------------------------------------------------------
The Corporation announced the following acquisition which is expected to be completed in 1995, pending all regulatory approvals:
Asset Purchase (in millions) Size Price Method ----------------------------------------------------------------------------------- University Bank and Trust $460 $70 Purchase -----------------------------------------------------------------------------------
NOTE 3--INVESTMENT SECURITIES Information concerning investment securities as shown in the consolidated balance sheets of the Corporation was as follows:
Gross Gross Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value --------------------------------------------------------------------------------- December 31, 1994 U.S. Government and agency securities $4,461,592 $ 5,538 $328,757 $4,138,373 State and municipal securities 421,975 15,820 2,192 435,603 Other securities 86,598 308 1,565 85,341 ------------------------------------------------------- Total securities held to maturity $4,970,165 $21,666 $332,514 $4,659,317 ================================================================================= December 31, 1993 U.S. Government and agency securities $3,232,127 $27,413 $ 12,452 $3,247,088 State and municipal securities 513,020 39,470 1,376 551,114 Other securities 232,303 2,536 2,549 232,290 ------------------------------------------------------- Total securities held to maturity $3,977,450 $69,419 $ 16,377 $4,030,492 =================================================================================
43 28 Gross unrealized gains and losses were $13 million and $98 million, respectively, at December 31, 1994 and $46 million and $4 million at December 31, 1993 for securities available for sale. The available for sale portfolio is primarily U.S. Government and agency securities. The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity -------------------------- -------------------------- December 31, 1994 Estimated Estimated (in thousands) Cost Fair Value Cost Fair Value ----------------------------------------------------------------------------------- Contractual maturity Within one year $ 429,934 $ 417,642 $ 98,345 $ 99,418 Over one year to five years 40,351 41,210 297,952 305,871 Over five years to ten years 2,163 1,779 92,027 94,913 Over ten years 88,018 74,472 33,439 34,301 ------------------------ -------------------------- Sub-total securities 560,466 535,103 521,763 534,503 Mortgage-backed securities 2,374,054 2,312,642 4,448,402 4,124,814 Equity and other non-debt securities 56,361 58,551 -- -- ------------------------ -------------------------- Total securities $2,990,881 $2,906,296 $4,970,165 $4,659,317 ===================================================================================
Sales and calls of investment securities available for sale and calls of investment securities held to maturity resulted in realized gains and losses as follows:
Year Ended December 31 Available for Sale Held to Maturity -------------------------- -------------------------- (in thousands) 1994 1993 1994 1993 ------------------------------------------------------ -------------------------- Securities gains $ 2,557 $ n/a $ 926 $ 2,128 Securities losses -- n/a (22) (150) -------------------------- -------------------------- Total $ 2,557 $ n/a $ 904 $ 1,978
Assets, principally securities, carried at approximately $6.3 billion at December 31, 1994, were pledged to secure public deposits (including State of Michigan deposits of $33 million at December 31, 1994), and for other purposes as required by law. Note 4--NONPERFORMING ASSETS The following table summarizes nonperforming assets and loans which are contractually past due 90 days or more as to interest or principal payments. Nonperforming assets consist of nonaccrual loans, reduced-rate loans and other real estate. Nonaccrual loans are those on which interest is not being recognized. Reduced-rate loans are those on which interest has been renegotiated to lower than market rates because of the weakened financial condition of the borrower. Nonaccrual and reduced-rate loans are included in loans on the consolidated balance sheet.
December 31 (in thousands) 1994 1993 ----------------------------------------------------------------------------------- Nonaccrual loans Commercial loans $ 88,514 $ 71,268 International loans -- 215 Real estate construction loans 16,941 18,748 Real estate mortgage loans (principally commercial) 56,268 63,688 --------- -------- Total 161,723 153,919 Reduced-rate loans 2,299 5,057 --------- --------- Total nonperforming loans 164,022 158,976 Other real estate 40,462 50,174 --------- -------- Total nonperforming assets $204,484 $209,150 ======== ======== Loans past due 90 days $ 39,161 $ 45,880 ======== ======== Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms $ 17,406 $ 20,247 ======== ======== Interest income recognized $ 3,325 $ 1,394 ======== ========
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" are effective beginning January 1, 1995. These standards will not have a material impact on the Corporation's financial statements. Note 5--ALLOWANCE FOR LOAN LOSSES An analysis of changes in the allowance for loan losses follows:
(in thousands) 1994 1993 1992 ----------------------------------------------------------------------------------- Balance at January 1 $ 298,685 $ 308,007 $ 279,342 Allowance of institutions and loans purchased/sold 19,467 -- 16,335 Loans charged off (83,086) (110,504) (120,778) Recoveries on loans previously charged off 35,129 32,182 21,546 --------- --------- --------- Net loans charged off (47,957) (78,322) (99,232) Provision for loan losses 56,000 69,000 111,562 --------- -------- --------- Balance at December 31 $ 326,195 $ 298,685 $ 308,007 ========= ========= ========= As a percent of total loans 1.47% 1.56% 1.69% ========= ========== ==========
NOTE 6--SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Concentrations of both on-balance-sheet and off-balance-sheet credit risk are controlled and monitored as part of the Corporation's credit policies. The Corporation is a regional bank holding company with a geographic concentration of its on-balance-sheet and off-balance-sheet activities cen- 44 29 tered in Michigan. In addition, the Corporation has an industry concentration with the automotive industry, which includes manufacturers and their finance subsidiaries, suppliers, dealers and company executives. At December 31, 1994 and 1993, the Corporation's exposure from loan commitments and guarantees to companies related to the automotive industry totaled $6.4 billion and $5.5 billion, respectively. Additionally, the Corporation's commercial real estate loans, including commercial mortgages and construction loans, totaled $3.5 billion in 1994 and $3.1 billion in 1993. Approximately $1.6 billion of the Corporation's commercial real estate loans at December 31, 1994 involves mortgages on owner-occupied properties. Those borrowers are involved in business activities other than real estate, and the sources of repayment are not dependent on the performance of the real estate market. NOTE 7--PREMISES AND EQUIPMENT A summary of premises and equipment at December 31 by major category follows:
(in thousands) 1994 1993 ------------------------------------------------------------------------------- Land $ 59,142 $ 52,932 Buildings and improvements 372,988 335,365 Furniture and equipment 453,131 409,728 --------- --------- Total cost 885,261 798,025 Less accumulated depreciation and amortization (447,504) (398,902) --------- --------- Net book value $ 437,757 $ 399,123 ========= =========
Other noninterest income for 1993 includes a $24 million gain on the sale of land adjacent to an operations center. Rental expense for leased properties and equipment amounted to $44 million in 1994, $42 million in 1993, and $41 million in 1992. Future minimum lease rentals under noncancelable operating lease obligations for 1995, 1996, 1997, 1998, 1999 and 2000 and later are $31 million, $30 million, $24 million, $22 million, $20 million, and $100 million, respectively. NOTE 8--SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Other borrowed funds, consisting of commercial paper, borrowed securities, term federal funds purchased, short-term notes and treasury tax and loan deposits, generally mature within one to 120 days from the transaction date. The following is a summary of short-term borrowings for the three years ended December 31, 1994:
Federal Funds Purchased Other and Securities Sold Under Borrowed (in thousands) Agreements to Repurchase Funds ------------------------------------------------------------------------------ December 31, 1994 Amount outstanding at year-end $2,594,189 $1,611,219 Weighted average interest rate at year-end 5.64% 4.96% Daily average amount outstanding $2,817,585 $2,002,249 Weighted average interest rate for the year 4.31% 3.92% Maximum amount outstanding at any month-end $3,313,085 $5,250,830 December 31, 1993 Amount outstanding at year-end $ 450,092 $4,950,507 Weighted average interest rate at year-end 2.89% 2.66% Daily average amount outstanding $1,586,662 $1,431,692 Weighted average interest rate for the year 3.01% 2.88% Maximum amount outstanding at any month-end $3,340,562 $4,950,507 December 31, 1992 Amount outstanding at year-end $1,646,291 $1,575,418 Weighted average interest rate at year-end 2.75% 2.52% Daily average amount outstanding $1,552,616 $1,307,908 Weighted average interest rate for the year 3.44% 3.52% Maximum amount outstanding at any month-end $2,214,077 $3,302,345
At December 31, 1994, the parent company had available additional credit totaling $60 million under a line of credit agreement, all of which was unused. The line is subject to annual review. NOTE 9--MEDIUM- AND LONG-TERM DEBT Medium- and long-term debt consisted of the following at December 31:
(in thousands) 1994 1993 ------------------------------------------------------------------------------- Parent Company 9.75% subordinated notes due 1999 $ 74,601 $ 74,511 10.125% subordinated debentures due 1998 74,721 74,641 ---------- ---------- Total parent company 149,322 149,152 Subsidiaries Subordinated notes: 8.375% subordinated notes due 2024 147,709 -- 7.25% subordinated notes due 2002 148,777 148,619 6.875% subordinated notes due 2008 98,990 98,913 7.125% subordinated notes due 2013 147,890 147,779 FDIC subordinated note due 1995 4,500 8,941 ---------- ---------- Total subordinated notes 547,866 404,252 Medium-term notes: Floating rate based on Treasury bill indices 2,849,205 -- Floating rate based on Prime indices 299,988 100,000 Floating rate based on LIBOR indices 25,000 50,000 Fixed rate notes with interest rates ranging from 3.55% to 5.95% 224,610 754,285 ---------- --------- Total medium-term notes 3,398,803 904,285 Notes payable bearing interest at rates ranging from 6.29% to 11.15% and maturing on dates ranging from 1995 through 1996 1,952 2,867 ---------- --------- Total subsidiaries 3,948,621 1,311,404 ---------- --------- Total medium- and long-term debt $4,097,943 $1,460,556 ========== ==========
45 30 All subordinated notes and debentures, with maturities greater than one year, qualify as tier 2 capital. The interest rate on the FDIC note is determined quarterly and is set at 50 basis points over the 52-week U.S. Treasury Bill discount rate (5.88% at December 31, 1994). Under established medium-term senior bank note programs, certain of the Corporation's bank subsidiaries may offer an aggregate principal amount of up to $4.5 billion. The notes can be issued as fixed or floating rate notes and with terms from nine months to 15 years. The interest rate on the floating rate medium-term note based on the London Interbank Offered Rate (LIBOR) was 4.375% at December 31, 1994. The note is due June 1, 1995. The interest rates on the floating rate medium-term notes based on the bank prime rate (8.50% at December 31, 1994) ranged from prime minus 2.48% to prime minus 2.25% for notes maturing in 1995. The interest rates on the floating medium-term notes based on the three-month U.S. Treasury Bill bond equivalent rate (5.72% at December 31, 1994) ranged from the rate plus 0.10% to the rate plus 0.30% for notes maturing from 1995 to 1997. The maturities of the fixed rate notes range from 1995 to 1997. The medium-term notes do not qualify as tier 2 capital and are not insured by the FDIC. The principal maturities of medium- and long-term debt for 1995, 1996, 1997, 1998, 1999 and 2000 and later are $2,356 million, $500 million, $550 million, $75 million, $75 million and $550 million, respectively. NOTE 10--SHAREHOLDERS' EQUITY The board of directors has authorized the repurchase of up to 6.7 million shares of Comerica Incorporated common stock for general corporate purposes, acquisitions and employee benefit plans. At December 31, 1994, 1.7 million shares had been repurchased. The Corporation intends to reissue up to 1.6 million shares to shareholders of University Bank and Trust, in exchange for a portion of University stock. The redeemable preferred stock was redeemed on January 4, 1993 for $42 million. At December 31, 1994, the Corporation had reserved 4.2 million shares of common stock for issuance to employees under the Corporation's profit sharing and long-term incentive plans. NOTE 11--NET INCOME PER COMMON SHARE Primary net income per common share is computed by dividing adjusted net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock plans, using the treasury stock method. Fully diluted net income per share of common stock is computed by assuming conversion of common stock equivalents and convertible subordinated notes after eliminating the related after-tax interest expense. A computation of earnings per share follows:
Year Ended December 31 (in thousands, except per share data) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------- Primary Average shares outstanding 117,264 118,461 117,185 Common stock equivalent Net effect of the assumed exercise of stock options 896 1,108 1,928 --------- --------- --------- Primary average shares 118,160 119,569 119,113 ========= ========= ========= Net income $ 387,242 $ 340,638 $ 240,432 Less preferred stock dividends -- 42 3,613 --------- --------- --------- Income applicable to common stock $ 387,242 $ 340,596 $ 236,819 ========= ========= ========= Primary net income per share $3.28 $2.85 $1.99 Fully diluted Average shares outstanding 117,264 118,461 117,185 Common stock equivalents Net effect of the assumed exercise of stock options 899 1,109 2,054 Average shares reserved for conversion of convertible debt -- 166 800 --------- --------- --------- Fully diluted average shares 118,163 119,736 120,039 ========= ========= ========= Net income $ 387,242 $ 340,638 $ 240,432 Less preferred stock dividends -- 42 3,613 --------- --------- --------- Income applicable to common stock 387,242 340,596 236,819 Interest on convertible debt less related income tax effect -- 86 390 --------- --------- --------- Net income applicable to common stock excluding above interest (net of income tax effect) $ 387,242 $ 340,682 $ 237,209 ========= ========= ========= Fully diluted net income per share $3.28 $2.85 $1.98
NOTE 12--LONG-TERM INCENTIVE PLAN The Corporation has long-term incentive plans under which it has awarded both shares of restricted stock to key executive officers and stock options to key executive and senior officers of the Corporation and its subsidiaries. The exercise price of the stock options is equal to the fair market value at the time the options are granted and the options may 46 31 have restrictions regarding exercisability. The duration of each option is determined at the date of grant; however, no options may be exercised later than ten years from the date of grant.
