-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LdfFua7/W1TsZTO3+j3oAU9NUj2gxJ7hReMHpXGH3Pg6+bEHhdr3um5P0jRrC5d5 i7uzqUliveed7Z33LgbZew== 0000950124-01-500562.txt : 20010430 0000950124-01-500562.hdr.sgml : 20010430 ACCESSION NUMBER: 0000950124-01-500562 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010427 ITEM INFORMATION: FILED AS OF DATE: 20010427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMERICA INC /NEW/ CENTRAL INDEX KEY: 0000028412 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 381998421 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10706 FILM NUMBER: 1613585 BUSINESS ADDRESS: STREET 1: 411 W LAFAYETTE CITY: DETROIT STATE: MI ZIP: 48226-3509 BUSINESS PHONE: 3132229743 MAIL ADDRESS: STREET 1: 411 W LAFAYETTE CITY: DETROIT STATE: MI ZIP: 48226-3509 FORMER COMPANY: FORMER CONFORMED NAME: DETROITBANK CORP DATE OF NAME CHANGE: 19850311 8-K 1 k61930e8-k.txt CURRENT REPORT DATED 04/27/01 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: April 27, 2001 (Date of earliest event reported) Commission File No.: 1-10706 Comerica Incorporated Delaware 38-1998421 (State of Incorporation) (I.R.S. Employer Identification No.) 500 Woodward Avenue Detroit, Michigan 48226 (Address of principal executive offices) (Zip Code) (800) 521-1190 Registrant's Telephone Number, including area code (Former name, former address and former fiscal year, if changed since last report) 2 ITEM 5. OTHER EVENTS. As reported in the registrant's Current Report on Form 8-K dated January 29, 2001 the merger of Imperial Bancorp, with and into Comerica Holdings Incorporated, a wholly-owned subsidiary of the registrant, on January 29, 2001 in a transaction accounted for by the pooling of interests method. Exhibit 99 to this Current Report on Form 8-K contains restated financial statements of the registrant, prepared in accordance with Regulation S-X, reflecting this merger. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMERICA INCORPORATED April 27, 2001 By: /s/ George W. Madison ---------------------------- George W. Madison Executive Vice President, General Counsel and Secretary 3 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23 a Consent of Ernst & Young b Consent of KPMG LLP 99 The following restated audited financial statements of the registrant, prepared in accordance with Regulation S-X to reflect the merger of Imperial Bancorp with and into Comerica Holdings Incorporated, a wholly-owned subsidiary of the registrant: - Consolidated Balance Sheets as of December 31, 2000 and 1999. - Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000. - Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2000. - Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000. - Notes to the Consolidated Financial Statements. - Report of Independent Auditors (Ernst & Young). - Report of Independent Auditors (KPMG LLP). EX-23.(A) 2 k61930ex23-a.txt CONSENT OF ERNST & YOUNG 1 EXHIBIT 23a Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements listed below of our report on the consolidated financial statements of Comerica Incorporated and subsidiaries dated January 22, 2001, except for Notes 2 and 10, as to which the date is April 27, 2001, included in Form 8-K dated April 27, 2001 of Comerica Incorporated for the year ended December 31, 2000: 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 Registration Statement No. 33-58823 on Form S-8 dated April 26, 1995 Registration Statement No. 33-58837 on Form S-8 dated April 26, 1995 Registration Statement No. 33-58841 on Form S-8 dated April 26, 1995 Registration Statement No. 33-65457 on Form S-8 dated December 29, 1995 Registration Statement No. 33-65459 on Form S-8 dated December 29, 1995 Registration Statement No. 333-00839 on Form S-8 dated February 9, 1996 Registration Statement No. 333-24569 on Form S-8 dated April 4, 1997 Registration Statement No. 333-24567 on Form S-8 dated April 4, 1997 Registration Statement No. 333-24565 on Form S-8 dated April 4, 1997 Registration Statement No. 333-24555 on Form S-8 dated April 4, 1997 Registration Statement No. 333-37061 on Form S-8 dated October 2, 1997 Registration Statement No. 333-48118 on Form S-8 dated October 18, 2000 Registration Statement No. 333-48120 on Form S-8 dated October 18, 2000 Registration Statement No. 333-48122 on Form S-8 dated October 18, 2000 Registration Statement No. 333-48124 on Form S-8 dated October 18, 2000 Registration Statement No. 333-48126 on Form S-8 dated October 18, 2000 Registration Statement No. 333-50966 on Form S-8 dated November 30, 2000 Registration Statement No. 333-51042 on Form S-8 to Form S-4 dated February 6, 2001 April 27, 2001 Detroit, Michigan /s/ Ernst & Young LLP EX-23.(B) 3 k61930ex23-b.txt CONSENT OF KPMG LLP 1 EXHIBIT 23b CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in the Form 8-K of Comerica Incorporated, of our report dated January 26, 2001, relating to the consolidated balance sheets of Imperial Bancorp and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000. Los Angeles, California April 27, 2001 EX-99 4 k61930ex99.txt RESTATED FINANCIAL STATEMENTS 1 EXHIBIT 99 Consolidated Balance Sheets Comerica Incorporated and Subsidiaries
December 31 (in thousands, except share data) 2000 1999 - -------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 1,930,682 $ 1,509,760 Short-term investments 1,730,158 2,337,543 Investment securities available for sale 3,890,725 3,783,493 Commercial loans 26,009,336 23,629,117 International loans 2,571,156 2,573,003 Real estate construction loans 2,915,168 2,166,598 Commercial mortgage loans 5,360,582 4,873,478 Residential mortgage loans 807,083 870,615 Consumer loans 1,477,135 1,388,829 Lease financing 1,029,164 803,786 - -------------------------------------------------------------------------------------------------- Total loans 40,169,624 36,305,426 Less allowance for credit losses (608,110) (548,147) - -------------------------------------------------------------------------------------------------- Net loans 39,561,514 35,757,279 Premises and equipment 364,246 371,973 Customers' liability on acceptances outstanding 26,668 43,810 Accrued income and other assets 2,030,063 1,706,176 - -------------------------------------------------------------------------------------------------- Total assets $49,534,056 $ 45,510,034 ================================================================================================== Liabilities and Shareholders' Equity Noninterest-bearing deposits $10,188,475 $ 8,674,888 Interest-bearing deposits 23,665,808 20,521,115 - -------------------------------------------------------------------------------------------------- Total deposits 33,854,283 29,196,003 Short-term borrowings 2,093,381 2,924,694 Acceptances outstanding 26,668 43,810 Accrued expenses and other liabilities 800,386 640,653 Medium- and long-term debt 8,259,179 8,756,823 - -------------------------------------------------------------------------------------------------- Total liabilities 45,033,897 41,561,983 Nonredeemable preferred stock-$50 stated value Authorized-5,000,000 shares Issued-5,000,000 shares at 12/31/00 and 12/31/99 250,000 250,000 Common stock-$5 par value Authorized-325,000,000 shares Issued-177,527,216 shares at 12/31/00 and 177,888,918 shares at 12/31/99 888,519 889,453 Capital surplus 301,414 226,001 Unearned employee stock ownership plan stock - 176,462 shares at 12/31/00 and 81,418 shares at 12/31/99 (6,750) (3,750) Accumulated other comprehensive income 12,097 (21,704) Retained earnings 3,085,784 2,677,210 Deferred compensation (14,494) (21,998) Less cost of common stock in treasury-289,397 shares at 12/31/00 and 715,496 shares at 12/31/99 (16,411) (47,161) - -------------------------------------------------------------------------------------------------- Total shareholders' equity 4,500,159 3,948,051 - -------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 49,534,056 $45,510,034 ==================================================================================================
See notes to consolidated financial statements. 2 Consolidated Statements of Income Comerica Incorporated and Subsidiaries
Year Ended December 31 (in thousands, except per share data) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Interest Income Interest and fees on loans $ 3,436,066 $ 2,822,937 $ 2,679,979 Interest on investment securities Taxable 256,469 194,254 256,090 Exempt from federal income tax 2,864 4,647 7,252 - ---------------------------------------------------------------------------------------------------------- Total interest on investment securities 259,333 198,901 263,342 Interest on short-term investments 77,749 39,317 34,798 - ---------------------------------------------------------------------------------------------------------- Total interest income 3,773,148 3,061,155 2,978,119 Interest Expense Interest on deposits 956,168 694,311 738,491 Interest on short-term borrowings 215,372 183,124 191,010 Interest on medium- and long-term debt 550,026 424,698 374,460 Net interest rate swap (income)/expense 47,413 (57,854) (45,810) - ---------------------------------------------------------------------------------------------------------- Total interest expense 1,768,979 1,244,279 1,258,151 - ---------------------------------------------------------------------------------------------------------- Net interest income 2,004,169 1,816,876 1,719,968 Provision for credit losses 254,800 146,220 146,375 - ---------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 1,749,369 1,670,656 1,573,593 Noninterest Income Fiduciary and investment management income 306,119 243,956 192,962 Service charges on deposit accounts 188,828 176,639 164,121 Commercial lending fees 62,645 54,659 57,977 Letter of credit fees 51,960 46,116 31,127 Securities gains/(losses) 10,529 8,675 7,441 Net gain on sales of businesses 50,299 76,387 10,705 Other noninterest income 288,070 260,582 202,616 - ---------------------------------------------------------------------------------------------------------- Total noninterest income 958,450 867,014 666,949 Noninterest Expenses Salaries and employee benefits 851,456 777,539 679,902 Net occupancy expense 110,126 104,308 100,337 Equipment expense 76,532 73,217 69,939 Outside processing fee expense 63,289 60,207 52,754 Restructuring charge/(credit) - - (6,840) Other noninterest expenses 384,889 343,637 340,878 - ---------------------------------------------------------------------------------------------------------- Total noninterest expenses 1,486,292 1,358,908 1,236,970 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 1,221,527 1,178,762 1,003,572 Provision for income taxes 430,792 419,347 352,748 - ---------------------------------------------------------------------------------------------------------- Net Income $ 790,735 $ 759,415 $ 650,824 ========================================================================================================== Net income applicable to common stock $ 773,635 $ 742,315 $ 633,724 ========================================================================================================== Basic net income per common share $ 4.38 $ 4.20 $ 3.58 Diluted net income per common share 4.31 4.13 3.51 Cash dividends declared on common stock $ 250,277 $ 224,837 $ 199,403 Dividends per common share $ 1.60 $ 1.44 $ 1.28 - ----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 3 Consolidated Statements of Changes in Shareholders' Equity Comerica Incorporated and Subsidiaries
Unearned Employee Non- Stock Accumulated Redeemable Ownership Other Preferred Common Capital Plan Comprehensive (in thousands, except share data) Stock Stock Surplus Shares Income ------------ ----------- ----------- ----------- -------------- Balances at January 1, 1998 As originally reported $ 250,000 $ 784,077 $ -- $ -- $ (1,937) Imperial balances at January 1, 1998 -- 236,186 -- -- 1,682 Pooling of interest adjustments -- (171,211) 171,211 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1998 250,000 849,052 171,211 -- (255) Net income for 1998 -- -- -- -- -- Other comprehensive income, net of tax -- -- -- -- (6,715) Total comprehensive income -- -- -- -- -- Cash dividend declared: -- -- -- -- -- Preferred stock -- -- -- -- -- Common stock -- -- -- -- -- Purchase and retirement of common stock -- (4,575) (26,150) -- -- Stock split -- 32,538 (32,538) -- -- Common stock issued for acquisition -- 922 3,000 -- -- Issuance of common stock under employee stock plans -- 4,515 37,272 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 250,000 882,452 152,795 -- (6,970) Net income for 1999 -- -- -- -- -- Other comprehensive income, net of tax -- -- -- -- (14,734) Total comprehensive income -- -- -- -- -- Cash dividends declared: Preferred stock -- -- -- -- -- Common stock -- -- -- -- -- Purchase of common stock -- (1,284) (8,069) -- -- Common stock dividend -- 7,712 44,993 -- -- Issuance of common stock under employee stock plans -- 573 12,067 (3,750) -- Amortization of deferred compensation, net of minority interest -- -- 24,215 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 250,000 889,453 226,001 (3,750) (21,704) Net income for 2000 -- -- -- -- -- Other comprehensive income, net of tax -- -- -- -- 33,801 Total comprehensive income -- -- -- -- -- Cash dividends declared: Preferred stock -- -- -- -- -- Common stock -- -- -- -- -- Purchase of common stock -- (4,651) (31,645) -- -- Common stock dividend -- -- 84,906 -- -- Issuance of common stock under employee stock plans -- 3,717 22,152 (3,000) -- Amortization of deferred compensation, net of minority interest -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000 $ 250,000 $ 888,519 $ 301,414 $ (6,750) $ 12,097 ===================================================================================================================================
