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 March 31, 2001 ---------------------------- 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) (800) 521-1190 ---------------------------------------------------- (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 April 30, 2001: 178,472,000 shares
2 ITEM I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> March 31, December 31, March 31, (in thousands, except share data) 2001 2000 2000 ----------- ----------- ----------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 2,008,803 $ 1,930,682 $ 1,855,110 Short-term investments 1,990,563 1,730,158 1,912,380 Investment securities available for sale 3,207,455 3,890,725 3,583,006 Commercial loans 26,373,429 26,009,336 24,519,861 International loans 2,653,902 2,571,156 2,565,966 Real estate construction loans 2,973,895 2,915,168 2,422,371 Commercial mortgage loans 5,570,134 5,360,601 5,078,245 Residential mortgage loans 793,075 807,064 849,912 Consumer loans 1,472,015 1,477,135 1,407,541 Lease financing 1,088,908 1,029,164 815,293 ----------- ----------- ----------- Total loans 40,925,358 40,169,624 37,659,189 Less allowance for credit losses (644,556) (608,110) (581,482) ----------- ----------- ----------- Net loans 40,280,802 39,561,514 37,077,707 Premises and equipment 360,145 364,246 364,104 Customers' liability on acceptances outstanding 26,917 26,668 17,179 Accrued income and other assets 2,395,541 2,030,063 1,852,333 ----------- ----------- ----------- TOTAL ASSETS $50,270,226 $49,534,056 $46,661,819 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $11,530,699 $10,188,475 $ 9,538,966 Interest-bearing deposits 25,255,219 23,665,808 19,856,778 ----------- ----------- ----------- Total deposits 36,785,918 33,854,283 29,395,744 Short-term borrowings 679,802 2,093,381 4,442,670 Acceptances outstanding 26,917 26,668 17,179 Accrued expenses and other liabilities 819,774 800,386 675,561 Medium- and long-term debt 7,289,301 8,259,179 8,073,259 ----------- ----------- ----------- Total liabilities 45,601,712 45,033,897 42,604,413 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 3/31/01, 12/31/00 and 3/31/00 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued - 178,337,648 shares at 3/31/01, 177,703,678 shares at 12/31/00 and 177,901,802 shares at 3/31/00 891,688 888,519 889,509 Capital surplus 326,134 301,414 313,493 Unearned employee stock ownership plan - 176,462 shares at 3/31/01 and 12/31/00 and 64,993 shares at 3/31/00 (6,750) (6,750) (3,000) Accumulated other comprehensive income 127,490 12,097 (37,345) Retained earnings 3,086,915 3,085,784 2,714,213 Deferred compensation (6,963) (14,494) (22,321) Less cost of common stock in treasury - 289,397 shares at 12/31/00 and 826,342 shares at 3/31/00 - (16,411) (47,143) ----------- ----------- ----------- Total shareholders' equity 4,668,514 4,500,159 4,057,406 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,270,226 $49,534,056 $46,661,819 =========== =========== =========== </TABLE>
3 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------- (In thousands, except per share data) 2001 2000 ---------- ---------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 865,333 $ 778,173 Interest on investment securities 64,625 61,447 Interest on short-term investments 10,502 31,799 ---------- ---------- Total interest income 940,460 871,419 INTEREST EXPENSE Interest on deposits 271,927 202,896 Interest on short-term borrowings 39,392 53,940 Interest on medium- and long-term debt 116,849 130,988 ---------- ---------- Total interest expense 428,168 387,824 ---------- ---------- Net interest income 512,292 483,595 Provision for credit losses 72,000 66,894 ---------- ---------- Net interest income after provision for credit losses 440,292 416,701 NONINTEREST INCOME Fiduciary income 45,426 45,199 Investment advisory revenue, net (9,489) 33,829 Service charges on deposit accounts 49,914 45,752 Commercial lending fees 13,854 12,381 Letter of credit fees 12,776 12,857 Warrant income 3,122 7,374 Securities gains 23,744 5,437 Net gain on sales of business - 30,484 Equity in earnings of unconsolidated subsidiaries (53,300) 2,927 Other noninterest income 83,935 58,580 ---------- ---------- Total noninterest income 169,982 254,820 NONINTEREST EXPENSES Salaries and employee benefits 206,776 211,827 Net occupancy expense 28,316 27,798 Equipment expense 19,397 18,946 Outside processing fee expense 15,827 14,487 Restructuring charge 94,304 - Customer services 9,258 8,176 Other noninterest expenses 76,099 85,561 ---------- ---------- Total noninterest expenses 449,977 366,795 ---------- ---------- Income before income taxes 160,297 304,726 Provision for income taxes 66,705 107,695 ---------- ---------- NET INCOME $ 93,592 $ 197,031 ========== ========== Net income applicable to common stock $ 89,317 $ 192,756 ========== ========== Basic net income per common share $0.50 $1.09 Diluted net income per common share $0.50 $1.08 Cash dividends declared on common stock $ 78,389 $ 62,519 Dividends per common share $0.44 $0.40 </TABLE>
4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Accumulated Nonredeemable Other (in thousands, except Preferred Common Capital Comprehensive Retained share data) Stock Stock Surplus Income Earnings --------- -------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $250,000 $889,453 $226,001 $(21,704) $2,677,210 Net income for 2000 - - - - 197,031 Other comprehensive income, net of tax - - - (15,641) - Total comprehensive income - - - - - Common stock dividend - - 84,906 - (84,927) Cash dividends declared: Preferred stock - - - - (4,275) Common stock - - - - (62,519) Purchase and retirement of 41,400 shares of common stock - (207) (1,902) - - Purchase of 331,362 shares of common stock - - - - - Net issuance of common stock under employee stock plans - 263 4,488 - (8,307) Amortization of deferred compensation - - - - - -------- -------- -------- -------- ---------- BALANCES AT MARCH 31, 2000 $250,000 $889,509 $313,493 $(37,345) $2,714,213 ======== ======== ======== ======== ========== BALANCES AT JANUARY 1, 2001 $250,000 $888,519 $301,414 $ 12,097 $3,085,784 Net income for 2001 - - - - 93,592 Other comprehensive income, net of tax - - - 115,393 - Total comprehensive income - - - - - Cash dividends declared: Preferred stock - - - - (4,275) Common stock - - - - (78,389) Purchase of 45,000 shares of common stock - - - - - Net issuance of common stock under employee stock plans - 3,169 24,720 - (9,797) Amortization of deferred compensation - - - - - -------- -------- -------- -------- ---------- BALANCES AT MARCH 31, 2001 $250,000 $891,688 $326,134 $127,490 $3,086,915 ======== ======== ======== ======== ========== </TABLE>