Number Exercise Price Range ------------------------------------------------------------------------- Outstanding--January 1, 1992 4,407,194 $ 7.00 -- $23.57 Granted 890,000 29.75 -- 31.06 Cancelled (44,848) 12.89 -- 29.75 Exercised (1,980,776) 7.00 -- 19.32 Expired -- ---------- ------------------ Outstanding--December 31, 1992 3,271,570 8.71 -- 31.06 Granted 754,740 32.38 Cancelled (139,943) 11.40 -- 32.38 Exercised (445,094) 8.71 -- 29.75 Expired -- ---------- ------------------ Outstanding--December 31, 1993 3,441,273 8.71 -- 32.38 Granted 887,350 27.00 -- 28.50 Cancelled (92,877) 14.75 -- 32.38 Exercised (247,726) 8.71 -- 29.75 Expired -- ---------- ------------------ Outstanding--December 31, 1994 3,988,020 $ 8.71 -- $32.38 ========== ================== Exercisable--December 31, 1994 1,882,815 Available for grant--December 31, 1994 112,650
NOTE 13--EMPLOYEE BENEFIT PLANS The Corporation has either defined benefit or defined contribution pension plans in effect for substantially all full-time employees. Staff expense includes income of $2.3 million in 1994, expense of $2.4 million in 1993 and $190 thousand in 1992 for defined benefit plans and expense of $387 thousand in 1994, $866 thousand in 1993 and $748 thousand in 1992 for defined contribution plans. Benefits under the defined benefit pension plan are based primarily on years of service and the levels of compensation during the five highest paid consecutive calendar years occurring during the last ten years before retirement. The plan's assets primarily consist of U.S. Government and agency securities, corporate bonds and notes, equity securities and units of certain collective investment funds administered by Comerica Bank. Contributions under the defined contribution plans are made at the discretion of the governing board and are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the funded status of the defined benefit pension plans and amounts recognized on the Corporation's balance sheet:
December 31 (in thousands) 1994 1993 ---------------------------------------------------------------------------- Accumulated benefit obligation Vested $269,889 $305,461 Nonvested 13,753 16,860 -------- -------- Accumulated benefit obligation 283,642 322,321 Effect of projected future compensation levels 51,974 68,197 -------- -------- Projected benefit obligation 335,616 390,518 Plan assets at fair value 395,365 424,024 -------- -------- Plan assets in excess of projected benefit obligation 59,749 33,506 Unrecognized net loss due to past experience different from that assumed and effects of changes in assumptions (27,422) (8,350) Unrecognized net assets being amortized over 15 years (29,859) (34,693) -------- -------- Prepaid pension (liability) $ 2,468 $ (9,537) ======== ========
Net periodic pension cost consisted of the following:
(in thousands) 1994 1993 1992 ---------------------------------------------------------------------------- Service cost--benefits earned during the period $ 9,273 $ 11,101 $ 11,923 Interest cost on projected benefit obligation 27,043 28,541 24,896 Actual return on plan assets 15,323 (44,094) (4,844) Net amortization and (deferral) (53,926) 6,811 (31,785) -------- -------- -------- Net pension (income) expense $ (2,287) $ 2,359 $ 190 ======== ======== ========
Actuarial assumptions were as follows:
1994 1993 1992 ---------------------------------------------------------------------------- Discount rate used in determining projected benefit obligation 8.5% 7.5% 8.25% Rate of increase in compensation levels 5% 5% 6% Long-term rate of return on assets 8% 8%-8.75% 8%-8.75%
The Corporation adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" in 1993. This statement mandates the accrual of the cost of providing postretirement benefits during the active service period of the employee. The Corporation's previous practice was to expense these benefits when paid. The Corporation's plan continues postretirement health care and life insurance benefits for current retirees, provides a phase-out for employees over 50 as of December 31, 1992, and substantially reduces all benefits for active employees. The postretirement plan is currently unfunded. 47 32 Net periodic postretirement benefit cost included the following components:
(in thousands) 1994 1993 ------------------------------------------------------------------------------- Service cost $ 467 $ 335 Interest cost on accumulated postretirement benefit obligation 6,698 7,234 Amortization of transition obligation 4,628 4,534 ------- ------- Net periodic postretirement benefit cost $11,793 $12,103 ======= =======
For the year ended December 31, 1992, postretirement benefit costs were recognized on a cash basis and approximated $5 million. The following table sets forth the status of the postretirement plan at December 31:
(in thousands) 1994 1993 ------------------------------------------------------------------------------- Retirees $ 74,338 $ 88,915 Other fully eligible plan participants 3,897 1,732 Other active plan participants 5,598 6,358 -------- -------- Total accumulated postretirement benefit obligation 83,833 97,005 Unrecognized net gain (loss) 8,394 (5,453) Unrecognized transition obligation (82,988) (86,129) -------- -------- Accrued postretirement benefit liability $ 9,239 $ 5,423 ======== ========
A 12 percent health care cost trend rate was projected for 1994, and is assumed to decrease gradually to 6 percent by 2002, remaining constant thereafter. Increasing each health care rate by one percentage point would increase the accumulated postretirement benefit obligation by $7 million at December 31, 1994 and the aggregate of the service and interest cost components by $570 thousand for the year ended December 31, 1994. A weighted average discount rate of 8.5 percent was used in determining the accumulated postretirement benefit obligation. The Corporation adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits" as of December 31, 1993. This accounting standard provides guidance on the accounting for benefits provided by an employer to former or inactive employees after active employment but before retirement. The adoption of SFAS No. 112 resulted in a one-time charge to benefits expense of nearly $3 million in 1993. NOTE 14--INCOME TAXES The current and deferred components of income taxes were as follows:
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------------- Currently payable Federal $176,322 $129,220 $106,205 State, local and foreign 6,676 4,143 2,348 -------- -------- -------- 182,998 133,363 108,553 Deferred federal, state and local (credit) 11,855 14,574 (19,950) -------- -------- -------- Total $194,853 $147,937 $ 88,603 ======== ======== ========
There were $1.2 million, $0.7 million and $2.1 million of income taxes provided on securities transactions in 1994, 1993 and 1992, respectively. The principal components of deferred tax (assets) liabilities at December 31 were as follows:
(in thousands) 1994 1993 ------------------------------------------------------------------------------- Allowance for loan losses $(99,305) $(74,166) Lease financing transactions 83,268 70,303 Allowance for depreciation 8,221 5,640 Deferred loan origination fees and costs (14,268) (13,170) Investment securities available for sale (29,605) 14,793 Employee benefits (3,405) 1,150 Other temporary differences, net (23,512) (36,923) -------- -------- Total $(78,606) $(32,373) ======== ========
The provision for federal income taxes is less than that computed by applying the federal statutory rate of 35 percent in 1994 and 1993 and 34 percent in 1992 for the reasons in the following analysis:
(in thousands) 1994 1993 1992 ------------------------------------------------------------------------------- Tax based on statutory rate $203,733 $171,001 $111,872 Effect of tax-exempt interest income (16,153) (18,145) (24,761) Effect of certain merger related expenses -- -- 6,800 Other 7,273 (4,919) (5,308) -------- -------- -------- Provision for income taxes $194,853 $147,937 $ 88,603 ======== ======== ========
NOTE 15--TRANSACTIONS WITH RELATED PARTIES The Corporation's bank subsidiaries have had, and expect to have in the future, transactions with the Corporation's directors and their affiliates. Such transactions were made in the ordinary course of business and included extensions of credit, all of which were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with 48 33 other customers and did not, in management's opinion, involve more than normal risk of collectibility or present other unfavorable features. The aggregate amount of loans attributable to persons who were related parties at December 31, 1994, approximated $136 million at the beginning and $142 million at the end of 1994. During 1994, new loans to related parties aggregated $96 million and repayments totaled $90 million. NOTE 16--DIVIDENDS DECLARED BY BANKING SUBSIDIARIES Banking regulations limit the transfer of assets in the form of dividends, loans or advances from the bank subsidiaries to the Corporation. Under the most restrictive of these regulations, the aggregate amount of dividends which can be paid to the Corporation without obtaining prior approval from bank regulatory agencies approximated $153 million at January 1, 1995 plus current years earnings. Substantially all the assets of the Corporation's subsidiaries are restricted from transfer to the Corporation in the form of loans or advances. Dividends paid to the Corporation by its banking subsidiaries amounted to $293 million in 1994, $311 million in 1993, and $60 million in 1992. NOTE 17--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Corporation enters into various transactions involving derivative and credit-related financial instruments to manage exposure to fluctuations in interest rate, foreign currency and other market risks and to meet the financing needs of customers. Derivative financial instruments include interest rate swaps; options, including interest rate caps; forward and futures interest and foreign exchange rate contracts; and other financial instruments with similar characteristics. Credit-related financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, and commercial letters of credit. These transactions are not reflected in the Corporation's consolidated balance sheets. The contract or notional amounts of off-balance-sheet financial instruments express the extent of involvement the Corporation has in each particular class of instrument and generally do not represent future cash requirements. Off-balance-sheet financial instruments involve, to varying degrees, elements of credit and market risk. Credit risk represents the possible loss that may occur in the event of nonperformance by the counterparty to the financial instrument. Market risk represents the potential loss resulting from movements in interest or foreign exchange rates which cause an unfavorable change in the value of an off-balance-sheet financial instrument. DERIVATIVE FINANCIAL INSTRUMENTS The nature of the Corporation's operations subject it to interest rate risk to the extent that there is a difference between the interest-earning assets and the interest-bearing liabilities that mature or reprice in specified periods. Asset and liability management activities are focused on providing maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating funding needs. Various types of derivative financial instruments are utilized to achieve these objectives. The use of these derivatives takes place predominately in the interest rate markets and mainly involves interest rate swaps. Other less commonly used derivative instruments include interest rate caps and forward and futures interest and foreign exchange rate contracts. The Corporation also makes forward commitments to purchase securities and to sell loans. The Corporation's derivatives activities also include selling interest rate caps and interest rate swaps to customers and entering into foreign exchange contracts with customers. These transactions are entered into upon the customer's request. The Corporation does not take market positions in derivative financial instruments with the expectation of profiting in the short-term from favorable movements in prices or market rates. Credit risk related to derivatives is measured as the cost to replace, at current market rates, those contracts in a profitable position. To minimize credit risk exposure, the Corporation evaluates the creditworthiness of its off-balance-sheet counterparties adhering to the same standards used in other transactions. In addition, bilateral collateral agreements have been entered into with a substantial number of counterparties to reduce credit risk and secure amounts due. At December 31, 1994 and 1993, the replacement cost of off-balance-sheet derivative financial instruments in an unrealized gain position approximated $9 million and $82 million, respectively. Replacement cost associated with interest rate swap agreements comprised $4 million of the year-end 1994 total and $61 million of the year-end 1993 total. These amounts do not reflect $159 million and $8 million of collateral at December 31, 1994 and 1993, respectively. By conducting all derivative transactions with domestic and foreign investment banks or commercial banks, with the exception of interest and foreign exchange rate futures contracts which are traded on organized exchanges, exposure to liquidity risk is reduced. Termination of derivative contracts, other than by a counterparty, is unlikely as a particular derivative instrument can be offset with an opposite-effect derivative product to facilitate the management of risk. Management limits the types of derivative instruments which are used to manage exposure to risk to those which alter the rate characteristics of assets and liabilities or those which reduce a specific interest rate or foreign currency gap. Market risk resulting from a particular off-balance- 49 34 sheet derivative financial instrument is normally offset by other on- or off-balance-sheet transactions. Therefore, unrealized gains or losses on derivatives are generally offset by increases or decreases in the value of rate sensitive on-balance-sheet instruments. Detailed discussions of each class of derivative financial instrument held or issued by the Corporation along with the associated risks are as follows:
Notional Amount (in millions) 1994 1993 --------------------------------------------------------------------------- Risk management: Interest rate swaps $3,643 $3,604 Interest rate caps 200 206 Interest rate forward and futures contracts -- 65 Commitments to purchase securities -- 622 Commitments to sell loans 77 250 Foreign exchange contracts 98 66 International swap agreements 25 20 ----- ----- Risk management derivatives 4,043 4,833 Customer initiated: Foreign exchange contracts 501 224 Interest rate caps 369 132 Interest rate swaps 7 30 ----- ----- Customer initiated derivatives 877 386 ------ ------ Total derivative financial instruments $4,920 $5,219 ====== ======
INTEREST RATE SWAPS The Corporation enters into interest rate swap agreements as an end-user mainly to reduce exposure to interest rate risk associated with asset and liability positions. These agreements involve the exchange of fixed and floating rate interest payments over a specified period of time. The interest payments are calculated based on an underlying notional amount. The floating rate portion of interest rate swaps is based on LIBOR. The Corporation is subject to both the market risk inherent in such agreements and the risk that counterparties will fail to meet the terms of the agreements. For the years ended December 31, 1994 and 1993, interest rate swaps used for risk management purposes generated $29 million and $32 million of net interest income, respectively. On a limited basis, interest rate swap agreements are entered into with customers seeking to manage risk exposure arising from asset and liability positions. The risk of counterparty default is evident in such agreements. Market risk, however, is virtually eliminated since these positions are generally offset with other swap agreements having opposite payment terms. The fair value and net income related to swaps initiated by customers were not significant at and for the years ended December 31, 1994 and 1993. INTEREST RATE CAPS Interest rate caps are option-like contracts that obligate the seller to pay the purchaser at specified future dates the amount by which a designated market rate index exceeds a contractually fixed ceiling rate, applied to an underlying notional amount. The buyer of an interest rate cap is protected against rising rates, while the seller is exposed to the potential for unlimited losses in a rising interest rate environment. Purchased interest rate caps contain credit risk due to possible counterparty nonperformance. The seller of interest rate caps, on the other hand, has no credit risk exposure. For interest rate risk management purposes, the Corporation buys and sells interest rate caps to reduce the impact of interest rate changes on certain assets and liabilities. Interest rate caps are also sold to accommodate the financial needs of customers. Interest rate caps initiated by customers, are not necessarily offset by other on- or off-balance-sheet financial instruments; however the Corporation has established diminutive authority limits for these transactions in order to minimize risk exposure. Resulting fair value and net income for interest rate caps sold to customers were, therefore, immaterial at and for the years ended December 31, 1994 and 1993. FORWARD AND FUTURES CONTRACTS Forward contracts are agreements negotiated between two parties through a broker to purchase and sell a specific quantity of a financial instrument at a price specified at origination of the contract, with delivery and settlement at a specified future date. Forward contracts are not traded on organized exchanges, resulting in exposure to liquidity and credit risk. Futures contracts are exchange-traded agreements, resulting in the elimination of credit risk, and involve the delivery of investment-grade financial instruments such as securities or other money market instruments. However, both forward and futures contracts are subject to market risk arising from changes in the value of the underlying financial instrument. The Corporation enters into forward and futures contracts to assist in managing exposure to interest rate risk. FOREIGN EXCHANGE CONTRACTS The Corporation enters into foreign currency spot, forward, and futures contracts on behalf of customers and to offset the risk associated with certain on-balance-sheet receivables and payables denominated in foreign currencies. Customer initiated contracts are complimented by foreign exchange options which act to offset some of the risk associated with foreign exchange price movements. Foreign exchange activity is conducted in accordance with established policy guidelines which monitor credit and market risk. Credit risk exposure arises from the possible inability of the counterparty to deliver under the terms of the contract. Market risk is minimal because such contracts are generally 50 35 offset with other foreign exchange positions. At December 31, 1994 and 1993, the fair value of customer initiated foreign exchange contracts was an estimated $1 million. The estimated fair value of these instruments also averaged $1 million during both 1994 and 1993. Foreign exchange contracts generated approximately $5 million of net income for each of the years ended December 31, 1994 and 1993. COMMITMENTS TO PURCHASE SECURITIES The Corporation enters into commitments to purchase securities with settlement terms of up to 60 days primarily to secure certain rates on U.S. Government and agency securities. These commitments may subject the Corporation to risk from changes in the price of the specified security before its actual issuance. Credit risk related to commitments to purchase securities results from the possibility that the counterparty to the financial instrument may fail to perform and is represented by the difference between the contractual amount and prevailing market price of these financial instruments at the settlement date. COMMITMENTS TO SELL LOANS Commitments with terms of up to 120 days are made to secure certain market rates on the sale of mortgage loans, particularly those held for sale and those expected to close, to the secondary market. These commitments expose the Corporation to credit risk in that the counterparty to the commitment may fail to provide funding for the mortgages at the settlement date. Market risk exposure is evident as well since a decline in secondary market interest rates may prevent the expected loan closing from occurring and, as a result, cause the Corporation to incur a loss from having to fulfill its obligation under the commitment. FIXED RATE LOAN COMMITMENTS The unused lines of credit on fixed rate credit cards are categorized as derivatives in that they have similar characteristics as option contracts. Credit card customers have the option to draw upon available credit lines without risk from rising interest rates. However, the Corporation is exposed to the risk of income reduction as interest rates increase. Refer to the "Credit-related Financial Instruments" section below for further information about fixed rate loan commitments. CREDIT-RELATED FINANCIAL INSTRUMENTS Exposure to credit loss from credit-related financial instruments is represented by the contractual amounts of those instruments and is summarized as follows:
Contract Amount (in millions) 1994 1993 ---------------------------------------------------------------------------------------- Unused commitments to extend credit $16,955 $11,042 Stanby letters of credit and financial guarantees 1,487 1,475 Commercial letters of credit 509 518
The Corporation applies similar credit policies in issuing off-balance-sheet credit-related financial instruments as it does for on-balance-sheet credit transactions. Collateral is obtained if deemed necessary based on management's credit evaluation of the counterparty. Collateral held by the Corporation varies but may include cash; marketable securities; accounts receivable; inventory; property, plant and equipment; and income-producing commercial properties. UNUSED COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity risk. As of December 31, 1994 and 1993, total unused commitments to extend credit included $5 billion and $4 billion, respectively, of variable and fixed rate revolving credit commitments. Other unused loan commitments, primarily variable rate, totaled $12 billion at December 31, 1994 and $7 billion at December 31, 1993. Revolving credit commitments included available credit lines on fixed rate credit cards of $1.4 billion and $1.3 billion at December 31, 1994 and 1993, respectively. These fixed rate credit card commitments subject the Corporation to market risk resulting from fluctuations in interest rates. However, exposure to market risk from these types of commitments is very limited since it is unlikely that a significant portion of credit card customers will simultaneously borrow up to the maximum credit lines. STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES Standby letters of credit and financial guarantees represent conditional obligations of the Corporation primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Long-term standby letters of credit and financial guarantees were $683 million and $581 million at December 31, 1994 and 1993, respectively, and generally extend for five years or more and expire in decreasing amounts through 2009. The remaining standby letters of credit and financial guarantees totaling $804 million and $894 million at December 31, 1994 and 1993, respectively, mature within one year. COMMERCIAL LETTERS OF CREDIT Commercial letters of credit, generally short-term in nature, represent conditional obligations of the Corporation issued to finance a customer's foreign or domestic trade transactions with a third party. 51 36 NOTE 18--CONTINGENT LIABILITIES The State of Michigan filed a lawsuit in District Court on July 24, 1990, against a subsidiary bank and certain former officers, directors and shareholders of a lending customer seeking recovery of amounts expended by the State (past and future) to clean up hazardous waste at two former plant sites, compensation for damages to natural resources, civil penalties for claimed violation of State Acts and attorney's fees. Plaintiff seeks cleanup costs and damages and has expressed the opinion that the claim will be well in excess of $30 million. In January 1993, the court granted the bank's motion for summary judgment and denied the Attorney General's motion for summary judgment. The Attorney General has filed an appeal to the Sixth Circuit Court of Appeals, which is still pending. The Corporation and its subsidiaries are parties to other litigation and claims arising in the normal course of their activities. Although the amount of ultimate liability, if any, with respect to such matters cannot be determined, management, after consultation with legal counsel, believes that the litigation and claims, including the matter described above, will not have a materially adverse effect on the Corporation's consolidated financial position. NOTE 19--USAGE RESTRICTIONS Included in cash and due from banks are amounts required to be deposited with the Federal Reserve Bank. These reserve balances vary, depending on the level of customer deposits in the Corporation's subsidiary banks. At December 31, 1994 and 1993, the Federal Reserve balances were $562 million and $532 million, respectively. NOTE 20--ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current exchange. Furthermore, as the Corporation normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles and loan servicing rights, the future earnings potential of significant customer relationships, and the value of trust operations and other fee generating businesses. The Corporation does not believe that it would be practicable to estimate a representational fair value for these types of items. The Corporation used the following methods and assumptions: Cash and short-term investments: The carrying amount approximates the estimated fair value of these instruments, which consist of cash and due from banks, interest-bearing deposits with banks, and federal funds sold. Trading account securities: These securities are carried at quoted market value or the market value for comparable securities, which represents estimated fair value. Mortgages held for sale: The market value of these loans represents estimated fair value. The market value is determined on the basis of existing forward commitments or the market values of similar loans. Investment securities: The market value of investment securities, which is based on quoted market values or the market values for comparable securities, represents estimated fair value. Domestic commercial loans: These consist of commercial, real estate construction, commercial mortgage, and equipment lease financing loans. The estimated fair value of the Corporation's variable rate commercial loans is represented by their carrying value, adjusted by an amount which estimates the change in fair value caused by changes in the credit quality of borrowers since the loans were originated. The estimated fair value of fixed rate commercial loans is calculated by discounting the contractual cash flows of the loans using year-end origination rates derived from the Treasury yield curve or other representative bases. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. International loans: The estimated fair value of the Corporation's short-term international loans which consist of trade-related loans, or loans which have no cross-border risk due to the existence of domestic guarantors or liquid collateral, is represented by their carrying value, adjusted by an amount which estimates the effect on fair value of changes in the credit quality of borrowers or guarantors. The estimated fair value of long-term international loans is based on the quoted market values of these loans or on the market values of international loans with similar characteristics. Retail loans: This category consists of residential mortgage, consumer, and auto lease financing loans. The estimated fair value of residential mortgage loans is based on discounted contractual cash flows or market values of 52 37 similar loans sold in conjunction with securitized transactions. For consumer loans, the estimated fair values are calculated by discounting the contractual cash flows of the loans using rates representative of year-end origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Customers' liability on acceptances outstanding: The carrying amount approximates the estimated fair value. Deposit liabilities: The estimated fair value of demand deposits, consisting of checking, savings and certain money market deposit accounts, is represented by the amounts payable on demand. The carrying amount of deposits in foreign offices approximates their estimated fair value, while the estimated fair value of term deposits is calculated by discounting the scheduled cash flows using the year-end rates offered on these instruments. Short-term borrowings: The carrying amount of federal funds purchased, securities sold under agreements to repurchase, and other borrowings approximates estimated fair value. Acceptances outstanding: The carrying amount approximates the estimated fair value. Medium- and long-term debt: The estimated fair value of the Corporation's variable rate medium- and long-term debt is represented by their carrying value. The estimated fair value of the fixed rate medium- and long-term debt is based on quoted market values. If quoted market values are not available, the estimated fair value is based on the market values of debt with similar characteristics. Derivative financial instruments: The estimated fair value of interest rate swaps is estimated as the amounts the Corporation would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. The estimated fair value of forward and futures contracts, foreign exchange contracts, interest rate caps, commitments to purchase securities and commitments to sell loans is based on quoted market prices or the market values of similar instruments. Credit-related financial instruments: The estimated fair value of unused commitments to extend credit and standby and commercial letters of credit is represented by the estimated cost to terminate or otherwise settle the obligations with the counterparties. This amount is approximated by the fees currently charged to enter into similar arrangements, considering the remaining terms of the agreements and any changes in the credit quality of counterparties since the agreements were entered into. This estimate of fair value does not take into account the significant value of the customer relationships and the future earnings potential involved in such arrangements, as the Corporation does not believe that it would be practicable to estimate a representational fair value for these items. The estimated fair values of the Corporation's financial instruments at December 31, 1994 and 1993 are as follows:
1994 1993 ------------------------------ ----------------------------- Carrying Estimated Carrying Estimated (in millions) Amount Fair Value Amount Fair Value --------------------------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments $ 2,247 $ 2,247 $ 3,719 $ 3,719 Trading account securities 4 4 4 4 Mortgages held for sale 92 92 331 332 Investment securities available for sale 2,906 2,906 2,322 2,322 Investment securities held to maturity 4,970 4,659 3,978 4,030 Commercial loans 10,634 10,448 9,087 9,002 International loans 1,195 1,183 1,136 1,155 Real estate construction loans 414 406 437 435 Commercial mortgage loans 3,056 2,983 2,700 2,717 Residential mortgage loans 2,436 2,346 1,857 1,880 Consumer loans 4,215 4,025 3,674 3,677 Lease financing 259 251 209 210 ----------------------------- ---------------------------- Total loans 22,209 21,642 19,100 19,076 Less allowance for loan losses (326) -- (299) -- ----------------------------- ---------------------------- Net loans 21,883 21,642 18,801 19,076 Customers' liability on acceptances outstanding 34 34 38 38 LIABILITIES Demand deposits (noninterest-bearing) 5,257 5,257 4,939 4,939 Interest-bearing deposits 14,742 14,731 14,643 14,731 Deposits in foreign offices 2,433 2,433 1,368 1,368 ----------------------------- ---------------------------- Total deposits 22,432 22,421 20,950 21,038 Short-term borrowings 4,206 4,206 5,400 5,400 Acceptances outstanding 34 34 38 38 Medium- and long-term debt 4,098 4,046 1,461 1,502 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Risk management derivatives: Unrealized gains -- 4 -- 79 Unrealized losses -- (240) -- (21) Customer initiated derivatives: Unrealized gains 5 5 4 4 Unrealized losses (5) (5) (2) (2) Credit-related financial instruments -- (13) -- (13)
53 38 NOTE 21--PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS--Comerica Incorporated December 31 (in thousands, except share data) 1994 1993 ------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,041 $ 1,111 Time deposits with banks 89,600 97,200 Investment securities available for sale 6,946 -- Investment securities held to maturity -- 7,507 Investment in subsidiaries, principally banks 2,423,918 2,208,710 Premises and equipment 58,967 49,670 Other assets 41,931 43,462 ---------- ---------- Total assets $2,623,403 $2,407,660 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt $ 149,322 $ 149,152 Advances from nonbanking subsidiaries 7,823 4,277 Other liabilities 74,478 72,573 ---------- ---------- Total liabilities 231,623 226,002 Common stock--$5 par value Authorized--250,000,000 shares Issued--119,294,531 shares in 1994 and 1993 596,473 596,473 Capital surplus 525,052 524,186 Unrealized gains and losses on investment securities available for sale (55,039) 27,473 Retained earnings 1,390,405 1,155,280 Less cost of common stock in treasury--2,382,333 shares in 1994 and 4,423,603 shares in 1993 (65,111) (121,754) ---------- ---------- Total shareholders' equity 2,391,780 2,181,658 ---------- ---------- Total liabilities and shareholders' equity $2,623,403 $2,407,660 ========== ==========
STATEMENTS OF INCOME--Comerica Incorporated Year Ended December 31 (in thousands) 1994 1993 1992 ------------------------------------------------------------------------------------------------------------- INCOME Income from subsidiaries Dividends from subsidiaries $293,390 $312,148 $ 60,975 Interest on receivables from subsidiaries -- 3,303 8,839 Other interest income 8,127 1,630 5,777 Intercompany management fees 267,123 211,351 136,806 Interest on bank time deposits 171 51 3,326 Other noninterest income 779 24,818 3,038 -------- -------- -------- Total income 569,590 553,301 218,761 EXPENSES Interest on commercial paper -- 13 473 Interest on long-term debt 15,076 18,529 21,623 Interest on advances from subsidiaries 198 193 548 Salaries and employee benefits 123,924 128,509 90,643 Occupancy expense 18,570 8,515 6,438 Equipment expense 25,649 23,608 9,330 Merger, integration and restructuring charge 2,363 22,000 45,962 Other noninterest expenses 68,185 60,305 34,549 -------- -------- -------- Total expenses 253,965 261,672 209,566 -------- -------- -------- Income before income taxes and equity in undistributed net income of subsidiaries 315,625 291,629 9,195 Income tax expense (credit) 7,058 (6,550) (10,720) -------- -------- -------- 308,567 298,179 19,915 Equity in undistributed net income of subsidiaries, principally banks 78,675 42,459 220,517 -------- -------- -------- NET INCOME $387,242 $340,638 $240,432 ======== ======== ========
54 39
STATEMENTS OF CASH FLOWS--Comerica Incorporated Year Ended December 31 (in thousands) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 387,242 $ 340,638 $ 240,432 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings of subsidiaries, principally banks (78,675) (42,459) (220,517) Depreciation 19,784 17,658 7,344 Merger, integration and restructuring charge (12,380) 5,414 15,701 Net amortization of intangibles 583 1,207 773 Interest on note with subsidiary -- -- (1,924) Other, net 10,480 (21,962) 6,142 --------- --------- --------- Total adjustments (60,208) (40,142) (192,481) --------- --------- --------- Net cash provided by operating activities 327,034 300,496 47,951 INVESTING ACTIVITIES Net decrease in receivables from subsidiaries -- 100,000 2,297 Net decrease in securities purchased from bank subsidiary under agreements to resell -- 16,538 9,046 Proceeds from maturities of investment securities available for sale 15,157 -- -- Purchase of investment securities available for sale (22,818) -- -- Proceeds from maturity of investment securities held to maturity 7,507 33,548 1,024 Purchase of investment securities held to maturity -- (16,549) (14,194) Proceeds from sales of fixed assets and other real estate 1,638 13,633 2,516 Purchases of fixed assets (30,226) (58,086) (15,374) Net decrease in bank time deposits 7,600 26,400 101,782 Capital transactions with subsidiaries (97,647) (4,620) (2,350) Purchase of subsidiaries -- -- (56,220) --------- --------- --------- Net cash provided by (used in) investing activities (118,789) 110,864 28,527 FINANCING ACTIVITIES Net increase (decrease) in advances from subsidiaries 3,546 (7,464) (7,864) Repayments and purchases of long-term debt -- (111,008) (6,946) Net decrease in short-term borrowings -- (8,502) (7,696) Proceeds from issuance of common stock and other capital transactions 5,407 9,395 33,057 Purchase of common stock for treasury (76,280) (128,848) (5,635) Redemption of preferred stock -- (41,779) -- Dividends paid (139,988) (124,306) (80,472) --------- --------- --------- Net cash used in financing activities (207,315) (412,512) (75,556) --------- --------- --------- Net increase (decrease) in cash on deposit at bank subsidiary 930 (1,152) 922 Cash on deposit at bank subsidiary at beginning of year 1,111 2,263 1,341 --------- --------- --------- Cash on deposit at bank subsidiary at end of year $ 2,041 $ 1,111 $ 2,263 ========= ========= ========= Interest paid $ 15,104 $ 18,652 $ 22,190 ========= ========= ========= Income taxes recovered $ 4,743 $ 12,191 $ 12,936 ========= ========= ========= Noncash investing and financing activities Conversion of debentures to equity $ -- $ 5,095 $ 1,348 ========= ========= ========= Treasury stock issued for acquisition $ 121,363 $ -- $ -- ========= ========= =========
55 40 NOTE 22--SUMMARY OF QUARTERLY FINANCIAL INFORMATION The following quarterly information is unaudited. However, in the opinion of management, the information furnished reflects all adjustments which are necessary for the fair presentation of the results of operations for the periods presented.
