-----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, Rg37Jo8oLbSebWPvda1dH6+CjlxnHT54cCVs2l/Q1RYza02fUw4wi7yZpPK2DKiT NBb/ozucpzI0fu7ait7Rng== 0000950124-99-005949.txt : 19991115 0000950124-99-005949.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950124-99-005949 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748641 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 September 30, 1999 ----------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 1-10706 -------------------------------------- Comerica Incorporated ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 38-1998421 - ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Comerica Tower at Detroit Center Detroit, Michigan 48226 ---------------------------------------- (Address of principal executive offices) (Zip Code) (313) 222-3300 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $5 par value common stock: outstanding as of October 31, 1999: 156,392,000 shares 2 PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries
September 30, December 31, September 30, (In thousands, except share data) 1999 1998 1998 ------------- ------------ ------------- ASSETS Cash and due from banks $ 1,485,739 $ 1,773,100 $ 1,364,063 Short-term investments 188,027 109,640 129,057 Investment securities available for sale 2,125,613 2,712,165 3,108,120 Commercial loans 20,023,564 19,086,541 17,361,281 International loans 2,575,318 2,713,259 2,524,159 Real estate construction loans 1,545,168 1,079,614 1,037,284 Commercial mortgage loans 4,513,685 4,179,271 3,927,689 Residential mortgage loans 878,223 1,037,941 1,136,195 Consumer loans 1,823,635 1,861,630 1,882,347 Lease financing 718,347 646,607 598,259 ----------- ----------- ----------- Total loans 32,077,940 30,604,863 28,467,214 Less allowance for credit losses (463,451) (452,409) (438,929) ----------- ----------- ----------- Net loans 31,614,489 30,152,454 28,028,285 Premises and equipment 336,410 352,650 361,171 Customers' liability on acceptances outstanding 25,960 12,335 12,945 Accrued income and other assets 1,508,752 1,488,487 1,372,573 ----------- ----------- ----------- TOTAL ASSETS $37,284,990 $36,600,831 $34,376,214 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,430,126 $ 6,999,337 $ 6,740,407 Interest-bearing deposits 16,470,174 17,313,796 15,493,005 ----------- ----------- ----------- Total deposits 22,900,300 24,313,133 22,233,412 Federal funds purchased and securities sold under agreements to repurchase 956,993 3,108,985 2,147,048 Other borrowed funds 1,254,976 471,168 1,182,122 Acceptances outstanding 25,960 12,335 12,945 Accrued expenses and other liabilities 427,728 366,338 227,983 Medium- and long-term debt 8,355,771 5,282,259 5,632,697 ----------- ----------- ----------- Total liabilities 33,921,728 33,554,218 31,436,207 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 9/30/99, 12/31/98 and 9/30/98 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued-157,233,107 shares at 9/30/99, 157,233,088 shares at 12/31/98 and 157,187,518 shares at 9/30/98 786,166 786,165 785,938 Capital surplus 32,452 24,649 16,713 Accumulated nonowner changes in equity (22,096) (6,455) 2,676 Retained earnings 2,379,372 2,086,589 1,999,197 Deferred compensation (3,517) (5,202) (3,110) Less cost of common stock in treasury- 896,861 shares at 9/30/99, 1,351,997 shares at at 12/31/98 and 1,689,201 shares at 9/30/98 (59,115) (89,133) (111,407) ----------- ----------- ----------- Total shareholders' equity 3,363,262 3,046,613 2,940,007 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,284,990 $36,600,831 $34,376,214 =========== =========== ===========
3 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------- (In thousands, except per share data) 1999 1998 1999 1998 -------- -------- ---------- ---------- Interest and fees on loans $631,796 $583,747 $1,818,483 $1,781,164 Interest on investment securities: Taxable 36,849 51,968 114,472 170,856 Exempt from federal income tax 1,108 1,754 3,744 5,774 -------- -------- ---------- ---------- Total interest on investment securities 37,957 53,722 118,216 176,630 Interest on short-term investments 2,183 2,093 6,173 6,859 -------- -------- ---------- ---------- Total interest income 671,936 639,562 1,942,872 1,964,653 INTEREST EXPENSE Interest on deposits 147,147 156,289 436,628 484,353 Interest on short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 35,793 35,453 112,711 93,655 Other borrowed funds 9,803 10,724 21,663 41,536 Interest on medium- and long-term debt 102,669 86,079 283,383 289,786 Net interest rate swap income (13,868) (9,418) (50,379) (35,198) -------- -------- ---------- ---------- Total interest expense 281,544 279,127 804,006 874,132 -------- -------- ---------- ---------- Net interest income 390,392 360,435 1,138,866 1,090,521 Provision for credit losses 21,000 21,000 69,000 77,000 -------- -------- ---------- ---------- Net interest income after provision for credit losses 369,392 339,435 1,069,866 1,013,521 NONINTEREST INCOME Fiduciary and investment management income 60,493 49,791 175,275 132,535 Service charges on deposit accounts 43,162 39,316 127,380 117,283 Commercial lending fees 14,001 10,701 35,212 27,850 Letter of credit fees 10,321 7,818 27,832 23,160 Securities gains 49 174 1,941 35 Other noninterest income 42,449 44,314 154,380 134,898 -------- -------- ---------- ---------- Total noninterest income 170,475 152,114 522,020 435,761 NONINTEREST EXPENSES Salaries and employee benefits 159,932 142,252 474,982 415,013 Net occupancy expense 24,648 22,533 71,717 66,873 Equipment expense 15,320 14,959 45,613 45,250 Outside processing fee expense 11,329 10,627 36,524 31,654 Other noninterest expenses 65,621 63,450 200,308 198,203 -------- -------- --------- ---------- Total noninterest expenses 276,850 253,821 829,144 756,993 -------- -------- --------- ---------- Income before income taxes 263,017 237,728 762,742 692,289 Provision for income taxes 92,603 83,238 265,834 243,033 -------- -------- ---------- ---------- NET INCOME $170,414 $154,490 $ 496,908 $ 449,256 ======== ======== ========== ========== Net income applicable to common stock $166,139 $150,215 $ 484,083 $ 436,431 ======== ======== ========== ========== Basic net income per common share $ 1.06 $ 0.97 $ 3.10 $ 2.80 Diluted net income per common share $ 1.05 $ 0.95 $ 3.06 $ 2.75 Cash dividends declared on common stock $ 56,226 $ 49,650 $ 168,556 $ 149,615 Dividends per common share $ 0.36 $ 0.32 $ 1.08 $ 0.96