5 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Unearned Employee Stock Total (in thousands, except Ownership Deferred Treasury Shareholders' share data) Plan Shares Compensation Stock Equity ---------- ------------ --------- ---------- <S> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $(3,750) $(21,998) $(47,161) $3,948,051 Net income for 2000 - - - 197,031 Other comprehensive income, net of tax - - - (15,641) ---------- Total comprehensive income - - - 181,390 Common stock dividend - - - (21) Cash dividends declared: Preferred stock - - - (4,275) Common stock - - - (62,519) Purchase and retirement of 41,400 shares of common stock - - - (2,109) Purchase of 331,362 shares of common stock - - (13,112) (13,112) Net issuance of common stock under employee stock plans 750 (2,711) 13,130 7,613 Amortization of deferred compensation - 2,388 - 2,388 ------- -------- -------- ---------- BALANCES AT MARCH 31, 2000 $(3,000) $(22,321) $(47,143) $4,057,406 ======= ======== ======== ========== BALANCES AT JANUARY 1, 2001 $(6,750) $(14,494) $(16,411) $4,500,159 Net income for 2001 - - - 93,592 Other comprehensive income, net of tax - - - 115,393 ---------- Total comprehensive income - - - 208,985 Cash dividends declared: Preferred stock - - - (4,275) Common stock - - - (78,389) Purchase of 45,000 shares of common stock - - (2,760) (2,760) Net issuance of common stock under employee stock plans - (3,857) 19,171 33,406 Amortization of deferred compensation - 11,388 - 11,388 ------- ------- -------- ---------- BALANCES AT MARCH 31, 2001 $(6,750) $(6,963) $ - $4,668,514 ======= ======= ======== ========== </TABLE>
6 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended March 31 -------------------------------- (in thousands) 2001 2000 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 93,592 $ 197,031 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 72,000 66,894 Depreciation 17,243 10,725 Restructuring charge 60,000 -- Net increase in trading account securities (20,938) (47,068) Net decrease in assets held for sale 43,808 23,295 Net (increase) decrease in accrued income receivable 37,886 (27,043) Net increase (decrease)in accrued expenses (33,526) 18,049 Net amortization of intangibles 8,685 8,516 Other, net (127,603) (98,466) ----------- ----------- Total adjustments 57,555 (45,098) ----------- ----------- Net cash provided by operating activities 151,147 151,933 INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (24,313) (21,678) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (258,962) 13,617 Proceeds from sale of investment securities available for sale 1,543,633 1,859,507 Proceeds from maturity of investment securities available for sale 385,727 290,622 Purchases of investment securities available for sale (1,320,085) (1,967,607) Net increase in loans (other than loans purchased) (804,231) (1,380,219) Fixed assets, net (13,142) (9,282) Net (increase) decrease in customers' liability on acceptances outstanding (249) 26,631 Net cash provided by acquisitions/sales -- 445,274 ----------- ----------- Net cash used in investing activities (491,622) (743,135) FINANCING ACTIVITIES: Net increase in deposits 2,918,166 199,741 Net increase (decrease) in short-term borrowings (1,413,579) 1,514,386 Net increase (decrease) in acceptances outstanding 249 (26,631) Proceeds from issuance of medium- and long-term debt 125,000 1,470,981 Repayments and purchases of medium- and long-term debt (1,174,696) (2,150,985) Proceeds from issuance of common stock and other capital transactions 33,406 4,844 Purchase of common stock for treasury (2,760) (15,221) Dividends paid (67,190) (60,563) ----------- ----------- Net cash provided by financing activities 418,596 936,552 ----------- ----------- Net increase in cash and due from banks 78,121 345,350 Cash and due from banks at beginning of year 1,930,682 1,509,760 ----------- ----------- Cash and due from banks at end of period $ 2,008,803 $ 1,855,110 =========== =========== Interest paid $ 462,494 $ 396,023 =========== =========== Income taxes paid $ 1,677 $ 91,823 =========== =========== Noncash investing and financing activities: Loan transfers to other real estate $ 1,399 $ 1,796 =========== =========== </TABLE>
7 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 three months ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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 Form 8-K of Comerica Incorporated and Subsidiaries (the "Corporation") dated April 27, 2001. Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), requires companies to recognize all of their derivative instruments as either assets or liabilities on the balance sheet position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. The net effect of these adjustments was immaterial. For
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Foreign exchange futures and forward contracts, foreign currency options, interest rate caps and interest rate swap agreements executed as a service to customers are not designated as hedging instruments. The adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative effect of an accounting change, net of tax, of $42 million in other comprehensive income. Note 2 - Investment Securities At March 31, 2001, investment securities having a carrying value of $1.1 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 $78 million.
