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, 1995 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 September 30, 1995: 114,556,000 shares
2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements <TABLE> CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries <CAPTION> Sept. 30, Dec. 31, Sept. 30, (In thousands, except per share data) 1995 1994 1994 ----------- ------------ ----------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 1,523,520 $ 1,822,313 $ 1,410,911 Interest-bearing deposits with banks 52,442 378,873 275,361 Federal funds sold and securities purchased under agreements to resell 733,200 46,000 50,499 Trading account securities 4,783 4,332 8,473 Mortgages held for sale 138,741 91,547 108,565 Investment securities available for sale 2,779,920 2,906,296 3,047,713 Investment securities held to maturity (estimated fair value of $4,534,625 at 9/30/95, $4,659,317 at 12/31/94 and $4,864,287 at 9/30/94) 4,591,928 4,970,165 5,081,797 ----------- ----------- ----------- Total investment securities 7,371,848 7,876,461 8,129,510 Commercial loans 11,679,983 10,633,808 9,787,241 International loans 1,400,513 1,195,328 1,167,371 Real estate construction loans 574,208 413,987 398,557 Commercial mortgage loans 3,200,054 3,056,337 3,008,809 Residential mortgage loans 2,451,943 2,436,445 2,289,889 Consumer loans 4,734,944 4,214,716 3,942,077 Lease financing 305,425 258,625 222,807 ----------- ----------- ----------- Total loans 24,347,070 22,209,246 20,816,751 Less allowance for loan losses (342,914) (326,195) (327,962) ----------- ----------- ----------- Net loans 24,004,156 21,883,051 20,488,789 Premises and equipment 456,424 437,757 440,254 Customers' liability on acceptances outstanding 34,336 33,632 38,502 Accrued income and other assets 1,029,076 855,936 852,725 ----------- ----------- ----------- TOTAL ASSETS $35,348,526 $33,429,902 $31,803,589 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits (noninterest-bearing) $ 5,180,358 $ 5,257,396 $ 4,617,674 Interest-bearing deposits 15,098,517 14,741,438 14,886,757 Deposits in foreign offices 1,732,254 2,433,482 820,265 ----------- ----------- ----------- Total deposits 22,011,129 22,432,316 20,324,696 Federal funds purchased and securities sold under agreements to repurchase 763,882 2,594,189 1,655,471 Other borrowed funds 4,665,515 1,611,219 3,528,471 Acceptances outstanding 34,336 33,632 38,502 Accrued expenses and other liabilities 372,102 268,823 268,353 Medium- and long-term debt 4,948,576 4,097,943 3,602,381 ----------- ----------- ----------- Total liabilities 32,795,540 31,038,122 29,417,874 Common stock - $5 par value: Authorized - 250,000,000 shares Issued-115,094,531 shares at 9/30/95, 119,294,531 shares at 12/31/94 and 9/30/94 575,473 596,473 596,473 Capital surplus 414,672 525,052 524,915 Unrealized gains and losses on investment securities available for sale 2,719 (55,039) (33,772) Retained earnings 1,574,639 1,390,405 1,331,379 Less cost of common stock in treasury-538,453 shares at 9/30/95, 2,382,333 shares at 12/31/94 and 1,193,179 shares at 9/30/94 (14,517) (65,111) (33,280) ----------- ----------- ----------- Total shareholders' equity 2,552,986 2,391,780 2,385,715 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,348,526 $33,429,902 $31,803,589 =========== =========== =========== /TABLE
3 <TABLE> CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 -------------------- ------------------------ (In thousands, except per share data) 1995 1994 1995 1994 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $532,490 $408,709 $1,550,093 $1,129,270 Interest on investment securities: Taxable 115,225 117,805 353,639 327,425 Exempt from federal income tax 6,390 7,358 20,214 23,445 -------- -------- ---------- ---------- Total interest on investment securities 121,615 125,163 373,853 350,870 Trading account interest 15 52 169 (18) Interest on federal funds sold and securities purchased under agreements to resell 3,405 642 6,041 4,095 Interest on time deposits with banks 1,099 3,646 7,550 17,204 Interest on mortgages held for sale 3,054 2,722 5,586 8,965 -------- -------- ---------- ---------- Total interest income 661,678 540,934 1,943,292 1,510,386 INTEREST EXPENSE Interest on deposits 183,958 141,129 538,194 389,231 Interest on short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 35,876 33,241 117,928 81,092 Other borrowed funds 41,301 16,880 112,050 60,894 Interest on medium- and long-term debt 76,607 41,741 211,133 89,418 Net interest rate swap (income)/expense 612 (5,056) 5,126 (28,093) -------- -------- ---------- ---------- Total interest expense 338,354 227,935 984,431 592,542 -------- -------- ---------- ---------- Net interest income 323,324 312,999 958,861 