-----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, CF7WHSa6AIY8ggLi8OfIWWpPhD4gJ90kyw1mHB5Bqp10oqqTZebpGkDF10eXBs9G XDNrcGZbuIwuIoPABfL7Tg== 0000950124-99-004731.txt : 19990816 0000950124-99-004731.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950124-99-004731 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-10706 FILM NUMBER: 99688533 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 10-Q 1 FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-10706 Comerica Incorporated (Exact name of registrant as specified in its charter) Delaware 38-1998421 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Comerica Tower at Detroit Center Detroit, Michigan 48226 (Address of principal executive offices) (Zip Code) (313) 222-3300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $5 par value common stock: outstanding as of July 31, 1999: 156,313,000 shares 2 PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries
June 30, December 31, June 30, (In thousands, except share data) 1999 1998 1998 ------------ ------------ ------------ ASSETS Cash and due from banks $ 1,535,721 $ 1,773,100 $ 2,222,463 Short-term investments 85,182 109,640 264,777 Investment securities available for sale 2,345,236 2,712,165 3,396,952 Commercial loans 19,647,781 19,086,541 16,891,406 International loans 2,629,303 2,713,259 2,389,783 Real estate construction loans 1,377,101 1,079,614 981,975 Commercial mortgage loans 4,536,512 4,179,271 3,788,052 Residential mortgage loans 903,189 1,037,941 1,360,363 Consumer loans 1,800,840 1,861,630 1,999,634 Lease financing 671,525 646,607 591,418 ------------ ------------ ------------ Total loans 31,566,251 30,604,863 28,002,631 Less allowance for credit losses (460,397) (452,409) (438,875) ------------ ------------ ------------ Net loans 31,105,854 30,152,454 27,563,756 Premises and equipment 345,298 352,650 361,003 Customers' liability on acceptances outstanding 15,164 12,335 26,252 Accrued income and other assets 1,518,032 1,488,487 1,214,802 ------------ ------------ ------------ TOTAL ASSETS $ 36,950,487 $ 36,600,831 $ 35,050,005 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,515,942 $ 6,999,337 $ 6,392,257 Interest-bearing deposits 15,837,640 17,313,796 16,226,376 ------------ ------------ ------------ Total deposits 22,353,582 24,313,133 22,618,633 Federal funds purchased and securities sold under agreements to repurchase 2,833,235 3,108,985 1,049,308 Other borrowed funds 912,330 471,168 2,542,210 Acceptances outstanding 15,164 12,335 26,252 Accrued expenses and other liabilities 357,712 366,338 324,618 Medium- and long-term debt 7,231,275 5,282,259 5,662,180 ------------ ------------ ------------ Total liabilities 33,703,298 33,554,218 32,223,201 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 6/30/99, 12/31/98 and 6/30/98 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued-157,233,107 shares at 6/30/99, 157,233,088 shares at 12/31/98 and 157,187,518 shares at 6/30/98 786,166 786,165 785,938 Capital surplus 31,946 24,649 14,889 Accumulated nonowner changes in equity (26,058) (6,455) (5,206) Retained earnings 2,271,378 2,086,589 1,904,223 Deferred compensation (4,107) (5,202) (3,071) Less cost of common stock in treasury- 942,715 shares at 6/30/99, 1,351,997 shares at at 12/31/98 and 1,818,965 shares at 6/30/98 (62,136) (89,133) (119,969) ------------ ------------ ------------ Total shareholders' equity 3,247,189 3,046,613 2,826,804 ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,950,487 $ 36,600,831 $ 35,050,005 ============ ============ ============
3 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries
Three Months Ended Six Months Ended June 30 June 30 --------------------------------- ----------------------------- (In thousands, except per share data) 1999 1998 1999 1998 --------- --------- ----------- ----------- INTEREST INCOME Interest and fees on loans $ 600,325 $ 590,427 $ 1,186,687 $ 1,197,417 Interest on investment securities: Taxable 37,906 56,582 77,623 118,888 Exempt from federal income tax 1,261 1,927 2,636 4,020 --------- --------- ----------- ----------- Total interest on investment securities 39,167 58,509 80,259 122,908 Interest on short-term investments 2,009 2,294 3,990 4,766 --------- --------- ----------- ----------- Total interest income 641,501 651,230 1,270,936 1,325,091 INTEREST EXPENSE Interest on deposits 139,807 160,927 289,481 328,064 Interest on short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 36,967 27,605 76,918 58,202 Other borrowed funds 6,439 17,563 11,860 30,812 Interest on medium- and long-term debt 96,283 93,879 180,714 203,707 Net interest rate swap income (17,637) (13,222) (36,511) (25,780) --------- --------- ----------- ----------- Total interest expense 261,859 286,752 522,462 595,005 --------- --------- ----------- ----------- Net interest income 379,642 364,478 748,474 730,086 Provision for credit losses 28,000 28,000 48,000 56,000 --------- --------- ----------- ----------- Net interest income after provision for credit losses 351,642 336,478 700,474 674,086 NONINTEREST INCOME Fiduciary and investment management income 59,839 42,009 114,782 82,744 Service charges on deposit accounts 42,520 39,517 84,218 77,967 Commercial lending fees 11,315 9,019 21,211 17,149 Securities gains/(losses) 690 11 1,892 (139) Other noninterest income 80,287 58,239 129,442 105,926 --------- --------- ----------- ----------- Total noninterest income 194,651 148,795 351,545 283,647 NONINTEREST EXPENSES Salaries and employee benefits 162,567 137,994 315,050 272,761 Net occupancy expense 23,975 21,579 47,069 44,340 Equipment expense 15,442 15,167 30,293 30,291 Outside processing fee expense 12,341 11,291 25,195 21,027 Other noninterest expenses 74,555 67,268 134,687 134,753 --------- --------- ----------- ----------- Total noninterest expenses 288,880 253,299 552,294 503,172 --------- --------- ----------- ----------- Income before income taxes 257,413 231,974 499,725 454,561 Provision for income taxes 90,031 81,591 173,231 159,795 --------- --------- ----------- ----------- NET INCOME $ 167,382 $ 150,383 $ 326,494 $ 294,766 ========= ========= =========== =========== Net income applicable to common stock $ 163,107 $ 146,108 $ 317,944 $ 286,216 ========= ========= =========== =========== Basic net income per common share $ 1.04 $ 0.94 $ 2.04 $ 1.83 Diluted net income per common share $ 1.03 $ 0.92 $ 2.01 $ 1.80 Cash dividends declared on common stock $ 56,181 $ 49,792 $ 112,330 $ 99,965 Dividends per common share $ 0.36 $ 0.32 $ 0.72 $ 0.64
4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries
Nonredeem- Accumulated able Nonowner Total Preferred Common Capital Changes Retained Deferred Treasury Shareholders' (in thousands) Stock Stock Surplus in Equity Earnings Compensation Stock Equity --------- --------- --------- ----------- ---------- ------------ --------- ------------- BALANCES AT JANUARY 1, 1998 $ 250,000 $ 784,077 $ - $ (1,937) $1,731,419 $ (1,783) $ - $2,761,776 Net income for 1998 - - - - 294,766 - - 294,766 Nonowner changes in equity, net of tax - - - (3,269) - - - (3,269) ---------- Net income and nonowner changes in equity - - - - - - - 291,497 Cash dividends declared: Preferred stock - - - - (8,550) - - (8,550) Common stock - - - - (99,965) - - (99,965) Purchase of 2,136,450 shares of common stock - - - - - - (141,070) (141,070) Purchase and retirement of 60,000 shares of common stock - (300) (3,182) - - - - (3,482) Net issuance of common stock under employee stock plans - 2,161 18,071 - (13,447) (1,794) 21,101 26,092 Amortization of deferred compensation - - - - - 506 - 506 --------- -------- --------- ----------- ---------- ------------ --------- ---------- BALANCES AT JUNE 30, 1998 $ 250,000 $785,938 $ 14,889 $ (5,206) $1,904,223 $ (3,071) $(119,969) $2,826,804 ========= ======== ========= =========== ========== ============ ========= ========== BALANCES AT JANUARY 1, 1999 $ 250,000 $786,165 $ 24,649 $ (6,455) $2,086,589 $ (5,202) $ (89,133) $3,046,613 Net income for 1999 - - - - 326,494 - - 326,494 Nonowner changes in equity, net of tax - - - (19,603) - - - (19,603) ---------- Net income and nonowner changes in equity - - - - - - - 306,891 Cash dividends declared: Preferred stock - - - - (8,550) - - (8,550) Common stock - - - - (112,330) - - (112,330) Purchase of 43,992 shares of common stock - - - - - - (2,885) (2,885) Net issuance of common stock under employee stock plans - 1 7,297 - (20,825) (44) 29,882 16,311 Amortization of deferred compensation - - - - - 1,139 - 1,139 --------- -------- --------- ----------- ---------- ------------ --------- ---------- BALANCES AT JUNE 30, 1999 $ 250,000 $786,166 $ 31,946 $ (26,058) $2,271,378 $ (4,107) $ (62,136) $3,247,189 ========= ======== ========= =========== ========== ============ ========= ==========
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries
Six Months Ended June 30 ----------------------------- (in thousands) 1999 1998 ----------- ----------- OPERATING ACTIVITIES: Net income $ 326,494 $ 294,766 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 48,000 56,000 Depreciation 28,340 28,332 Restructuring charge - (13,974) Net (increase) decrease in trading account securities (1,031) 3,979 Net (increase) decrease in assets held for sale 24,705 (22,464) Net (increase) decrease in accrued income receivable (27,023) 19,127 Net decrease in accrued expenses (2,083) (194,383) Net amortization of intangibles 16,937 13,464 Other, net (22,964) 154,485 ----------- ----------- Total adjustments 64,881 44,566 ----------- ----------- Net cash provided by operating activities 391,375 339,332 INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (13,484) (20,473) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 14,268 (22,862) Proceeds from sale of investment securities available for sale 3,539 36,295 Proceeds from maturity of investment securities available for sale 418,262 611,325 Purchases of investment securities available for sale (82,769) (100,105) Net increase in loans (other than purchased loans) (1,001,400) (1,122,522) Purchase of loans - (1,115) Proceeds from sale of consumer businesses - 2,006,091 Fixed assets, net (20,988) (16,776) Net increase in customers' liability on acceptances outstanding (2,829) (7,860) ----------- ----------- Net cash provided by (used in) investing activities (685,401) 1,361,998 FINANCING ACTIVITIES: Net increase (decrease) in deposits (1,959,551) 32,316 Net increase in short-term borrowings 165,412 398,617 Net increase in acceptances outstanding 2,829 7,860 Proceeds from issuance of medium- and long-term debt 3,525,000 1,500,000 Repayments and purchases of medium- and long-term debt (1,575,984) (3,124,207) Proceeds from issuance of common stock and other capital transactions 16,355 27,886 Purchase of common stock for treasury and retirement (2,885) (144,552) Dividends paid (114,529) (103,874) ----------- ----------- Net cash provided by (used in) financing activities 56,647 (1,405,954) ----------- ----------- Net increase (decrease) in cash and due from banks (237,379) 295,376 Cash and due from banks at beginning of year 1,773,100 1,927,087 ----------- ----------- Cash and due from banks at end of period $ 1,535,721 $ 2,222,463 =========== =========== Interest paid $ 525,878 $ 658,920 =========== =========== Income taxes paid $ 148,621 $ 150,107 =========== =========== Noncash investing and financing activities: Loan transfers to other real estate $ 3,643 $ 2,355 =========== ===========
6 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Certain items in prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report of Comerica Incorporated and Subsidiaries (the "Corporation") on Form 10-K for the year ended December 31, 1998. The Corporation may use derivative financial instruments, including foreign exchange contracts, to manage the Corporation's exposure to interest rate and foreign currency risks. These instruments are treated as hedges, and accounted for on an accrual basis, since there is a high correlation with the on-balance sheet instrument being hedged. If this correlation ceases to exist, the existing unrealized gain or loss is amortized over the remaining term of the instrument, and future changes in fair value are accounted for on a mark-to-market basis. Derivative financial instruments executed as a service to customers are accounted for on a mark-to-market basis. For further information, refer to the Accounting Policies footnote in the Corporation's 1998 annual report. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not 7 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated nonowner changes in equity until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." Statement 137 amended the required effective date of Statement 133, requiring adoption of Statement 133 in years beginning after June 15, 2000. The Corporation expects to adopt Statement 133 effective January 1, 2001. The Corporation has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Corporation. Note 2 - Investment Securities At June 30, 1999, investment securities having a carrying value of $1.6 billion were pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $18 million. 8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses The following analyzes the changes in the allowance for credit losses included in the consolidated balance sheets:
(in thousands) 1999 1998 --------- --------- Balance at January 1 $ 452,409 $ 424,147 Charge-offs (52,127) (66,630) Recoveries 12,089 25,358 --------- --------- Net charge-offs (40,038) (41,272) Provision for credit losses 48,000 56,000 Foreign currency translation adjustment 26 - --------- --------- Balance at June 30 $ 460,397 $ 438,875 ========= =========
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," considers a loan impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans averaged $137 million and $134 million for the quarter and six months ended June 30, 1999, compared to $79 million and $74 million for the comparable periods last year. The following are period-end balances:
(in thousands) June 30, 1999 December 31, 1998 ------------- ----------------- Total impaired loans $ 124,215 $ 101,417 Impaired loans requiring an allowance 115,248 87,494 Impairment allowance 41,811 21,951
Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan. 9 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 4 - Medium- and Long-term Debt Medium- and long-term debt consisted of the following at June 30, 1999 and December 31, 1998:
(in thousands) June 30, 1999 December 31,1998 ------------- ---------------- 9.75% subordinated notes due 1999 $ - $ 74,970 7.25% subordinated notes due 2007 159,111 159,669 ---------- ---------- Total parent company 159,111 234,639 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 198,401 198,301 7.875% subordinated notes due 2026 173,655 174,086 8.375% subordinated notes due 2024 155,396 155,502 7.25% subordinated notes due 2002 149,481 149,404 6.875% subordinated notes due 2008 103,959 104,186 7.125% subordinated notes due 2013 155,009 155,181 6.00% subordinated notes due 2008 247,895 247,798 ---------- ---------- Total subordinated notes 1,183,796 1,184,458 Medium-term notes: Floating rate based on Treasury indices 37,000 37,000 Floating rate based on Prime indices 1,224,982 - Floating rate based on LIBOR indices 4,412,233 3,612,076 Fixed rate notes with interest rate of 6.65% 199,877 199,810 ---------- ---------- Total medium-term notes 5,874,092 3,848,886 Notes payable 14,276 14,276 ---------- ---------- Total subsidiaries 7,072,164 5,047,620 ---------- ---------- Total medium- and long-term debt $7,231,275 $5,282,259 ========== ==========
Note 5 - Income Taxes The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after deducting non-taxable items, principally interest income on state and municipal securities. State and foreign taxes are then added to the federal provision. 10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
June 30, 1999 December 31, 1998 ------------------------------ ------------------------------ Notional/ Notional/ Contract Unrealized Fair Contract Unrealized Fair Amount Gains Losses Value Amount Gains Losses Value (in millions) (1) (2) (3) (1) (2) (3) ------------------------------ ------------------------------- Risk Management Interest rate contracts Swaps (4) $ 8,543 $ 50 $ (78) $ (28) $ 6,869 $ 152 $ (6) $ 146 Caps and floors purchased - - - - 15 - - - Foreign exchange contracts Spot and forward 889 16 (17) (1) 782 32 (29) 3 Swaps 124 - (3) (3) 131 12 - 12 ------- ----- ----- ------ ------- ----- ----- ------ Total risk management 9,556 66 (98) (32) 7,797 196 (35) 161 Customer Initiated and Other Interest rate contracts Caps and floors written 241 - (1) (1) 241 - (1) (1) Caps and floors purchased 188 - - - 176 1 - 1 Swaps 257 2 (1) 1 264 7 (6) 1 Foreign exchange contracts Spot, forward and options 853 17 (16) 1 673 20 (13) 7 Swaps 8 1 - 1 - - - - ------- ----- ----- ------ ------- ----- ----- ------ Total customer initiated and other 1,547 20 (18) 2 1,354 28 (20) 8 ------- ----- ----- ------ ------- ----- ----- ------ Total derivatives and foreign exchange contracts $11,103 $ 86 $(116) $ (30) $ 9,151 $ 224 $ (55) $ 169 ======= ===== ===== ===== ======= ===== ===== ======
(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. (2) Represents credit risk, which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk. (3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. The fair values of customer initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets. Futures contracts are subject to daily cash settlements; therefore, the fair value of these instruments is zero. (4) Includes index amortizing swaps with a notional amount of $202 million and $2,180 million at June 30, 1999 and December 31, 1998, respectively. These swaps had net unrealized losses of less than $1 million at June 30, 1999, versus $15 million of unrealized gains at December 31, 1998. As of June 30, 1999, index amortizing swaps had an average expected life of approximately 10 months with a stated maturity that averaged 1 year. 11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) Risk Management - --------------- Interest rate risk arises in the normal course of business to the extent there is a difference between the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. This gap in the balance sheet structure reflects the sensitivity of the Corporation's net interest income to a change in interest rates. Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs on-balance sheet instruments such as investment securities, as well as off-balance sheet derivative financial instruments and foreign exchange contracts, to manage exposure to these and other risks, including liquidity risk. As an end-user, the Corporation mainly accesses the interest rate markets to obtain off-balance sheet derivative instruments for use principally in connection with asset and liability management activities. The Corporation principally utilizes interest rate swaps with the objective of managing the sensitivity of net interest income to interest rate fluctuations. To accomplish this objective, the Corporation primarily uses interest rate swaps to modify the interest rate characteristics of certain assets and liabilities (for example, from a floating rate to a fixed rate, a fixed rate to a floating rate or from one floating rate index to another). Management believes this strategy achieves an optimal match between the rate maturities of assets and their funding sources which, in turn, reduces the overall exposure of net interest income to interest rate risk, although there can be no assurance that such a strategy will be successful. The following table summarizes the expected maturity distribution of the notional amount of interest rate swaps used for risk management purposes. The table also indicates the weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements as of June 30, 1999. The swaps are grouped by the assets or liabilities to which they have been designated. 12 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued)
- -------------------------------------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: 2004- Dec. 31, (dollar amounts in millions) 1999 2000 2001 2002 2003 2026 Total 1998 - -------------------------------------------------------------------------------------------------- Variable rate asset designation: Receive fixed swaps Generic $ - $ 700 $3,250 $2,850 $ - $ - $ 6,800 $3,950 Index amortizing 48 146 - - - - 194 2,169 Weighted average: (1) Receive rate 5.90% 6.34% 5.68% 7.14% -% -% 6.36% 6.01% Pay rate 5.18% 5.15% 5.05% 6.56% -% -% 5.68% 5.30% Fixed rate asset designation: Pay fixed swaps Generic $ 4 $ - $ - $ - $ - $ - $ 4 $ 2 Index amortizing 1 7 - - - - 8 11 Weighted average: (1) Receive rate 5.05% 5.09% -% -% -% -% 5.08% 5.54% Pay rate 6.47% 5.34% -% -% -% -% 5.81% 5.88% Medium- and long-term debt designation: Generic receive fixed swaps $ - $ 200 $ - $ 150 $ - $1,150 $ 1,500 $ 700 Weighted average: (1) Receive rate -% 6.91% -% 7.37% -% 6.79% 6.86% 7.33% Pay rate -% 5.05% -% 5.04% -% 5.14% 5.12% 5.28% Floating/floating swaps $ - $ 37 $ - $ - $ - $ - $ 37 $ 37 Weighted average: (2) Receive rate -% 5.00% -% -% -% -% 5.00% 4.98% Pay rate -% 4.99% -% -% -% -% 4.99% 5.19% Total notional amount $ 53 $1,090 $3,250 $3,000 $ - $1,150 $ 8,543 $6,869
