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, 2000 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 April 30, 2000: 156,424,000 shares
2 PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> March 31, December 31, March 31, (In thousands, except share data) 2000 1999 1999 ------------- ------------ ------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 1,444,127 $ 1,201,990 $ 1,489,205 Short-term investments 204,075 612,959 84,275 Investment securities available for sale 2,667,400 2,739,464 2,484,883 Commercial loans 21,472,144 20,654,658 19,361,893 International loans 2,565,966 2,573,003 2,677,582 Real estate construction loans 1,871,592 1,709,261 1,165,498 Commercial mortgage loans 4,981,168 4,774,052 4,361,292 Residential mortgage loans 849,359 870,029 975,321 Consumer loans 1,368,733 1,350,725 1,800,993 Lease financing 755,298 761,550 639,966 ----------- ----------- ----------- Total loans 33,864,260 32,693,278 30,982,545 Less allowance for credit losses (502,954) (476,470) (452,936) ----------- ----------- ----------- Net loans 33,361,306 32,216,808 30,529,609 Premises and equipment 318,101 330,728 347,479 Customers' liability on acceptances outstanding 17,179 43,810 11,374 Accrued income and other assets 1,648,126 1,507,573 1,500,717 ----------- ----------- ----------- TOTAL ASSETS $39,660,314 $38,653,332 $36,447,542 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,342,570 $ 6,136,038 $ 6,701,698 Interest-bearing deposits 16,965,975 17,155,365 15,883,633 ----------- ----------- ----------- Total deposits 23,308,545 23,291,403 22,585,331 Federal funds purchased and securities sold under agreements to repurchase 3,465,102 1,332,397 3,144,172 Other borrowed funds 879,555 1,435,634 389,594 Acceptances outstanding 17,179 43,810 11,374 Accrued expenses and other liabilities 524,207 495,587 426,480 Medium- and long-term debt 7,900,388 8,579,857 6,731,749 ----------- ----------- ----------- Total liabilities 36,094,976 35,178,688 33,288,700 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 3/31/00, 12/31/99 and 3/31/99 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued-157,233,107 shares at 3/31/00, 12/31/99 and 3/31/99 786,166 786,166 786,166 Capital surplus 36,440 35,092 30,729 Accumulated nonowner changes in equity (42,864) (31,702) (3,917) Retained earnings 2,587,819 2,485,204 2,168,145 Deferred compensation (5,080) (2,955) (4,591) Less cost of common stock in treasury- 826,342 shares at 3/31/00, 715,496 shares at 12/31/99 and 1,026,993 shares at 3/31/99 (47,143) (47,161) (67,690) ----------- ----------- ----------- Total shareholders' equity 3,565,338 3,474,644 3,158,842 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $39,660,314 $38,653,332 $36,447,542 =========== =========== =========== </TABLE>
3 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended March 31 --------------------------- (In thousands, except per share data) 2000 1999 -------- -------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $693,840 $586,362 Interest on investment securities: Taxable 47,803 39,717 Exempt from federal income tax 803 1,375 -------- -------- Total interest on investment securities 48,606 41,092 Interest on short-term investments 17,419 1,981 -------- -------- Total interest income 759,865 629,435 INTEREST EXPENSE Interest on deposits 169,171 149,674 Interest on short-term borrowings 52,459 45,372 Interest on medium- and long-term debt 129,952 84,431 Net interest rate swap (income)/expense 3,340 (18,874) -------- -------- Total interest expense 354,922 260,603 -------- -------- Net interest income 404,943 368,832 Provision for credit losses 55,000 20,000 -------- -------- Net interest income after provision for credit losses 349,943 348,832 NONINTEREST INCOME Fiduciary and investment management income 79,028 54,943 Service charges on deposit accounts 43,892 41,698 Commercial lending fees 11,215 9,896 Letter of credit fees 10,694 8,491 Securities gains 253 1,202 Other noninterest income 75,615 40,664 -------- -------- Total noninterest income 220,697 156,894 NONINTEREST EXPENSES Salaries and employee benefits 168,001 152,483 Net occupancy expense 24,954 23,094 Equipment expense 15,074 14,851 Outside processing fee expense 12,332 12,854 Other noninterest expenses 75,662 60,132 -------- -------- Total noninterest expenses 296,023 263,414 -------- -------- Income before income taxes 274,617 242,312 Provision for income taxes 96,901 83,200 -------- -------- NET INCOME $177,716 $159,112 ======== ======== Net income applicable to common stock $173,441 $154,837 ======== ======== Basic net income per common share $1.11 $0.99 Diluted net income per common share $1.10 $0.98 Cash dividends declared on common stock $62,519 $56,149 Dividends per common share $0.40 $0.36 </TABLE>