917,844 Provision for loan losses 26,000 14,000 53,500 44,000 -------- -------- ---------- ---------- Net interest income after provision for loan losses 297,324 298,999 905,361 873,844 NONINTEREST INCOME Income from fiduciary activities 31,129 29,019 93,863 91,738 Service charges on deposit accounts 33,150 32,029 97,138 91,456 Customhouse broker fees 8,789 10,201 27,137 30,481 Revolving credit fees 13,699 10,200 37,636 28,557 Securities gains 516 1,581 788 2,363 Other noninterest income 40,831 33,608 113,006 99,415 -------- -------- ---------- ---------- Total noninterest income 128,114 116,638 369,568 344,010 NONINTEREST EXPENSES Salaries and employee benefits 142,507 138,456 420,374 406,407 Net occupancy expense 24,649 25,188 73,306 74,881 Equipment expense 16,787 16,313 50,670 49,570 FDIC insurance expense (500) 11,106 21,418 33,129 Telecommunications expense 7,230 6,748 22,027 18,869 Other noninterest expenses 74,223 65,304 221,582 196,842 -------- -------- ---------- ---------- Total noninterest expenses 264,896 263,115 809,377 779,698 -------- -------- ---------- ---------- Income before income taxes 160,542 152,522 465,552 438,156 Provision for income taxes 55,240 51,918 158,696 147,511 -------- -------- ---------- ---------- NET INCOME $105,302 $100,604 $ 306,856 $ 290,645 ======== ======== ========== ========== NET INCOME PER SHARE: Primary $0.91 $0.84 $2.62 $2.46 Fully diluted $0.91 $0.84 $2.61 $2.46 Primary average shares 115,993 119,436 117,199 118,148 Cash dividends declared $40,089 $37,897 $118,237 $107,724 Dividends per share $0.35 $0.32 $1.02 $0.92 </TABLE>
4 <TABLE> CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <CAPTION> Unrealized Total Common Capital Gains/ Retained Treasury Shareholders' (in thousands) Stock Surplus (Losses) Earnings Stock Equity --------- --------- ---------- ---------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 1994 $596,473 $524,186 $ 27,473 $1,155,280 $(121,754) $2,181,658 Net income for 1994 - - - 290,645 - 290,645 Cash dividends declared - - - (107,724) - (107,724) Purchase of 1,601,164 shares - - - - (43,892) (43,892) Issuance of shares: Employee stock plans - 318 - (2,964) 7,145 4,499 Acquisition of Pacific Western - - - (3,858) 125,221 121,363 Amortization of deferred compensation - 411 - - - 411 Change in unrealized gains/(losses) on investment securities available for sale - - (61,245) - - (61,245) -------- -------- -------- ---------- --------- ---------- BALANCES AT SEPTEMBER 30, 1994 $596,473 $524,915 $(33,772) $1,331,379 $ (33,280) $2,385,715 ======== ======== ======== ========== ========= ========== BALANCES AT JANUARY 1, 1995 $596,473 $525,052 $(55,039) $1,390,405 $ (65,111) $2,391,780 Net income for 1995 - - - 306,856 - 306,856 Cash dividends declared - - - (118,237) - (118,237) Purchase of 1,405,500 shares - - - - (38,725) (38,725) Purchase and retirement of 4,200,000 shares (21,000) (112,691) - - - (133,691) Issuance of shares: Employee stock plans - 191 - (4,385) 13,669 9,475 Acquisitions - 1,450 - - 75,650 77,100 Amortization of deferred compensation - 670 - - - 670 Change in unrealized gains/(losses) on investment securities available for sale - - 57,758 - - 57,758 -------- -------- -------- ---------- --------- ---------- BALANCES AT SEPTEMBER 30, 1995 $575,473 $414,672 $ 2,719 $1,574,639 $ (14,517) $2,552,986 ======== ======== ======== ========== ========= ========== </TABLE>
5 <TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <CAPTION> Nine Months Ended September 30 --------------------------- (in thousands) 1995 1994 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 306,856 $ 290,645 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 53,500 44,000 Depreciation 47,355 44,320 Net increase in trading account securities (451) (4,873) Net (increase) decrease in mortgages held for sale (47,194) 222,102 Net increase in accrued income receivable (30,830) (26,289) Net increase (decrease) in accrued expenses 111,488 (20,113) Net amortization of intangibles 21,519 17,994 Funding for employee benefit plans (125,000) (59,719) Other, net (25,607) 35,109 ------------ ------------ Total adjustments 4,780 252,531 ------------ ------------ Net cash provided by operating activities 311,636 543,176 INVESTING ACTIVITIES: Net decrease in interest-bearing deposits with banks 326,431 751,112 Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (651,900) 1,041,290 Proceeds from sale of investment securities available for sale 39,342 1,509 Proceeds from maturity of investment securities available for sale 308,979 455,785 Purchases of investment securities available for sale (31,434) (1,147,791) Proceeds from maturity of investment securities held to maturity 579,776 1,249,296 Purchases of investment