1994 ----------------------------------------------------------------- (in thousands, Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------------ Intrest income $581,538 $540,934 $514,057 $455,395 Interest expense 269,255 227,935 199,503 165,104 Net interest income 312,283 312,999 314,554 290,291 Provision for loan losses 12,000 14,000 15,000 15,000 Securities gains 1,098 1,581 358 424 Noninterest income (excluding securities gains) 121,529 115,057 115,069 111,521 Noninterest expenses 278,971 263,115 264,877 251,706 Net income 96,597 100,604 99,178 90,863 Per common share Primary net income $0.82 $0.84 $0.83 $0.79 Fully diluted net income $0.82 $0.84 $0.83 $0.79 1993 ----------------------------------------------------------------- (in thousands, Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------------ Interest income $451,594 $438,088 $446,024 $447,147 Interest expense 163,457 158,173 162,440 165,245 Net interest income 288,137 279,915 283,584 281,902 Provision for loan losses 14,000 15,000 18,000 22,000 Securities gains 411 526 407 634 Noninterest income (excluding securities gains) 130,891 109,488 111,101 109,044 Noninterest expenses 276,917 253,821 255,292 252,435 Net income 90,090 83,696 83,727 83,125 Per common share Primary net income $0.76 $0.70 $0.70 $0.69 Fully diluted net income $0.76 $0.70 $0.70 $0.69
56 41 REPORT OF MANAGEMENT Management is responsible for the accompanying financial statements and all other financial information in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts which of necessity are based on management's best estimates and judgments and give due consideration to materiality. The other financial information herein is consistent with that in the financial statements. In meeting its responsibility for the reliability of the financial statements, management develops and maintains systems of internal accounting controls. These controls are designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The concept of reasonable assurance is based on the recognition that the cost of internal accounting control systems should not exceed the related benefits. The systems of control are continually monitored by the internal auditors whose work is closely coordinated with and supplements in many instances the work of independent auditors. The financial statements have been audited by independent auditors Ernst & Young LLP. Their role is to render an independent professional opinion on management's financial statements based upon performance of procedures they deem appropriate under generally accepted auditing standards. The Corporation's Board of Directors oversees management's internal control and financial reporting responsibilities through its Audit Committee as well as various other committees. The Audit Committee, which consists of directors who are not officers or employees of the Corporation, meets periodically with management and internal and independent auditors to assure that they and the Committee are carrying out their responsibilities and to review auditing, internal control and financial reporting matters. Eugene A. Miller Eugene A. Miller Chairman and Chief Executive Officer Paul H. Martzowka Paul H. Martzowka Executive Vice President and Chief Financial Officer Arthur W. Hermann Arthur W. Hermann Senior Vice President and Controller REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS, COMERICA INCORPORATED We have audited the accompanying consolidated balance sheets of Comerica Incorporated and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comerica Incorporated and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Detroit, Michigan January 17, 1995 57 42 HISTORICAL REVIEW-AVERAGE BALANCE SHEETS: COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information (in millions) 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,532 $ 1,490 $ 1,322 $ 1,201 $ 1,231 Interest-bearing deposits with banks 552 814 1,017 1,413 1,376 Federal funds sold and securities purchased under agreements to resell 116 135 399 454 307 Trading account securities 5 12 78 53 47 Mortgages held for sale 150 232 196 92 63 Investment securities 8,004 5,512 5,373 5,740 5,081 Commercial loans 9,598 8,473 7,753 7,359 7,034 International loans 1,107 897 710 501 412 Real estate construction loans 403 441 503 530 478 Commercial mortgage loans 2,916 2,629 2,368 2,190 1,938 Residential mortgage loans 2,175 1,979 2,297 2,438 2,317 Consumer loans 3,795 3,697 3,625 3,427 3,130 Lease financing 217 191 191 177 168 ------- ------- ------- ------- ------- Total loans 20,211 18,307 17,447 16,622 15,477 Less allowance for loan losses (322) (311) (291) (275) (276) ------- ------- ------- ------- ------- Net loans 19,889 17,996 17,156 16,347 15,201 Accrued income and other assets 1,203 1,045 969 1,065 1,026 ------- ------- ------- ------- ------- Total assets $31,451 $27,236 $26,510 $26,365 $24,332 ======= ======= ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits (noninterest-bearing) $ 4,700 $ 4,380 $ 3,796 $ 3,417 $ 3,336 Interest-bearing deposits 14,809 15,035 15,449 15,933 15,202 Deposits in foreign offices 1,816 1,306 1,668 1,435 843 ------- ------- ------- ------- ------- Total deposits 21,325 20,721 20,913 20,785 19,381 Federal funds purchased and securities sold under agreements to repurchase 2,817 1,586 1,553 1,530 1,767 Other borrowed funds 2,002 1,432 1,308 1,527 809 Accrued expenses and other liabilities 286 274 327 421 504 Medium- and long-term debt 2,708 1,087 414 323 348 ------- ------- ------- ------- ------- Total liabilities 29,138 25,100 24,515 24,586 22,809 Shareholders' equity 2,313 2,136 1,995 1,779 1,523 ------- ------- ------- ------- ------- Total liabilities and shareholders' equity $31,451 $27,236 $26,510 $26,365 $24,332 ======= ======= ======= ======= =======
58 43 HISTORICAL REVIEW-STATEMENTS OF INCOME: COMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Information (in millions, except per share data) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $1,577 $1,388 $1,445 $1,634 $1,668 Interest on investment securities Taxable 446 307 356 437 392 Exempt from federal income tax 31 40 55 62 67 ------ ------ ------ ------ ------ Total interest on investment securities 477 347 411 499 459 Trading account interest -- 1 3 3 4 Interest on federal funds sold and securities purchased under agreements to resell 5 4 15 25 25 Interest on time deposits with banks 22 28 45 99 120 Interest on mortgages held for sale 11 15 14 8 6 ------ ------ ------ ------ ------ Total interest income 2,092 1,783 1,933 2,268 2,282 INTEREST EXPENSE Interest on deposits 543 530 707 1,033 1,119 Interest on short-term borrowings Federal funds purchased and securities sold under agreements to repurchase 121 47 53 86 142 Other borrowed funds 79 41 46 86 65 Interest on medium- and long-term debt 148 63 30 28 33 Net interest rate swap income (29) (32) (24) (15) (4) ------ ------ ------ ------ ------ Total interest expense 862 649 812 1,218 1,355 ------ ------ ------ ------ ------ Net interest income 1,230 1,134 1,121 1,050 927 Provision for loan losses 56 69 111 105 100 ------ ------ ------ ------ ------ Net interest income after provision for loan losses 1,174 1,065 1,010 945 827 NONINTEREST INCOME Income from fiduciary activities 122 122 114 105 100 Service charges on deposit accounts 124 120 113 103 89 Customhouse broker fees 41 40 38 36 35 Revolving credit fees 41 36 34 32 30 Securities gains 3 2 6 5 2 Other noninterest income 136 142 106 104 92 ------ ------ ------ ------ ------ Total noninterest income 467 462 411 385 348 NONINTEREST EXPENSES Salaries and employee benefits 549 529 516 500 454 Net occupancy expense 99 96 86 83 76 Equipment expense 68 62 57 54 50 FDIC insurance expense 44 44 45 41 22 Telecommunications expense 27 21 17 16 15 Merger, integration and restructuring charge 7 22 128 -- -- Other noninterest expenses 265 264 243 251 231 ------ ------ ------ ------ ------ Total noninterest expenses 1,059 1,038 1,092 945 848 ------ ------ ------ ------ ------ Income before income taxes 582 489 329 385 327 Provision for income taxes 195 148 89 105 79 ------ ------ ------ ------ ------ NET INCOME $ 387 $ 341 $ 240 $ 280 $ 248 ====== ====== ====== ====== ====== Net income applicable to common stock $ 387 $ 341 $ 237 $ 277 $ 245 ====== ====== ====== ====== ====== NET INCOME PER COMMON SHARE Primary $3.28 $2.85 $1.99 $2.41 $2.25 Fully diluted $3.28 $2.85 $1.98 $2.38 $2.23 Primary average shares (in thousands) 118,160 119,569 119,113 114,713 108,742 Cash dividends declared on common stock $145 $125 $108 $93 $78 Dividends per common share $1.24 $1.07 $0.96 $0.92 $0.87
59 44 Historical Review-Statistical Data: Comerica Incorporated and Subsidiaries
Consolidated Financial Information 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------------- AVERAGE RATES (Fully Taxable Equivalent Basis) Interest-bearing deposits with banks 3.96% 3.41% 4.43% 7.01% 8.73% Federal funds sold and securities purchased under agreements to resell 4.06 2.99 3.67 5.58 8.18 Trading account securities 1.67 6.76 3.99 6.75 7.95 Mortgages held for sale 7.31 6.38 7.34 8.66 9.78 Investment securities available for sale 5.50 n/a n/a n/a n/a Investment securities held to maturity 6.55 6.70 8.16 9.25 9.73 --------------------------------------------------------------- Total investment securities 6.15 6.70 8.16 9.25 9.73 Commercial loans 7.38 6.56 6.98 9.01 10.48 International loans 5.58 5.04 5.70 8.14 9.94 Real estate construction loans 7.85 6.63 7.00 8.69 10.17 Commercial mortgage loans 8.52 8.10 8.54 9.99 11.04 Residential mortgage loans 7.46 8.57 9.53 10.01 9.96 Consumer loans 9.44 9.98 11.03 12.10 12.53 Lease financing 6.48 7.34 8.89 9.66 10.06 --------------------------------------------------------------- Total loans 7.84 7.62 8.34 9.89 10.86 --------------------------------------------------------------- Interest income as a percent of earning assets 7.28 7.25 8.04 9.48 10.42 Domestic deposits 3.14 3.24 4.13 5.93 6.90 Deposits in foreign offices 4.28 3.29 4.11 6.14 8.31 -------------------------------------------------------------- Total interest-bearing deposits 3.26 3.24 4.13 5.95 6.97 Federal funds purchased and securities sold under agreements to repurchase 4.31 3.01 3.44 5.60 8.04 Other borrowed funds 3.92 2.88 3.52 5.68 9.36 Medium- and long-term debt 5.46 5.77 7.18 8.56 8.05 -------------------------------------------------------------- Interest expense as a percent of interest-bearing sources 3.57 3.18 3.98 5.87 7.14 -------------------------------------------------------------- Interest rate spread 3.71 4.07 4.06 3.61 3.28 Impact of net noninterest-bearing sources of funds 0.61 0.58 0.67 0.88 1.08 -------------------------------------------------------------- Net interest margin as percent of earning assets 4.32 4.65 4.73 4.49 4.36 RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY 16.74 15.94 12.10 15.90 16.47 RETURN ON AVERAGE ASSETS 1.23 1.25 0.91 1.06 1.02 PER SHARE DATA Book value at year-end $ 20.46 $18.99 $17.38 $16.30 $14.52 Market value--high and low for year 31-24 35-25 33-26 27-14 17-11 OTHER DATA Number of banking offices 398 385 427 412 401 Number of employees (full-time equivalent) 13,077 12,670 13,322 13,836 13,423