4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Nonredeem- Accumulated able Nonowner Total Preferred Common Capital Changes Retained Deferred Treasury Shareholders' (in thousands) Stock Stock Surplus in Equity Earnings Compensation Stock Equity --------- --------- --------- ---------- ---------- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 1999 $250,000 $786,165 $ 24,649 $ (6,455) $2,086,589 $ (5,202) $ (89,133) $3,046,613 Net income for 1999 - - - - 159,112 - - 159,112 Nonowner changes in equity, net of tax - - - 2,538 - - - 2,538 ---------- Net income and nonowner changes in equity - - - - - - - 161,650 Cash dividends declared: Preferred stock - - - - (4,275) - - (4,275) Common stock - - - - (56,149) - - (56,149) Purchase of 44,082 shares of common stock - - - - - - (2,885) (2,885) Net issuance of common stock under employee stock plans - 1 6,080 - (17,132) 34 24,328 13,311 Amortization of deferred compensation - - - - - 577 - 577 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT MARCH 31, 1999 $250,000 $786,166 $ 30,729 $ (3,917) $2,168,145 $ (4,591) $ (67,690) $3,158,842 ======== ======== ========= ========= ========== ========= ========= ========== BALANCES AT JANUARY 1, 2000 $250,000 $786,166 $ 35,092 $ (31,702) $2,485,204 $ (2,955) $ (47,161) $3,474,644 Net income for 2000 - - - - 177,716 - - 177,716 Nonowner changes in equity, net of tax - - - (11,162) - - - (11,162) ---------- Net income and nonowner changes in equity - - - - - - - 166,554 Cash dividends declared: Preferred stock - - - - (4,275) - - (4,275) Common stock - - - - (62,519) - - (62,519) Purchase of 331,362 shares of common stock - - - - - - (13,112) (13,112) Net issuance of common stock under employee stock plans - - 1,348 - (8,307) (2,711) 13,130 3,460 Amortization of deferred compensation - - - - - 586 - 586 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT MARCH 31, 2000 $250,000 $786,166 $ 36,440 $ (42,864) $2,587,819 $ (5,080) $ (47,143) $3,565,338 ======== ======== ========= ========= ========== ========= ========= ========== </TABLE>
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended March 31 --------------------------------- (in thousands) 2000 1999 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 177,716 $ 159,112 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 55,000 20,000 Depreciation 13,861 14,193 Net (increase) decrease in trading account securities 9,549 (1,827) Net decrease in assets held for sale 20,635 26,225 Net increase in accrued income receivable (18,087) (22,307) Net increase in accrued expenses 3,984 56,088 Net amortization of intangibles 8,516 8,477 Other, net (90,951) (1,900) ------------ ------------ Total adjustments 2,507 98,949 ------------ ------------ Net cash provided by operating activities 180,223 258,061 INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (21,678) (583) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (56,383) 1,550 Proceeds from sale of investment securities available for sale 1,408 2,849 Proceeds from maturity of investment securities available for sale 112,955 235,613 Purchases of investment securities available for sale (63,014) (6,785) Net increase in loans (1,199,498) (397,155) Fixed assets, net (1,234) (9,022) Net decrease in customers' liability on acceptances outstanding 26,631 961 Net cash provided by acquisitions/sales 445,274 - ------------ ------------ Net cash used in investing activities (755,539) (172,572) FINANCING ACTIVITIES: Net increase (decrease) in deposits 17,142 (1,727,802) Net increase (decrease) in short-term borrowings 1,576,626 (46,387) Net decrease in acceptances outstanding (26,631) (961) Proceeds from issuance of medium- and long-term debt 1,470,981 2,250,000 Repayments and purchases of medium- and long-term debt (2,150,450) (800,510) Proceeds from issuance of common stock and other capital transactions 3,460 13,277 Purchase of common stock for treasury and retirement (13,112) (2,885) Dividends paid (60,563) (54,116) ------------ ------------ Net cash provided by (used in) financing activities 817,453 (369,384) ------------ ------------ Net increase (decrease) in cash and due from banks 242,137 (283,895) Cash and due from banks at beginning of year 1,201,990 1,773,100 ------------ ------------ Cash and due from banks at end of period $ 1,444,127 $ 1,489,205 ============ ============ Interest paid $ 356,789 $ 260,974 ============ ============ Income taxes paid $ 91,823 $ 645 ============ ============ Noncash investing and financing activities: Loan transfers to other real estate $ 1,796 $ 297 ============ ============ </TABLE>
6 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. Certain items in prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report of Comerica Incorporated and Subsidiaries (the "Corporation") on Form 10-K for the year ended December 31, 1999. The Corporation may use derivative financial instruments, including foreign exchange contracts, to manage the Corporation's exposure to interest rate and foreign currency risks. These instruments are treated as hedges, and accounted for on an accrual basis, since there is a high correlation with the on-balance sheet instrument being hedged. If this correlation ceases to exist, the existing unrealized gain or loss is amortized over the remaining term of the instrument, and future changes in fair value are accounted for on a mark-to-market basis. Derivative financial instruments executed as a service to customers are accounted for on a mark-to-market basis. For further information, refer to the Accounting Policies footnote in the Corporation's 1999 annual report.