securities held to maturity (164,828) (2,125,409) Net increase in loans (other than purchased loans) (1,904,378) (844,671) Purchase of loans (44,110) (227,192) Fixed assets, net (49,166) (65,452) Net increase in customers' liability on acceptances outstanding (704) (290) Net cash provided by acquisitions 28,835 58,626 ------------ ------------ Net cash used in investing activities (1,563,157) (853,187) FINANCING ACTIVITIES: Net decrease in deposits (839,927) (1,802,852) Net increase (decrease) in short-term borrowings 1,223,989 (77,988) Net increase in acceptances outstanding 704 290 Proceeds from issuance of medium- and long-term debt 2,460,000 2,750,000 Repayments and purchases of medium- and long-term debt (1,614,011) (608,175) Proceeds from issuance of common stock and other capital transactions 10,145 4,910 Purchase of common stock for treasury and retirement (172,416) (43,892) Dividends paid (115,756) (102,066) ------------ ------------ Net cash provided by financing activities 952,728 120,227 ------------ ------------ Net decrease in cash and due from banks (298,793) (189,784) Cash and due from banks at beginning of year 1,822,313 1,600,695 ------------ ------------ Cash and due from banks at end of period $ 1,523,520 $ 1,410,911 ============ ============ Interest paid $ 926,747 $ 597,862 ============ ============ Income taxes paid $ 130,629 $ 127,851 ============ ============ Noncash investing and financing activities: Loan transfers to other real estate $ 15,249 $ 12,241 ============ ============ Treasury stock issued for acquisitions $ 77,100 $ 121,363 ============ ============ Loan transfer to investment securities $ - $ 91,538 ============ ============ </TABLE>
6 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation 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, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Comerica Incorporated and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1994. Note 2 - Investment Securities At September 30, 1995 investment securities having a carrying value of $5.6 billion were pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $36 million. Note 3 - Allowance for Loan Losses The following analyzes the changes in the allowance for loan losses included in the consolidated balance sheets: <TABLE> <CAPTION> (in thousands) 1995 1994 --------- --------- <S> <C> <C> Balance at January 1 $ 326,195 $ 298,685 Allowance acquired 3,260 19,467 Loans charged off (73,831) (60,863) Recoveries on loans previously charged off 33,790 26,673 --------- --------- Net loans charged off (40,041) (34,190) Provision for loan losses 53,500 44,000 --------- --------- Balance at September 30 $ 342,914 $ 327,962 ========= ========= </TABLE> A loan is considered impaired if 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 $150 million for the quarter and nine months ended September 30, 1995, respectively. Of the $150 million period-end impaired loans, approximately $84 million required an allowance for loan losses of $19 million in accordance with SFAS No. 114. The remaining impaired loan balance represents loans for which the fair value exceeded the recorded investment in the loan.
7 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, 1995 and December 31, 1994: <TABLE> <CAPTION> (in thousands) September 30, 1995 December 31, 1994 ------------------ ----------------- <S> <C> <C> Parent Company 9.75% subordinated notes due 1999 $ 74,669 $ 74,601 10.125% subordinated debentures due 1998 74,781 74,721 7.25% subordinated notes due 2007 148,591 - ---------- ---------- Total parent company 298,041 149,322 Subsidiaries Subordinated notes: 8.375% subordinated notes due 2024 147,762 147,709 7.25% subordinated notes due 2002 148,891 148,777 6.875% subordinated notes due 2008 99,047 98,990 7.125% subordinated notes due 2013 147,972 147,890 FDIC subordinated note due 1995 4,500 4,500 ---------- ---------- Total subordinated notes 548,172 547,866 Medium-term notes: Floating rate based on Treasury bill indices 1,899,600 2,849,205 Floating rate based on Prime indices 550,000 299,988 Floating rate based on LIBOR indices 299,934 25,000 Fixed rate notes with interest rates ranging from 5.65% to 7.5% 1,348,240 224,610 ---------- ---------- Total medium-term notes 4,097,774 3,398,803 Notes payable bearing interest at rates ranging from 7.35% to 8.00% and maturing on dates ranging from 1995 through 2015 4,589 1,952 ---------- ---------- Total subsidiaries 4,650,535 3,948,621 ---------- ---------- Total medium- and long-term debt $4,948,576 $4,097,943 ========== ========== </TABLE> Note 5 - Income Taxes The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after deducting non-taxable items, principally interest income on state and municipal securities.