- -------------------------------------------------------------------------------- (1) Variable rates are based on LIBOR or prime rates paid or received at June 30, 1999. (2) Variable rates paid are based on LIBOR at June 30, 1999, while variable rates received are based on prime. - -------------------------------------------------------------------------------- 13 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) During the first quarter of 1999, the Corporation terminated a portion of its portfolio of index amortizing interest rate swaps. The notional amount of these swaps totaled $1,376 million. The gain resulting from early termination was deferred and is being amortized over the remaining expected life of the terminated swaps. The Corporation also uses various other types of off-balance sheet financial instruments to manage interest rate and foreign currency risks associated with specific assets or liabilities, including interest rate caps and floors, forward and futures interest and foreign exchange rate contracts, and foreign exchange rate swaps, which are reflected in the table above. At June 30, 1999 and December 31, 1998, the notional amounts of commitments to purchase and sell U.S. Treasury and municipal bond securities related to the Corporation's trading account totaled $48 million and $17 million, respectively. These commitments, which are similar in nature to forward contracts, are not reflected in the above table due to the immaterial impact they have on the financial statements. Customer Initiated and Other - ----------------------------- The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts, interest rate caps and floors and forward rate agreements, at the request of customers. The Corporation minimizes market risk arising from customer initiated foreign exchange contracts and forward rate agreements by entering into offsetting transactions. Average fair values and income from customer initiated and other foreign exchange contracts were not material for the six-month period ended June 30, 1999 and for the year ended December 31, 1998. Customer initiated interest rate caps and floors generally are not offset by other on- or off-balance sheet financial instruments; however, the Corporation has established authority limits for engaging in these transactions in order to minimize risk exposure. As a result, average 14 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) fair values and income from this activity were not material for the six-month period ended June 30, 1999 and for the year ended December 31, 1998. Available credit lines on fixed rate credit card and check product accounts, which expose the Corporation to the risk of a reduction in net interest income as rates increase, totaled approximately $1.2 billion at June 30, 1999 and $1.6 billion at December 31, 1998. Management believes that market risk exposure arising from these revolving credit commitments is very limited, however, since it is unlikely that a significant number of customers with these accounts will simultaneously borrow up to their maximum available credit lines. Off-Balance Sheet and Foreign Exchange Activity - ----------------------------------------------- The following table provides a reconciliation of the beginning and ending notional amounts for interest rate derivatives and foreign exchange contracts.
Customer Initiated Risk Management and Other ----------------------- ----------------------- Interest Foreign Interest Foreign Rate Exchange Rate Exchange (in millions) Contracts Contracts Contracts Contracts ----------------------- ----------------------- Balances at December 31, 1998 $ 6,884 $ 913 $ 681 $ 673 Additions 3,652 4,938 41 11,365 Maturities/amortizations (617) (4,838) (36) (11,177) Terminations (1,376) - - - -------- -------- -------- -------- Balances at June 30, 1999 $ 8,543 $ 1,013 $ 686 $ 861 ======== ======== ======== ========
Additional information regarding the nature, terms and associated risks of the above off-balance sheet derivatives and foreign exchange contracts, along with information on derivative accounting policies, can be found in the Corporation's 1998 annual report on page 37 and in Notes 1 and 18 to the consolidated financial statements. 15 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business are differentiated based on the products and services provided. In addition to the three major lines of business, the Finance Division is also reported as a segment. Lines of business results are produced by the Corporation's internal management accounting system. This system measures financial results based on the internal organizational structure of the Corporation; information presented is not necessarily comparable with any other financial institution. Lines of business/segment financial results for the six months ended June 30, 1999 and 1998 are presented below. For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to note 22 to the consolidated financial statements. 16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) Six Months Ended June 30
Business Individual Investment Bank Bank** Bank* - ---------------------------------------------------------------------------- (in millions) 1999 1998 1999 1998 1999 1998 - ---------------------------------------------------------------------------- Average assets $25,538 $22,126 $6,923 $8,320 $ 27 $ 41 Total revenues (FTE) 503 431 489 502 65 61 Net income 181 175 125 143 2 3 Return on average assets 1.42% 1.58% 1.39% 1.58% 4.82% 5.35% Return on average common equity 23.73% 27.41% 35.98% 37.01% 11.25% 21.42% Finance Other Total - ---------------------------------------------------------------------------- (in millions) 1999 1998 1999 1998 1999 1998 - ---------------------------------------------------------------------------- Average assets $ 3,866 $ 4,545 $ 1 $ 238 $36,355 $35,270 Total revenues (FTE) 20 24 26 - 1,103 1,018 Net income 11 14 7 (40) 326 295 Return on average assets 0.18% 0.24% N/M N/M 1.80% 1.67% Return on average common equity 7.01% 8.57% N/M N/M 21.99% 22.33%
* Net income was reduced by charges for fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income would have been $4 million and $6 million, and return on average common equity would have been 31.56% and 42.77%, in 1999 and 1998, respectively. ** Financial results for the Individual Bank for 1998 were affected by the sale of the mortgage servicing business and $2.0 billion of indirect consumer loans and non-relationship credit card receivables in the second quarter of 1998. N/M - Not Meaningful 17 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Nonowner Changes in Equity Nonowner changes in equity include the change in unrealized gains and losses on investment securities available for sale and the change in the accumulated foreign currency translation adjustment. The Consolidated Statements of Changes in Shareholders' Equity include only the combined, net of tax, nonowner changes in equity. The following presents reconciliations of the components of accumulated nonowner changes in equity for the six months ended June 30, 1999 and 1998.