Total Retained Deferred Treasury Shareholders' (in thousands, except share data) Earning Compensation Stock Equity ----------- ------------ ------------ ------------- Balances at January 1, 1998 As originally reported $ 1,731,419 $ (1,783) $ -- $ 2,761,776 Imperial balances at January 1, 1998 114,156 -- -- 352,024 Pooling of interest adjustments -- -- -- -- - ---------------------------------------------------------------------------------------------------------------- Balances at January 1, 1998 1,845,575 (1,783) -- 3,113,800 Net income for 1998 -- -- -- 650,824 Other comprehensive income, net of tax 650,824 -- -- (6,715) ----------- Total comprehensive income -- -- -- 644,109 Cash dividend declared: -- -- -- -- Preferred stock (17,100) -- -- (17,100) Common stock (199,403) -- -- (199,403) Purchase and retirement of common stock -- -- (145,202) (175,927) Stock split -- -- -- -- Common stock issued for acquisition -- -- -- 3,922 Issuance of common stock under employee stock plans (35,403) (3,419) 56,069 59,034 - ---------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 2,244,493 (5,202) (89,133) 3,428,435 Net income for 1999 759,415 -- -- 759,415 Other comprehensive income, net of tax -- -- -- (14,734) ----------- Total comprehensive income -- -- -- 744,681 Cash dividends declared: Preferred stock (17,100) -- -- (17,100) Common stock (224,837) -- -- (224,837) Purchase of common stock -- -- (2,885) (12,238) Common stock dividend (52,724) -- -- (19) Issuance of common stock under employee stock plans (32,037) 4 44,857 21,714 Amortization of deferred compensation, net of minority interest -- (16,800) -- 7,415 - ---------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 2,677,210 (21,998) (47,161) 3,948,051 Net income for 2000 790,735 -- -- 790,735 Other comprehensive income, net of tax -- -- -- 33,801 ----------- Total comprehensive income -- -- -- 824,536 Cash dividends declared: Preferred stock (17,100) -- -- (17,100) Common stock (250,277) -- -- (250,277) Purchase of common stock -- -- (14,108) (50,404) Common stock dividend (84,927) -- -- (21) Issuance of common stock under employee stock plans (29,857) (3,278) 44,858 34,592 Amortization of deferred compensation, net of minority interest -- 10,782 -- 10,782 - ---------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000 $ 3,085,784 $ (14,494) $ (16,411) $ 4,500,159 ================================================================================================================
( ) Indicates deduction. See notes to consolidated financial statements. 4 Consolidated Statements of Cash Flows Comerica Incorporated and Subsidiaries
Year Ended December 31 (in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 790,735 $ 759,415 $ 650,824 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 254,800 146,220 146,375 Depreciation 70,988 74,768 60,913 Restructuring charge -- -- (21,923) Net increase in securities (12,410) (46,854) (14,566) Net (increase) decrease in assets held for sale (33,385) 53,568 (19,760) Net (increase) decrease in accrued income receivable (80,923) (42,321) 16,417 Net increase in accrued expenses 110,273 138,459 2,973 Net change in equity investments (29,817) 16,031 (3,272) Gain on the sale of businesses (50,299) (76,387) (10,705) Net amortization of intangibles 36,643 33,921 30,414 Other, net (152,773) 30,368 (130,106) - -------------------------------------------------------------------------------------------------------------------------- Total adjustments 113,097 327,773 56,760 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 903,832 1,087,188 707,584 Investing Activities Net (increase) decrease in interest-bearing deposits with banks (2,846) (9,418) (1,184) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 176,527 (134,094) (584,059) Proceeds from sale of investment securities available for sale 6,298,862 1,921,554 992,271 Proceeds from maturity of investment securities available for sale 827,426 3,965,212 5,502,573 Purchases of investment securities available for sale (7,200,262) (6,328,161) (5,324,039) Net increase in loans (other than loans purchased) (4,032,060) (2,918,339) (4,417,160) Purchase of loans -- -- (1,115) Proceeds from exercise of warrants and sale of equity securities 23,155 17,658 10,572 Proceeds from sale of real estate and other assets owned 107 1,618 3,972 Fixed assets, net (62,187) (55,825) (50,259) Net (increase) decrease in customers' liability on acceptances outstanding 17,142 (31,475) 6,057 Net cash provided by acquisition/sale of businesses 442,426 69,512 1,878,907 - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,511,710) (3,501,758) (1,983,464) Financing Activities Net increase (decrease) in deposits 4,658,280 (686,777) 3,121,865 Net increase (decrease) in short-term borrowings (831,313) (716,060) 391,938 Net increase (decrease) in acceptances outstanding (17,142) 31,475 (6,057) Proceeds from issuance of medium- and long-term debt 6,103,664 6,373,364 3,200,000 Repayments and purchases of medium- and long-term debt (6,594,637) (2,981,672) (5,213,360) Net proceeds from ESOP loans 6,000 5,985 -- Proceeds from exercise of employee stock options 10,648 1,446 2,855 Other (26) (1,352) 377 Redemption of capital securities (9,793) -- -- Proceeds from issuance of common stock 20,618 23,268 50,885 Purchase of common stock for treasury and retirement (56,403) (18,118) (175,927) Dividends paid (261,096) (235,646) (211,966) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 3,028,800 1,795,913 1,160,610 - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and due from banks 420,922 (618,657) (115,270) Cash and due from banks at beginning of year 1,509,760 2,128,417 2,243,687 - -------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 1,930,682 $ 1,509,760 $ 2,128,417 ========================================================================================================================== Interest paid $ 1,718,365 $ 1,210,598 $ 1,291,024 ========================================================================================================================== Income taxes paid $ 379,250 $ 347,933 $ 288,783 ========================================================================================================================== Noncash investing and financing activities Transfer from loans to loans held for sale $ -- $ 620,280 $ -- Loans made in conjunction with the sale of loans -- $ 7,210 $ -- Common stock issued for an acquisition $ -- $ -- $ 3,922 Loan transfers to other real estate 6,870 11,430 6,911 ==========================================================================================================================
See notes to consolidated financial statements. 5 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries 1 Accounting Policies ORGANIZATION Comerica Incorporated is a registered financial holding company headquartered in Detroit, Michigan. The Corporation's principal lines of business are the Business Bank, the Individual Bank and the Investment Bank. The core businesses are tailored to each of the Corporation's four primary geographic markets: Michigan, Texas, California and Florida. In addition to the three major lines of business, the Finance segment is also significant. The Finance segment includes Comerica's securities portfolio and asset and liability management activities. This segment is responsible for managing Comerica's funding, liquidity and capital needs, performing interest sensitivity gap and earnings simulation analysis and executing various strategies to manage Comerica's exposure to interest rate risk. The accounting and reporting policies of Comerica Incorporated and its subsidiaries conform to accounting principles generally accepted in the United States and prevailing practices within the banking industry. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from these estimates. The following is a summary of the more significant accounting and reporting policies. CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of all significant intercompany accounts and transactions. Prior years' financial statements have been reclassified to conform with current financial statement presentation. For acquisitions accounted for as pooling-of-interests combinations, the historical consolidated financial statements are restated to include the accounts and results of operations. For acquisitions using the purchase method of accounting, the assets acquired and liabilities assumed are adjusted to fair market values at the date of acquisition, and the resulting net discount or premium is accreted or amortized into income over the remaining lives of the relevant assets and liabilities. Goodwill representing the excess of cost over the net book value of identifiable assets acquired is amortized on a straight- line basis over periods ranging from 10 to 25 years (weighted average of 19 years). Core deposit intangible assets are amortized on an accelerated method over 10 years. IMPAIRMENT The Corporation periodically evaluates long-lived assets, certain identifiable intangibles, deferred costs and goodwill for indication of impairment in value. When required, asset impairment is recorded. LOANS HELD FOR SALE Loans held for sale are carried at the lower of cost or market. Market value is determined in the aggregate. 6 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 assets. The estimated useful lives are generally 10-33 years for premises that the company owns and 3-8 years for furniture and equipment. Leasehold improvements are amortized over the terms of their respective leases or 10 years, whichever is shorter. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses represents management's assessment of probable losses inherent in the Corporation's on- and off-balance sheet credit portfolio. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology, which has been in use, without material change, for several years. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Business loans are defined as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. A detailed credit quality review is performed quarterly on large business loans which have deteriorated below certain levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent loan loss experience, current economic conditions and trends, geographic dispersion of borrowers, and trends with respect to past due and nonaccrual amounts. Management maintains an unallocated allowance to recognize the uncertainty and imprecision underlying the process of estimating expected credit losses. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan 7 portfolio may exist which are not necessarily captured by the application of historical loss ratios. Loans which are deemed uncollectible are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans previously charged off are added to the allowance. 