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> September 30, 1995 December 31, 1994 ------------------------------ ------------------------------ 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 Swaps (4) $4,224 $34 $(59) $(25) $3,643 $ 4 $(238) $(234) Caps purchased 25 - - - 50 - - - Caps written 178 - - - 198 - (1) (1) Foreign exchange contracts Spot and forwards 124 2 - 2 98 - (1) (1) Swaps 49 7 - 7 25 - - - Commitments To purchase securities 59 - - - - - - - To sell securities 2 - - - - - - - To sell loans 165 - - - 77 - - - ------ --- ---- ---- ------ --- ----- ----- Total risk management 4,826 43 (59) (16) 4,091 4 (240) (236) Customer Initiated and Other Interest rate contracts Caps written 474 - - - 321 - (1) (1) Options purchased 27 - - - - - - - Swaps 4 - - - 7 - - - Foreign exchange contracts Spot, forward, futures and options 552 9 (8) 1 503 5 (4) 1 ------ --- ---- ---- ------ --- ----- ----- Total customer initiated and other 1,057 9 (8) 1 831 5 (5) - ------ --- ---- ---- ------ --- ----- ----- Total derivatives and foreign exchange contracts $5,883 $52 $(67) $(15) $4,922 $ 9 $(245) $(236) ====== === ==== ==== ====== === ===== ===== (1) The notional or contract amounts of derivatives and foreign exchange contracts represent the extent of the Corporation's involvement in such transactions. These amounts are generally used as a point of reference for calculating the amounts to be exchanged in accordance with the terms of the agreement and, therefore, are not reflected in the consolidated balance sheets. The potential for gain or loss associated with the credit or market risks inherent in such transactions is significantly less than the notional or contract amounts. (2) Represents credit risk exposure which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk amounts are calculated before consideration is given to bilateral collateral agreements or master netting arrangements with counterparties 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. Futures contracts are subject to daily cash settlements; therefore, the fair value of these instruments is zero. The fair values of customer initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets. (4) Includes the notional amount of index amortizing swaps of $2,143 million and $1,936 million at September 30, 1995 and December 31, 1994, respectively. These swaps had net unrealized losses of $30 million and $133 million at September 30, 1995 and December 31, 1994, respectively. As of September 30, 1995, index amortizing swaps had an average expected life of approximately 2.05 years with a stated maturity that averaged 3.25 years. </TABLE>
9 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 off-balance sheet derivative financial instruments and foreign exchange contracts, in addition to certain on-balance sheet instruments, to manage exposure to these and other risks, including liquidity risk. The Corporation principally uses off-balance sheet derivatives as an end-user in connection with asset and liability management activities. The main objective of asset and liability management is to maximize net interest income while operating within acceptable ranges of interest rate sensitivity and providing adequate levels of liquidity and funding. The Corporation's use of derivatives takes place predominately in the interest rate markets and mainly involves interest rate swaps, both amortizing and non-amortizing. Interest rate swaps are primarily used to alter the interest rate characteristics of certain assets and liabilities in order to provide a more precise match between their rate maturities. 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, 1995. The swaps are grouped by the assets or liabilities to which they have been designated. Various other types of off-balance sheet financial instruments may also be used for risk management purposes, including interest rate caps, forward and futures interest and foreign exchange rate contracts, foreign exchange rate swaps, commitments to purchase and sell securities and commitments to sell mortgage loans. Customer Initiated and Other - ----------------------------- The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts and interest rate caps, at the request of customers. The average fair value of customer initiated and other foreign exchange contracts was $1 million for both the nine months ended September 30, 1995 and the year ended December 31, 1994. Foreign exchange contracts generated $5 million of income for the nine months ended September 30, 1995, compared to $3 million for the same period a year earlier and $5 million for the year ended December 31, 1994. The risks associated with customer initiated foreign exchange contracts are generally reduced by entering into offsetting foreign exchange contracts. Customer initiated interest rate caps generally are not offset by other on- or off-balance sheet financial instruments; however, diminutive authority limits have been established for engaging in these transactions in order to minimize risk exposure. As a result, average fair values and income from this activity were not significant for the nine-month period ended September 30, 1995 and for the year ended December 31, 1994.