Six Months Ended ------------------------- (in thousands) 1999 1998 -------- ------- Net unrealized gains (losses) on investment securities available for sale: Balance at beginning of year $ (7,688) $ (970) Net unrealized holding gains (losses) arising during the period (28,769) (289) Less: Reclassification adjustment for gains (losses) included in net income 1,892 (139) -------- ------- Change in net unrealized gains (losses) before income taxes (30,661) (150) Provision for income taxes (11,231) 633 -------- ------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax (19,430) (783) -------- ------- Balance at June 30 $(27,118) $(1,753) Accumulated foreign currency translation adjustment: Balance at beginning of year $ 1,233 $ (967) Net translation gains (losses) arising during the period (173) (2,486) Less: Reclassification adjustment for gains (losses) included in net income - - -------- ------- Change in translation adjustment before income taxes (173) (2,486) Provision for income taxes - - -------- ------- Change in foreign currency translation adjustment, net of tax (173) (2,486) -------- ------- Balance at June 30 $ 1,060 $(3,453) -------- ------- Total accumulated nonowner changes in equity, net of taxes, at June 30 $(26,058) $(5,206) ======== =======
18 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ----------------------- Results of Operations - --------------------- Net income for the quarter ended June 30, 1999, was $167 million, up $17 million, or 11 percent, from $150 million reported for the second quarter of 1998. Diluted net income per share increased 12 percent to $1.03 from $0.92 a year ago. Return on average common shareholders' equity was 22.08 percent and return on average assets was 1.83 percent, compared to 22.57 percent and 1.74 percent, respectively, for the comparable quarter last year. Net income for the first six months of 1999 was $2.01 per share or $326 million, compared to $1.80 or $295 million for the same period in 1998, increases of 12 percent and 11 percent, respectively. Return on average common shareholders' equity was 21.99 percent and return on average assets was 1.80 percent for the first six months of 1999, compared to 22.33 percent and 1.67 percent, respectively, for the first six months of 1998. Net Interest Income - ------------------- The rate-volume analysis in Table I details the components of the change in net interest income on a fully taxable equivalent (FTE) basis for the quarter ended June 30, 1999. On a FTE basis, net interest income was $381 million for the three months ended June 30, 1999, an increase of $15 million, or 4 percent, from the comparable quarter in 1998. Net interest income and the net interest margin were both affected by the sale of $2.0 billion of indirect consumer loans and nonrelationship credit card receivables during the second quarter of 1998. Excluding the impact of the consumer sale, net interest income would have increased 5 percent. The increase in net interest income was primarily due to a 15 percent increase in average commercial loans and an increase in the level of noninterest-bearing sources of funds. The net interest margin for the 19 three months ended June 30, 1999 was 4.53 percent, a decrease of 9 basis points from 4.62 percent for the second quarter of 1998. Table II provides an analysis of net interest income for the first six months of 1999. On an FTE basis, net interest income for the six months ended June 30, 1999, was $751 million compared to $734 million for the same period in 1998. This increase is primarily attributed to the factors cited in the quarterly discussion. The net interest margin for the six months ended June 30, 1999, was 4.52 percent compared to 4.56 percent for the same period in 1998. Interest rate swaps permit management to control the sensitivity of net interest income to fluctuations in interest rates in a manner similar to on-balance sheet investment securities but without significant impact to capital or liquidity. These instruments are designated against certain assets and liabilities, therefore, their impact on net interest income is generally offset by and should be considered in relation to the level of net interest income generated by the related on-balance sheet assets and liabilities. In addition to using interest rate swaps and other off-balance sheet instruments to control the Corporation's exposure to interest rate risk, management attempts to monitor the effect of movements in interest rates on net interest income by regularly performing interest sensitivity gap and earnings simulation analyses. At June 30, 1999, the Corporation was in an asset sensitive position of $159 million (on an elasticity adjusted basis), or less than 1 percent of earning assets. The earnings simulation analysis performed at the end of the quarter reflects changes to both interest rates and loan, investment and deposit volumes. The measurement of risk exposure at June 30, 1999, for a 200 basis point decline in short-term interest rates identified approximately $81 million, or 5 percent, of net interest income at risk during the next 12 months. If short-term interest rates rise 200 basis points, net interest income would be enhanced by approximately $34 million, or 2 percent. The results of these simulations are within established corporate policy guidelines. 20 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended ------------------------------------------------------------ June 30, 1999 June 30, 1998 ----------------------------- ---------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------- Loans $31,208 $601 7.72% $28,143 $591 8.42% Investment securities 2,397 40 6.63 3,500 60 6.81 Other earning assets 112 2 7.23 160 2 5.92 - --------------------------------------------------------------------------------------------- Total earning assets 33,717 643 7.64 31,803 653 8.23 Interest-bearing deposits 15,930 140 3.52 15,931 161 4.05 Short-term borrowings 3,646 44 4.77 3,223 45 5.62 Medium- and long-term debt 7,193 96 5.37 6,087 94 6.18 Net interest rate swap (income)/ expense (1) - (18) - - (13) - - --------------------------------------------------------------------------------------------- Total interest-bearing sources $26,769 262 3.92 $25,241 287 4.56 -------------- -------------- Net interest income/ Rate spread (FTE) $381 3.72 $366 3.67 ==== ==== FTE adjustment $ 1 $ 2 ==== ==== Impact of net noninterest-bearing sources of funds 0.81 0.95 - --------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.53% 4.62% =============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three months ended June 30, 1999, to the related assets and liabilities, the average yield on total loans was 7.88 percent as of June 30, 1999, compared to 8.52 percent a year ago. The average cost of funds for medium- and long-term debt was 5.08 percent as of June 30, 1999, compared to 5.73 percent a year earlier.
Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- Loans $ (46) $ 56 $ 10 Investment securities (1) (19) (20) Other earning assets - - - -------------------------------- Total earning assets (47) 37 (10) Interest-bearing deposits (21) - (21) Short-term borrowings (6) 5 (1) Medium- and long-term debt (13) 15 2 Net interest rate swap (income)/expense (5) - (5) ------------------------------ Total interest-bearing sources (45) 20 (25) ------------------------------ Net interest income/Rate spread (FTE) $ (2) $ 17 $ 15 ==============================
* Rate/Volume variances are allocated to variances due to volume. 21 TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended ------------------------------------------------------------ June 30, 1999 June 30, 1998 ----------------------------- ---------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------- Loans $30,896 $1,188 7.75% $28,530 $1,199 8.46% Investment securities 2,471 82 6.59 3,673 125 6.83 Other earning assets 106 4 7.69 164 5 5.94 - --------------------------------------------------------------------------------------------- Total earning assets 33,473 1,274 7.66 32,367 1,329 8.27 Interest-bearing deposits 16,211 290 3.60 16,116 328 4.11 Short-term borrowings 3,707 89 4.83 3,214 89 5.58 Medium- and long-term debt 6,651 181 5.47 6,618 204 6.20 Net interest rate swap (income)/expense (1) - (37) - - (26) - - --------------------------------------------------------------------------------------------- Total interest-bearing sources $26,569 523 3.96 $25,948 595 4.62 ---------------- ---------------- Net interest income/ Rate spread (FTE) $ 751 3.70 $ 734 3.65 ====== ====== FTE adjustment $ 3 $ 4 ====== ====== Impact of net noninterest-bearing sources of funds 0.82 0.91 - --------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.52% 4.56% =============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the six months ended June 30, 1999, to the related assets and liabilities, the average yield on total loans was 7.93 percent as of June 30, 1999, compared to 8.55 percent a year ago. The average cost of funds for medium- and long-term debt was 5.19 percent as of June 30, 1999, compared to 5.79 percent as of June 30, 1998.
Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- Loans $ (84) $ 73 $(11) Investment securities (3) (40) (43) Other earning assets 1 (2) (1) -------------------------------- Total earning assets (86) 31 (55) Interest-bearing deposits (39) 1 (38) Short-term borrowings (12) 12 - Medium- and long-term debt (24) 1 (23) Net interest rate swap (income)/expense (11) - (11) -------------------------------- Total interest-bearing sources (86) 14 (72) -------------------------------- Net interest income/Rate spread (FTE) $ - $ 17 $ 17 ================================
* Rate/Volume variances are allocated to variances due to volume. 22 Provision for Credit Losses - --------------------------- The provision for credit losses was $28 million for the second quarter of 1999 and 1998. The provision for the first six months of 1999 was $48 million compared to $56 million for the same period in 1998. The Corporation establishes this provision to maintain an adequate allowance for credit losses, which is discussed in the section entitled "Allowance for Credit Losses and Nonperforming Assets." Noninterest Income - ------------------ Noninterest income was $195 million for the three months ended June 30, 1999, an increase of $46 million, or 31 percent, over the same period in 1998. Second quarter 1999 noninterest income reflects the consolidated financial results of Munder Capital Management, an investment advisory subsidiary in which a majority interest was obtained during July 1998. The Corporation's minority interest in Munder in prior periods was accounted for under the equity method. Included in second quarter 1999 noninterest income was a $21 million gain on the sale of Comerica's ownership in an ATM network provider. Growth in fiduciary, investment management and commercial fees, excluding the effect of large nonrecurring items, acquisitions and divestitures in both periods, supported a 16 percent noninterest income increase in the second quarter of 1999, compared to the second quarter of 1998. For the first six months of 1999, noninterest income was $352 million, an increase of $68 million, or 24 percent, from the first six months of 1998. Noninterest Expenses - -------------------- Noninterest expenses were $289 million for the second quarter ended June 30, 1999, an increase of $36 million, or 14 percent, from the second quarter of 1998. Second quarter 1999 noninterest expenses were impacted by the Munder acquisition described above. Excluding the effect of large 23 nonrecurring items, including a $5 million contribution to Comerica's charitable foundation, acquisitions and divestitures in both periods, noninterest expenses increased 11 percent in the second quarter of 1999, compared to the second quarter of 1998. Approximately one-half of this increase was directly attributable to year 2000 initiatives and revenue- related incentives. For the first six months of 1999, noninterest expenses were $552 million, an increase of $49 million, or 10 percent, from the first six months of 1998. Provision for Income Taxes - -------------------------- The provision for income taxes for the second quarter of 1999 totaled $90 million, an increase of 10 percent compared to $82 million reported for the same period a year ago. The provision for the first six months of 1999 was $173 million compared to $160 million for the same period in 1998. The effective tax rate was 35 percent for the second quarter and the first six months of 1999 and 1998. Financial Condition - ------------------- Total assets were $37.0 billion at June 30, 1999, compared with $36.6 billion at December 31, 1998. The Corporation has continued to generate commercial loan growth in 1999. Since December 31, 1998, domestic commercial loans have increased $561 million, or 3 percent, and commercial mortgage loans have increased $357 million, or 9 percent. The increase in commercial loans was partially funded by runoff of investment securities, which declined $367 million, or 14 percent, since December 31, 1998. Total liabilities increased $149 million, or less than 1 percent, to $33.7 billion since December 31, 1998. Total deposits decreased $2.0 billion, or 8 percent, since year-end 1998. Of this $2.0 billion decrease, nearly $1.0 billion was attributable to a decline in foreign office time deposits. The decline in total deposits was offset by an increase in medium- and long-term debt of $1.9 billion, or 37 percent. 24 Allowance for Credit Losses and Nonperforming Assets - ---------------------------------------------------- The allowance for credit losses represents management's assessment of possible losses inherent in the Corporation's on- and off-balance sheet credit portfolio. The amount attributable to the off-balance sheet credit portfolio is not material. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. Internal risk ratings are assigned to each corporate loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Included in that risk rating is management's assessment of the potential failure of a customer to be adequately prepared for the year 2000, but only in those instances where management has significant information indicating a customer may not be adequately prepared (for more information on year 2000, see the section entitled "Other Matters"). A detailed credit quality review is performed quarterly on large corporate loans which have deteriorated below certain levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining corporate loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent loan loss experience, current economic conditions and trends, geographic dispersion of borrowers, and trends with respect to past due and nonaccrual amounts. However, actual loss ratios experienced in the future could vary from those projected. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may 25 exist which are not necessarily captured by the application of historical loss ratios. The allocated allowance was $241 million at June 30, 1999. To ensure a higher degree of confidence, an unallocated allowance is also maintained. The unallocated portion of the loss reserve reflects management's view that the reserve should have a margin that recognizes the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgement. Factors which were considered in the evaluation of the adequacy of the Corporation's unallocated reserve include portfolio exposures in the areas of sub-prime lending, healthcare, high technology, energy and hedge funds, as well as Indonesian and Latin American transfer risks and new business migration risk. The unallocated allowance was $219 million at June 30, 1999, a decrease of only $6 million from December 31, 1998. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment of the portfolio. At June 30, 1999, the allowance for credit losses was $460 million, an increase of $8 million since December 31, 1998. The allowance as a percentage of total loans decreased to 1.46 percent, compared to 1.48 percent at December 31, 1998. As a percentage of nonperforming assets, the allowance decreased to 319 percent at June 30, 1999 from 375 percent at year-end 1998. Net charge-offs for the second quarter of 1999 were $21 million, or 0.26 percent of average total loans, compared with $19 million, or 0.27 percent, for the year-earlier quarter. Net charge-offs for the first six months of 1999 were $40 million, or 0.26 percent of average total loans, compared to $41 million, or 0.29 percent, for the same period last year. An analysis of the allowance for credit losses is presented in note 5 to the consolidated financial statements. 26 Nonperforming assets increased $23 million, or 20 percent, since December 31, 1998, and were categorized as follows:
June 30, December 31, (in thousands) 1999 1998 ------------ ------------ Nonaccrual loans: Commercial $ 73,294 $ 77,175 International 47,573 20,350 Real estate construction 255 452 Commercial mortgage 9,870 6,788 Residential mortgage 1,008 3,468 ------------ ---------- Total nonaccrual loans 132,000 108,233 Reduced-rate loans 7,342 7,464 ------------ ---------- Total nonperforming loans 139,342 115,697 Other real estate 5,056 4,956 ------------ ---------- Total nonperforming assets $ 144,398 $ 120,653 ============ ========== Loans past due 90 days or more $ 54,747 $ 40,209 ============ ==========
The increase in international nonaccrual loans from December 31, 1998, was primarily related to Canadian and Indonesian customers. Nonperforming assets as a percentage of total loans and other real estate were 0.46 percent at June 30, 1999 and 0.39 percent at December 31, 1998. Capital - ------- Common shareholders' equity was up $220 million from December 31, 1998 to June 30, 1999, excluding nonowner changes in equity. The increase was primarily due to the retention of $206 million in earnings and a $16 million increase related to employee stock option activity. 27 Capital ratios exceed minimum regulatory requirements as follows:
June 30, December 31, 1999 1998 -------- ------------ Leverage ratio (3.00 - minimum) 8.08% 7.68% Tier 1 risk-based capital ratio (4.0 - minimum) 6.71 6.26 Total risk-based capital ratio (8.0 - minimum) 10.69 10.28
At June 30, 1999, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of "well capitalized" institutions as defined in the final rule under FDICIA. Other Matters - ------------- The Corporation initiated a company-wide project to prepare its computer systems, applications and infrastructure for year 2000 readiness. The following discussion of the implications of the year 2000 issue for the Corporation contains numerous forward-looking statements based on inherently uncertain information. The cost of the project and the planned date to complete the internal year 2000 modifications are based on management's best estimates, derived utilizing a number of assumptions of future events such as the continued availability of internal and external resources, including employees, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ. In addition, the Corporation places a high degree of reliance on the computer systems of third parties, such as customers, suppliers, and other financial and governmental institutions. Although the Corporation is assessing the readiness of these third parties and has prepared contingency plans, there can be no guarantee that business-critical third party vendors or other significant third parties, such as public utilities will adequately address their year 2000 issues. 28 Readiness Preparation Comerica is ready to conduct business in the year 2000. The Corporation established an extensive enterprise-wide and centrally managed year 2000 program in early 1996. The year 2000 team includes the active involvement of senior executives as well as seasoned project managers and business unit liaisons from throughout the company. The Corporation continues to evaluate and monitor the year 2000 readiness of vendors, customers and third party processors. Completing a successful year 2000 program is a top priority so that the arrival of the 21st century will be noted by a continuation of quality customer service. Many factors can affect a company's ability to deliver quality services at any given time. While Comerica is "ready" to do business in the year 2000, there can be no guarantee that services will be uninterrupted due to the century date change or otherwise. To emphasize the importance of being available for customers during the millennium change, the Corporation has implemented a no-vacation policy for the entire organization from December 27, 1999, through January 31, 2000. Specific business units have adopted additional vacation guidelines including dates prior and post the transition period. The Corporation's year 2000 program is comprised of numerous individual projects which address the following broad areas: data processing systems, telecommunications and data networks, building facilities and security systems, vendor risk, customer risk, contingency planning and communications. As of June 30, 1999, 100 percent of Comerica's mission critical applications and services are year 2000 ready and 98 percent of the Corporation's total systems and components have been remediated, validated and placed back into production. The year 2000 program utilized an extensive testing methodology and verification process. In May 1999, the Corporation conducted an off-site test of 25 of its most complex business systems and applications. The results of this testing confirmed that the Corporation's year 2000 remediation, testing and validation processes were thorough. All 25 29 applications completed 100 percent of the testing with no reported year 2000 related problems. A rigorous process has been implemented to reduce risks associated with changes or the introduction of new components. This process will limit, eliminate or defer the introduction of change to systems and components certified as year 2000 ready. Furthermore, the Corporation is enhancing contingency plans for all business critical applications to minimize any disruptions to customer service caused by year 2000 issues. The Corporation does not