9 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: <TABLE> <CAPTION> (in thousands) 2001 2000 --------- --------- <S> <C> <C> Balance at January 1 $ 608,110 $ 548,147 Charge-offs (45,327) (37,121) Recoveries 9,916 3,569 --------- --------- Net charge-offs (35,411) (33,552) Provision for credit losses 72,000 66,894 Foreign currency translation adjustment (143) (7) --------- --------- Balance at March 31 $ 644,556 $ 581,482 ========= ========= </TABLE> The provision for credit losses in 2001 included a $25 million merger- related charge to conform the credit policies of Imperial with Comerica. 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 $406 million for the quarter ended March 31, 2001, compared to $225 million for the comparable period last year. The following are period-end balances: <TABLE> <CAPTION> (in thousands) March 31, 2001 December 31, 2000 -------------- ----------------- <S> <C> <C> Total impaired loans $467,163 $364,895 Impaired loans requiring an allowance 437,855 277,159 Impairment allowance 164,319 104,107 </TABLE> Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan.
10 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 March 31, 2001 and December 31, 2000: <TABLE> <CAPTION> (in thousands) March 31, 2001 December 31, 2000 -------------- ----------------- <S> <C> <C> Parent Company 7.25% subordinated notes due 2007 $157,136 $ 157,414 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 212,600 198,703 7.875% subordinated notes due 2026 179,261 172,346 8.375% subordinated notes due 2024 185,630 155,071 7.25% subordinated notes due 2002 155,026 149,719 6.875% subordinated notes due 2008 106,717 103,272 7.125% subordinated notes due 2013 167,691 154,486 6.00% subordinated notes due 2008 253,459 248,238 7.65% subordinated notes due 2010 265,392 248,385 8.50% subordinated notes due 2009 101,048 99,474 9.98% junior subordinated debentures due 2026 67,805 63,690 ---------- ---------- Total subordinated notes 1,694,629 1,593,384 Medium-term notes: Floating rate based on Treasury indices 125,000 125,000 Floating rate based on Prime indices 1,799,965 1,320,964 Floating rate based on LIBOR indices 3,499,840 5,048,972 ---------- ---------- Total medium-term notes 5,424,805 6,494,936 Notes payable 12,731 13,445 ---------- --------- Total subsidiaries 7,132,165 8,101,765 ---------- ---------- Total medium- and long-term debt $7,289,301 $8,259,179 ========== ========== </TABLE> The balances of medium- and long-term debt at March 31, 2001 include the fair values of risk management interest rate swap contracts modifying the interest rate characteristics of the debt. 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. The effective tax rate in the first quarter 2001 was affected by adjustments to Imperial Bancorp's tax liabilities at merger date, partially offset by a $7 million tax benefit related to the Imperial Bancorp acquisition that was recognizable immediately, but only after Imperial became part of Comerica.
11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> March 31, 2001 December 31, 2000 ------------------------------ ------------------------------ Notional/ Notional/ Contract Unrealized Fair Contract Unrealized Fair Amount Gains Losses Value Amount Gains Losses Value (in millions) (1) (2) (3) (1) (2) (3) ------------------------------ ------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> RISK MANAGEMENT Interest rate contracts: Options, caps and floors purchased $ 7 $ - $ - $ - $ 6,058 $ 10 $ (1) $ 9 Swaps 16,348 378 (1) 377 12,594 206 (33) 173 Foreign exchange contracts: Spot, forward and options 595 7 (17) (10) 493 18 (6) 12 Swaps 115 - (18) (18) 115 1 (13) (12) ------- ---- ----- ----- ------- ---- ----- ----- Total risk management 17,065 385 (36) 349 19,260 235 (53) 182 CUSTOMER-INITIATED AND OTHER Interest rate contracts: Caps and floors written 302 - (2) (2) 198 - (1) (1) Caps and floors purchased 292 2 - 2 179 1 - 1 Swaps 555 9 (9) - 493 5 (4) 1 Foreign exchange contracts: Spot, forward and options 1,658 33 (27) 6 1,827 26 (19) 7 Swaps 453 2 (5) (3) 50 - - - ------- ---- ----- ----- ------- ---- ----- ----- Total customer-initiated and other 3,260 46 (43) 3 2,747 32 (24) 8 ------- ---- ----- ----- ------- ---- ----- ----- Total derivatives and foreign exchange contracts $20,325 $431 $ (79) $ 352 $22,007 $267 $ (77) $ 190 ======= ==== ===== ===== ======= ==== ===== ===== </TABLE> (1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. (2) Represents credit risk, which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk. (3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. In 2001, the fair value of all derivatives and foreign exchange contracts are reflected in the consolidated balance sheets, as required by SFAS No. 133. In 2000, only the fair values of customer-initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
12 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) Risk Management Interest rate risk arises in the normal course of business due to differences in 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 cash instruments, such as investment securities, as well as 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 derivative instruments for use principally in connection with asset and liability management activities. As part of a fair value hedging strategy, the Corporation has entered into interest rate swap agreements for interest rate risk management purposes. The interest rate swap agreements utilized, effectively modify the Corporation's exposure to interest rate risk by converting fixed-rate deposits and debt to a floating rate. These agreements involve the receipt of fixed rate of interest amounts in exchange for floating rate interest payments over the life of the agreement, without an exchange of the underlying principal amount. No ineffectiveness was required to be recorded on these hedging instruments in the statement of income. As part of a cash flow hedging strategy, the Corporation has entered into interest rate swap agreements that effectively convert a portion of its existing and forecasted floating-rate loans to a fixed-rate basis for the next 3 years, thus reducing the impact of interest rate changes on future interest income. Approximately 30% ($12 billion) of the Corporation's outstanding loans were designated as the hedged items to interest rate swap agreements at March 31, 2001. During the quarter ended March 31, 2001, interest rate swap agreements designated as cash flow hedges increased interest and fees on loans by approximately $3 million. No ineffectiveness was required to be recorded on these hedging instruments in the statement of income. The Corporation expects to reclassify