10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts (Continued) 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 $2.0 billion and $1.9 billion at September 30, 1995 and December 31, 1994, respectively. 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. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: 2000- Dec. 31, (dollar amounts in millions) 1995 1996 1997 1998 1999 2014 Total 1994 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Variable rate asset designation: Receive fixed swaps Generic $ - $ 50 $ - $ - $ - $ - $ 50 $ 50 Amortizing 21 16 84 100 - - 221 297 Index Amortizing 281 361 961 175 130 235 2,143 1,936 Weighted average: (1) Receive rate 6.42% 5.76% 5.23% 5.70% 6.20% 5.83% 5.64% 5.38% Pay rate 5.88% 5.88% 5.91% 5.85% 5.83% 5.81% 5.88% 5.78% Fixed rate asset designation: Generic pay fixed swaps $ 98 $ 35 $ - $ - $ 2 $ - $ 135 $ 185 Weighted average: (1) Receive rate 5.91% 5.91% -% -% 5.83% -% 5.95% 5.91% Pay rate 6.31% 7.05% -% -% 8.73% -% 6.56% 7.43% Medium- and long-term debt designation: Generic receive fixed swaps $ - $ 600 $ 50 $ - $ - $700 $1,350 $ 675 Weighted average: (1) Receive rate -% 6.27% 9.35% -% -% 7.65% 7.10% 7.37% Pay rate - 5.88% 5.89% -% -% 5.96% 5.92% 5.73% Generic pay fixed swaps $ - $ 25 $ - $ - $ - $ - $ 25 $ 25 Weighted average: (1) Receive rate -% 5.88% -% -% -% -% 5.88% 6.89% Pay rate -% 8.28% -% -% -% -% 8.28% 8.28% Basis swaps $ - $ 300 $ - $ - $ - $ - $ 300 $ 475 Weighted average: (1) Receive rate -% 5.80% -% -% -% -% 5.80% 6.01% Pay rate -% 5.80% -% -% -% -% 5.80% 5.80% Total notional amount $400 $1,387 $1,095 $275 $132 $935 $4,224 $3,643 - ----------------------------------------------------------------------------------------- (1) Variable rates are based on those rates paid or received at September 30, 1995. Variable rates paid or received are based on LIBOR. - ----------------------------------------------------------------------------------------- </TABLE>
11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance-Sheet Derivatives and Foreign Exchange Contracts (Continued) 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. <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, 1994 $ 3,891 $ 123 $ 328 $ 503 Additions 1,678 1,817 427 26,367 Maturities/amortizations (1,142) (1,767) (250) (26,318) Terminations - - - - ------- ------- ----- -------- Balances at September 30, 1995 $ 4,427 $ 173 $ 505 $ 552 ======= ======= ===== ======== </TABLE> Additional information regarding the nature, terms and attendant 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 1994 annual report on Form 10-K on pages 33 through 37 and in Notes 1 and 17 to the consolidated financial statements.
12 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ----------------------- Results of Operations - --------------------- Comerica Incorporated reported net income of $105 million for the quarter ended September 30, 1995, an increase of nearly $5 million, or 5 percent, over the amount reported for the third quarter of 1994. Net income per share increased 8 percent to $0.91 from $0.84 a year ago. Return on average common shareholders' equity was 16.81 percent and return on average assets was 1.22 percent, compared to 17.11 percent and 1.27 percent, respectively, for the comparable quarter last year. For the nine months ended September 30, 1995, net income rose 6 percent to $307 million, or $2.62 per share, compared to net income of $291 million, or $2.46 per share, reported for the same period in 1994. Return on average common shareholders' equity was 16.45 percent and return on average assets was 1.20 percent for the year-to-date period, compared to 16.94 percent and 1.24 percent, respectively, a year earlier. Acquisitions - ------------ On October 27, 1995, the Corporation completed the acquisition of QuestStar Bank, N.A. (QuestStar) in Houston, Texas, for approximately $25 million in cash. At September 30, 1995, QuestStar had approximately $200 million in total assets. The transaction was accounted for as a purchase. In May 1995, the Corporation entered into an Agreement and Plan of Merger to acquire Metrobank, headquartered in Los Angeles, California, for approximately 4.2 million shares of common stock then valued at $120 million. At March 31, 1995 Metrobank had approximately $1.3 billion in total assets. The transaction will be accounted for as a purchase and, subject to regulatory approval, is expected to be completed in the first quarter of 1996. Net Interest Income - ------------------- The Rate-Volume Analyses in Tables I and II detail the components of the change in net interest income (FTE) for the quarter and nine months ended September 30, 1995. On a fully taxable equivalent (FTE) basis, net interest income was $329 million for the three months ended September 30, 1995, up $10 million, or 3 percent, from $319 million reported for the comparable quarter in 1994. This increase, primarily the result of acquisitions and continued expansion in the loan portfolio, was partially offset by the utilization of wholesale funds to support loan growth and customers shifting deposits from NOW, savings and money market accounts to higher-paying certificates of deposit. Growth in commercial and consumer loan balances accounted for more than 75 percent of the overall increase in average total loans. For the third quarter of 1995, average commercial loans rose $1.9 billion, or 19 percent, over the prior year, reflecting continued strong loan demand by corporate customers. Average consumer loans increased $842 million, or 22 percent, over the comparable period a year earlier, due to rapid growth in the revolving credit portfolio. This growth resulted as customers responded to bankcard promotions begun in the third quarter of 1994. Investments in other earning assets were reduced in order to partially fund loan growth.