60 45 ECONOMIC REPORT: FIFTH YEAR OF EXPANSION AHEAD FOR ECONOMY It was expected that the Federal Reserve would begin tightening the monetary screws back in 1993, but the monetary authorities didn't apply the brakes until early 1994. By infusing financial markets with an additional year of double digit reserve growth, the U.S. economy will undoubtedly experience an extra year of solid gross domestic product expansion before succumbing to below-average growth in 1996. Correspondingly, the degree of weakness in 1996's real GDP will depend very heavily upon how many months into 1995 the Fed remains as restrictive as it was throughout 1994. WHAT WENT RIGHT AND WRONG In terms of real GDP growth and low inflation, 1994 was a much better performance year than most forecasters had anticipated. It was a disappointing year for most stock and bond investors. The dichotomy is reconciled by what Federal Reserve policy makers were doing before and during 1994. Last year was stronger than expected because the monetary authorities had pursued very stimulative policies in 1991, 1992 and 1993. By year-end 1993, they had succeeded in pushing most interest rates down to 20-to-30 year lows. Such stimulation accumulated like gasoline in the fuel tank of a vehicle that was operating too slowly to draw down the needle on its fuel gauge. More to the point, during the first 2.5 years of the current expansion, real GDP growth averaged only 2.4 percent--the most anemic growth for any similar recovery period in the post-World War II era and well below the long-term growth potential for the U.S. economy. Yet, the Fed had been adding reserves at a furious 11.3 percent annual rate over that same time period. Thus, even at the more accelerated 4 percent annual pace of 1994's economic expansion, there remains plenty of fuel to carry real GDP to new highs in 1995. Likewise, inflation rates drifted lower between 1991 and 1994: The Consumer Price Index averaged 4.2, 3.0, 3.0 and 2.6, respectively, over those years. Excellent productivity gains in the private sector of the United States and prolonged recession in Europe and Japan helped moderate domestic price pressures, despite revved up monetary policies over a rather extended period of time. Last year also was good from the standpoint of what was avoided: a federal government takeover of at least another 8 percent of the U.S. GDP associated with proposed health care reform. In retrospect, it is more clear than ever that programs featuring socialized medicine are inferior to market-based, competitive systems for the delivery of health care. Despite a respectable economic performance in 1994, the overall tax and regulatory burdens on American workers and businesses grew. Along with this proliferation of disincentives for work effort, saving, and investment came economic frustration. Household income, after taxes and inflation, was not advancing any longer, and higher payroll and capital gains taxes were shrinking the pool of current and future wealth in America. The administration and new Congress are unlikely to lower tax burdens or the costs of regulation as early as 1995, but changes in attitude and the application of rational cost-benefit analysis to government spending programs should pave the way for more tangible fiscal policy reforms in 1996 and beyond. 1995: A FIFTH YEAR OF GROWTH At year-end 1994 there was ample economic momentum to sustain an average 3.3 percent real GDP growth in 1995, compared with 4.0 percent growth in 1994. Between fourth quarter 1994 and fourth quarter 1995, however, the real GDP expansion is likely to be a more modest 2.6 percent, reflecting the dampening effects of 1994's Fed tightening and higher real borrowing costs. Deceleration in the final quarters of 1995 definitely contrast with the acceleration that occurred during the second half of 1994. In historical perspective, however, such deceleration would be customary in the fifth year of a cyclical expansion, especially when it comes in the wake of a central bank policy focused on preempting higher inflation. Inflation tends to accelerate whenever the utilization rate of industrial capacity moves toward 85 percent. Indeed, during the last half of 1994, capacity utilization rates averaged a robust 84.4 percent. Moreover, as of early 1995, there still was scant relief in commodity price pressures, and various labor shortages emerged. Most significantly for the future direction of short-term interest rates, the Michigan and U.S. purchasing management surveys were recording intensifying price pressures on purchased materials, and shortages of many basic resources appeared as 1994 progressed. UNDERPINNINGS OF OPTIMISM Comerica has two summary forecasting measures for the U.S. economy: the Recession Watch Index and the Advance Economic Barometer. The Recession Watch Index measures the chances of a recession occurring within approximately one year. In December 1994, the index assigned a mere 16 percent probability for a recession in 1995 (Figure 1). This year-end number was higher than the 2-to-10 percent range that the Recession Watch Index had roamed through most of 1994. The 16 percent probability reading for recession in 1995 is precisely the average we experienced in most of 1985 and 1986, when there were years of expansion yet to come. The counterpart to the Recession Watch Index is the Advance Economic Barometer, developed by Comerica to predict approximate real GDP strength 6 to 12 months into the future (Figure 2). In this case, the GDP outlook for 1995, while certainly not recessionary, is forecasted to undergo at least two quarters of slowing from recent 4.0 to 4.5 percent growth rates. For nine months during 1994, roughly from March to December, the Advance Economic Barometer exhibited a consistent pattern of slowing--from a level of 4.6 to 2.6. If historical relations are any guide to the future, this development should augur somewhat more modest real GDP advances by the middle quarters of 1995. 70 46 Of the three primary economic measures comprising the Advance Economic Barometer, at least two are likely to show weakness in the opening quarters of 1995. Continued Federal Reserve restraint will further slow the monetary factors in the index, and rising short-term interest rates will create a flatter yield curve, depressing the financial series component of the index as well (Figure 3). Also, to the extent rising interest rates slow the housing and construction industry and generate an adverse wealth effect on stock and bond holders, the overall leading economic indicators published by the U.S. Commerce Department will suffer. If these events materialize, then the continuity of real economic growth for 1996 could be broken. REGIONAL OUTLOOKS FOR COMERICA AFFILIATES For the first time in four years, all regional economies in the U.S. should be moving higher together in 1995. Considering the interest rate increases from 1994 and early this year, it will be more difficult for the credit-sensitive sectors and regions to match the strong performance relative to the U.S. again in 1995. The upper Midwest is especially vulnerable to these developments because of its greater reliance on the sale of large-ticket durable goods. Midwest growth rates will converge to the national average. Michigan and Illinois are expected to match the U.S. performance because aggregate U.S. income and spending should do well in 1995. On the other hand, California still struggles to catch up. The state's economy finally appears to be emerging from recession and stagnation. Its readjustment period was quite prolonged, but employment is once again rebounding. California's growth will be augmented by improving exports to high-growth developing nations in the Orient and Latin America. Growth could match the U.S. average based on California's relatively depressed base of 1994. We are unlikely to see a significant defense industry rebuilding before the end of President Clinton's term. Growth in Texas and the Southwest converged to and then slipped below the national pace over the past two years after exhibiting three years of faster than average expansion. In 1995, slower growth in the interest-rate sensitive construction and housing sectors and poorer GDP prospects for Mexico strongly suggest that this region will again experience slightly below normal growth. Florida and the Southeast could see economic acceleration as population growth and foreign investment bolster employment, income and output. INTEREST RATES AND HOPE Absent some unforeseen, non-economic shock, it is inevitable that short-term interest rates will rise 1 to 2 percentage points in the first half of 1995. Continued GDP upswing and increasingly tight labor and materials markets will keep the Federal Reserve tightfisted in its conduct of monetary policy. Only when the U.S. economy emits unmistakable signs of significantly slower real GDP growth with inflation rates at or below 3 percent will there be a policy shift toward monetary ease. This could occur in the second half of 1995. (Recession Watch Index Figure 1. - Graph) (Advance Economic Barometer