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 which were restructured, but yield a rate equal to or greater than the rate charged for new loans with comparable risk and have met the requirements for accrual status, are generally not reported as nonperforming assets. Such loans are evaluated for impairment in the calendar year of the modifications. These loans may be excluded from the impairment assessment in the calendar years subsequent to the restructuring if not impaired based on the modified terms. See Note 4 for additional information on loan impairment. Consumer loans are generally not placed on nonaccrual status and are charged off no later than 180 days past due, or earlier if deemed uncollectible. Loans other than consumer are generally placed on nonaccrual status when principal or interest is past due 90 days or more and/or when, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable. Generally, a loan may be returned to accrual status when all delinquent principal and interest become current and the Corporation expects repayment of the remaining contractual principal and interest or when the loan is both well secured and in the process of collection. A nonaccrual loan that is restructured will generally remain on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, sustained payment performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the restructured terms. These factors may result in the loan being returned to an accrual basis at the time of restructuring or upon satisfaction of a shorter performance period. If management is uncertain whether the borrower has the ability to meet the revised payment schedule, the loan remains classified as nonaccrual. Other real estate acquired is carried at the lower of cost or fair value, minus estimated costs to sell. When the property is acquired through foreclosure, any excess of the related loan balance over fair value is charged to the allowance for credit losses. Subsequent write-downs, operating expenses and losses upon sale, if any, are charged to noninterest expenses. STOCK-BASED COMPENSATION The Corporation elected to continue to apply the disclosure only method in accounting for its stock-based compensation plans. Information on the Corporation's stock-based compensation plans is included in Note 13. PENSION COSTS 8 Pension costs are charged to salaries and employee benefits expense and funded consistent with the requirements of federal law and regulations. POSTRETIREMENT BENEFITS Postretirement benefits are recognized in the financial statements during the employee's active service period. DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS Interest rate and foreign exchange swaps, interest rate caps and floors, and futures and forward contracts may be used to manage the Corporation's exposure to interest rate and foreign currency risks. These instruments, with the exception of futures and forwards, are accounted for on an accrual basis since there is a high correlation with the on-balance sheet instrument being hedged. If this correlation ceases to exist, the existing unrealized gain or loss is amortized over the remaining term of the instrument, and future changes in fair value are accounted for in noninterest income or expense. Net interest income or expense, including premiums paid or received, is recognized over the life of the contract and reported as an adjustment to interest expense. Realized gains and losses on futures and forwards are generally deferred and amortized over the life of the contract as an adjustment to net interest income. Gains or losses on early termination of risk management derivative financial instruments are deferred and amortized as an adjustment to the yields of the related assets or liabilities over their remaining contractual life. If the designated asset or liability matures, or is disposed of or extinguished, any unrealized gains or losses on the related derivative instrument are recognized currently and reported as an adjustment to interest expense. Foreign exchange futures and forward contracts, foreign currency options, interest rate caps and interest rate swap agreements executed as a service to customers are accounted for on a fair value basis. As a result, the fair values of these instruments are recorded in the consolidated balance sheet with both realized and unrealized gains and losses recognized currently in noninterest income. INCOME TAXES Provisions for income taxes are based on amounts reported in the statements of income (after exclusion of nontaxable income such as interest on state and municipal securities) and include deferred income taxes on temporary differences between the tax basis and financial reporting basis of assets and liabilities. STATEMENTS OF CASH FLOWS For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption, "Cash and due from banks." DEFERRED COSTS Certain mutual fund costs are capitalized when paid and amortized over the period that fees contractually recoup the deferred costs. The net of fees and amortization is recorded in noninterest income. 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 9 adjustment. Loan fees on unused commitments and fees related to loans sold are recognized currently as noninterest income. OTHER COMPREHENSIVE INCOME The Corporation has elected to present information on comprehensive income in the Consolidated Statements of Changes in Shareholders' Equity and in Note 12. 2 Acquisitions On November 1, 2000, the Corporation and Imperial Bancorp announced a definitive agreement to merge through an exchange of shares. Under the terms of the agreement, Imperial shareholders received 0.46 shares of Comerica common stock for each share of Imperial common stock. The merger was completed in January 2001 and was accounted for as a pooling of interests. The Corporation anticipates incurring a pre-tax, merger-related and restructuring charge of approximately $169 million ($124 million after-tax) in 2001 in connection with the acquisition. The financial information presented in this form 8-K is for Comerica Incorporated and is restated to include the accounts and results of operations of the acquisition accounted for as a pooling of interests combination. During 1998, Comerica purchased a majority interest in Munder Capital Management, an investment advisory firm. Net income for the third and fourth quarter of 1998 included the consolidated financial results of Munder. The Corporation's minority interest in periods prior to the third quarter of 1998 was accounted for under the equity method. Intangible assets increased $133 million as a result of the consolidation. The fair market value of total assets acquired and total liabilities assumed was not material. At December 31, 2000 the Corporation owned 12 million shares, or approximately 56%, of the outstanding common stock of Official Payment Corporation ("OPAY")(Nasdaq: OPAY). OPAY completed an initial public offering ("IPO") on November 23, 1999, of 5 million shares of common stock priced at $15 per share. As a result of the offering, the Corporation's ownership percentage of OPAY's common stock decreased from 80% to approximately 56% of total outstanding shares. The Corporation recognized a $44 million pretax gain in 1999 representing the increase in its basis in OPAY stock due to the IPO. The gain is reflected in "Net gain on sale of businesses" in the Consolidated Statements of Income. 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, 2000 U.S. government and agency securities $3,120,561 $ 22,476 $ 8,417 $3,134,620
10 State and municipal securities 44,920 1,417 40 46,297 Other securities 713,101 6,599 9,892 709,808 ---------- ---------- -------- ---------- Total securities available for sale $3,878,582 $ 30,492 $ 18,349 $3,890,725 ========== ========== ======== ========== December 31, 1999 U.S. government and agency securities $2,995,992 $ 1,458 $ 47,781 $2,949,669 State and municipal securities 72,054 1,764 122 73,696 Other securities 748,576 24,153 12,601 760,128 ---------- ---------- -------- ---------- Total securities available for sale $3,816,622 $ 27,375 $ 60,504 $3,783,493 ========== ========== ======== ==========
The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2000 Estimated (in thousands) Cost Fair Value ---------- ---------- Contractual maturity Within one year $ 285,950 $ 288,331 Over one year to five years 450,154 451,471 Over five years to ten years 61,774 59,126 Over ten years 764,158 759,013 ---------- ---------- Subtotal securities 1,562,036 1,557,941 Mortgage-backed securities 2,175,568 2,191,673 Equity and other nondebt securities 140,978 141,111 ---------- ---------- Total securities available for sale $3,878,582 $3,890,725 ========== ==========
Sales, calls and write-downs of investment securities available for sale resulted in realized gains and losses as follows:
Year Ended December 31 (in thousands) 2000 1999 ------- ------ Securities gains $20,821 $8,869 Securities losses (3,826) (194) Write-down of low income housing investments (6,466) -- ------- ------ Total $10,529 $8,675 ======= ======
Assets, principally securities, carried at approximately $1.8 billion at December 31, 2000, were pledged to secure public deposits (including State of Michigan deposits of $73 million at December 31, 2000) and for other purposes as required by law. 11 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) 2000 1999 -------- --------- Nonaccrual loans Commercial loans $244,390 $ 126,640 International loans 57,929 44,046 Real estate construction loans 4,542 249 Commercial mortgage loans 17,417 10,189 Residential mortgage loans 166 572 Consumer loans 3,080 5,356 Lease financing 3,837 5,630 -------- --------- Total 331,361 192,682 Reduced-rate loans 2,306 9,348 -------- --------- Total nonperforming loans 333,667 202,030 Other real estate 5,577 10,530 -------- --------- Total nonperforming assets $339,244 $ 212,560 ======== ========= Loans past due 90 days and still accruing $ 35,820 $ 47,676 ======== ========= Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms $ 36,176 $ 19,692 -------- --------- Interest income recognized $ 7,502 $ 2,327 ======== =========
A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans at December 31, 2000, were $365 million, $29 million of which were formerly on nonaccrual status, but were restructured and met the requirements to be restored to an accrual basis. These loans are performing in accordance with their modified terms, but, in accordance with impaired loan disclosures must continue to be disclosed as impaired for the remainder of the calendar year of the restructuring. 12
December 31 (in thousands) 2000 1999 1998 -------- --------- -------- Average impaired loans for the year $292,665 $209,480 $164,141 Total period-end impaired loans 364,895 199,922 163,010 Period-end impaired loans requiring an allowance 277,159 184,607 144,240 Impairment allowance 104,107 61,913 34,726
Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan. Remaining loan impairment is based on the present value of expected future cash flows discounted at the loan's effective interest rate. 13 5 Allowance for Credit Losses An analysis of changes in the allowance for credit losses follows:
(in thousands) 2000 1999 1998 -------- --------- --------- Balance at January 1 $548,147 $ 515,058 $ 475,290 Loans charged off (223,527) (143,727) (149,420) Recoveries on loans previously charged off 28,745 34,563 42,813 -------- --------- --------- Net loans charged off (194,782) (109,164) (106,607) Provision for credit losses 254,800 146,220 146,375 Transfer to loans held for sale - (4,000) - Foreign currency translation adjustment (55) 33 - -------- --------- --------- Balance at December 31 $608,110 $ 548,147 $ 515,058 ======== ========= ========= As a percent of total loans 1.51% 1.51% 1.51% ======== ========= =========
6 Significant Group Concentrations of Credit Risk Concentrations of both on-balance sheet and off-balance sheet credit risk are controlled and monitored as part of credit policies. The Corporation is a regional financial holding company with a geographic concentration of its on-balance sheet and off-balance sheet activities centered in Michigan. In addition, the Corporation has an industry concentration with the automotive industry, which includes manufacturers and their finance subsidiaries, suppliers, dealers and company executives. At December 31, 2000 and 1999, exposure from loan commitments and guarantees to companies related to the automotive industry totaled $10.6 billion and $8.9 billion, respectively. Additionally, commercial real estate loans, including commercial mortgages and construction loans, totaled $8.5 billion in 2000 and $6.5 billion in 1999. Approximately $3.5 billion of commercial real estate and real estate construction loans at December 31, 2000, involved owner-occupied properties. Those borrowers are involved in business activities other than real estate, and the sources of repayment are not dependent on the performance of the real estate market. 7 Premises and Equipment and Other Noncancellable Obligations A summary of premises and equipment at December 31 by major category follows:
(in thousands) 2000 1999 ---------- --------- Land $ 54,878 $ 51,229 Buildings and improvements 356,012 355,483 Furniture and equipment 423,743 404,029 ---------- --------- Total cost 834,633 810,741 Less accumulated depreciation and amortization (470,387) (438,768) ---------- --------- Net book value $ 364,246 $ 371,973 ========== =========
14 Rental expense for leased properties and equipment amounted to $51 million in 2000, $50 million in 1999 and $49 million in 1998. Future minimum payments under noncancellable obligations are as follows: (in thousands) 2001 $ 60,622 2002 55,240 2003 52,219 2004 46,930 2005 39,665 2006 and later 278,872
8 Deposits A maturity distribution of domestic Certificates of Deposits of $100,000 and over at December 31 follows:
(in millions) 2000 1999 ---- ---- Three months of less $3,206 $2,752 Over three months to six months 2,028 662 Over six months to twelve months 2,061 637 Over twelve months 349 187 ------ ------ Total $7,644 $4,238 ====== ======
9 Short-Term Borrowings Federal funds purchased and securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Other borrowed funds, consisting of commercial paper, borrowed securities, term federal funds purchased, short-term notes and treasury tax and loan deposits, generally mature within one to 120 days from the transaction date. The following is a summary of short-term borrowings at December 31, 2000 and 1999.