13 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) $79 million of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months due to receipt of variable interest associated with the existing and forecasted floating-rate loans. Management believes these strategies achieve 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 strategies will be successful. In addition, the Corporation uses forward foreign exchange contracts to protect the value of its investments in foreign subsidiaries in Canada and the United Kingdom. Realized and unrealized gains and losses from these hedges are not included in the statement of income, but are shown in the accumulated foreign currency translation adjustment account included in other comprehensive income, with the related amounts due to or from counterparties included in other liabilities or other assets. During the quarter ended March 31, 2001, the Corporation recognized $2 million of net gains, included in the accumulated foreign currency translation adjustment, related to the forward foreign exchange contracts. The Corporation also uses various other types of financial instruments to mitigate interest rate and foreign currency risks associated with specific assets or liabilities, which are reflected in the table above. Such instruments include interest rate caps and floors, foreign exchange forward contracts, and foreign exchange cross-currency swaps. 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 March 31, 2001. The swaps are grouped by the assets or liabilities to which they have been designated.
14 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: (dollar amounts 2006- Dec. 31, in millions) 2001 2002 2003 2004 2005 2026 Total 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> VARIABLE RATE ASSET DESIGNATION: Receive fixed swaps Generic $ 2,850 $ 2,860 $ 4,750 $ 900 $ 500 $ 500 $12,360 $ 9,277 Weighted average: (1) Receive rate 5.64% 7.13% 8.31% 8.02% 8.13% 5.83% 7.29% 7.55% Pay rate 5.48% 7.04% 7.36% 8.00% 8.00% 5.65% 6.86% 8.14% FIXED RATE ASSET DESIGNATION: Pay fixed swaps Generic $ 16 $ - $ - $ - $ - $ - $ 16 $ 98 Amortizing - - 1 - - - 1 1 Weighted average: (2) Receive rate 5.18% -% 5.17% -% -% -% 5.18% 6.70% Pay rate 5.47% -% 6.05% -% -% -% 5.51% 6.79% FIXED RATE DEPOSIT DESIGNATION: Generic receive fixed swaps $ 987 $ 1,039 $ - $ 20 $ - $ 150 $ 2,196 $ 1,378 Weighted average: (1) Receive rate 7.17% 5.44% -% 7.10% -% 7.13% 6.35% 7.19% Pay rate 5.17% 5.28% -% 5.31% -% 5.45% 5.24% 6.66% MEDIUM- AND LONG-TERM DEBT DESIGNATION: Generic receive fixed swaps $ - $ 150 $ - $ - $ 250 $ 1,250 $ 1,650 $ 1,715 Weighted average: (1) Receive rate -% 7.22% -% -% 7.04% 6.73% 6.82% 6.83% Pay rate -% 6.76% -% -% 5.39% 5.99% 5.97% 6.76% Floating/floating swaps $ 125 $ - $ - $ - $ - $ - $ 125 $ 125 Weighted average: (3) Receive rate 5.23% -% -% -% -% -% 5.23% 6.72% Pay rate 5.03% -% -% -% -% -% 5.03% 6.59% Total notional amount $ 3,978 $ 4,049 $ 4,751 $ 920 $ 750 $ 1,900 $16,348 $12,594 - ----------------------------------------------------------------------------------------------------------------- </TABLE> (1) Variable rates paid on receive fixed swaps are based on one-month and three-month LIBOR or one-month CDOR rates in effect at March 31, 2001. Variable rates received on pay fixed swaps are based on prime. (2) Variable rate received is based on one-month CDOR at March 31, 2001. (3) Variable rate paid is based on LIBOR at March 31, 2001, while variable rate received is based on the three-month U.S. Treasury bill bond equivalent rate. - -------------------------------------------------------------------------------
15 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) The notional amounts of commitments to purchase and sell U.S. Treasury, U.S. government agency and municipal bond securities related to the Corporation's trading account and available for sale portfolio totaled $673 million and $3 million at March 31, 2001 and December 31, 2000, respectively. These commitments, which are short-term and similar in nature to forward contracts, are not reflected in the preceding table due to the immaterial impact on the financial statements. Customer-Initiated and Other The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts and interest rate caps, floors and swaps to accommodate the needs of customers requesting such services. The Corporation minimizes market risk arising from customer-initiated foreign exchange contracts by entering into offsetting transactions. Average fair values and income from customer-initiated and other foreign exchange contracts were not material for the three-month period ended March 31, 2001 and for the year ended December 31, 2000. Customer-initiated interest rate caps, floors and swaps generally are not offset by other 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 three-month period ended March 31, 2001 and for the year ended December 31, 2000. Derivative and Foreign Exchange Activity The following table provides a reconciliation of the beginning and ending notional amounts for interest rate derivatives and foreign exchange contracts. <TABLE> <CAPTION> Customer-Initiated Risk Management and Other --------------------- ---------------------- Interest Foreign Interest Foreign Rate Exchange Rate Exchange (in millions) Contracts Contracts Contracts Contracts --------------------- ---------------------- <S> <C> <C> <C> <C> Balances at December 31, 2000 $ 18,652 $ 608 $ 870 $ 1,877 Additions 5,865 2,338 524 13,194 Maturities/amortizations (6,762) (2,236) (245) (12,960) Terminations (1,400) -- -- -- -------- ------- ------- -------- Balances at March 31, 2001 $ 16,355 $ 710 $ 1,149 $ 2,111 ======== ======= ======= ======== </TABLE>
16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) Additional information regarding the nature, terms and associated risks of the above derivatives and foreign exchange contracts, can be found in Note 19 to the consolidated financial statements included in the Form 8-K of the Corporation dated April 27, 2001. 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 three months ended March 31, 2001 and 2000 are presented below.