significantly rely on embedded technology in its critical processes. Since some building systems and components are controlled with embedded technology, facilities were reviewed and verified for year 2000 readiness. Customers and vendors who have significant relationships with the Corporation continue to be evaluated to determine their preparation and readiness for the year 2000. The potential failure of those customers to be adequately prepared for year 2000 is included in management's credit and review process used to establish loss reserves. A high level risk reduction strategy has been implemented to manage and mitigate risks to our asset/liability position. There can be no guarantee that the remediation of the systems of the Corporation's vendors or customers will be completed on a timely basis. Comerica's senior executives, the board of directors and a project steering committee regularly review the year 2000 program and its progress. In addition, the federal and state agencies that regulate the banking industry regularly monitor the year 2000 program. Cost Included in the Corporation's estimate of year 2000 project cost are internal and external development costs, asset impairment write-offs and the cost of software and hardware for systems that are not ready, or would not have been ready by the new century as a result of normal replacement. The Corporation's current estimate is that year 2000 project cost, both 30 internal and external, will total approximately $50 million, of which the Corporation incurred approximately $41 million in 1996, 1997, 1998, and the first six months of 1999. Of the $41 million incurred to date, $10 million was for capital assets which the Corporation is expensing over their useful lives. The Corporation will fund the remaining year 2000 costs yet to be incurred by normal operating cash flow. The project is staffed with external resources as well as internal staff redeployed from less time-sensitive assignments. The Corporation does not believe the redeployment of existing staff will have a material adverse effect on its business, results of operations or financial position. Approximately $3 million of the remaining cost is for capital assets which will be expensed over their useful lives. Estimated total project cost could change further as efforts continue. Risks The Corporation has grouped the principal risks associated with the year 2000 problem into three categories. The first is the risk that the Corporation does not successfully ready operations for the year 2000. The Corporation, like other financial institutions, is heavily dependent on computer systems. The complexity of these systems and dependence on one another makes it impossible to switch to other systems immediately as would be required if necessary corrections were not made in advance. Management believes it has made the necessary corrections in advance. Computer failure of third parties may jeopardize the Corporation's operations, but how seriously depends on the nature and duration of such failures. The most serious impact on the Corporation's operations from suppliers would result if basic services such as telecommunications, electric power suppliers, and services provided by other financial institutions and governmental agencies were disrupted. Our research through public disclosures along with our own inquiries regarding their state of readiness indicates that basic services will not result in significant disruptions, however, the Corporation has contingency plans in 31 the event of sustained disruptions. Operational failures among the Corporation's sources of major funding, larger borrowers and capital market counterparties could affect their ability to continue to provide funding or meet obligations when due. At this time, any "high risk" areas are being closely monitored and reviewed to minimize the impact to the Corporation. Contingency Plans The Corporation initiated an event planning team responsible to develop and implement strategies to prepare for various year 2000 scenarios through enhancing existing business resumption contingency plans. Business resumption contingency plans address the actions that would be taken if critical business functions can not be carried out in the normal manner due to system or supplier failure. While Comerica does not expect major year 2000 problems, the Corporation believes it is sound judgement to anticipate and prepare for potential problems. Plans will be verified to ensure that they are reasonable, coordinated, comprehensive and functional. This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analysis. Numerous factors could cause variances in these projections, and their underlying assumptions, such as changes in interest rates, the industry where the Corporation has a concentration of loans, changes in the level of fee income, year 2000 expenses and economic conditions. 32 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits (11) Statement re: Computation of Earnings Per Share (27) Financial Data Schedule (b) Reports on Form 8-K The Corporation did not file any reports on Form 8-K during the three months ended June 30, 1999. 33 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMERICA INCORPORATED -------------------------------------- (Registrant) /s/Ralph W. Babb, Jr. -------------------------------------- Ralph W. Babb Jr. Vice Chairman of Finance & Administration and Chief Financial Officer (Principal Financial Officer) /s/Marvin J. Elenbaas -------------------------------------- Marvin J. Elenbaas Senior Vice President and Controller (Principal Accounting Officer) Date: August 13, 1999 34 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 11 Statement Re: Computation of Earnings Per Share 27 Financial Data Schedule EX-11 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 Exhibit (11) - Statement Re: Computation of Earnings Per Share COMPUTATION OF EARNINGS PER SHARE Comerica Incorporated and Subsidiaries (In thousands, except per share data)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1999 1998 1999 1998 ------- ------ ------ ------ Basic: Average shares outstanding 156,086 155,992 155,972 156,353 ======== ======== ======== ======== Net income $167,382 $150,383 $326,494 $294,766 Less preferred stock dividends 4,275 4,275 8,550 8,550 -------- -------- -------- -------- Net income applicable to common stock $163,107 $146,108 $317,944 $286,216 ======== ======== ======== ======== Basic net income per share $ 1.04 $ 0.94 $ 2.04 $ 1.83 Diluted: Average shares outstanding 156,086 155,992 155,972 156,353 Nonvested stock 166 209 171 199 Common stock equivalent: Net effect of the assumed exercise of stock options 2,324 2,812 2,320 2,839 -------- -------- -------- -------- Diluted average shares 158,576 159,013 158,463 159,391 ======== ======== ======== ======== Net income $167,382 $150,383 $326,494 $294,766 Less preferred stock dividends 4,275 4,275 8,550 8,550 -------- -------- -------- -------- Net income applicable to common stock $163,107 $146,108 $317,944 $286,216 ======== ======== ======== ======== Diluted net income per share $ 1.03 $ 0.92 $ 2.01 $ 1.80
EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 1999 FORM 10-Q FOR COMERICA INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,535,721 17,987 32,558 7,337 2,345,236 0 0 31,566,251 460,397 36,950,487 22,353,582 3,745,565 372,876 7,231,275 0 250,000 786,166 2,211,023 36,950,487 1,186,687 80,259 3,990 1,270,936 289,481 522,462 748,474 48,000 1,892 552,294 499,725 326,494 0 0 326,494 2.04 2.01 4.52 132,000 54,747 7,342 0 452,409 52,127 12,089 460,397 211,517 30,317 218,563
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