13 The net interest margin for the three months ended September 30, 1995, was 4.10 percent, a decline of 5 basis points from 4.15 percent for the second quarter of 1995, and 25 basis points from 4.35 percent for the third quarter of 1994. Continued margin compression is an indication of market pressure to maintain competitive pricing on loan and deposit products and the Corporation's increased use of purchased funds, a more expensive funding vehicle. For the nine months ended September 30, 1995, net interest income (FTE) totaled $976 million, an increase of $40 million, or 4 percent, over the amount reported for the same period a year ago. This increase in net interest income, led by acquisitions and growth in commercial and consumer loans, was partially offset by a rise in purchased funds used to support loan growth as well as an overall increase in interest-bearing deposits as customers invested more funds in certificates of deposit. Average commercial loans grew $1.8 billion, or 19 percent, while average consumer loans rose $784 million, or 21 percent. The average balances of investment securities and temporary investments were reduced to facilitate loan growth. The net interest margin for the nine months ended September 30, 1995, was 4.14 percent, a decrease of 2 basis points from 4.16 percent for the six months ended June 30, 1995, and 20 basis points from 4.34 percent for the first nine months of 1994. Continued compression in the margin for the year-to-date period is attributable to the same factors discussed above for the third quarter. Net interest income growth for the quarter and nine months ended September 30, 1995, was also partially offset as the Corporation's risk management interest rate swap portfolio continued to generate net interest expense. These interest rate swaps are designated against certain assets and liabilities, therefore, the impact on net interest income attributable to these off-balance sheet instruments is generally offset by net interest income generated by 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 minimize the effect of movements in interest rates on net interest income by regularly performing interest sensitivity gap and earnings simulation analyses. At September 30, 1995, the Corporation was in an asset sensitive position of approximately $542 million (on an elasticity-adjusted basis), or 1.66 percent of earning assets. The earnings simulation analysis performed at September 30, 1995, indicated forecasted net interest income is at risk by less than 4 percent if short-term interest rates decreased 200 basis points or could increase by less than 1 percent if short-term interest rates rose 200 basis points. These results are within established corporate policy guidelines. Provision for Loan Losses - ------------------------- The provision for loan losses for the third quarter of 1995 was $26 million, up $12 million from the third quarter of 1994. For the nine months ended September 30, 1995, the provision for loan losses was $54 million, an increase of $10 million over the provision for the same period a year ago. The provision is predicated upon maintaining an adequate allowance for loan losses, which is further discussed in the section entitled "Financial Condition."
14 <TABLE> TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <CAPTION> Three Months Ended ------------------------------------------------------------- September 30, 1995 September 30, 1994 ----------------------------- ----------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $23,984 $ 534 8.86% $20,463 $ 411 7.99% Investment securities 7,534 125 6.63 8,228 129 6.24 Other earning assets 451 8 6.67 479 7 5.86 - ---------------------------------------------------------------------------------------------- Total earning assets 31,969 667 8.30 29,170 547 7.45 Interest-bearing deposits 16,926 184 4.31 16,743 141 3.34 Short-term borrowings 5,280 77 5.80 4,361 50 4.56 Medium- and long-term debt 4,779 77 6.37 3,185 42 5.24 Net interest rate swap (income)/expense (1) - - - - (5) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $26,985 338 4.98 $24,289 228 3.73 ----------------- ----------------- Net interest income/ Rate spread (FTE) $ 329 3.32 $ 319 3.72 ====== ====== FTE adjustment $ 5 $ 6 ====== ====== Impact of net noninterest- bearing sources of funds 0.78 0.63 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.10% 4.35% ============================================================================================== (1) After allocation of the income or expense generated by interest rate swaps for the three months ended September 30, 1995, to the related assets and liabilities, the average yield on total loans was 8.85 percent as of September 30, 1995, compared to 8.08 percent a year ago. The average cost of funds for medium- and long-term debt was 6.14 percent as of September 30, 1995, compared to 4.97 percent a year earlier. Increase Increase (Decrease) (Decrease) Net Due to Due to Increase Rate Volume* (Decrease) ---------- ---------- ---------- (in millions) Loans $ 45 $ 78 $ 123 Investment securities 7 (11) (4) Other earning assets 1 - 1 ------------------------------ Total earning assets 53 67 120 Interest-bearing deposits 36 7 43 Short-term borrowings 14 13 27 Medium- and long-term debt 9 26 35 Net interest rate swap (income)/expense 5 - 5 ------------------------------ Total interest-bearing sources 64 46 110 ------------------------------ Net interest income/Rate spread (FTE) $ (11) $ 21 $ 10 ============================== * Rate/Volume variances are allocated to variances due to volume. /TABLE
15 <TABLE> TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <CAPTION> Nine Months Ended ------------------------------------------------------------- September 30, 1995 September 30, 1994 ----------------------------- ----------------------------- Average Average Average Average (in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $23,291 $1,556 8.93% $19,825 $1,135 7.65% Investment securities 7,721 385 6.62 7,996 363 6.06 Other earning assets 389 19 6.67 931 30 4.34 - ---------------------------------------------------------------------------------------------- Total earning assets 31,401 1,960 8.33 28,752 1,528 7.10 Interest-bearing deposits 16,875 538 4.26 16,641 389 3.13 Short-term borrowings 5,200 230 5.91 4,948 142 3.84 Medium- and long-term debt 4,393 211 6.42 2,298 89 5.19 Net interest rate swap (income)/expense (1) - 5 - - (28) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $26,468 984 4.97 $23,887 592 3.32 ----------------- ------------------ Net interest income/ Rate spread (FTE) $ 976 3.36 $ 936 3.78 ====== ====== FTE adjustment $ 17 $ 18 ====== ====== Impact of net noninterest-bearing sources of funds 0.78 0.56 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.14% 4.34% ============================================================================================== (1) After allocation of the income or expense generated by interest rate swaps for the nine months ended September 30, 1995, to the related assets and liabilities, the average yield on total loans was 8.83 percent as of September 30, 1995, compared to 7.77 percent a year ago. The average cost of funds for medium- and long-term debt was 6.16 percent as of September 30, 1995, compared to 4.71 percent a year earlier. Increase Increase (Decrease) (Decrease) Net Due to Due to Increase Rate Volume* (Decrease) ---------- ---------- ---------- (in millions) Loans $ 189 $ 232 $ 421 Investment securities 35 (13) 22 Other earning assets 16 (27) (11) ------------------------------ Total earning assets 240 192 432 Interest-bearing deposits 130 19 149 Short-term borrowings 77 11 88 Medium- and long-term debt 21 101 122 Net interest rate swap (income)/expense 33 - 33 ------------------------------ Total interest-bearing sources 261 131 392 ------------------------------ Net interest income/Rate spread (FTE) $ (21) $ 61 $ 40 ============================== * Rate/Volume variances are allocated to variances due to volume. /TABLE