17 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) <TABLE> <CAPTION> Three Months Ended March 31 (dollar amounts in Business Individual Investment millions) Bank Bank Bank* - ---------------------------------------------------------------------------------- 2001 2000 2001 2000*** 2001** 2000 - ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 37,785 $34,349 $ 7,319 $7,031 $ 455 $ 300 Total revenues (FTE) 432 387 252 293 (36) 65 Net income/(loss) 120 130 66 92 (56) 8 Return on average assets 1.27% 1.51% 1.39% 2.02% (45.27)% 9.59% Return on average common equity 17.47% 21.36% 33.90% 49.73% (75.65)% 13.98% <CAPTION> Finance Other Total - ---------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 - ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 4,227 $ 4,063 $ (455) $ (46) $49,331 $45,697 Total revenues (FTE) 35 (3) - (3) 683 739 Net income/(loss) 20 (2) (56) (31) 94 197 Return on average assets 0.50% (0.05)% N/M N/M 0.76% 1.72% Return on average common equity 14.69% (2.08)% N/M N/M 8.11% 20.66% </TABLE> * Net income was reduced by charges for fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income/(loss) would have been ($53) million and $9 million, and return on average common equity would have been (71.52%) and 17.13%, in 2001 and 2000, respectively. ** Net income in 2001 was reduced by a $26 million pre-tax deferred distribution costs impairment charge and a $53 million pre-tax charge related to long-term incentive plans at an unconsolidated subsidiary. Excluding these charges, Investment Bank total revenues (FTE) and net loss in 2001 would have been $47 million and ($5) million, respectively, while return on average assets and return on average common equity would have been (4.14%) and (6.91%), respectively. *** Year-to-date March 31, 2000, financial results for the Individual Bank include a $30 million gain on the sale of $457 million of revolving check credit and bankcard loans. Excluding the $30 million gain, total revenues (FTE) and net income would have been $263 million and $72 million, respectively, while return on average assets and return on average common equity would have been 1.58% and 38.76%, respectively. N/M - Not Meaningful 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 23 to the consolidated financial statements in the Corporation's Form 8-K dated April 27, 2001.
18 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income Other comprehensive income includes the change in net unrealized gains and losses on investment securities available for sale, the change in the accumulated foreign currency translation adjustment and the change in accumulated gains and losses on cash flow hedges. The Consolidated Statements of Changes in Shareholders' Equity present combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the three months ended March 31, 2001 and 2000. Total comprehensive income for the three months ended March 31, 2001 and 2000, totaled $209 million and $181 million, respectively.