Federal Funds Purchased and Other Securities Sold Under Borrowed (in thousands) Agreements to Repurchase Funds December 31, 2000 --------------------------- ---------- Amount outstanding at year-end $1,640,006 $ 453,375 Weighted average interest rate at year-end 6.37% 5.51% December 31, 1999 Amount outstanding at year-end $1,387,536 $1,537,158 Weighted average interest rate at year-end 4.43% 4.45%
At December 31, 2000, the parent company had available a $250 million commercial paper facility of which $80 million was outstanding. This facility is supported by a $200 million line of credit agreement. Under the current agreement the line will expire in May of 2001. 15 At December 31, 2000, the Corporation's subsidiary banks had pledged loans totaling $30.8 billion to secure a collateralized borrowing account with the Federal Reserve Bank. 10 Medium- and Long-Term Debt Medium- and long-term debt consisted of the following at December 31:
(in thousands) 2000 1999 ---------- ---------- Parent Company 7.25% subordinated notes due 2007 $ 157,414 $ 158,543 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 198,703 198,502 8.375% subordinated notes due 2024 155,071 155,287 7.25% subordinated notes due 2002 149,719 149,561 6.875% subordinated notes due 2008 103,272 103,729 7.125% subordinated notes due 2013 154,486 154,834 7.875% subordinated notes due 2026 172,346 173,217 6.00% subordinated notes due 2008 248,238 248,010 7.65% subordinated notes due 2010 248,385 - 8.50% subordinated notes due 2009 99,474 99,411 9.98% junior subordinated debentures due 2026 63,690 73,430 ---------- ---------- Total subordinated notes 1,593,384 1,355,981 Medium-term notes: Floating rate based on LIBOR indices 5,048,972 5,766,070 Floating rate based on Treasury indices 125,000 37,000 Floating rate based on Prime indices 1,320,964 1,224,993 Fixed rate notes with interest rate of 6.65% - 199,944 ---------- ---------- Total medium-term notes 6,494,936 7,228,007 Notes payable 13,445 14,292 ---------- ---------- Total subsidiaries 8,101,765 8,598,280 ---------- ---------- Total medium- and long-term debt $8,259,179 $8,756,823 ========== ==========
Concurrent with the issuance of certain of the medium- and long-term debt presented above, the Corporation entered into interest rate swap agreements to convert the stated rate of the debt to a rate based on the indices identified in the following table.
Principal Amount Base of Debt Rate at (in thousands) Converted Base Rate 12/31/00 ---------------- ------------- -------- Parent company 7.25% subordinated notes $150,000 6-month LIBOR 6.21% Subsidiaries Subordinated notes: 7.25% subordinated notes $200,000 6-month LIBOR 6.21% 8.375% subordinated notes 150,000 6-month LIBOR 6.21% 7.25% subordinated notes 150,000 6-month LIBOR 6.21% 6.875% subordinated notes 100,000 6-month LIBOR 6.21% 6.00% subordinated notes 250,000 6-month LIBOR 6.21% 7.125% subordinated notes 150,000 6-month LIBOR 6.21% 7.875% subordinated notes 150,000 6-month LIBOR 6.21%
16 7.65% subordinated notes 250,000 3-month LIBOR 6.44% Medium-term notes: Floating rate based on Treasury indices 125,000 1-month LIBOR 6.64%
All subordinated notes and debentures with maturities greater than one year qualify as Tier 2 capital. The Corporation currently has two medium-term note programs: a senior note program and a European note program. Under these programs, certain bank subsidiaries may offer an aggregate principal amount of up to $17.0 billion. The notes can be issued as fixed or floating rate notes and with terms from one month to 15 years. The interest rates on the floating rate medium-term notes based on LIBOR ranged from three-month LIBOR plus 0.07% to one-month LIBOR plus 0.20%. The notes are due from 2001 to 2005. The interest rate on the floating rate medium-term notes based on U.S. Treasury indices is equal to the three-month U.S. Treasury bill bond equivalent rate plus 0.67%. The notes are due in 2001. The medium-term notes do not qualify as Tier 2 capital and are not insured by the FDIC. The principal maturities of medium- and long-term debt are as follows: (in thousands) 2001 $5,257,051 2002 991,137 2003 132,309 2004 102,330 2005 187,366 2006 and later 1,588,986
11 Shareholders' Equity The board of directors had authorized the repurchase of up to 40.5 million shares of Comerica Incorporated common stock for general corporate purposes, acquisitions and employee benefit plans. In connection with the Imperial Bancorp acquisition, the board of directors of the Corporation rescinded its previous authorization. On March 27, 2001, the Board of Directors of Comerica approved a share repurchase program, authorizing the Corporation to repurchase up to one million (1,000,000) shares of its outstanding common stock. At December 31, 2000, the Corporation had reserved 11.3 million shares of common stock for issuance to employees and directors under the long-term incentive plans. The Corporation issued 5 million shares of Fixed/Adjustable Rate Noncumulative Preferred Stock, Series E, with a stated value of $50 per share in 1996. Dividends are payable quarterly, at a rate of 6.84% per annum through July 1, 2001. Thereafter, the rate will be equal to 0.625% plus an effective rate, but not less than 7.34% nor greater than 13.34%. The effective rate will be equal to the highest of the Treasury Bill Rate, the Ten Year Constant Treasury Maturity Rate and the Thirty Year Constant Treasury Maturity Rate (as defined in the prospectus). The Corporation, at its option after regulatory approval, may redeem all or part of the outstanding shares on or after July 1, 2001. 12 Other Comprehensive Income Other comprehensive income includes the change in unrealized gains and losses on investment securities available for sale and the change in the accumulated foreign 17 currency translation adjustment. The Consolidated Statements of Changes in Shareholders' Equity includes only combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the years ended December 31, 2000, 1999 and 1998.
Year Ended December 31 (in thousands) 2000 1999 1998 Net unrealized gains (losses) on investment securities available for sale: Balance at beginning of year $(22,719) $ (8,203) $ 712 Net unrealized holding gains (losses) arising during the period 56,230 (12,452) (6,301) Less: Reclassification adjustment for gains (losses) included in net income 10,529 8,675 7,441 -------- ---------- -------- Change in net unrealized gains (losses) before income taxes 45,701 (21,127) (13,742) Provision for income taxes 14,966 (6,611) (4,827) -------- ---------- -------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax 30,735 (14,516) (8,915) -------- ---------- -------- Balance at December 31 $ 8,016 $ (22,719) $ (8,203) Accumulated foreign currency translation adjustment: Balance at beginning of year 1,015 1,233 (967) Net translation gains (losses) arising during the period 3,066 (218) 2,200 Less: Reclassification adjustment for gains (losses) included in net income - - - -------- ---------- -------- Change in translation adjustment before income taxes 3,066 (218) 2,200 Provision for income taxes - - - -------- ---------- -------- Change in foreign currency translation adjustment, net of tax 3,066 (218) 2,200 -------- ---------- -------- Balance at December 31 $ 4,081 $ 1,015 $ 1,233 -------- ---------- -------- Total accumulated other comprehensive income, net of taxes, at December 31 $ 12,097 $ (21,704) $ (6,970) ======== ========== ========
13 Net Income per Common Share Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares, nonvested stock and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock plans, using the treasury stock method. A computation of earnings per share follows:
Year Ended December 31 (in thousands, except per share data) 2000 1999 1998 -------- -------- -------- Basic Average shares outstanding 176,827 176,771 177,016 ======== ======== ========
18 Net income $790,735 $759,415 $650,824 Less preferred stock dividends 17,100 17,100 17,100 -------- -------- -------- Net income applicable to common stock $773,635 $742,315 $633,724 ======== ======== ======== Basic net income per common share $ 4.38 $ 4.20 $ 3.58 ======== ======== ======== Diluted Average shares outstanding 176,827 176,771 177,016 Nonvested stock 159 167 191 Common stock equivalents Net effect of the assumed exercise of stock options 2,395 2,863 3,496 -------- -------- -------- Diluted average shares 179,381 179,801 180,703 ======== ======== ======== Net income $790,735 $759,415 $650,824 Less preferred stock dividends 17,100 17,100 17,100 -------- -------- -------- Net income applicable to common stock $773,635 $742,315 $633,724 ======== ======== ======== Diluted net income per common share $ 4.31 $ 4.13 $ 3.51 ======== ======== ========
14 Long-Term Incentive Plans The Corporation has long-term incentive plans under which it has awarded both shares of restricted stock to key executive officers and stock options to executive officers, directors and key personnel of the Corporation and its subsidiaries. The Corporation has elected to follow the disclosure only method in accounting for the employee and director stock options when the exercise price equals the market price of the underlying stock on the date of grant. The maturity of each option is determined at the date of grant; however, no options may be exercised later than ten years from the date of grant. The options may have restrictions regarding exercisability. A majority of the Corporation's options vest over a four-year period. Pro forma information regarding net income and earnings per share was determined as if the Corporation had accounted for its employee and director stock options under the fair value method. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The model may not necessarily provide a reliable single measure of the fair value of employee and director stock options. The Corporation's employee and director stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. The fair value of the options was estimated using an option valuation model with the following weighted-average assumptions:
2000 1999 1998 ----- ----- ----- Risk-free interest rate 6.46% 5.15% 5.54% Expected dividend yield 2.84% 3.24% 3.45% Expected volatility factors of the market price of Comerica common stock 28% 24% 21% Expected option life (in years) 4.8 4.8 4.3
19 Had compensation cost for the Corporation's stock-based compensation plans been determined in accordance with the fair value provisions, net income and earnings per share would have been as follows:
(in thousands, except per share data) 2000 1999 1998 -------- -------- -------- Pro forma net income $747,700 $719,598 $619,569 Pro forma earnings per share: Basic $4.23 $4.07 $3.50 Diluted 4.17 4.00 3.43
Average per Share Exercise Market Number Price Price ---------- ------ ------ Outstanding-December 31, 1997 9,702,927 $22.81 $60.17 Granted 3,334,915 54.95 71.37 Cancelled (1,095,827) 54.75 64.33 Exercised (1,707,059) 18.35 64.07 Expired - - ---------- ------ ------ Outstanding-December 31, 1998 10,234,956 $33.26 $68.19 Granted 2,388,392 64.86 66.63 Cancelled (259,697) 56.27 58.69 Exercised (801,136) 18.44 62.76 Expired - - ---------- ------ ------ Outstanding-December 31, 1999 11,562,515 $40.32 $46.69 Granted 2,781,847 42.53 41.95 Cancelled (261,986) 50.92 49.58 Exercised (1,522,564) 17.16 17.31 Expired - - ---------- ------ ------ Outstanding-December 31, 2000 12,559,812 $43.38 $59.38 ========== ====== ====== Exercisable-December 31, 2000 8,026,508 Available for grant-December 31, 2000 142,316
The following table summarizes information about stock options outstanding at December 31, 2000:
Outstanding Exercisable Average Average Exercise Average Exercise Exercise Price Range Shares Life (a) Price Shares Price ---------- -------- -------- --------- ---------- $ 6.30 -$19.00 1,359,931 3.8 $18.23 1,359,931 $18.23 19.83 - 35.33 3,405,229 4.9 26.26 3,401,479 26.26 40.09 - 58.44 3,854,534 8.1 41.33 1,213,527 40.98 60.31 - 66.81 2,155,613 8.2 66.61 959,260 66.41 68.44 - 71.58 1,784,505 7.2 71.58 1,092,311 71.58 ---------- ----- ------ --------- ----- Total 12,559,812 6.7 43.38 8,026,508 38.09 ========== ===== ====== ========= =====