16 Noninterest Income - ------------------ After adjusting for acquisitions, noninterest income rose $10 million to $127 million for the three months ended September 30, 1995, a 9 percent increase from the corresponding period in 1994. This growth in noninterest income, primarily attributable to an escalation in revenue within the other noninterest income category and a $3 million increase in revolving credit fees resulting from new credit card balances, was partially offset by decreases in customhouse brokerage fees and securities gains. Other noninterest income grew $7 million, or 21 percent, from the third quarter of 1994, benefiting principally from increases in fees and commissions generated by the investment management, securities brokerage and insurance businesses. For the nine months ended September 30, 1995, noninterest income totaled $361 million, excluding the effects of acquisitions, an increase of $17 million, or 5 percent, over the comparable period in 1994. Growth in noninterest income primarily resulted from an $8 million boost in revolving credit fees arising directly from growth in the bankcard portfolio and an increase in other noninterest income. Reductions in income associated with customhouse brokerage fees and securities gains partially offset the rise in noninterest income. Other noninterest income for the first nine months of 1995 reached $112 million, an increase of $12 million, or 13 percent, over the same period a year earlier. Earnings from investment management activities contributed $6 million to other noninterest income for the nine-month period, while the securities brokerage and insurance areas generated over $5 million in additional fees and commissions. A decline in income from mortgage-related activities, particularly gains from bulk sales of mortgage servicing rights, partially offset the increase in other noninterest income. Noninterest Expenses - -------------------- Noninterest expenses for the three months ending September 30, 1995, rose 3 percent, or $8 million, from the corresponding period in 1994, excluding the effects of acquisitions and a $12 million rebate received in connection with a lower FDIC insurance rate. This nominal increase in noninterest expenses was the result of normal business growth. For the nine months ended September 30, 1995, noninterest expenses were well-controlled, rising less than 2 percent from the same period a year ago, excluding the expenses associated with acquisitions and the aforementioned FDIC insurance premium rebate. Provision for Income Taxes - -------------------------- The provision for income taxes for the nine months ended September 30, 1995, totaled $159 million, an increase of 8 percent compared to $148 million reported for the same period a year ago. The effective tax rate was 34 percent for the first nine months of both 1995 and 1994.
17 Financial Condition - ------------------- Total assets at September 30, 1995 were $35.3 billion, up $2 billion or 6 percent since December 31, 1994. Earning assets growth of $2 billion, or 7 percent, to $32.6 billion since year-end 1994 was mainly caused by a $2.1 billion, or 10 percent, increase in total loans. This increase was partially funded by a decline in the investment securities portfolio of $505 million. Since December 31, 1994, loan growth has remained strong as a result of both acquisitions and continued expansion in the commercial and consumer loan portfolios. Commercial loans showed the strongest improvement, increasing $1.0 billion, or 10 percent, reflecting prolonged customer demand in the Corporation's markets. Consumer loans followed with an increase of $520 million, or 12 percent, largely due to growth in revolving credit loans. Total liabilities increased $1.8 billion, or 6 percent, to $32.8 billion since December 31, 1994, primarily due to the addition of $1.2 billion in short-term borrowings and an increase of $850 million in medium- and long-term debt. The rise in medium- and long-term debt reflects the net result of the issuance of $2.4 billion of medium- and long-term notes and the maturity of approximately $1.6 billion of medium- term notes since December 31, 1994. Refer to the notes to the consolidated financial statements for an analysis of medium- and long-term debt. As the deposit base remains relatively flat, greater reliance on federal funds purchased, other short-term borrowings, and medium- and long-term debt is necessary to support expanding loan volumes. Allowance for Loan Losses and Nonperforming Assets - -------------------------------------------------- Management determines the adequacy of the allowance for loan losses by applying projected loss ratios to the risk-ratings of loans, both individually and by category. The projected loss ratios incorporate such factors as recent loan loss experience, current economic conditions and trends, geographic dispersion of borrowers, trends in past due and nonaccrual amounts, risk characteristics of various categories and concentrations of loans, and transfer risks. At September 30, 1995, the allowance for loan losses was $343 million, an increase of $17 million, or 5 percent, since December 31, 1994. Due to the magnitude of loan growth during 1995, the allowance as a percentage of total loans declined slightly to 1.41 percent from 1.47 percent at December 31, 1994. However, the allowance as a percentage of total nonperforming assets increased from 160 percent at year-end 1994 to 178 percent at September 30, 1995. Net charge-offs for the third quarter of 1995 were $21 million, or 0.35 percent of average total loans, compared with $11 million, or 0.21 percent of average total loans in the third quarter of 1994. The level of charge-offs, while still below historical norms, has increased relative to the extremely low levels experienced over the past year due to credit card loans. For the first nine months of both 1995 and 1994, net charge-offs of $40 million and $34 million, respectively, represented just 0.23 percent of average total loans. An analysis of the allowance for loan losses is presented in the notes to the consolidated financial statements.