19 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income (continued) <TABLE> <CAPTION> Three Months Ended March 31 ------------------------ (in thousands) 2001 2000 --------- -------- <S> <C> <C> Net unrealized gains/(losses) on investment securities available for sale: Balance at beginning of year $ 8,016 $(22,719) Net unrealized holding gains/(losses) arising during the period 14,269 (15,413) Less: Reclassification adjustment for gains/(losses) included in net income 23,744 5,437 --------- -------- Change in net unrealized gains/(losses) before income taxes (9,475) (20,850) Provision for income taxes (3,316) (7,990) --------- -------- Change in net unrealized gains/(losses) on investment securities available for sale, net of tax (6,159) (12,860) --------- -------- Balance at March 31 $ 1,857 $(35,579) Accumulated foreign currency translation adjustment: Balance at beginning of year $ 4,081 $ 1,015 Net translation gains/(losses) arising during the period (5,073) (2,781) Less: Reclassification adjustment for gains/(losses) included in net income -- -- --------- -------- Change in translation adjustment before income taxes (5,073) (2,781) Provision for income taxes -- -- --------- -------- Change in foreign currency translation adjustment, net of tax (5,073) (2,781) --------- -------- Balance at March 31 $ (992) $ (1,766) Accumulated net gains/(losses) on cash flow hedges: Balance at beginning of period $ -- $ -- Transition adjustment upon adoption of accounting standard 64,705 -- Net cash flow hedge gains/(losses) arising during the period 133,099 -- Less: Reclassification adjustment for gains/(losses) included in net income 2,996 -- --------- -------- Change in cash flow hedges before income taxes 194,808 -- Provision for income taxes 68,183 -- --------- -------- Change in cash flow hedges, net of tax 126,625 -- --------- -------- Balance at March 31 $ 126,625 $ -- --------- -------- Accumulated other comprehensive income, net of taxes, at March 31 $ 127,490 $(37,345) ========= ======== </TABLE>
20 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Restructuring Charge The Corporation recorded restructuring charges related to the acquisition of Imperial Bancorp of $119 million for the first quarter of 2001. The components of the charges, $25 million and $94 million of which were recorded in the provision for credit losses and noninterest expenses, respectively, are shown in the table below. The Corporation expects to incur additional merger-related restructuring charges in 2001 in connection with the combining of Comerica and Imperial Bancorp. Restructuring charges are expected to total $169 million by the end of integration, which is currently targeted for completion in the first quarter of 2002. <TABLE> <CAPTION> Restructuring Reserve Analysis Imperial Merger Other Facilities Employee Employee Conforming and (in thousands) Termination -Related Policies Operations Other Total ----------- ---------- ---------- ---------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2001 $ - $ - $ - $ - $ - $ - Provision charged to operating expense 30,000 29,000 44,000 2,000 14,000 119,000 Cash outlays (8,000) (14,500) - - (12,000) (34,500) Noncash write-downs and other - (11,000) (34,500) - - (45,500) ------------------------------------------------------------------ Balance at March 31, 2001 $22,000 $ 3,500 $ 9,500 $2,000 $ 2,000 $ 39,000 ================================================================== </TABLE> Employee termination costs included the cost of severance, outplacement and other benefits associated with the involuntary termination of employees, primarily senior management and employees in corporate support and data processing functions. Approximately 350 employees are expected to be terminated as part of the restructuring plan, 4 of which occurred in the first quarter 2001. Other employee-related costs include cash payments related to change in control provisions in employment contracts and retention bonuses. The charge related to conforming policies represents costs associated with conforming the credit and accounting policies of Imperial with those of the Corporation. Of the $44 million charge associated with conforming policies in the first quarter 2001, $25 million was included in the provision for credit losses on the statement of income. The remaining amounts applied against the liability for conforming policies related primarily to the adjusting of commercial equipment lease
21 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Restructuring Charge (continued) residual values. The Corporation has yet to incur most of the facilities and operations charges in 2001, which are associated with closing excess facilities, replacing signage, lease and computer service contract termination costs and disposal of computer hardware. Other merger-related restructuring costs were primarily comprised of investment banking, accounting, consulting and legal fees. The Corporation expects to realize annual noninterest expense savings totaling $60 million upon completion of its integration effort, the full effect of which will not begin to be realized until the second quarter of 2002.
22 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net income for the quarter ended March 31, 2001, was $94 million, down $103 million, or 52 percent, from $197 million reported for the first quarter of 2000. Diluted net income per share decreased 54 percent to $0.50 from $1.08 a year ago. Return on average common shareholders' equity was 8.11 percent and return on average assets was 0.76 percent, compared to 20.66 percent and 1.72 percent, respectively, for the comparable quarter last year. Net income in the first quarter 2001 included a $95 million after-tax restructuring charge related to the Corporation's merger with Imperial Bancorp. Excluding the restructuring charge, net income and diluted net income per share would have been $189 million and $1.02, respectively, while return on average common shareholders' equity and return on average assets would have been 16.74% and 1.53%, respectively. 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 March 31, 2001. On a FTE basis, net interest income was $513 million for the three months ended March 31, 2001, an increase of $28 million, or six percent, from the comparable quarter in 2000. This increase in net interest income was primarily due to an eight percent increase in average earning assets, as average business loans increased by $4 billion, or 11 percent, over last year's first quarter, as well as an increase in interest-free sources of funds. Excluding the divestiture of consumer loans in the first quarter 2000, net interest income (FTE) increased $37 million, or eight percent, over the first quarter of 2000. The net interest margin for the three months ended March 31, 2001, was 4.55 percent, a decrease of 5 basis points from 4.60 percent for the first quarter of 2000. Excluding the consumer loan divestiture, the net interest margin decreased two basis points. The net interest margin was negatively impacted by slower growth in core deposit balances than that of earning assets, resulting in a greater reliance on higher cost certificates of deposit in the mix of interest-bearing liabilities. This was partially offset by an increase in the impact to the margin provided by interest-free sources of funds. With core
23 deposit balances growing at rates slower than earning assets, a greater reliance on market-priced sources of funding is expected, which will gradually reduce the margin. Interest rate swaps permit management to control the sensitivity of net interest income to fluctuations in interest rates in a manner similar to investment securities but without significant impact to capital or liquidity. In addition to using interest rate swaps and other instruments to control exposure to interest rate risk, management attempts to evaluate the effect of movements in interest rates on net interest income by regularly performing interest sensitivity gap and earnings simulation analyses. At March 31, 2001, the Corporation was in an asset sensitive position of $628 million (on an elasticity adjusted basis), or one 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 March 31, 2001, for a 200 basis point decline in short-term interest rates identified approximately $51 million, or two percent, of forecasted net interest income at risk during the next 12 months. If short-term interest rates rise 200 basis points, forecasted net interest income would be enhanced by approximately $6 million, or less than one percent. The results of these simulations are within established corporate policy guidelines.