20 (a) Average contractual life remaining in years. 15 Employee Benefit Plans The Corporation has a defined benefit pension plan in effect for substantially all full-time employees. Staff expense includes income of $7.9 million in 2000, $0.8 million in 1999 and $3.0 million in 1998 for the plan. Benefits under the plan are based primarily on years of service, age and compensation during the five highest paid consecutive calendar years occurring during the last ten years before retirement. The plan's assets primarily consist of units of certain collective investment funds administered by Munder Capital Management, equity securities, U.S. government and agency securities and corporate bonds and notes. The Corporation's postretirement benefits plan continues postretirement health care and life insurance benefits for retirees as of December 31, 1992, provides a phase-out for employees over 50 as of that date. The Corporation has funded the plan with a company-owned life insurance contract. The tables below set forth reconciliations of the Corporation's pension and postretirement plan obligations and plan assets:
Defined Benefit Postretirement Pension Plan Benefit Plan (in thousands) 2000 1999 2000 1999 -------- -------- ------- ------- Change in benefit obligation: Benefit obligation at January 1 $509,686 $542,941 $74,562 $80,710 Service cost 13,531 15,387 79 256 Interest cost 42,839 38,118 5,541 5,308 Amendments 25,696 - - - Actuarial (gain)/loss 22,294 (63,598) 2,892 (4,995) Benefits paid (23,419) (23,162) (7,122) (6,717) -------- -------- ------- ------- Benefit obligation at December 31 $590,627 $509,686 $75,952 $74,562 ======== ======== ======= ======= Change in plan assets: Fair value of plan assets at January 1 $651,782 $628,194 $84,391 $88,312 Actual return on plan assets 2,656 46,750 5,136 (1,475) Employer contributions - - 3,306 4,271 Benefits paid (23,419) (23,162) (7,122) (6,717) -------- -------- ------- ------- Fair value of plan assets at December 31 $631,019 $651,782 $85,711 $84,391 ======== ======== ======= =======
21 The following table sets forth the funded status of the defined benefit pension and postretirement plan and amounts recognized on the Corporation's balance sheet:
Defined Benefit Postretirement Benefit Plan Pension Plan (in thousands) 2000 1999 2000 1999 -------- --------- -------- ------- Funded status at December 31 $ 40,393 $ 142,096 $ 9,758 $ 9,829 Unrecognized net (gain)/loss (24,927) (106,068) 3,282 (4,701) Unrecognized net transition (asset)/obligation (856) (5,690) 51,388 59,850 Unrecognized prior service cost 21,597 (2,072) - - -------- --------- -------- ------- Prepaid benefit cost $ 36,207 $ 28,266 $ 64,428 $64,978 ======== ========= ======== =======
Components of net periodic benefit cost/(income):
Defined Benefit Pension Plan (in thousands) 2000 1999 1998 -------- -------- -------- Service cost $ 13,531 $ 15,387 $ 13,924 Interest cost 42,839 38,118 36,039 Expected return on plan assets (60,920) (51,241) (48,887) Amortization of unrecognized transition asset (4,834) (4,834) (4,834) Amortization of unrecognized prior service cost 2,026 (322) (331) Amortization of unrecognized net (gain)/loss (584) 2,132 1,071 -------- -------- -------- Net periodic benefit income $ (7,942) $ (760) $ (3,018) ======== ======== ========
Postretirement Benefit Plan (in thousands) 2000 1999 1998 -------- -------- ------- Service cost $ 79 $ 256 $ 262 Interest cost 5,541 5,308 5,509 Expected return on plan assets (6,069) (5,935) (5,829) Amortization of unrecognized transition obligation 4,305 4,628 4,628 Amortization of unrecognized net gain - - - -------- -------- ------- Net periodic benefit cost $ 3,856 $ 4,257 $ 4,570 ======== ======== =======
Actuarial assumptions were as follows:
Defined Benefit Pension Plan 2000 1999 1998 -------- -------- ------- Discount rate used in determining benefit obligation 7.9% 8.0% 7.0% Long-term rate of return on assets 10.0% 9.3% 9.0% Rate of compensation increase 5.0% 5.0% 5.0%
Postretirement Benefit Plan 2000 1999 1998 -------- -------- -------
22 Discount rate used in determining benefit obligation 7.9% 8.0% 7.0% Long-term rate of return on assets 6.7% 6.7% 6.7%
The health care and prescription drug cost trend rates projected for 2000 were nine percent and eleven percent, respectively. Each health care cost trend rate is assumed to gradually decrease to five precent by the year 2007. Increasing each health care rate by one percentage point would increase the accumulated postretirement benefit obligation by $5 million at December 31, 2000, and the aggregate of the service and interest cost components by $359 thousand for the year ended December 31, 2000. Decreasing each health care rate by one percentage point would decrease the accumulated postretirement benefit obligation by $5 million at December 31, 2000, and the aggregate of the service and interest cost components by $317 thousand for the year ended December 31, 2000. The Corporation also maintains defined contribution plans (including 401(k) plans) for various groups of its employees. All of the Corporation's salaried and regular part-time employees are eligible to participate in one or more of the plans. The Corporation makes matching contributions, most of which are based on a declining percentage of employee contributions (currently, maximum per employee is $1,000) as well as a performance-based matching contribution based on the Corporation's financial performance. Staff expense includes expense of $35.1 million in 2000, $22.9 million in 1999 and $17.9 million in 1998 for the plans. The Corporation maintained an employee stock ownership plan ("ESOP") for certain employees. The Corporation accounted for its ESOP in accordance with Statement of Position 93-6. Accordingly, the Corporation recorded compensation expense equal to the fair value of the shares allocated. The contributions to the plan are discretionary. At December 31, 2000 the plan was externally leveraged. The Corporation borrowed $6.0 million from a correspondent bank in 1999 and an additional $6 million in 2000 to fund the purchase of 133,723 and 165,227 shares of common stock, respectively, for future contributions to the ESOP. In 2001 the plan was converted to an internally leveraged plan and merged into the Corporation's 401(k) plan. Shares are deemed to be available for release to the ESOP as principal and interest payments are made on the loans, however, shares were released to the ESOP annually in 2000 and 1999. In 2000, a total of 70,183 shares of common stock, with a cost basis of $3.1 million, were released to the ESOP. For 1999, a total of 52,305 shares, with a cost basis of $2.3 million, were released to the ESOP. At December 31, 2000 and 1999, unearned compensation related to the ESOP of $6.8 million and $3.8 million, respectively, is reflected as a reduction of shareholders' equity. The fair value of unallocated ESOP shares totaled $10.5 million and $3.8 million at December 31, 2000 and 1999, respectively. The Corporation also maintained a Deferred Compensation Plan ("DC Plan") to provide specified benefits to certain employees and directors. The DC Plan allowed participants to defer all or a portion of their salary and bonus. The Corporation matched a percentage of certain participants' deferrals as determined by a formula under the plan, which may range from 0% to 50% match. The match percentage was 50% for 2000 and 1999 and 10% for 1998. The expense of funding the deferred compensation plans totaled $8.1 million, $4.7 million and $2.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. 23 16 Income Taxes The current and deferred components of income taxes were as follows:
(in thousands) 2000 1999 1998 -------- -------- -------- Currently payable Federal $360,514 $337,127 $274,720 Foreign 16,120 22,797 27,263 State and local 20,464 31,019 24,209 -------- -------- -------- 397,098 390,943 326,192 Deferred federal, state and local 45,709 35,453 16,249 -------- -------- -------- Total $442,807 $426,396 $342,441 ======== ======== ========
There were $4.4 million, $3.8 million and $2.6 million of income tax provision/(benefit) on securities transactions in 2000, 1999 and 1998, respectively. The principal components of deferred tax (assets)/liabilities at December 31 were as follows:
(in thousands) 2000 1999 --------- --------- Deferred tax assets: Allowance for credit losses $(199,371) $(182,697) Allowance for depreciation (3,302) 2,871 Deferred loan origination fees and costs (30,598) (29,214) Employee benefits (35,857) (24,636) Other temporary differences, net (49,457) (44,007) --------- --------- Total deferred tax assets $(318,585) $(277,683) Deferred tax liabilities: Lease financing transactions $ 311,858 $ 229,086 Investment in Official Payments Corporation 17,065 19,404 Investment securities available for sale 4,486 (9,550) --------- --------- Total deferred tax liabilities 333,409 238,940 --------- --------- Net deferred tax (asset)/liability $ 14,824 $ (38,743) ========= =========
The provision for income taxes differs from that computed by applying the federal statutory rate of 35 percent for the reasons in the following analysis:
(in thousands) 2000 1999 1998 Amount Rate Amount Rate Amount Rate --------- ---- --------- ---- --------- ---- Tax based on federal statutory rate $ 427,535 35.0% $ 412,567 35.0% $ 351,250 35.0% Effect of tax-exempt interest income (1,917) (0.2) (2,856) (0.2) (4,141) (0.4) Bank owned life insurance (11,553) (0.9) (11,054) (0.9) (10,651) (1.1) Goodwill 7,557 (0.6) 7,584 (0.6) 7,559 0.8 Other 9,170 0.8 13,106 (1.1) 8,731 0.8 --------- ---- --------- ---- --------- ---- Provision for income taxes $ 430,792 35.3% $ 419,347 35.6% $ 352,748 35.1% ========= ==== ========= ==== ========= ====
24 17 Transactions with Related Parties The bank subsidiaries have had, and expect to have in the future, transactions with the Corporation's directors and their affiliates. Such transactions were made in the ordinary course of business and included extensions of credit, all of which were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not, in management's opinion, involve more than normal risk of collectibility or present other unfavorable features. The aggregate amount of loans attributable to persons who were related parties at December 31, 2000, approximated $368 million at the beginning and $450 million at the end of 2000. During 2000, new loans to related parties aggregated $710 million and repayments totaled $628 million. 18 Regulatory Capital and Banking Subsidiaries Banking regulations limit the transfer of assets in the form of dividends, loans or advances from the bank subsidiaries to the Corporation. Under the most restrictive of these regulations, the aggregate amount of dividends which can be paid to the Corporation without obtaining prior approval from bank regulatory agencies approximated $1,110 million at January 1, 2001, plus current year's earnings. Substantially all the assets of the Corporation's subsidiaries are restricted from transfer to the Corporation in the form of loans or advances. Dividends paid to the Corporation by its banking subsidiaries amounted to $339 million in 2000, $261 million in 1999 and $442 million in 1998. The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of Tier 1 and total capital (as defined in the regulations) to average and risk-weighted assets. At December 31, 2000 and 1999, the Corporation and all of its banking subsidiaries exceeded the ratios required for an institution to be considered "well capitalized" (total capital ratio greater than 10 percent). The following is a summary of the capital position of the Corporation and its significant banking subsidiaries.