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 - - - - 449,256 - - 449,256 Nonowner changes in equity, net of tax - - - 4,613 - - - 4,613 ---------- Net income and nonowner changes in equity - - - - - - - 453,869 Cash dividends declared: Preferred stock - - - - (12,825) - - (12,825) Common stock - - - - (149,615) - - (149,615) Purchase of 2,136,450 shares of common stock - - - - - - (141,070) (141,070) Purchase and retirement of 60,000 shares of common stock - (300) (3,182) - - - - (3,482) Net issuance of common stock under employee stock plans - 2,161 19,895 - (19,038) (2,085) 29,663 30,596 Amortization of deferred compensation - - - - - 758 - 758 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT SEPTEMBER 30, 1998 $250,000 $785,938 $ 16,713 $ 2,676 $1,999,197 $ (3,110) $(111,407) $2,940,007 ======== ======== ========= ========= ========== ========= ========= ========== BALANCES AT JANUARY 1, 1999 $250,000 $786,165 $ 24,649 $ (6,455) $2,086,589 $ (5,202) $ (89,133) $3,046,613 Net income for 1999 - - - - 496,908 - - 496,908 Nonowner changes in equity, net of tax - - - (15,641) - - - (15,641) ---------- Net income and nonowner changes in equity - - - - - - - 481,267 Cash dividends declared: Preferred stock - - - - (12,825) - - (12,825) Common stock - - - - (168,556) - - (168,556) Purchase of 43,992 shares of common stock - - - - - - (2,885) (2,885) Net issuance of common stock under employee stock plans - 1 7,803 - (22,744) 4 32,903 17,967 Amortization of deferred compensation - - - - - 1,681 - 1,681 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT SEPTEMBER 30, 1999 $250,000 $786,166 $ 32,452 $ (22,096) $2,379,372 $ (3,517) $ (59,115) $3,363,262 ======== ======== ========= ========= ========== ========= ========= ==========
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries
Nine Months Ended September 30 --------------------------------- (in thousands) 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $ 496,908 $ 449,256 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 69,000 77,000 Depreciation 42,556 42,997 Restructuring charge - (14,957) Net decrease in trading account securities 1,925 2,968 Net (increase) decrease in assets held for sale 24,862 (6,857) Net increase in accrued income receivable (28,563) (4,514) Net increase (decrease) in accrued expenses 60,651 (161,337) Net amortization of intangibles 25,417 21,930 Other, net 39,850 48,576 ------------ ------------ Total adjustments 235,698 5,806 ------------ ------------ Net cash provided by operating activities 732,606 455,062 INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (32,332) (11,869) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (72,842) 89,658 Proceeds from sale of investment securities available for sale 3,588 44,364 Proceeds from maturity of investment securities available for sale 603,066 876,576 Purchases of investment securities available for sale (96,633) (108,428) Net increase in loans (other than purchased loans) (1,531,035) (1,608,051) Purchase of loans - (1,115) Proceeds from sale of consumer businesses - 1,878,907 Fixed assets, net (26,316) (29,494) Net (increase) decrease in customers' liability on acceptances outstanding (13,625) 5,447 ------------ ------------ Net cash provided by (used in) investing activities (1,166,129) 1,135,995 FINANCING ACTIVITIES: Net decrease in deposits (1,412,833) (352,905) Net increase (decrease) in short-term borrowings (1,368,184) 136,269 Net increase (decrease) in acceptances outstanding 13,625 (5,447) Proceeds from issuance of medium- and long-term debt 5,400,000 2,500,000 Repayments and purchases of medium- and long-term debt (2,326,488) (4,162,060) Proceeds from issuance of common stock and other capital transactions 17,963 32,681 Purchase of common stock for treasury and retirement (2,885) (144,552) Dividends paid (175,036) (158,067) ------------ ------------ Net cash provided by (used in) financing activities 146,162 (2,154,081) ------------ ------------ Net decrease in cash and due from banks (287,361) (563,024) Cash and due from banks at beginning of year 1,773,100 1,927,087 ------------ ------------ Cash and due from banks at end of period $ 1,485,739 $ 1,364,063 ============ ============ Interest paid $ 794,391 $ 900,964 ============ ============ Income taxes paid $ 203,862 $ 214,738 ============ ============ Noncash investing and financing activities: Loan transfers to other real estate $ 4,334 $ 5,629 ============ ============
6 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Certain items in prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report of Comerica Incorporated and Subsidiaries (the "Corporation") on Form 10-K for the year ended December 31, 1998. The Corporation may use derivative financial instruments, including foreign exchange contracts, to manage the Corporation's exposure to interest rate and foreign currency risks. These instruments are treated as hedges, and accounted for on an accrual basis, since there is a high correlation with the on-balance sheet instrument being hedged. If this correlation ceases to exist, the existing unrealized gain or loss is amortized over the remaining term of the instrument, and future changes in fair value are accounted for on a mark-to-market basis. Derivative financial instruments executed as a service to customers are accounted for on a mark-to-market basis. For further information, refer to the Accounting Policies footnote in the Corporation's 1998 annual report. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, 7 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated nonowner changes in equity until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." Statement 137 amended the required effective date of Statement 133, requiring adoption of Statement 133 in years beginning after June 15, 2000. The Corporation expects to adopt Statement 133 effective January 1, 2001. The Corporation has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Corporation. Note 2 - Investment Securities At September 30, 1999, investment securities having a carrying value of $1.4 billion were pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $47 million. Note 3 - Allowance for Credit Losses The following analyzes the changes in the allowance for credit losses included in the consolidated balance sheets:
(in thousands) 1999 1998 --------- --------- Balance at January 1 $ 452,409 $ 424,147 Charge-offs (76,350) (95,881) Recoveries 18,368 33,663 --------- --------- Net charge-offs (57,982) (62,218) Provision for credit losses 69,000 77,000 Foreign currency translation adjustment 24 - --------- --------- Balance at September 30 $ 463,451 $ 438,929 ========= =========