24 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Three Months Ended - --------------------------------------------------------------------------------------------- March 31, 2001 March 31, 2000 ----------------------------- ---------------------------- (dollar amounts Average Average Average Average in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $41,100 $866 8.54% $37,243 $779 8.41% Investment securities (1) 3,881 65 6.74 3,550 62 6.88 Short-term investments 634 10 6.74 1,519 32 8.41 - --------------------------------------------------------------------------------------------- Total earning assets 45,615 941 8.36 42,312 873 8.28 Interest-bearing deposits 24,167 272 4.56 20,215 203 4.04 Short-term borrowings 2,573 39 6.21 3,589 54 6.05 Medium- and long-term debt 7,729 117 6.13 8,621 131 6.11 - --------------------------------------------------------------------------------------------- Total interest-bearing sources $34,469 428 5.04 $32,425 388 4.81 -------------- -------------- Net interest income/ Rate spread (FTE) $513 3.32 $485 3.47 ==== ==== FTE adjustment $ 1 $ 1 ==== ==== Impact of net noninterest-bearing sources of funds 1.23 1.13 - --------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.55% 4.60% ============================================================================================= </TABLE> (1) The average rate for investment securities was computed using average historical cost. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- <S> <C> <C> <C> Loans $ 6 $ 81 $ 87 Investment securities (3) 6 3 Short-term investments (11) (11) (22) - --------------------------------------------------------------------------- Total earning assets (8) 76 68 Interest-bearing deposits 18 51 69 Short-term borrowings 1 (16) (15) Medium- and long-term debt (1) (13) (14) - --------------------------------------------------------------------------- Total interest-bearing sources 18 22 40 - --------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $(26) $ 54 $ 28 ================================ </TABLE> * Rate/Volume variances are allocated to variances due to volume.
25 Provision for Credit Losses The provision for credit losses was $72 million for the first quarter of 2001, compared to $67 million for the same period in 2001. 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." Included in the first quarter 2001 provision for credit losses is a $25 million merger-related charge to conform the credit policies of Imperial with Comerica. Noninterest Income Noninterest income was $170 million for the three months ended March 31, 2001, a decrease of $85 million, or 33 percent, over the same period in 2000. Noninterest income in the first quarter of 2001 was reduced by a $26 million deferred distribution costs impairment charge ($17 million after-tax) and a one- time $53 million charge ($34 million after-tax) related to an unconsolidated subsidiary, both of which are discussed more fully below. Noninterest income in 2001 also included gains of $24 million from securities sales and $11 million in net gains resulting from the purchase and subsequent sale, all within the first quarter, of interest rate derivative contracts which failed to meet the Corporation's stringent risk-reduction criteria. Noninterest income in the first quarter of 2000 included a $30 million gain associated with the sale of revolving check credit and bankcard loans. Excluding the effect of securities gains, warrant income and large, nonrecurring items, and the impact of last year's revolving check credit and bankcard loan sale, noninterest income increased three percent in the first quarter of 2001 from the first quarter of 2000. The $26 million pre-tax deferred distribution costs impairment charge related to the Corporation's Munder subsidiary resulted from the Corporation's reassessment of its ability to recover the unamortized cost of the commissions to brokers for selling certain shares, principally shares in its Munder subsidiary's NetNet, International NetNet and Future Technology funds. Net asset values in these technology funds suffered as market conditions weakened significantly following the peak in the first half of 2000. After a fourth quarter 2000 impairment charge of $7 million, this sector of the equity markets declined another 26 percent in the first quarter 2001.
26 This prompted Comerica's current revaluation of expected future cash flows from the funds, which are based on a percentage of assets under management and early redemption fees. Net remaining deferred distribution costs at March 31, 2001, were $54 million. Excluding the impairment charges, investment advisory revenues totaled $17 million in the first quarter of 2001, a decrease of $8 million from the fourth quarter 2000 and $17 million from the first quarter 2000. The decrease is primarily attributable to the decline in the market values of technology-related stocks from their record highs during the first quarter of last year. The $53 million pre-tax charge is related to long-term incentive plans at a United Kingdom subsidiary, Framlington Holdings Limited, of which Munder is a minority owner. In May 2000, the announcement that the majority owner of Framlington was being acquired triggered a change-in-control provision which fully vested all options and restricted shares held by employees of Framlington. In March 2001, all outstanding options held by employees were exercised and their shares mandatorily purchased by Framlington, requiring U.S. accounting recognition of the expense. The pre-tax charge, included in equity in earnings of unconsolidated subsidiaries, reflects Munder's portion of the resulting expense. Noninterest Expenses Noninterest expenses, which included a merger-related restructuring charge of $94 million, were $450 million for the first quarter ended March 31, 2001, an increase of $83 million, or 23 percent, from the first quarter of 2000. Excluding the restructuring charge, noninterest expenses decreased $11 million, or three percent, when compared to the same period in 2000, primarily due to a decline in revenue-related incentives. Provision for Income Taxes The provision for income taxes for the first quarter of 2001 totaled $67 million, a decrease of 38 percent compared to $108 million reported for the same period a year ago. The effective tax rate was 42 percent for the first quarter of 2001, compared to 35 percent for the same quarter of 2000. The effective tax