Comerica Inc. Comerica Comerica Bank- Comerica Bank- Imperial (in thousands) (Consolidated) Bank Texas California Bank -------------- ------------- -------------- --------------- ----------- December 31, 2000 Tier 1 capital $ 4,230,159 $ 2,923,331 $ 370,520 $ 482,292 $ 514,476 Total capital 6,398,904 4,600,732 519,976 695,433 683,474 Tier 1 capital to average assets (minimum-3.0%) 8.74% 8.91% 9.95% 8.95% 7.55% Tier 1 capital to risk-weighted assets (minimum-4.0%) 7.35 7.09 9.43 7.26 8.34 Total capital to risk-weighted assets (minimum-8.0%) 11.11 11.16 13.23 10.46 11.08 December 31, 1999 Tier 1 capital $ 3,746,973 $ 2,614,284 $ 358,200 $ 382,339 493,633 Total capital 5,636,708 4,046,166 452,678 576,282 659,214 Tier 1 capital to average assets (minimum-3.0%) 8.50% 8.53% 9.59% 8.60% 8.11% Tier 1 capital to risk-weighted assets (minimum-4.0%) 7.34 7.00 10.12 7.48 9.33 Total capital to risk-weighted assets (minimum-8.0%) 11.04 10.83 12.79 11.27 12.47
19 Financial Instruments with Off-Balance Sheet Risk 25 In the normal course of business, the Corporation enters into various off-balance sheet transactions involving derivative financial instruments, foreign exchange contracts and credit-related financial instruments to manage exposure to fluctuations in interest rate, foreign currency and other market risks and to meet the financing needs of customers. These financial instruments involve, to varying degrees, elements of credit and market risk in excess of the amount reflected in the consolidated balance sheets. Credit risk is the possible loss that may occur in the event of nonperformance by the counterparty to a financial instrument. The Corporation attempts to minimize credit risk arising from off-balance sheet financial instruments by evaluating the creditworthiness of each counterparty, adhering to the same credit approval process used for traditional lending activities. Counterparty risk limits and monitoring procedures have also been established to facilitate the management of credit risk. Collateral is obtained, if deemed necessary, based on the results of management's credit evaluation. Collateral varies, but may include cash, investment securities, accounts receivable, inventory, property, plant and equipment or real estate. Derivative financial instruments and foreign exchange contracts are traded over an organized exchange or negotiated over-the-counter. Credit risk associated with exchange-traded contracts is typically assumed by the organized exchange. Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange-traded contracts which have standardized terms and readily available price information. The Corporation reduces exposure to credit and liquidity risks from over-the-counter derivative and foreign exchange contracts by conducting such transactions with investment-grade domestic and foreign investment banks or commercial banks. Market risk is the potential loss that may result from movements in interest or foreign currency rates which cause an unfavorable change in the value of a financial instrument. The Corporation manages this risk by establishing monetary exposure limits and monitoring compliance with those limits. Market risk arising from derivative and foreign exchange positions entered into on behalf of customers is reflected in the consolidated financial statements and may be mitigated by entering into offsetting transactions. Market risk inherent in off-balance sheet derivative and foreign exchange contracts held or issued for risk management purposes is generally offset by changes in the value of rate sensitive on-balance sheet assets or liabilities. DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS The Corporation, as an end-user, employs a variety of off-balance sheet financial instruments for risk management purposes. Activity related to these instruments is centered predominantly in the interest rate markets and mainly involves interest rate swaps. Various other types of instruments are also used to manage exposures to market risks, including interest rate caps and floors, total return swaps, foreign exchange forward contracts and foreign exchange swap agreements. The following table presents the composition of off-balance sheet derivative financial instruments and foreign exchange contracts, excluding commitments, held or issued for risk management purposes at December 31, 2000 and 1999. Notional amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. 26
Notional/ Contract Unrealized Unrealized Fair (in millions) Amount Gains Losses Value --------- ---------- ---------- -------- December 31, 2000 Risk management Interest rate contracts: Swaps $12,594 $ 206 $ (33) $ 173 Options, caps and floors purchased 6,058 10 (1) 9 Foreign exchange contracts: Spot and forwards 493 18 (6) 12 Swaps 115 1 (13) (12) ------- ------- ------- ------- Total foreign exchange contracts 608 19 (19) -- ------- ------- ------- ------- Total risk management $19,260 $ 235 $ (53) $ 182 ======= ======= ======= ======= December 31, 1999 Risk management Interest rate contracts: Swaps $ 8,974 $ 19 $ (184) $ (165) Options, caps and floors purchased 8,022 -- -- -- Foreign exchange contracts: Spot and forwards 1,098 33 (23) 10 Swaps 115 -- (5) (5) ------- ------- ------- ------- Total foreign exchange contracts 1,213 33 (28) 5 ------- ------- ------- ------- Total risk management $18,209 $ 52 $ (212) $ (160) ======= ======= ======= =======
During 1999, the Corporation terminated a portion of its portfolio of index amortizing interest rate swaps. The notional amount of these swaps totaled $1,376 million. The gain resulting from early termination was deferred and is being amortized over the remaining expected life of the swaps at time of termination. Credit risk, which excludes the effects of any collateral or netting arrangements, is measured as the cost to replace, at current market rates, contracts in a profitable position. The amount of this exposure is represented by the gross unrealized gains on derivative and foreign exchange contracts. Bilateral collateral agreements with counterparties covered 95 percent of the notional amount of interest rate derivative contracts at December 31, 2000 and 1999. These agreements reduce credit risk by providing for the exchange of marketable investment securities to secure amounts due on contracts in an unrealized gain position. In addition, at December 31, 2000, master netting arrangements had been established with all interest rate swap counterparties and certain foreign exchange counterparties. These arrangements effectively reduce credit risk by permitting settlement, on a net basis, of contracts entered into with the same counterparty. The Corporation has not experienced any material credit losses associated with derivative or foreign exchange contracts. On a limited scale, fee income is earned from entering into various transactions, principally foreign exchange contracts and interest rate caps, at the request of customers. The Corporation does not speculate in derivative financial instruments for the purpose of profiting in the short-term from favorable movements in market rates. Fair values for customer-initiated and other derivative and foreign exchange contracts represent the net unrealized gains or losses on such contracts and are recorded in the consolidated balance sheets. Changes in fair value are recognized in the consolidated income statements. For the year ended December 31, 2000, unrealized gains and unrealized losses on customer-initiated and other foreign exchange contracts averaged $26 million and $19 million, respectively. For the year ended December 31, 1999, unrealized gains and unrealized losses averaged $19 million and $15 million, respectively. These contracts also generated noninterest income of $9 million in 2000 and $10 million in 1999. Average positive and negative fair values and income related to customer-initiated and other interest rate contracts were not material for 2000 and 1999. 27 The following table presents the composition of off-balance sheet derivative financial instruments and foreign exchange contracts held or issued in connection with customer-initiated and other activities at December 31, 2000 and 1999.
Notional/ Contract Unrealized Unrealized Fair (in millions) Amount Gains Losses Value ---------- ---------- ---------- ------- December 31, 2000 Customer-initiated and other Interest rate contracts: Caps and floors written $ 198 $ -- $ (1) $ (1) Caps and floors purchased 179 1 -- 1 Swaps 493 5 (4) 1 ------ ------ ------ ------ Total interest rate contracts 870 6 (5) 1 Foreign exchange contracts: Spot, forwards, futures and options 1,827 26 (19) 7 Swaps 50 -- -- -- ------ ------ ------ ------ Total customer-initiated and other $2,747 $ 32 $ (24) $ 8 ====== ====== ====== ====== December 31, 1999 Customer-initiated and other Interest rate contracts: Caps and floors written $ 166 $ -- $ (1) $ (1) Caps and floors purchased 141 1 -- 1 Swaps 256 2 (2) -- ------ ------ ------ ------ Total interest rate contracts 563 3 (3) -- Foreign exchange contracts: Spot, forwards, futures and options 707 15 (11) 4 ------ ------ ------ ------ Total customer-initiated and other $1,270 $ 18 $ (14) $ 4 ====== ====== ====== ======
Detailed discussions of each class of derivative financial instruments and foreign exchange contracts held or issued by the Corporation for both risk management and customer-initiated and other activities are as follows. INTEREST RATE SWAPS Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for variable payments based on a designated market rate or index (or variable payments based on two different rates or indices for basis swaps), applied to a specified notional amount until a stated maturity. The Corporation's swap agreements are structured such that variable payments are primarily based on prime, one-month LIBOR or three-month LIBOR. These instruments are principally negotiated over-the-counter and are subject to credit risk, market risk and liquidity risk. INTEREST RATE OPTIONS, INCLUDING CAPS AND FLOORS Option contracts grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate caps and floors are option-based contracts which entitle the buyer to receive cash payments based on the difference between a designated reference rate and the strike price, applied to a notional amount. Written options, primarily caps, expose the Corporation to market risk but not credit risk. A fee is received at inception for assuming the risk of unfavorable changes in interest rates. Purchased options contain both credit and market risk; however, market risk is limited to the fee paid. Options are either exchange-traded or negotiated over-the-counter. All interest rate caps and floors are over-the-counter agreements. FOREIGN EXCHANGE CONTRACTS The Corporation uses foreign exchange rate swaps, including generic receive variable swaps and cross-currency swaps, for risk management purposes. Generic receive variable swaps 28 involve payment, in a foreign currency, of the difference between a contractually fixed exchange rate and an average exchange rate determined at settlement, applied to a notional amount. Cross-currency swaps involve the exchange of both interest and principal amounts in two different currencies. Other foreign exchange contracts such as futures, forwards and options are primarily entered into as a service to customers and to offset market risk arising from such positions. Futures and forward contracts require the delivery or receipt of foreign currency at a specified date and exchange rate. Foreign currency options allow the holder to purchase or sell a foreign currency at a specified date and price. Foreign exchange futures are exchange-traded, while forwards, swaps and most options are negotiated over-the-counter. Foreign exchange contracts expose the Corporation to both market risk and credit risk. COMMITMENTS The Corporation also enters into commitments to purchase or sell earning assets for risk management purposes. These transactions, which are similar in nature to forward contracts, did not have a material impact on the consolidated financial statements for the years ended December 31, 2000 and 1999. Commitments to purchase and sell investment securities for the Corporation's trading account totaled $3 million and $4 million at December 31, 2000 and 1999, respectively. Outstanding commitments expose the Corporation to both credit and market risk. CREDIT-RELATED FINANCIAL INSTRUMENTS The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
(in millions) 2000 1999 ------- ------- Unused commitments to extend credit $28,625 $27,656 Standby letters of credit and financial guarantees 4,692 4,282 Commercial letters of credit 305 291 Credit default swaps 44 44