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses (continued) Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," considers a loan impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans averaged $156 million and $141 million for the quarter and nine months ended September 30, 1999, compared to $93 million and $80 million for the comparable periods last year. The following are period-end balances:
(in thousands) September 30, 1999 December 31, 1998 ------------------ ----------------- Total impaired loans $150,513 $101,417 Impaired loans requiring an allowance 146,971 87,494 Impairment allowance 60,245 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 September 30, 1999 and December 31, 1998:
(in thousands) September 30, 1999 December 31, 1998 ------------------ ---------------- Parent Company 9.75% subordinated notes due 1999 $ - $ 74,970 7.25% subordinated notes due 2007 158,827 159,669 ---------- ---------- Total parent company 158,827 234,639 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 198,451 198,301 7.875% subordinated notes due 2026 173,436 174,086 8.375% subordinated notes due 2024 155,342 155,502 7.25% subordinated notes due 2002 149,521 149,404 6.875% subordinated notes due 2008 103,845 104,186 7.125% subordinated notes due 2013 154,921 155,181 6.00% subordinated notes due 2008 247,952 247,798 ---------- ---------- Total subordinated notes 1,183,468 1,184,458 Medium-term notes: Floating rate based on Treasury indices 37,000 37,000 Floating rate based on Prime indices 1,224,988 - Floating rate based on LIBOR indices 5,537,302 3,612,076 Fixed rate notes with interest rate of 6.65% 199,910 199,810 ---------- ---------- Total medium-term notes 6,999,200 3,848,886 Notes payable 14,276 14,276 ---------- ---------- Total subsidiaries 8,196,944 5,047,620 ---------- ---------- Total medium- and long-term debt $8,355,771 $5,282,259 ========== ==========
Note 5 - Income Taxes The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after deducting non-taxable items, principally income on bank-owned life insurance and interest income on state and municipal securities. State and foreign taxes are then added to the federal provision. 10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
September 30, 1999 December 31, 1998 ------------------------------ ------------------------------ Notional/ Notional/ Contract Unrealized Fair Contract Unrealized Fair Amount Gains Losses Value Amount Gains Losses Value (in millions) (1) (2) (3) (1) (2) (3) ------------------------------ ------------------------------ Risk Management Interest rate contracts Swaps (4) $ 8,515 $ 35 $ (96) $ (61) $ 6,869 $152 $ (6) $ 146 Caps and floors purchased - - - - 15 - - - Foreign exchange contracts Spot, forward and options 1,110 27 (14) 13 782 32 (29) 3 Swaps 152 1 (1) - 131 12 - 12 ------- ---- ----- ----- ------- ---- ----- ----- Total risk management 9,777 63 (111) (48) 7,797 196 (35) 161 Customer Initiated and Other Interest rate contracts Caps and floors written 248 - (1) (1) 241 - (1) (1) Caps and floors purchased 225 1 - 1 176 1 - 1 Swaps 256 1 (1) - 264 7 (6) 1 Foreign exchange contracts Spot, forward and options 1,038 16 (15) 1 673 20 (13) 7 Swaps 35 2 - 2 - - - - ------- ---- ----- ----- ------- ---- ----- ----- Total customer initiated and other 1,802 20 (17) 3 1,354 28 (20) 8 ------- ---- ----- ----- ------- ---- ----- ----- Total derivatives and foreign exchange contracts $11,579 $ 83 $(128) $ (45) $ 9,151 $224 $ (55) $ 169 ======= ==== ===== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. (2) Represents credit risk, which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk. (3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. The fair values of customer initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets. Futures contracts are subject to daily cash settlements; therefore, the fair value of these instruments is zero. (4) Includes index amortizing swaps with a notional amount of $176 million and $2,180 million at September 30, 1999 and December 31, 1998, respectively. These swaps had net unrealized losses of less than $1 million at September 30, 1999, versus $15 million of unrealized gains at December 31, 1998. As of September 30, 1999, index amortizing swaps had an average expected life of approximately 9 months with a stated maturity that averaged 1 year. 11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) Risk Management Interest rate risk arises in the normal course of business to the extent there is a difference between the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. This gap in the balance sheet structure reflects the sensitivity of the Corporation's net interest income to a change in interest rates. Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs on-balance sheet instruments such as investment securities, as well as off-balance sheet derivative financial instruments and foreign exchange contracts, to manage exposure to these and other risks, including liquidity risk. As an end-user, the Corporation mainly accesses the interest rate markets to obtain off-balance sheet derivative instruments for use principally in connection with asset and liability management activities. The Corporation principally utilizes interest rate swaps with the objective of managing the sensitivity of net interest income to interest rate fluctuations. To accomplish this objective, the Corporation primarily uses interest rate swaps to modify the interest rate characteristics of certain assets and liabilities (for example, from a floating rate to a fixed rate, a fixed rate to a floating rate or from one floating rate index to another). Management believes this strategy achieves an optimal match between the rate maturities of assets and their funding sources which, in turn, reduces the overall exposure of net interest income to interest rate risk, although there can be no assurance that such a strategy will be successful. The following table summarizes the expected maturity distribution of the notional amount of interest rate swaps used for risk management purposes. The table also indicates the weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements as of September 30, 1999. The swaps are grouped by the assets or liabilities to which they have been designated. 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: (dollar amounts 2004- Dec. 31, 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 20 146 - 3 - - 169 2,169 Weighted average: (1) Receive rate 5.86% 6.34% 5.68% 7.14% -% -% 6.36% 6.01% Pay rate 5.42% 5.49% 5.42% 6.85% -% -% 6.01% 5.30% Fixed rate asset designation: Pay fixed swaps Generic $ 2 $ - $ - $ - $ - $ - $ 2 $ 2 Index amortizing 1 6 - - - - 7 11 Weighted average: (1) Receive rate 5.41% 5.38% -% -% -% -% 5.39% 5.54% Pay rate 7.95% 5.34% -% -% -% -% 6.21% 5.88% Medium- and long-term debt designation: Generic receive fixed swaps $ - $ 200 $ - $ 150 $ - $1,150 $1,500 $ 700 Weighted average: (1) Receive rate -% 6.91% -% 7.37% -% 6.79% 6.86% 7.33% Pay rate -% 5.50% -% 5.04% -% 5.48% 5.44% 5.28% Floating/floating swaps $ - $ 37 $ - $ - $ - $ - $ 37 $ 37 Weighted average: (2) Receive rate -% 5.47% -% -% -% -% 5.47% 4.98% Pay rate -% 5.30% -% -% -% -% 5.30% 5.19% Total notional amount $ 23 $1,089 $3,250 $3,003 $ - $1,150 $8,515 $6,869