18 Nonperforming assets declined 6 percent since December 31, 1994, and were categorized as follows: <TABLE> <CAPTION> September 30, December 31, (in thousands) 1995 1994 ------------- ------------ <S> <C> <C> Nonaccrual loans: Commercial $ 98,653 $ 88,514 Real estate construction 9,788 16,941 Commercial mortgage 35,408 47,152 Residential mortgage 7,933 9,116 ------------- ------------ Total nonaccrual loans 151,782 161,723 Reduced-rate loans 4,137 2,299 ------------- ------------ Total nonperforming loans 155,919 164,022 Other real estate 36,941 40,462 ------------- ------------ Total nonperforming assets $ 192,860 $ 204,484 ============= ============ Loans past due 90 days or more $ 71,924 $ 39,161 ============= ============ </TABLE> Nonperforming assets as a percentage of total loans and other real estate at September 30, 1995 and December 31, 1994, were 0.79 percent and 0.92 percent, respectively. The $33 million increase in loans past due 90 days or more since year-end 1994 is related principally to credit card loans. Capital - ------- Shareholders' equity increased $161 million from December 31, 1994 to September 30, 1995, principally through retention of $189 million in earnings, the issuance of $76 million of common stock in connection with the acquisition of University Bank & Trust (University) in March 1995, and a $58 million decrease in unrealized losses on investment securities available for sale. The repurchase of 1.4 million shares, or $39 million, of common stock related to the acquisition of University partially offset the rise in shareholders' equity, along with the repurchase and retirement of 4.2 million shares, or $134 million, of common stock related to the impending Metrobank acquisition. Capital ratios continue to comfortably exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> September 30, December 31, 1995 1994 ------------- ------------ <S> <C> <C> Leverage ratio (3.00 - minimum) 6.72% 6.93% Tier 1 risk-based capital ratio (4.0 - minimum) 7.75 8.13 Total risk-based capital ratio (8.0 - minimum) 11.47 11.68 </TABLE>
19 At September 30, 1995, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of a "well capitalized" institution as defined in the final rule under FDICIA. Other Matters - ------------- As disclosed in Part I, Item 3 of Form 10-K for the year ended December 31, 1994, a lawsuit was filed on July 24, 1990, by the State of Michigan against a subsidiary bank involving hazardous waste issues. The Corporation's motion for summary judgment was granted in January 1993, however, the State of Michigan has filed an appeal that is still pending. Management believes that even if the summary judgment is not upheld on appeal, the results of this action will not have a materially adverse effect on the Corporation's consolidated financial position. Although, depending upon the amount of the ultimate liability, if any, and the consolidated results of operations in the year of final resolution, the legal action may have a materially adverse effect on the consolidated results of operation in that year.
20 PART II. OTHER INFORMATION ITEM 2. Changes in Securities (a) Changes in documents defining rights of security holders. On July 21, 1995, the Corporation made several amendments to its bylaws. Among other things, these amendments modified the procedure for holders of its Common Stock, $5.00 par value per share, to make director nominations and added procedures regarding shareholder requests for business to be conducted at a shareholder meeting. Advance notice of director nominations must be given by a shareholder not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; previously, such notice had to be given at least 30 days prior to such anniversary date. In addition, shareholders who desire to bring business at a shareholders meeting must comply with the advance notice provisions listed above as well as satisfy certain other technical notice requirements. A copy of the amended bylaws is attached hereto as Exhibit (4). ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (4) Instruments Defining the Rights of Security Holders - Corporate Bylaws As Amended on July 21, 1995 (11) Statement re: Computation of Earnings Per Share (b) Reports on Form 8-K None.
21 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. Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/Arthur W. Hermann -------------------------------------- Arthur W. Hermann Senior Vice President and Controller (Principal Accounting Officer) Date: October 31, 1995