UNUSED COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation. Total unused commitments to extend credit included variable- and fixed-rate bankcard, revolving check credit and equity access loan commitments of $1 billion at December 31, 2000 and $3 billion at December 31, 1999. The decline in these commitments was attributable to forming a bankcard and revolving check credit alliance. Other unused commitments, primarily variable rate, totaled $29 billion at December 31, 2000 and $28 billion at December 31, 1999. STANDBY AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES Standby and commercial letters of credit and financial guarantees represent conditional obligations of the Corporation which guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Long-term standby letters of credit and financial guarantees, defined as those maturing beyond one year, expire in decreasing amounts through the year 2012, and were $1,338 million and $1,475 million at December 31, 2000 and 1999, respectively. The remaining standby letters of credit and financial guarantees, which 29 mature within one year, totaled $2,997 million and $2,589 million at December 31, 2000 and 1999, respectively. Commercial letters of credit are issued to finance foreign or domestic trade transactions. CREDIT DEFAULT SWAPS Credit default swaps allow the Corporation to diversify its loan portfolio by assuming credit exposure from different borrowers or industries without actually extending credit in the form of a loan. Credit risk associated with credit default swaps was $44 million at December 31, 2000 and 1999. 20 Contingent Liabilities The Corporation and its subsidiaries are parties to litigation and claims arising in the normal course of their activities. The amount of ultimate liability, if any, with respect to such matters, or the likelihood or impact of future claims that may be brought against the Corporation, cannot be determined with reasonable certainty. Management, after consultation with legal counsel, believes that the litigation and claims, some of which are substantial, will not have a material adverse effect on the Corporation's consolidated financial position. 21 Usage Restrictions Cash and due from banks may include amounts required to be deposited with the Federal Reserve Bank. These reserve balances vary, depending on the level of customer deposits in the Corporation's subsidiary banks. The average amount of these reserves was $201 million and $282 million for the years ended December 31, 2000 and 1999, respectively. 22 Estimated Fair Values of Financial Instruments Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current exchange. Furthermore, as the Corporation normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of trust operations and other fee generating businesses. The Corporation does not believe that it would be practicable to estimate a representational fair value for these types of items. The Corporation used the following methods and assumptions: Cash and short-term investments: The carrying amount approximates the estimated fair value of these instruments, which consist of cash and due from banks, interest-bearing deposits with banks and federal funds sold. Trading account securities: These securities are carried at quoted market value or the market value for comparable securities, which represents estimated fair value. Loans held for sale: The market value of these loans represents estimated fair value or estimated net selling price. The market value is determined on the basis of existing forward commitments or the market values of similar loans. 30 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 business loans: These consist of commercial, real estate construction, commercial mortgage and equipment lease financing loans. The estimated fair value of the Corporation's variable rate commercial loans is represented by their carrying value, adjusted by an amount which estimates the change in fair value caused by changes in the credit quality of borrowers since the loans were originated. The estimated fair value of fixed rate commercial loans is calculated by discounting the contractual cash flows of the loans using year-end origination rates derived from the Treasury yield curve or other representative bases. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. International loans: The estimated fair value of the Corporation's short-term international loans which consist of trade-related loans, or loans which have no cross-border risk due to the existence of domestic guarantors or liquid collateral, is represented by their carrying value, adjusted by an amount which estimates the effect on fair value of changes in the credit quality of borrowers or guarantors. The estimated fair value of long-term international loans is based on the quoted market values of these loans or on the market values of international loans with similar characteristics. Retail loans: This category consists of residential mortgage, consumer and auto lease financing loans. The estimated fair value of residential mortgage loans is based on discounted contractual cash flows or market values of similar loans sold in conjunction with securitized transactions. For consumer loans, the estimated fair values are calculated by discounting the contractual cash flows of the loans using rates representative of year-end origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Customers' liability on acceptances outstanding: The carrying amount approximates the estimated fair value. Loan servicing rights: The estimated fair value is a discounted cash flow analyses, using interest rates and prepayment speed assumptions currently quoted for comparable instruments. Deposit liabilities: The estimated fair value of demand deposits, consisting of checking, savings and certain money market deposit accounts, is represented by the amounts payable on demand. The carrying amount of deposits in foreign offices approximates their estimated fair value, while the estimated fair value of term deposits is calculated by discounting the scheduled cash flows using the year-end rates offered on these instruments. Short-term borrowings: The carrying amount of federal funds purchased, securities sold under agreements to repurchase and other borrowings approximates estimated fair value. Acceptances outstanding: The carrying amount approximates the estimated fair value. Medium- and long-term debt: The estimated fair value of the Corporation's variable rate medium- and long-term debt is represented by its carrying value. The estimated fair value of the fixed rate medium- and long-term debt is based on quoted market values. If quoted market values are not available, the estimated fair value is based on the market values of debt with similar characteristics. Derivative financial instruments and foreign exchange contracts: The estimated fair value of interest rate swaps represents the amount the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date, taking into 31 consideration current unrealized gains and losses on open contracts. The estimated fair value of foreign exchange futures and forward contracts and commitments to purchase or sell financial instruments is based on quoted market prices. The estimated fair value of interest rate and foreign currency options (including interest rate caps and floors) is determined using option pricing models. Credit-related financial instruments: The estimated fair value of unused commitments to extend credit and standby and commercial letters of credit is represented by the estimated cost to terminate or otherwise settle the obligations with the counterparties. This amount is approximated by the fees currently charged to enter into similar arrangements, considering the remaining terms of the agreements and any changes in the credit quality of counterparties since the agreements were entered into. This estimate of fair value does not take into account the significant value of the customer relationships and the future earnings potential involved in such arrangements as the Corporation does not believe that it would be practicable to estimate a representational fair value for these items. The estimated fair values of the Corporation's financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999 Carrying Estimated Carrying Estimated (in millions) Amount Fair Value Amount Fair Value Assets Cash and short-term investments $ 2,017 $ 2,017 $ 1,602 $ 1,602 Trading account securities 104 104 103 103 Loans held for sale 152 159 588 619 Investment securities available for sale 3,891 3,891 3,783 3,783 Commercial loans 26,009 25,673 23,629 23,330 International loans 2,571 2,501 2,573 2,538 Real estate construction loans 2,915 2,926 2,167 2,168 Commercial mortgage loans 5,361 5,323 4,873 4,768 Residential mortgage loans 807 818 870 866 Consumer loans 1,477 1,500 1,389 1,359 Lease financing 1,029 1,086 804 796 -------- -------- -------- -------- Total loans 40,169 39,827 36,305 35,825 Less allowance for credit losses (608) -- (548) -- -------- -------- -------- -------- Net loans 39,561 39,827 35,757 35,825 Customers' liability on acceptances Outstanding 27 27 44 44 Loan servicing rights 4 4 5 5 Liabilities Demand deposits (noninterest-bearing) 10,189 10,189 8,675 8,675 Interest-bearing deposits 23,666 23,760 20,521 20,502 -------- -------- -------- -------- Total deposits 33,855 33,949 29,196 29,177 Short-term borrowings 2,094 2,094 2,925 2,925 Acceptances outstanding 27 27 44 44 Medium- and long-term debt 8,259 8,209 8,757 8,653 Off-Balance Sheet Financial Instruments Derivative financial instruments and foreign exchange contracts Risk management: Unrealized gains 7 235 1 52 Unrealized losses -- (53) (1) (212) Customer-initiated and other: Unrealized gains 35 32 19 18 Unrealized losses (27) (24) (15) (14) Credit-related financial instruments -- (89) -- (71)
32 23 Business Segment Information The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business are differentiated based on the products and services provided. Lines of business results are produced by the Corporation's internal management accounting system. This system measures financial results based on the internal organizational structure of the Corporation. Information presented is not necessarily comparable with similar information for any other financial institution. The management accounting system assigns balance sheet and income statement items to each line of business using certain methodologies which are constantly being refined. For comparability purposes, amounts in all periods are based on methodologies in effect at December 31, 2000. These methodologies, which are briefly summarized in the following paragraph, may be modified as management accounting systems are enhanced and changes occur in the organizational structure or product lines. In addition to the three major lines of business, the Finance Division is also reported as a segment. The Corporation's internal funds transfer pricing system records cost of funds or credit for funds using a combination of matched maturity funding for certain assets and liabilities and a blended rate based on various maturities for the remaining assets and liabilities. The credit loss provision is assigned based on the amount necessary to maintain an allowance for credit losses adequate for that line of business. Noninterest income and expenses directly attributable to a line of business are assigned to that business. Direct expenses incurred by areas whose services support the overall Corporation are allocated to the business lines as follows: Product processing expenditures are allocated based on standard unit costs applied to actual volume measurements; administrative expenses are allocated based on estimated time expended; and corporate overhead is assigned based on the ratio of a line of business' noninterest expenses to total noninterest expenses incurred by all business lines. Common equity is allocated based on credit, operational and business risks. The following discussion provides information about the activities of each line of business. The Business Bank is comprised of middle market lending, asset-based lending, large corporate banking, venture capital investing, merchant banking and international financial services. This line of business meets the needs of medium-size businesses, multinational corporations and governmental entities by offering various products and services, including commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services. The Individual Bank includes consumer lending, consumer deposit gathering, mortgage loan origination and servicing, small business banking (annual sales under $5 million) and private banking. This line of business offers a variety of consumer products, including deposit accounts, direct and indirect installment loans, credit cards, home equity lines of credit and residential mortgage loans. In addition, a full range of financial services is provided to small businesses and municipalities. Private lending and personal trust services are also provided to meet the personal financial needs of affluent individuals (as defined by individual net income or wealth). The Investment Bank is responsible for the sale of mutual fund and annuity products, as well as life, disability and long-term care insurance products. This line of business also offers institutional trust products, retirement services and provides investment management and advisory services (including Munder), investment banking and discount securities brokerage services. The Finance segment includes the Corporation's securities portfolio and asset and liability management activities. This segment is responsible for managing the 33 Corporation's funding, liquidity and capital needs, performing interest sensitivity gap and earnings simulation analysis and executing various strategies to manage the Corporation's exposure to interest rate risk. The Other category includes divested business lines, the income and expense impact of cash and credit loss reserves not assigned to specific business lines, miscellaneous other items of a corporate nature and certain direct expenses not allocated to business lines. Lines of business/segment financial results were as follows:
Business Bank Individual Bank Investment Bank* (dollar amounts in millions) 2000 1999 1998 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings Summary Net interest income (FTE) $ 1306 $ 1123 $ 1005 $ 734 $ 699 $ 679 $ (10) $ (5) $ (3) Provision for credit losses 291 181 112 1 (6) (14) -- -- -- Noninterest income 349 343 218 338 294 300 267 201 146 Noninterest expenses 653 581 525 588 593 586 234 176 128 Provision for income taxes (FTE) 262 261 214 165 141 142 11 7 5 Net income (loss) 449 443 372 318 265 265 12 13 10 Selected Average Balances Assets $ 35,568 $ 31,822 $ 27,890 $ 6,938 $ 7,402 $ 7,651 $ 408 $ 247 $ 141 Loans 32,253 28,890 24,800 6,466 6,584 7,076 52 -- 1 Deposits 10,736 9,489 8,683 17,808 17,332 17,213 37 24 34 Common equity 2,551 2,014 1,718 742 715 736 282 197 121 Statistical Data Return on average assets 1.26% 1.39% 1.33% 1.71% 1.47% 1.47% 2.70% 5.43% 6.68% Return on average common equity 17.60 22.00 21.65 42.78 37.08 35.96 4.26 6.80 7.79 Efficiency ratio 39.46 39.63 42.93 54.53 59.74 59.82 90.95 89.37 89.38 Finance Other Total 2000 1999 1998 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings Summary Net interest income (FTE) $ (23) $ 7 $ 47 $ 1 $ (2) $ -- $ 2,008 $ 1,822 $ 1,728 Provision for credit losses -- -- -- (37) (29) 48 255 146 146 Noninterest income 6 8 7 (1) 21 (4) 959 867 667 Noninterest expenses 2 3 3 9 6 (5) 1,486 1,359 1,237 Provision for income taxes (FTE) (7) 4 18 4 11 (18) 435 424 361 Net income (loss) (12) 8 33 24 31 (29) 791 760 651 Selected Average Balances Assets $ 3,898 $ 3,730 $ 4,320 $ 65 $ (179) $ (33) $ 46,877 $ 43,022 $ 39,969 Loans 544 481 280 (682) (526) (313) 38,633 35,429 31,844 Deposits 1,706 569 704 54 65 (30) 30,341 27,479 26,604 Common equity 372 315 333 (4) 168 87 3,943 3,409 2,995 Statistical Data Return on average assets (0.08)% 0.06% 0.28% n/m% n/m% n/m% 1.69% 1.77% 1.63% Return on average common equity (3.32) 2.41 10.01 n/m n/m n/m 20.06 22.29 21.74 Efficiency ratio (12.43) 24.17 5.73 n/m n/m n/m 50.08 50.54 51.65
* Included in noninterest expenses are fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income would have been $26 million in 2000, $22 million in 1999 and $15 million in 1998. Return on average common equity would have been 9.32% in 2000, 11.38% in 1999 and 11.99% in 1998. n/m - not meaningful 34 24 Parent Company Financial Statements
BALANCE SHEETS-Comerica Incorporated December 31 (in thousands, except share data) 2000 1999 ----------- ----------- Assets Cash and due from banks $ 9,918 $ 80 Time deposits with banks 112,100 69,900 Investment securities available for sale 47,262 27,505 Investment in subsidiaries, principally banks 4,634,579 4,142,842 Premises and equipment 3,391 4,335 Other assets 66,009 55,900 ----------- ----------- Total assets $ 4,873,259 $ 4,300,562 =========== =========== Liabilities and Shareholders' Equity Commercial paper $ 79,985 $ 74,877 Long-term debt 157,414 158,543 Advances from nonbanking subsidiaries 4,453 3,882 Other liabilities 131,248 115,209 ----------- ----------- Total liabilities 373,100 352,511 Nonredeemable preferred stock-$50 stated value Authorized-5,000,000 shares Issued-5,000,000 shares in 2000 and 1999 250,000 250,000 Common stock-$5 par value Authorized-3,250,000,000 shares Issued-177,703,678 shares in 2000 and 177,890,503 in 1999 888,519 889,453 Capital surplus 301,414 226,001 Unearned employee stock ownership plan shares 176,462 shares at 12/31/00 and 81,418 Shares at 12/31/99 (6,750) (3,750) Accumulated other comprehensive income 12,097 (21,704) Retained earnings 3,085,784 2,677,210 Deferred compensation (14,494) (21,998) Less cost of common stock in treasury- 289,397 shares in 2000 and 715,496 shares in 1999 (16,411) (47,161) ----------- ----------- Total shareholders' equity 4,500,159 3,948,051 ----------- ----------- Total liabilities and shareholders' equity $ 4,873,259 $ 4,300,562 =========== ===========
35
STATEMENTS OF INCOME-Comerica Incorporated Year Ended December 31 (in thousands) 2000 1999 1998 --------- --------- --------- Income Income from subsidiaries Dividends from subsidiaries $ 339,060 $ 260,603 $ 442,495 Other interest income 6,464 808 3,899 Intercompany management fees 97,865 93,414 157,393 Other interest income 123 347 545 Other noninterest income 1,572 24,354 2,628 --------- --------- --------- Total income 445,084 379,526 606,960 Expenses Interest on long-term debt and other borrowed funds 15,178 17,193 22,214 Net interest rate swap (income)/expense 394 (682) (1,648) Salaries and employee benefits 63,258 64,580 61,583 Occupancy expense 4,238 5,840 6,630 Equipment expense 1,721 1,572 1,873 Other noninterest expenses 35,131 29,730 36,102 --------- --------- --------- Total expenses 119,920 118,233 126,754 --------- --------- --------- Income before income taxes and equity in undistributed net income of subsidiaries 325,164 261,293 480,206 Income tax expense/(credit) (4,528) 349 13,279 --------- --------- --------- 329,692 260,944 466,927 Equity in undistributed net income of subsidiaries, principally banks 461,043 498,471 183,897 --------- --------- --------- Net Income $ 790,735 $ 759,415 $ 650,824 ========= ========= =========
24 Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS-Comerica Incorporated Year Ended December 31 (in thousands) 2000 1999 1998 --------- --------- --------- Operating Activities Net income $ 790,735 $ 759,415 $ 650,824 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings of subsidiaries, principally banks (461,043) (498,471) (183,897) Depreciation 1,458 1,404 1,755 Restructuring charge -- -- (6,008) Other, net 4,513 5,822 4,908 --------- --------- --------- Total adjustments (455,072) (491,245) (183,242) --------- --------- --------- Net cash provided by operating Activities 335,663 268,170 467,582 Investing Activities Purchase of investment securities
36 available for sale (24,432) (7,687) (11,640) Proceeds from sale of investment securities available for sale 2,176 2,580 1,983 Proceeds from sales of fixed assets and other real estate 30 115 136 Purchases of fixed assets (614) (316) (1,222) Net (increase) decrease in bank time deposits (42,200) (47,300) 57,800 Capital transactions with subsidiaries (10,750) (5,610) (134,752) --------- --------- --------- Net cash used in investing activities (75,790) (58,218) (87,695) Financing Activities Net increase (decrease) in advances from subsidiaries 571 3,882 (4,054) Repayments and purchases of long-term debt (1,129) (76,096) (63,712) Net increase in short-term borrowings 5,109 74,877 -- Proceeds from issuance of common stocks 20,618 23,268 50,885 Purchase of common stock for treasury and retirement (14,108) (2,885) (148,684) Dividends paid (261,096) (235,646) (211,966) --------- --------- --------- Net cash used in financing activities (250,035) (212,600) (377,531) --------- --------- --------- Net increase (decrease) in cash on deposit at bank subsidiary 9,838 (2,648) 2,356 Cash on deposit at bank subsidiary at beginning of year 80 2,728 372 --------- --------- --------- Cash on deposit at bank subsidiary at end of year $ 9,918 $ 80 $ 2,728 ========= ========= ========= Interest paid $ 16,251 $ 19,184 $ 15,290 ========= ========= ========= Income taxes recovered $ 5,990 $ 9,807 $ 975 ========= ========= =========
25 Summary of Quarterly Financial Information The following quarterly information is unaudited. However, in the opinion of management, the information reflects all adjustments which are necessary for the fair presentation of the results of operations for the periods presented.
2000 2000 2000 2000 (in thousands, Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Interest income $1,005,596 $967,697 $922,178 $877,677 Interest expense 486,397 464,015 424,485 394,082 Net interest income 519,199 503,682 497,693 483,595 Provision for credit losses 88,006 43,300 56,600 66,894 Securities gains/(losses) (3,731) 1,566 7,256 5,438 Noninterest income (excluding securities gains/(losses)) 220,183 242,877 235,037 249,824
37 Noninterest expenses 376,524 375,846 366,685 367,237 Net income 172,596 215,058 206,050 197,031 Basic net income per common share $ .95 $ 1.19 $ 1.14 $ 1.09 Diluted net income per common share .94 1.17 1.12 1.08
1999 1999 1999 1999 (in thousands, Fourth Third Second First except per share data) Quarter Quarter Quarter Quarter ---------- --------- --------- -------- Interest income $ 839,487 $771,083 $733,718 $716,867 Interest expense 358,221 312,267 288,583 285,208 Net interest income 481,266 458,816 445,135 431,659 Provision for credit losses 56,400 27,000 38,026 24,794 Securities gains 6,792 (63) 744 1,202 Noninterest income (excluding securities gains) 262,841 187,309 230,509 177,680 Noninterest expenses 360,405 331,407 347,227 319,869 Net income 213,621 185,266 187,193 173,335 Basic net income per common share $ 1.18 $ 1.02 $ 1.03 $ 0.96 Diluted net income per common share 1.17 1.01 1.02 0.94
26 Pending Accounting Pronouncements In June 1998, The Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statements No. 137 and 138, which the Corporation adopted effective January 1, 2001. The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value in net income. If the derivative is a hedge, depending on the nature of the hedge, the change in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through net income or recognized in other comprehensive income until the hedged item is recognized in net income. The ineffective portion of a derivative's change in fair value will be immediately recognized in net income. The Corporation utilizes interest rate swaps predominantly as asset and liability management tools with the overall objective of mitigating adverse impacts to net interest income from changes in interest rates. Interest rate swaps that are used to hedge the variable cash flows from loans will be accounted for as cash flow hedges upon adoption of SFAS 133. The Corporation also utilizes interest rate swaps to hedge fixed rate deposits and medium- and long-term debt. These swaps will be accounted for as fair value hedges upon adoption of SFAS 133. The Corporation utilizes foreign exchange forward contracts and foreign exchange swap agreements to manage risk associated with foreign denominated assets and liabilities. The gains or losses recognized on foreign exchange contracts related to foreign denominated assets and liabilities provide an offset to the transaction gain or loss recognized from remeasurement of the asset or liability in the Corporation's functional currency. The Corporation has foreign exchange contracts hedging the foreign currency exposure of its net investment in foreign operations. These qualify for hedge accounting treatment under SFAS 133 and the effective portion of these hedges will continue to be recorded in other 38 comprehensive income as an offset to the currency translation adjustment that arises upon consolidation of the foreign operation. Based on the Corporation's derivative positions at the January 1, 2001 adoption date, the Corporation will report a gain from the cumulative effect of adoption of approximately $1 million and an increase in other comprehensive income of $42 million. 39 Report of Independent Auditors Board of Directors Comerica Incorporated We have audited the supplemental consolidated balance sheets of Comerica Incorporated and subsidiaries (formed as a result of the consolidation of Comerica Incorporated and subsidiaries and Imperial Bancorp and subsidiaries) as of December 31, 2000 and 1999 and the related supplemental consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. The supplemental consolidated financial statements give retroactive effect to the merger of Comerica Incorporated and subsidiaries and Imperial Bancorp and subsidiaries on January 29, 2001, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of Comerica Incorporated. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We did not audit the financial statements of Imperial Bancorp and subsidiaries which statements reflect total assets constituting 15% for 2000 and 1999 of the related supplemental consolidated financial statement totals, and which reflect net income constituting approximately 5%, 11%, and 7% of the related supplemental consolidated financial statement totals for the years ended December 31, 2000, 1999, and 1998, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Imperial Bancorp and subsidiaries is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comerica Incorporated and subsidiaries at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, after giving retroactive effect to the merger of Imperial Bancorp and subsidiaries as described in the notes to the supplemental consolidated financial statements, in conformity with accounting principles generally accepted in the United States. Detroit, Michigan January 22, 2001, except for Notes 2 and 10, as to which the date is April 27, 2001 40 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Imperial Bancorp: We have audited the accompanying consolidated balance sheets of Imperial Bancorp and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000 (such consolidated financial statements are not included separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imperial Bancorp and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Los Angeles, California January 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----