- -------------------------------------------------------------------------------- (1) Variable rates are based on LIBOR or prime rates paid or received at September 30, 1999. (2) Variable rates paid are based on LIBOR at September 30, 1999, while variable rates received are based on prime. - -------------------------------------------------------------------------------- 13 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) During the first quarter of 1999, the Corporation terminated a portion of its portfolio of index amortizing interest rate swaps. The notional amount of these swaps totaled $1,376 million. The gain resulting from early termination was deferred and is being amortized over the remaining expected life of the swaps at time of termination. The Corporation also uses various other types of off-balance sheet financial instruments to manage interest rate and foreign currency risks associated with specific assets or liabilities, including interest rate caps and floors, forward and futures interest and foreign exchange rate contracts, and foreign exchange rate swaps, which are reflected in the table above. Commitments to purchase U.S. government and agency securities for the Corporation's available-for-sale investment security portfolio totaled $200 million at September 30, 1999. No such commitments were outstanding at year-end 1998. At September 30, 1999 and December 31, 1998, the notional amounts of commitments to purchase and sell U.S. Treasury and municipal bond securities related to the Corporation's trading account totaled $22 million and $17 million, respectively. These commitments, which are similar in nature to forward contracts, are not reflected in the above table due to the immaterial impact they have on the financial statements. Customer Initiated and Other The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts, interest rate caps and floors and forward rate agreements, at the request of customers. The Corporation minimizes market risk arising from customer initiated foreign exchange contracts and forward rate agreements by entering into offsetting transactions. Average fair values and income from customer initiated and other foreign exchange contracts were not material for the nine-month period ended September 30, 1999 and for the year ended December 31, 1998. 14 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) Customer initiated interest rate caps and floors generally are not offset by other on- or off-balance sheet financial instruments; however, the Corporation has established authority limits for engaging in these transactions in order to minimize risk exposure. As a result, average fair values and income from this activity were not material for the nine-month period ended September 30, 1999 and for the year ended December 31, 1998. Available credit lines on fixed rate credit card and check product accounts, which expose the Corporation to the risk of a reduction in net interest income as rates increase, totaled approximately $1.2 billion at September 30, 1999 and $1.6 billion at December 31, 1998. Management believes that market risk exposure arising from these revolving credit commitments is very limited, however, since it is unlikely that a significant number of customers with these accounts will simultaneously borrow up to their maximum available credit lines. Off-Balance Sheet Derivative and Foreign Exchange Activity The following table provides a reconciliation of the beginning and ending notional amounts for interest rate derivatives and foreign exchange contracts.
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 3,653 7,962 83 20,297 Maturities/amortizations (646) (7,613) (35) (19,897) Terminations (1,376) - - - ------ ------ ------ ------- Balances at September 30, 1999 $ 8,515 $ 1,262 $ 729 $ 1,073 ====== ====== ====== =======
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 nine months ended September 30, 1999 and 1998 are presented below. For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to Note 22 to the consolidated financial statements. Nine Months Ended September 30
Business Individual Investment (in millions) Bank Bank** Bank* - ---------------------------------------------------------------------------- 1999 1998 1999 1998 1999 1998 - ---------------------------------------------------------------------------- Average assets $25,751 $22,277 $7,006 $7,916 $ 27 $ 34 Total revenues (FTE) 766 650 740 743 97 88 Net income 263 242 186 208 4 4 Return on average assets 1.36% 1.45% 1.38% 1.54% 9.29% 8.76% Return on average common equity 22.47% 24.89% 35.08% 36.95% 20.00% 21.07% Finance Other Total - ---------------------------------------------------------------------------- 1999 1998 1999 1998 1999 1998 - ---------------------------------------------------------------------------- Average assets $ 3,739 $ 4,427 $ 21 $ 179 $36,544 $34,833 Total revenues (FTE) 20 41 42 10 1,665 1,532 Net income 12 25 32 (30) 497 449 Return on average assets 0.12% 0.29% N/M N/M 1.81% 1.72% Return on average common equity 4.82% 10.14% N/M N/M 21.95% 22.56%
* Net income was reduced by charges for fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income would have been $7 million and $9 million and return on average common equity would have been 33.63% and 44.14%, in 1999 and 1998, respectively. ** Financial results for the Individual Bank for 1998 were affected by the sale of the mortgage servicing business and $2.0 billion of indirect consumer loans and non-relationship credit card receivables in the second quarter of 1998. N/M - Not Meaningful 16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Nonowner Changes in Equity Nonowner changes in equity include the change in unrealized gains and losses on investment securities available for sale and the change in the accumulated foreign currency translation adjustment. The Consolidated Statements of Changes in Shareholders' Equity include only the combined, net of tax, nonowner changes in equity. The following presents reconciliations of the components of accumulated nonowner changes in equity for the nine months ended September 30, 1999 and 1998.