Figure 2. - Graph) (Yield Curve Spread (30 Year Treasury Minus Federal Funds) Figure 3. - Graph) Otherwise, to make the Fed's job easier, it is incumbent on the new legislators and the administration in Washington to reinvigorate the long-term real growth potential of the U.S. economy by downsizing and rationalizing government spending, taxes and regulations. David L. Littmann First Vice President and Senior Economist 71 47 DIRECTORS AND OFFICERS: COMERICA INCORPORATED BOARD OF DIRECTORS DIRECTOR RETIREMENTS JOHN R. HAGGERTY President and Chief Executive Officer E. PAUL CASEY COMERICA EXPRESSES ITS SINCERE Comerica Mortgage Corporation Chairman and Managing General Partner APPRECIATION TO THE FOLLOWING Metapoint Partners DIRECTORS UPON THEIR RETIREMENT FROM ROBERT A. HERDOIZA THE CORPORATION'S BOARD IN 1994: Executive Vice President JAMES F. CORDES Comerica Bank Executive Vice President DONALD R. MANDICH The Coastal Corporation Retired Chairman and ARTHUR W. HERMANN Chief Executive Officer Senior Vice President and J. PHILIP DINAPOLI Comerica Incorporated Controller Attorney (Director since 1974) Comerica Incorporated and J. Philip DiNapoli Offices Comerica Bank DEAN E. RICHARDSON MAX M. FISHER Retired Chairman THOMAS R. JOHNSON Investor Manufacturers National Corporation Executive Vice President (Director since 1973) Comerica Incorporated JOHN D. LEWIS Vice Chairman THOMAS F. RUSSELL JOHN D. LEWIS Comerica Incorporated Retired Chairman and Vice Chairman Chief Executive Officer Comerica Incorporated PATRICIA SHONTZ LONGE, PH.D. Federal Mogul Corporation Economist; Senior Partner (Director since 1977) PAUL H. MARTZOWKA The Longe Company Executive Vice President and EXECUTIVE OFFICERS Chief Financial Officer WAYNE B. LYON Comerica Incorporated and President and Chief Operating Officer JOSEPH J. BUTTIGIEG III Comerica Bank Masco Corporation Executive Vice President Comerica Bank EUGENE A. MILLER GERALD V. MACDONALD Chairman and Chief Executive Retired Chairman and RICHARD A. COLLISTER Officer Chief Executive Officer Executive Vice President Comerica Incorporated and Comerica Incorporated Comerica Incorporated and Comerica Bank Comerica Bank MICHAEL T. MONAHAN EUGENE A. MILLER President Chairman and Chief Executive Officer JUDITH C. LALKA DART Comerica Incorporated and Comerica Incorporated and Executive Vice President Comerica Bank Comerica Bank General Counsel and Corporate Secretary Comerica Incorporated and DAVID B. STEPHENS MICHAEL T. MONAHAN Comerica Bank Executive Vice President President Comerica Bank Comerica Incorporated and GEORGE C. ESHELMAN Comerica Bank Executive Vice President JAMES R. TIETJEN Comerica Incorporated and Senior Vice President and ALFRED A. PIERGALLINI Comerica Bank General Auditor President and Chief Executive Officer Comerica Incorporated Gerber Products Company DOUGLAS W. FIEDLER President and Chief Executive Officer PAUL D. TOBIAS ALAN E. SCHWARTZ Comerica Bank & Trust, FSB Executive Vice President Partner Comerica Incorporated Honigman Miller Schwartz and Cohn J. MICHAEL FULTON President and Chief Executive Officer DAVID C. WHITE HOWARD F. SIMS Comerica Bank-California President and Chief Chairman Executive Officer Sims-Varner & Associates CHARLES L. GUMMER Comerica Bank-Illinois President and Chief Executive Officer Comerica Bank-Texas
72 48 DIRECTORS AND OFFICERS: COMERICA INCORPORATED AND SUBSIDIARIES COMERICA BANK (MICHIGAN) HEINZ C. PRECHTER REV. ZAN W. HOLMES JR. Chairman and Founder Senior Pastor EUGENE A. MILLER ASC Incorporated St. Luke Community United Chairman and Chief Executive Officer Methodist Church RICHARD D. ROHR MICHAEL T. MONAHAN Managing Partner JAKE KAMIN President Bodman, Longley & Dahling Investor and Developer DIRECTORS ROBERT S. TAUBMAN AGGIE JORDAN-DELAURENTI, PH.D. President and Chief Executive Officer President WENDELL W. ANDERSON JR. The Taubman Company, Inc. Jordan-DeLaurenti, Inc. Retired Chairman Bundy Corporation ALFRED H. TAYLOR JR. Trustee, Former Chairman and LILLIAN BAUDER, PH.D. Chief Executive Officer W. THOMAS MCQUAID President and Chief Executive Officer Kresge Foundation President Cranbrook Educational Community Performance Properties WILLIAM P. VITITOE Corporation E.L. COX Chairman and Chief Executive Officer Executive Director Washington Energy Company RAYMOND D. NASHER State Accident Fund of Michigan Chairman of the Board of MARTIN D. WALKER Directors ROGER FRIDHOLM Chairman and Chief Executive Officer Comerica Bank-Texas; President M.A. Hanna Company Chairman, The Nasher Company St. Clair Group GAIL L. WARDEN CALVIN E. PERSON TODD W. HERRICK President and Chief Executive Officer Owner President and Chief Executive Officer Henry Ford Health System Calvin Person & Associates Tecumseh Products Company COMERICA BANK-TEXAS BOONE POWELL JR. EDWARD C. LEVY JR. President and Chief Executive President and Chief Executive Officer CHARLES L. GUMMER Officer Edw. C. Levy Co. President and Chief Executive Officer Baylor University Medical Center JOHN D. LEWIS DIRECTORS Vice Chairman BILL J. PRIEST, PH.D. Comerica Incorporated CARROLL BAIRD Chancellor Emeritus President Dallas County Community PAUL H. MARTZOWKA Mrs Baird's Bakeries, Inc. College District Executive Vice President and Chief Financial Officer C. DEWITT BROWN JR. THOMAS J. TIERNEY Comerica Incorporated and President and Chief Executive Officer Chairman of the Board Comerica Bank Dee Brown Masonry Corporate Communications Center, Inc. WALTER J. MCCARTHY JR. JAMES F. CORDES Retired Chairman and Executive Vice President COMERICA BANK-ILLINOIS Chief Executive Officer The Coastal Corporation The Detroit Edison Company DAVID C. WHITE THOMAS M. DUNNING President and Chief EUGENE A. MILLER Chairman Executive Officer Chairman and Chief Executive Officer Dunning Benefit Corporation Comerica Incorporated and DIRECTORS Comerica Bank RUBEN E. ESQUIVEL Vice Chairman GREGORY R. BEARD MICHAEL T. MONAHAN AVO International, Inc. Executive Vice President President Comerica Bank-Illinois Comerica Incorporated and JOE R. GOYNE Comerica Bank Vice Chairman THOMAS F. CAREY Comerica Bank-Texas Attorney at Law JOHN W. PORTER Carey, Filter, White & Boland Chief Executive Officer CHARLES L. GUMMER Urban Education Alliance, Inc. President and Chief Executive Officer ROBERT E. HUGHES Comerica Bank-Texas Retired Chairman Affiliated Banc Group, Inc. DAVID C. WHITE President and Chief Executive Officer Comerica Bank-Illinois ROBERT J. ZAHORIK President MidCon Products
73 49 DIRECTORS AND OFFICERS: COMERICA INCORPORATED AND SUBSIDIARIES COMERICA BANK-CALIFORNIA LOWELL W. MORSE DONALD R. MANDICH Chairman of the Board Retired Chairman and J. MICHAEL FULTON Cypress Ventures, Inc. Chief Executive Officer President and Chief Executive Officer Comerica Incorporated JOSEPH P. PARISI DIRECTORS President WILLIAM A. PREW Therma, Inc. Retired President THEODORE J. BIAGINI Prew Insurance Of Counsel EDWARD P. ROSKI JR. Pillsbury Madison & Sutro President BILL T. SMITH JR., ESQ. Majestic Realty Company Attorney PHILLIP R. BOYCE Bill T. Smith Jr., P.A. Investor LEWIS N. WOLFF Chairman and Chief Executive Officer MAXWELL H. BLOOM Wolff Sesnon Buttery President L. Bloom Sons, Co. COMERICA BANK & TRUST, FSB (Florida) JACK C. CARSTEN Venture Capitalist DOUGLAS W. FIEDLER President and Chief Executive Officer JACK W. CONNER Chairman DIRECTORS Comerica Bank-California ARTHUR R. BRADLEY J. PHILIP DINAPOLI Chairman Attorney Comerica Bank & Trust, FSB J. Philip DiNapoli Offices NANCY H. CANARY BRUCE C. EDWARDS Partner President Thompson, Hine and Flory March Development Company E. PAUL CASEY J. MICHAEL FULTON Chairman and Managing General Partner President and Chief Executive Officer Metapoint Partners Comerica Bank-California JOHN F. DALY DREW GIBSON Retired Vice Chairman Chairman and Chief Executive Officer Johnson Controls Gibson Speno Companies DOUGLAS W. FIEDLER WALTER T. KACZMAREK President and Chief Executive Officer Executive Vice President and Comerica Bank & Trust, FSB Chief Operating Officer Comerica Bank-California DON B. DEAN Retired President and PATRICIA N. LOWELL Chief Executive Officer Retired President Manufacturers Bank & Trust of Florida Comerica Bank-California RONALD S. HOLLIDAY, ESQ. ELINOR WEISS MANSFIELD Managing Partner Attorney Rudnick & Wolf WALTER J. MCCARTHY JR. JOHN D. LEWIS Retired Chairman and Vice Chairman Chief Executive Officer Comerica Incorporated The Detroit Edison Company PATRICIA SHONTZ LONGE, PH.D. Economist; Senior Partner The Longe Company
74 50 COMERICA INCORPORATED AND SUBSIDIARIES COMERICA-BANK-CALIFORNIA COMERICA BANK (MICHIGAN) COMERICA BANK & TRUST, FSB SUBSIDIARIES (FLORIDA) COMERICA LEASING CORPORATION COMERICA BANK-ILLINOIS Provides equipment leasing and financing services for businesses throughout the COMERICA BANK (MICHIGAN) United States. COMERICA BANK-TEXAS COMERICA MORTGAGE CORPORATION Offers residential real estate financing COMERICA ACCEPTANCE CORPORATION for new mortgages and servicing of Generates consumer loans through dealers existing mortgages owned by Comerica Bank in several states. and other investors. COMERICA BANK-ANN ARBOR, N.A. JOHN V. CARR & SON, INC. A cash management and holding company for Provides customhouse brokerage and certain investment subsidiaries. freight forwarding services from offices in 12 states and the Canadian provinces COMERICA BANK-MIDWEST, N.A. of Ontario and Quebec. Specializes in revolving credit loans; based in Toledo, Ohio. COMERICA INVESTMENT SERVICES COMERICA COMMUNITY DEVELOPMENT CORPORATION SUBSIDIARIES A non-conventional financial resource for housing rehabilitation and small COMERICA INSURANCE SERVICES business enterprise in Comerica's Michigan CORPORATION markets. Offers retail and commercial insurance consulting, sales and product management services. COMERICA SECURITIES, INC. A full service broker-dealer that offers stocks, bonds, mutual funds and annuities to individual investors, along with investment banking services. WILSON, KEMP & ASSOCIATES, INC. Offers individualized investment portfolio management services to customers in the Midwest and Florida. PARTNERSHIP INTEREST MUNDER CAPITAL MANAGEMENT An independent investment advisory firm.