27 rate in the first quarter 2001 was affected by adjustments to Imperial Bancorp's tax liabilities at merger date, partially offset by a $7 million tax benefit related to the Imperial Bancorp acquisition that was immediately recognizable, but only after Imperial became part of Comerica. Financial Condition Total assets were $50.3 billion at March 31, 2001, compared with $49.5 billion at year-end 2000 and $46.7 billion at March 31, 2000. The Corporation has experienced growth in all business loan categories since December 31, 2000, with the most significant increases in the domestic commercial loan and commercial mortgage categories, which increased $364 million and $210 million, respectively. Total liabilities increased $568 million, or one percent, since December 31, 2000 to $45.6 billion. Total deposits increased $2.9 billion to $36.8 billion at March 31, 2001 from $33.9 billion at December 31, 2000, primarily due to growth in certificates of deposit issued in denominations in excess of $100,000 through brokers or to institutional investors. The increase in deposits was largely offset by declines in short-term borrowings, which decreased $1.4 billion, or 67 percent, since year-end 2000, and medium- and long-term debt, which decreased $1 billion, or 12 percent. Allowance for Credit Losses and Nonperforming Assets The allowance for credit losses represents management's assessment of probable losses inherent in the Corporation's loan portfolio, including all binding commitments to lend. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Business loans are defined as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. A detailed credit quality review is performed quarterly on large business loans which have deteriorated below certain
28 levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent charge-off experience, current economic conditions and trends, geographic dispersion of borrowers, and trends with respect to past due and nonaccrual amounts. The allocated reserve was $490 million at March 31, 2001, an increase of $47 million from year-end 2000. This increase was attributable to the specific portion of the allowance associated with the quarterly credit quality review of certain large business loans with deteriorated credit risk at March 31, 2001. 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 to the healthcare, high technology and energy industries, customers engaged in sub-prime lending, as well as Latin American transfer risks and the risk associated with new customer relationships. The unallocated allowance was $155 million at March 31, 2001, a decrease of $10 million from December 31, 2000. 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 March 31, 2001, the allowance for credit losses was $645 million, an
29 increase of $37 million since December 31, 2000. The allowance as a percentage of total loans was 1.57 percent, compared to 1.51 percent at December 31, 2000. As a percentage of nonperforming assets, the allowance was 135 percent at March 31, 2001, versus 179 percent at year-end 2000. Net charge-offs for the first quarter of 2001 were $35 million, or 0.34 percent of average total loans, compared with $34 million, or 0.36 percent, for the year-earlier quarter. Nonperforming assets increased $137 million, or 40 percent, since December 31, 2000, and were categorized as follows: <TABLE> <CAPTION> March 31, December 31, (in thousands) 2001 2000 ------------- ------------ <S> <C> <C> Nonaccrual loans: Commercial $ 389,206 $ 244,390 International 48,721 57,929 Real estate construction 6,942 4,542 Commercial mortgage 18,356 17,398 Residential mortgage 289 185 Consumer 3,147 3,080 Lease financing 3,817 3,837 ------------- ------------ Total nonaccrual loans 470,478 331,361 Reduced-rate loans 275 2,306 ------------- ------------ Total nonperforming loans 470,753 333,667 Other real estate 5,577 5,577 ------------- ------------ Total nonperforming assets $ 476,330 $ 339,244 ============= ============ Loans past due 90 days or more $ 55,260 $ 36,176 ============= ============ </TABLE> Nonperforming assets as a percentage of total loans and other real estate were 1.16 percent at March 31, 2001 and 0.84 percent at December 31, 2000. Capital Common shareholders' equity increased $53 million from December 31, 2000 to March 31, 2001, excluding other comprehensive income. The increase was primarily due to employee stock plan activity, which increased common shareholders' equity $45 million, and the retention of $11 million of current year earnings. Capital ratios exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> March 31, December 31, 2001 2000 --------- ----------- <S> <C> <C> Leverage ratio (3.00 - minimum) 8.76% 8.74% Tier 1 risk-based capital ratio (4.0 - minimum) 7.46 7.35 Total risk-based capital ratio (8.0 - minimum) 11.26 11.11 </TABLE> At March 31, 2001, 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.
30 Other Matters This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analysis. Such statements reflect the view of Comerica's management, as of the date of this report, with respect to future events and are subject to risks and uncertainties, such as changes in Comerica's plans, objectives, expectations and intentions and do not purport to speak as of any other date. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Corporation's actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences are changes in interest rates, changes in the industries in which the Corporation has a concentration of loans, changes in the level of fee revenues, changes in the accounting treatment of any particular item, the entry of new competitors into the banking industry as a result of the enactment of the Gramm-Leach-Bliley Act of 1999, changing economic conditions and related credit and market conditions, difficulty integrating Imperial Bancorp or retaining key personnel and other factors. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
31 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement re: Computation of Earnings Per Share (b) Reports on Form 8-K 1. A report on Form 8-K, dated January 22, 2001, was filed under report item number 9, concerning the announcement of Comerica Incorporated's earnings for the fourth quarter and year ended December 31, 2000. 2. A report on Form 8-K, dated January 29, 2001, was filed under report item numbers 5 and 7, concerning the announcement of the merger of Imperial Bancorp and Comerica Holdings Incorporated, a wholly owned subsidiary of Comerica Incorporated, as well as the announcement of Imperial Bancorp's earnings for the fourth quarter and year ended December 31, 2000.
32 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 and Chief Financial Officer (Principal Financial Officer) /s/ Marvin J. Elenbaas ----------------------------------------- Marvin J. Elenbaas Senior Vice President and Controller (Principal Accounting Officer) Date: May 15, 2001
33 Exhibit Index ------------- <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 11 Statement re: Computation of Earnings Per Share </TABLE>