Nine 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 (24,272) 11,938 Less: Reclassification adjustment for gains (losses) included in net income 1,941 35 -------- ------- Change in net unrealized gains (losses) before income taxes (26,213) 11,903 Provision for income taxes (9,705) 6,541 -------- ------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax (16,508) 5,362 -------- ------- Balance at September 30 $(24,196) $ 4,392 Accumulated foreign currency translation adjustment: Balance at beginning of year $ 1,233 $ (967) Net translation gains (losses) arising during the period 867 (749) Less: Reclassification adjustment for gains (losses) included in net income - - -------- ------- Change in translation adjustment before income taxes 867 (749) Provision for income taxes - - -------- ------- Change in foreign currency translation adjustment, net of tax 867 (749) -------- ------- Balance at September 30 $ 2,100 $(1,716) -------- ------- Total accumulated nonowner changes in equity, net of taxes, at September 30 $(22,096) $ 2,676 ======== ======= Three Months Ended ------------------- (in thousands) 1999 1998 -------- -------- Net income and nonowner changes in equity $174,376 $162,376 ======== ========
17 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net income for the quarter ended September 30, 1999, was $170 million, up $16 million, or 10 percent, from $154 million reported for the third quarter of 1998. Diluted net income per share increased 11 percent to $1.05 from $0.95 a year ago. Return on average common shareholders' equity was 21.89 percent and return on average assets was 1.85 percent, compared to 23.02 percent and 1.82 percent, respectively, for the comparable quarter last year. Net income for the first nine months of 1999 was $3.06 per share or $497 million, compared to $2.75 or $449 million for the same period in 1998, both increases of 11 percent. Return on average common shareholders' equity was 21.95 percent and return on average assets was 1.81 percent for the first nine months of 1999, compared to 22.56 percent and 1.72 percent, respectively, for the first nine months of 1998. Net Interest Income The rate-volume analysis in Table I details the components of the change in net interest income on a fully taxable equivalent (FTE) basis for the quarter ended September 30, 1999. On a FTE basis, net interest income was $391 million for the three months ended September 30, 1999, an increase of $29 million, or 8 percent, from the comparable quarter in 1998. The increase in net interest income was primarily due to an 18 percent increase in average commercial loans and an increase in the level of noninterest-bearing sources of funds. The net interest margin for the three months ended September 30, 1999 was 4.56 percent, a decrease of 7 basis points from 4.63 percent for the third quarter of 1998. Table II provides an analysis of net interest income for the first nine months of 1999. On a FTE basis, net interest income for the nine months ended September 30, 1999, was $1,143 million compared to $1,096 million for the same period in 1998. The increase of $47 million over the prior year is primarily attributed to the factors cited in the quarterly discussion. The net interest 18 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended - ---------------------------------------------------------------------------------------------- September 30, 1999 September 30, 1998 ----------------------------- ----------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- Loans $31,727 $632 7.91% $27,775 $584 8.36% Investment securities 2,211 39 6.85 3,209 55 6.81 Other earning assets 113 2 7.73 128 2 6.43 - ---------------------------------------------------------------------------------------------- Total earning assets 34,051 673 7.84 31,112 641 8.19 Interest-bearing deposits 16,311 147 3.58 15,605 156 3.97 Short-term borrowings 3,404 46 5.31 3,273 46 5.60 Medium- and long-term debt 7,298 103 5.59 5,652 86 6.05 Net interest rate swap (income)/ expense (1) - (14) - - (9) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $27,013 282 4.14 $24,530 279 4.52 -------------- --------------- Net interest income/ Rate spread (FTE) $391 3.70 $362 3.67 ==== ==== FTE adjustment $ 1 $ 2 ==== ==== Impact of net noninterest-bearing sources of funds 0.86 0.96 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.56% 4.63% ==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three months ended September 30, 1999, to the related assets and liabilities, the average yield on total loans was 8.02 percent as of September 30, 1999, compared to 8.43 percent a year ago. The average cost of funds for medium- and long-term debt was 5.28 percent as of September 30, 1999, compared to 5.77 percent a year earlier.
Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- Loans $(30) $ 78 $ 48 Investment securities 1 (17) (16) Other earning assets 1 (1) - - --------------------------------------------------------------------------- Total earning assets (28) 60 32 Interest-bearing deposits (18) 9 (9) Short-term borrowings (2) 2 - Medium- and long-term debt (6) 23 17 Net interest rate swap (income)/expense (5) - (5) - --------------------------------------------------------------------------- Total interest-bearing sources (31) 34 3 - --------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $ 3 $ 26 $ 29 =================================
* Rate/Volume variances are allocated to variances due to volume. 19 TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Nine Months Ended - ---------------------------------------------------------------------------------------------- September 30, 1999 September 30, 1998 ---------------------------- ----------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- Loans $31,177 $1,820 7.80% $28,276 $1,783 8.43% Investment securities 2,383 120 6.68 3,516 180 6.82 Other earning assets 108 7 7.70 152 7 6.09 - --------------------------------------------------------------------------------------------- Total earning assets 33,668 1,947 7.72 31,944 1,970 8.24 Interest-bearing deposits 16,244 437 3.59 15,944 484 4.06 Short-term borrowings 3,605 134 4.98 3,234 135 5.59 Medium- and long-term debt 6,869 283 5.51 6,293 290 6.15 Net interest rate swap (income)/ expense (1) - (50) - - (35) - - --------------------------------------------------------------------------------------------- Total interest-bearing sources $26,718 804 4.02 $25,471 874 4.59 --------------- --------------- Net interest income/ Rate spread (FTE) $1,143 3.70 $1,096 3.65 ====== ====== FTE adjustment $ 4 $ 6 ====== ====== Impact of net noninterest-bearing sources of funds 0.83 0.93 - --------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.53% 4.58% =============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the nine months ended September 30, 1999, to the related assets and liabilities, the average yield on total loans was 7.96 percent as of September 30, 1999, compared to 8.52 percent a year ago. The average cost of funds for medium- and long-term debt was 5.23 percent as of September 30, 1999, compared to 5.78 percent as of September 30, 1998.
Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- Loans $(114) $ 151 $ 37 Investment securities (3) (57) (60) Other earning assets 2 (2) - - ---------------------------------------------------------------------------- Total earning assets (115) 92 (23) Interest-bearing deposits (58) 11 (47) Short-term borrowings (15) 14 (1) Medium- and long-term debt (30) 23 (7) Net interest rate swap (income)/expense (15) - (15) - ---------------------------------------------------------------------------- Total interest-bearing sources (118) 48 (70) - ---------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $ 3 $ 44 $ 47 ==================================
* Rate/Volume variances are allocated to variances due to volume. 20 margin for the nine months ended September 30, 1999, was 4.53 percent compared to 4.58 percent for the same period in 1998. Interest rate swaps permit management to control the sensitivity of net interest income to fluctuations in interest rates in a manner similar to on- balance sheet investment securities but without significant impact to capital or liquidity. These instruments are designated against certain assets and liabilities, therefore, their impact on net interest income is generally offset by and should be considered in relation to the level of net interest income generated by the related on-balance sheet assets and liabilities. In addition to using interest rate swaps and other off-balance sheet instruments to control the Corporation's exposure to interest rate risk, management attempts to monitor the effect of movements in interest rates on net interest income by regularly performing interest sensitivity gap and earnings simulation analyses. At September 30, 1999, the Corporation was in an asset sensitive position of $465 million (on an elasticity adjusted basis), or 1 percent of earning assets. The earnings simulation analysis performed at the end of the quarter reflects changes to both interest rates and loan, investment and deposit volumes. The measurement of risk exposure at September 30, 1999, for a 200 basis point decline in short-term interest rates identified approximately $79 million, or 5 percent, of net interest income at risk during the next 12 months. If short-term interest rates rise 200 basis points, net interest income would be enhanced by approximately $40 million, or 2 percent. The results of these simulations are within established corporate policy guidelines. Provision for Credit Losses The provision for credit losses was $21 million for the third quarter of 1999 and 1998. The provision for the first nine months of 1999 was $69 million compared to $77 million for the same period in 1998. The Corporation establishes this provision to maintain an adequate allowance for credit losses, which is discussed in the section entitled "Allowance for Credit Losses and Nonperforming Assets." 21 Noninterest Income Noninterest income was $170 million for the three months ended September 30, 1999, an increase of $18 million, or 12 percent, over the same period in 1998. This increase was due primarily to growth in fiduciary, investment management and commercial fees. For the first nine months of 1999, noninterest income was $522 million, an increase of $86 million, or 20 percent, from the first nine months of 1998. Excluding the effect of large nonrecurring items, acquisitions and divestitures in both periods, noninterest income increased 13 percent in the first nine months of 1999, when compared to the same period in 1998. Large nonrecurring items include a $21 million gain on the sale of Comerica's ownership in an ATM network provider in 1999, and a $9 million gain on the sale of consumer loans and the mortgage servicing business in 1998. Noninterest Expenses Noninterest expenses were $277 million for the third quarter ended September 30, 1999, an increase of $23 million, or 9 percent, from the third quarter of 1998. Salaries and benefits expense increased $18 million in the third quarter of 1999 over the third quarter of 1998, due primarily to annual merit increases and higher levels of revenue-related incentives. For the first nine months of 1999, noninterest expenses were $829 million, an increase of $72 million, or 10 percent, from the first nine months of 1998. Excluding the effect of large nonrecurring items, acquisitions and divestitures in both periods, noninterest expenses increased 7 percent in the first nine months of 1999, when compared to the same period in 1998. This increase was primarily due to an increase in salaries and benefits expense for the reasons cited above. Provision for Income Taxes The provision for income taxes for the third quarter of 1999 totaled $93 million, an increase of 11 percent compared to $83 million reported for the same period a year ago. The provision for the first nine months of 1999 was $266 22 million compared to $243 million for the same period in 1998. The effective tax rate was 35 percent for the third quarter and the first nine months of 1999 and 1998. Financial Condition Total assets were $37.3 billion at September 30, 1999, compared with $36.6 billion at December 31, 1998. The Corporation has continued to generate commercial loan growth in 1999. Since December 31, 1998, domestic commercial loans have increased $937 million, or 5 percent, real estate construction loans have increased $466 million, or 43 percent, and commercial mortgage loans have increased $334 million, or 8 percent. These increases were partially funded by runoff of investment securities, which declined $587 million, or 22 percent, since December 31, 1998. Total liabilities increased $368 million, or 1 percent, to $33.9 billion since December 31, 1998. Total deposits and total short-term borrowings each decreased $1.4 billion since year-end 1998. Of the $1.4 billion decrease in deposits, $0.4 billion was attributable to a decline in foreign office time deposits. Medium- and long-term debt increased $3.1 billion, or 58 percent, offsetting these declines and supporting the growth in commercial loans. Allowance for Credit Losses and Nonperforming Assets The allowance for credit losses represents management's assessment of possible losses inherent in the Corporation's on- and off-balance sheet credit portfolio. The amount attributable to the off-balance sheet credit portfolio is not material. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent based on past history but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. Internal risk ratings are assigned to each corporate loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Included in that 23 risk rating is management's assessment of the potential failure of a customer to be adequately prepared for the year 2000, but only in those instances where management has significant information indicating a customer may not be adequately prepared (for more information on year 2000, see the section entitled "Other Matters"). A detailed credit quality review is performed quarterly on large corporate loans which have deteriorated below certain levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining corporate loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent loan loss experience, current economic conditions and trends, geographic dispersion of borrowers, and trends with respect to past due and nonaccrual amounts. The allocated reserve increased $55 million from year-end 1998, to $282 million at September 30, 1999. The credit quality of the Corporation's international and health care portfolios and the imprecision of the risk rating on a large commercial credit contributed to this increase. Actual loss ratios experienced in the future could vary from those projected. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. To ensure a higher degree of confidence, an unallocated allowance is also maintained. The unallocated portion of the loss reserve reflects management's view that the reserve should have a margin that recognizes the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgement. Factors which were considered in the evaluation of the adequacy of the Corporation's unallocated reserve include portfolio exposures in the areas of sub-prime lending, healthcare, high technology, energy and hedge funds, as well as Indonesian and Latin American transfer risks and new business migration risk. 24 The unallocated allowance was $181 million at September 30, 1999, down $44 million from December 31, 1998. This decrease in the unallocated allowance was primarily due to reductions in loan balances to sub-prime lending and hedge fund customers. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment of the portfolio. At September 30, 1999, the allowance for credit losses was $463 million, an increase of $11 million since December 31, 1998. The allowance as a percentage of total loans was 1.44 percent, compared to 1.48 percent at December 31, 1998. As a percentage of nonperforming assets, the allowance was 275 percent at September 30, 1999, versus 375 percent at year-end 1998. Net charge-offs for the third quarter of 1999 were $18 million, or 0.23 percent of average total loans, compared with $21 million, or 0.30 percent, for the year-earlier quarter. Net charge-offs for the first nine months of 1999 were $58 million, or 0.25 percent of average total loans, compared to $62 million, or 0.29 percent, for the same period last year. An analysis of the allowance for credit losses is presented in Note 5 to the year-end 1998 consolidated financial statements. Nonperforming assets increased $48 million, or 40 percent, since December 31, 1998, and were categorized as follows:
September 30, December 31, (in thousands) 1999 1998 ------------- ------------ Nonaccrual loans: Commercial $ 100,899 $ 77,175 International 45,129 20,350 Real estate construction 249 452 Commercial mortgage 10,797 6,788 Residential mortgage 792 3,468 ------------- ------------ Total nonaccrual loans 157,866 108,233 Reduced-rate loans 7,379 7,464 ------------- ------------ Total nonperforming loans 165,245 115,697 Other real estate 3,471 4,956 ------------- ------------ Total nonperforming assets $ 168,716 $ 120,653 ============= ============ Loans past due 90 days or more $ 60,959 $ 40,209 ============= ============
25 The increase in international nonaccrual loans from December 31, 1998, was primarily related to Indonesian and two Canadian customers. The increase in loans past due 90 days or more from year-end 1998 was primarily attributable to the energy industry. Nonperforming assets as a percentage of total loans and other real estate were 0.53 percent at September 30, 1999 and 0.39 percent at December 31, 1998. Capital Common shareholders' equity was up $332 million from December 31, 1998 to September 30, 1999, excluding nonowner changes in equity. The increase was primarily due to the retention of $316 million in earnings and an $18 million increase related to employee stock option activity. Capital ratios exceed minimum regulatory requirements as follows:
September 30, December 31, 1999 1998 ------------ ----------- Leverage ratio (3.00 - minimum) 8.35% 7.68% Tier 1 risk-based capital ratio (4.0 - minimum) 6.91 6.26 Total risk-based capital ratio (8.0 - minimum) 10.86 10.28
At September 30, 1999, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of "well capitalized" institutions as defined in the final rule under FDICIA. Other Matters The Corporation initiated a company-wide project to prepare its computer systems, applications and infrastructure for year 2000 readiness. The following discussion of the implications of the year 2000 issue for the Corporation contains numerous forward-looking statements based on inherently uncertain information. In addition, the Corporation places a high degree of reliance on the computer systems of third parties, such as customers, suppliers, and other financial and governmental institutions. Although the Corporation has assessed the readiness of these third parties and has prepared contingency plans, there can be no guarantee that business-critical third party vendors or other significant third parties, such as public utilities, will adequately address 26 their year 2000 issues or that there will be no disruptions due to unpredictable public reaction. Readiness Preparation Comerica is ready to conduct business in the year 2000. The Corporation established an extensive enterprise-wide and centrally managed year 2000 program in early 1996. The year 2000 team included the active involvement of senior executives as well as seasoned project managers and business unit liaisons from throughout the Corporation. The Corporation continues to evaluate and monitor the year 2000 readiness of vendors, customers and third party processors. Completing a successful year 2000 program is a top priority so that the arrival of the 21st century will be noted by a continuation of quality customer service. Many factors can affect a company's ability to deliver quality services at any given time. While Comerica is "ready" to do business in the year 2000, there can be no guarantee that services will be uninterrupted due to the century date change or otherwise. To emphasize the importance of being available for customers during the millennium change, the Corporation has implemented a no- vacation policy for the entire organization from December 27, 1999, through January 31, 2000. Specific business units have adopted additional vacation guidelines including dates prior and post the transition period. The Corporation's year 2000 program was comprised of numerous individual projects which address the following broad areas: data processing systems, telecommunications and data networks, building facilities and security systems, vendor risk, customer risk, contingency planning and communications. As of September 30, 1999, 100 percent of Comerica's mission critical applications and services are year 2000 ready and 99 percent of the Corporation's total systems and components have been remediated, validated and placed back into production. The year 2000 program utilized an extensive testing methodology and verification process. In May 1999, the Corporation conducted an off-site test of 25 of its most complex business systems and applications. The results of this testing confirmed that the Corporation's year 2000 remediation, testing and validation processes were thorough. All 25 applications completed 100 percent of the testing with no reported year 2000 related problems. A rigorous process 27 was implemented to reduce risks associated with changes or the introduction of new components. This process will limit, eliminate or defer the introduction of change to systems and components certified as year 2000 ready. Furthermore, the Corporation is enhancing contingency plans for all business critical applications to minimize any disruptions to customer service caused by year 2000 issues. The Corporation does not significantly rely on embedded technology in its critical