75 51 SHAREHOLDER INFORMATION STOCK Comerica's stock trades on the New York Stock Exchange (NYSE) under the symbol CMA. SHAREHOLDER ASSISTANCE Inquiries related to shareholder records, change of name, address or ownership of stock, and lost or stolen stock certificates should be directed to the transfer agent and registrar: Norwest Bank Minnesota, N.A. P.O. Box 738 South St. Paul, Minnesota 55075-0738 800-468-9716 ELIMINATION OF DUPLICATE MATERIALS If you receive duplicate mailings of quarterly and annual reports at one address, you may have multiple shareholder accounts. You can consolidate your multiple accounts into a single, more convenient account by contacting the transfer agent shown above. In addition, if more than one member of your household is receiving shareholder materials, you can eliminate the duplicate mailings by contacting the transfer agent. DIVIDEND REINVESTMENT PLAN Comerica offers a dividend reinvestment plan which permits participating shareholders of record to reinvest dividends in Comerica common stock without paying brokerage commissions or service charges. Participating shareholders also may invest up to $3,000 in additional funds each quarter for the purchase of additional shares. A brochure describing the plan in detail and an authorization form can be requested from the transfer agent shown above. DIVIDEND DIRECT DEPOSIT Common shareholders of Comerica may have their dividends deposited into their savings or checking account at any bank that is a member of the National Automated Clearing House (ACH) system. Information describing this service and an authorization form can be requested from the transfer agent shown above. DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends customarily are paid on Comerica's common stock on or about April 1, July 1, September 1 and January 1. ANNUAL MEETING The Annual Meeting of Shareholders of Comerica Incorporated will be held on Friday, May 19, 1995, at 9:30 a.m. in the Renaissance Conference Center, Level 2, Tower 300 of the Renaissance Center, Detroit, Michigan. CORPORATE INFORMATION Comerica Incorporated Comerica Tower at Detroit Center Detroit, Michigan 48226 313-222-3300 EQUAL EMPLOYMENT OPPORTUNITY Comerica is committed to its affirmative action program and practices which ensure uniform treatment of employees without regard to race, creed, color, age, national origin, religion, handicap, marital status, veteran status, weight, height or sex. INVESTOR CONTACT Allison McFerren Cione 313-222-6317 MEDIA CONTACT Sharon R. McMurray 313-222-4881 76 52 COMERICA'S GUIDING PRINCIPLES OUR MISSION To forge a cohesive team dedicated to being the standard for exceptional customer service. OUR PURPOSE We are in business to enrich people's lives. OUR BUSINESS VISION We define ourselves as a relationship-driven organization. Our customers are our first priority. Our board of directors are the shareholders' representatives; we are accountable to them. We shall strive to consistently produce outstanding earnings. We shall strive to be leaders in the communities we serve. Our employees are our most valuable resource; we will invest in them. Our employees will be known for their teamwork and will be faithful to our core values and beliefs. We will be known for our outstanding management processes. 77 53 APPENDIX DESCRIPTION OF GRAPHIC MATERIAL--EXHIBIT 13 PAGE NUMBER GRAPHIC MATERIAL ------ ---------------- 19 Bar graph depicting the Corporation's return on assets (in percentages) from 1990 to 1994 compared to an industry average. Text next to the graph: "In 1994, our return on assets again outperformed the industry." 1990 1991 1992 1993 1994 ------------------------------------ Comerica 1.02 1.06 0.91 1.25 1.23 Excluding Restructuring Charge 1.25 Industry Average 0.49 0.47 0.83 1.15 1.11 19 Bar graph depicting the Corporation's net interest income--FTE (in millions), with a line showing net interest margin--FTE (percent of earning assets), from 1990 to 1994. Text next to the graph: "Net interest income was up in 1994 as a result of strong loan growth. Margin compression should end in the second half of 1995 when interest rates are projected to stabilize." 1990 1991 1992 1993 1994 ------------------------------------ Net Interest Income (FTE) 975 1,093 1,159 1,163 1,254 Net Interest Margin (FTE) 4.36 4.49 4.73 4.65 4.32 22 Bar graph depicting the Corporation's net loans charged off to average loans (in percentages) from 1990 to 1994 compared to an industry average. Text next to the graph: "We have an excellent record of credit underwriting." 1990 1991 1992 1993 1994 ------------------------------------ Comerica 1.18 0.58 0.57 0.43 0.24 Industry Average 1.56 1.85 1.42 0.96 0.51 24 Bar graph depicting the Corporation's noninterest income (in millions) from 1990 to 1994. Text next to the graph: "Prospects for future growth in noninterest income are enhanced by the partnership with Munder Capital Management and a focus on sales of nontraditional products such as mutual funds, annuities and life insurance." 1990 1991 1992 1993 1994 ------------------------------------ 348 385 411 462 467 25 Bar graph depicting the Corporation's noninterest expenses (in millions) from 1990 to 1994. Text next to the graph: "Noninterest expenses for 1994 were flat compared to 1993, excluding the effects of companies acquired and significant nonrecurring items." 1990 1991 1992 1993 1994 ------------------------------------ 848 945 1,092 1,038 1,059 30 Bar graph depicting the Corporation's nonperforming assets to loans and other real estate (in percentages) from 1990 to 1994 compared to an industry average. Text next to the graph: "Industry-leading credit quality standards have been maintained as the portfolio has expanded." 1990 1991 1992 1993 1994 ------------------------------------ Comerica 1.54 1.48 1.50 1.09 0.92 Industry Average 4.93 5.30 4.62 2.81 1.67 EX-21 5 EXHIBIT 21 1 Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANT
State or jurisdiction of Incorporation Name or organization ---- ---------------------- Comerica Bank Michigan Comerica California Incorporated California Comerica Bank-Illinois Illinois Comerica Community Development Corporation Michigan Comerica Assurance Ltd. Bermuda Comerica Bank & Trust, F.S.B. United States Comerica Bank-Midwest, N.A. United States Manufacturers Bank-Wilmington Delaware Comerica Bank-Ann Arbor, N.A. United States Comerica Texas Incorporated Delaware Comerica Acceptance Corporation Michigan Comerica Corporate Services Incorporated Michigan Comerica Insurance Company Arizona Comerica Properties Corporation Michigan M L Inc. Michigan Manufacturers Properties Corporation Michigan Waterfront Corporation Michigan Subsidiaries of Comerica Bank ------------------------------ Comerica Investment Services, Inc. Michigan Comerica Insurance Services Corporation Michigan Comerica Securities, Inc. Michigan Wilson, Kemp & Associates, Inc. Michigan Comerica Financial Services, Inc. Michigan C-Tec Ventures, Inc. Michigan Access Insurance Services, Inc. Michigan Interstate Select Insurance Services, Inc. Michigan Comerica Leasing Corporation d/b/a Manucor Leasing, Inc. Michigan Comerica Mortgage Corporation Michigan Manufacturers Data Corporation Michigan Manufacturers Mortgage Corporation Michigan A/H Hotel Management Co. Michigan Roca-I, Inc. Michigan VRB Corp. Michigan
2 John V. Carr & Son, Inc. Michigan Duty Drawback Service, Inc. Michigan John V. Carr & Son, Ltd. Ontario Comerica International Corporation United States Comerica International (Canada) Limited Ontario Comerica International (Canada) Properties, Limited Ontario Subsidiaries of Comerica California Incorporated ------------------------------------------------ Comerica Bank-California California Western Capital Management California Pacific Western Financial California Rowland Financial Corporation California Plaza Commerce Leasing California Subsidiary of Comerica Bank-Illinois ------------------------------------ B&E Realty Corporation Illinois Subsidiaries of Comerica Texas Incorporated ------------------------------------------- Comerica Bank-Texas Texas Comerica Asset Management Incorporated Michigan Riverside Investments Inc. Texas Riverside Investments II Inc. Texas BTXW Investments, Inc. Texas NorthPark Securities, Inc. Texas North Dallas Realty Management Corporation Texas P & SA Corp. Texas Park Properties, Inc. Texas Subsidiaries of Comerica Bank-Ann Arbor --------------------------------------- Woodbridge Capital Management, Inc. Michigan WAM Holdings, Inc. Michigan Munder Capital Management Michigan
EX-23 6 EXHIBIT 23 1 EXHIBIT 23 [ERNST & YOUNG LLP LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements listed below, of our reports on the consolidated financial statements of Comerica Incorporated and subsidaries dated January 17, 1995, financial statements of Comerica Incorporated Preferred Savings Plan dated March 8, 1995 and financial statements of John V. Carr & Son, Inc. Employees' Profit-Sharing Trust dated March 8, 1995, all included in the Annual Report on Form 10-K of Comerica Incorporated for the year ended December 31, 1994: Registration Statement No. 33-42485 on Form S-8 dated August 29, 1991 Registration Statement No. 33-45500 on Form S-8 dated February 11, 1992 Registration Statement No. 33-49964 on Form S-8 dated July 23, 1992 Registration Statement No. 33-49966 on Form S-8 dated July 23, 1992 Registration Statement No. 33-53220 on Form S-8 dated October 13, 1992 Registration Statement No. 33-53222 on Form S-8 dated October 13, 1992 Ernst & Young LLP March 27,1995 EX-27 7 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 1994 FORM 10K FOR COMERICA INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1,822,313 378,873 46,000 4,332 2,906,296 4,970,165 4,659,317 22,209,246 326,195 33,429,902 22,432,316 4,205,408 268,823 4,097,943 596,473 0 0 1,795,307 33,429,902 1,577,329 476,952 37,643 2,091,924 542,727 861,797 1,230,127 56,000 3,461 1,058,669 582,095 387,242 0 0 387,242 3.28 3.28 4.32 161,723 39,161 2,299 318,589 298,685 83,086 35,129 326,195 222,873 2,886 100,436