processes. Since some building systems and components are controlled with embedded technology, facilities were reviewed and verified for year 2000 readiness. Customers and vendors who have significant relationships with the Corporation continue to be evaluated to determine their preparation and readiness for the year 2000. The potential failure of those customers to be adequately prepared for year 2000 is included in management's credit and review process used to establish loss reserves. A high level risk reduction strategy has been implemented to manage and mitigate risks to our asset/liability position. There can be no guarantee that the remediation of the systems of the Corporation's vendors or customers will be completed on a timely basis. Comerica's senior executives, the board of directors and a project steering committee regularly review the year 2000 program and its progress. In addition, the federal and state agencies that regulate the banking industry regularly monitor the year 2000 program. Cost Included in the Corporation's year 2000 project cost are internal and external development costs, asset impairment write-offs and the cost of software and hardware for systems that are not ready, or would not have been ready by the new century as a result of normal replacement. The Corporation's year 2000 project cost, both internal and external, will total approximately $50 million, of which the Corporation incurred approximately $45 million in 1996, 1997, 1998, and the first nine months of 1999. Of the $45 million incurred to date, $11 million was for capital assets which the Corporation is expensing over their useful lives. The Corporation will fund the remaining year 2000 costs yet to be incurred by normal operating cash flow. The project was staffed with external 28 resources as well as internal staff redeployed from less time-sensitive assignments. The redeployment of existing staff did not have a material adverse effect on the Corporation's business, results of operations or financial position. Approximately $1 million of the remaining cost is for capital assets which will be expensed over their useful lives. Risks The Corporation has grouped the principal risks associated with the year 2000 problem into three categories. The first is the risk that the Corporation does not successfully ready operations for the year 2000. The Corporation, like other financial institutions, is heavily dependent on computer systems. The complexity of these systems and dependence on one another makes it impossible to switch to other systems immediately as would be required if necessary corrections were not made in advance. Management believes it has made the necessary corrections in advance. Computer failure of third parties may jeopardize the Corporation's operations, but how seriously depends on the nature and duration of such failures. The most serious impact on the Corporation's operations from suppliers would result if basic services such as telecommunications, electric power suppliers, and services provided by other financial institutions and governmental agencies were disrupted. Our research through public disclosures along with our own inquiries regarding their state of readiness indicates that basic services will not result in significant disruptions, however, the Corporation has contingency plans in the event of sustained disruptions. Operational failures among the Corporation's sources of major funding, larger borrowers and capital market counterparties could affect their ability to continue to provide funding or meet obligations when due. At this time, any "high risk" areas are being closely monitored and reviewed to minimize the impact to the Corporation. Contingency Plans The Corporation initiated an event planning team responsible to develop and implement strategies to prepare for various year 2000 scenarios through enhancing 29 existing business resumption contingency plans. Business resumption contingency plans address the actions that would be taken if critical business functions can not be carried out in the normal manner due to system or supplier failure. While Comerica does not expect major year 2000 problems, the Corporation believes it is sound judgement to anticipate and prepare for potential problems. Plans will be verified to ensure that they are reasonable, coordinated, comprehensive and functional. This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analysis. Numerous factors could cause variances in these projections, and their underlying assumptions, such as changes in interest rates, the industry where the Corporation has a concentration of loans, changes in the level of fee income, year 2000 expenses, unpredictable public reaction related to the millennium change and economic conditions. 30 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits (11) Statement re: Computation of Earnings Per Share (27) Financial Data Schedule (b) Reports on Form 8-K The Corporation did not file any reports on Form 8-K during the three months ended September 30, 1999. 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMERICA INCORPORATED ---------------------------------------- (Registrant) /s/ Ralph W. Babb Jr. ---------------------------------------- Ralph W. Babb Jr. Vice Chairman of Finance & Administration and Chief Financial Officer (Principal Financial Officer) /s/ Marvin J. Elenbaas ---------------------------------------- Marvin J. Elenbaas Senior Vice President and Controller (Principal Accounting Officer) Date: November 12, 1999 32 Exhibit Index -------------
Exhibit No. Description - ----------- ----------- 11 Statement Re: Computation of Earnings Per Share 27 Financial Data Schedule
EX-11 2 COMPUTATION OF EARNINGS 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 Nine Months Ended September 30 September 30 ------------------ ------------------- 1999 1998 1999 1998 ------- -------- -------- -------- Basic: Average shares outstanding 156,154 155,278 156,033 155,990 ======== ======== ======== ======== Net income $170,414 $154,490 $496,908 $449,256 Less preferred stock dividends 4,275 4,275 12,825 12,825 -------- -------- -------- -------- Net income applicable to common stock $166,139 $150,215 $484,083 $436,431 ======== ======== ======== ======== Basic net income per share $ 1.06 $ 0.97 $ 3,10 $ 2.80 Diluted: Average shares outstanding 156,154 155,278 156,033 155,990 Nonvested stock 164 177 169 192 Common stock equivalent: Net effect of the assumed exercise of stock options 1,993 2,635 2,215 2,770 -------- -------- -------- -------- Diluted average shares 158,311 158,090 158,417 158,952 ======== ======== ======== ======== Net income $170,414 $154,490 $496,908 $449,256 Less preferred stock dividends 4,275 4,275 12,825 12,825 -------- -------- -------- -------- Net income applicable to common stock $166,139 $150,215 $484,083 $436,431 ======== ======== ======== ======== Diluted net income per share $ 1.05 $ 0.95 $ 3.06 $ 2.75
EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 1999 FORM 10-Q FOR COMERICA INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,485,739 36,835 119,157 4,381 2,125,613 0 0 32,077,940 463,451 37,284,990 22,900,300 2,211,969 453,688 8,355,771 0 250,000 786,166 2,327,096 37,284,990 1,818,483 118,216 6,173 1,942,872 436,628 804,006 1,138,866 69,000 1,941 829,144 762,742 496,908 0 0 496,908 3.10 3.06 4.53 157,866 60,959 7,379 0 452,409 76,350 18,368 463,451 251,893 29,910 181,648
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