7 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated nonowner changes in equity until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." Statement 137 amended the required effective date of Statement 133, requiring adoption of Statement 133 in years beginning after June 15, 2000. The Corporation expects to adopt Statement 133 effective January 1, 2001. The Corporation is in the process of assessing what the effect of Statement 133 will be on the earnings and financial position of the Corporation. Note 2 - Investment Securities At March 31, 2000, investment securities having a carrying value of $1.8 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 $52 million.
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses The following analyzes the changes in the allowance for credit losses included in the consolidated balance sheets: <TABLE> <CAPTION> (in thousands) 2000 1999 --------- --------- <S> <C> <C> Balance at January 1 $ 476,470 $ 452,409 Charge-offs (31,731) (24,710) Recoveries 3,222 5,229 --------- --------- Net charge-offs (28,509) (19,481) Provision for credit losses 55,000 20,000 Foreign currency translation adjustment (7) 8 --------- --------- Balance at March 31 $ 502,954 $ 452,936 ========= ========= </TABLE> 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 $179 million for the three months ended March 31, 2000, compared to $131 million for the comparable period last year. The following are period-end balances: <TABLE> <CAPTION> (in thousands) March 31, 2000 December 31, 1999 -------------- ----------------- <S> <C> <C> Total impaired loans $168,054 $159,165 Impaired loans requiring an allowance 157,600 155,828 Impairment allowance 44,123 51,753 </TABLE> Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan.
9 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 4 - Medium- and Long-term Debt Medium- and long-term debt consisted of the following at March 31, 2000 and December 31, 1999: <TABLE> <CAPTION> (in thousands) March 31, 2000 December 31, 1999 --------------- ----------------- <S> <C> <C> Parent Company 7.25% subordinated notes due 2007 $ 158,263 $ 158,543 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 198,552 198,502 7.875% subordinated notes due 2026 173,000 173,217 8.375% subordinated notes due 2024 155,233 155,287 7.25% subordinated notes due 2002 149,600 149,561 6.875% subordinated notes due 2008 103,616 103,729 7.125% subordinated notes due 2013 154,747 154,834 6.00% subordinated notes due 2008 248,066 248,010 ---------- ---------- Total subordinated notes 1,182,814 1,183,140 Medium-term notes: Floating rate based on Treasury bill indices 37,000 37,000 Floating rate based on Prime indices 895,998 1,224,993 Floating rate based on LIBOR indices 5,412,418 5,762,320 Fixed rate notes with interest rate of 6.65% 199,978 199,944 ---------- ---------- Total medium-term notes 6,545,394 7,224,257 Notes payable 13,917 13,917 ---------- ---------- Total subsidiaries 7,742,125 8,421,314 ---------- ---------- Total medium- and long-term debt $7,900,388 $8,579,857 ========== ========== </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 income on bank-owned life insurance and interest income on state and municipal securities. State and foreign taxes are then added to the federal provision.
10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> March 31, 2000 December 31, 1999 -------------------------------------- ------------------------------------ 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 swaps $ 8,923 $ 20 $ (191) $ (171) $ 8,518 $ 17 $ (172) $ (155) Foreign exchange contracts: Spot, forward and options 1,154 30 (28) 2 1,098 33 (23) 10 Swaps 115 -- (10) (10) 115 -- (5) (5) ------- -------- -------- -------- ------- ----- ------- -------- Total risk management 10,192 50 (229) (179) 9,731 50 (200) (150) Customer-Initiated and Other Interest rate contracts: Caps and floors written 200 -- (1) (1) 166 -- (1) (1) Caps and floors purchased 179 1 -- 1 141 1 -- 1 Swaps 292 3 (3) -- 256 2 (2) -- Foreign exchange contracts: Spot, forward and options 656 14 (11) 3 579 14 (11) 3 ------- -------- -------- -------- ------- ----- ------- -------- Total customer-initiated and other 1,327 18 (15) 3 1,142 17 (14) 3 ------- -------- -------- -------- ------- ----- ------- -------- Total derivatives and foreign exchange contracts $11,519 $ 68 $ (244) $ (176) $10,873 $ 67 $ (214) $ (147) ======= ======== ======== ========= ======= ===== ======= ======== </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. The fair values of customer-initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets. Futures contracts are subject to daily cash settlements; therefore, the fair value of these instruments is zero.
11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) Risk Management Interest rate risk arises in the normal course of business 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 on-balance sheet instruments such as investment securities, as well as off-balance sheet derivative financial instruments and foreign exchange contracts, to manage exposure to these and other risks, including liquidity risk. As an end-user, the Corporation mainly accesses the interest rate markets to obtain off-balance sheet derivative instruments for use principally in connection with asset and liability management activities. The Corporation principally utilizes interest rate swaps with the overall objective of mitigating adverse impacts to net interest income from changes in interest rates. To accomplish this objective, the Corporation uses interest rate swaps primarily to modify the interest rate characteristics of certain assets and liabilities (for example, from a floating rate to a fixed rate, a fixed rate to a floating rate or from one floating rate index to another). Management believes this strategy achieves an optimal match between the rate maturities of assets and their funding sources which, in turn, reduces the overall exposure of net interest income to interest rate risk, although there can be no assurance that such a strategy will be successful. The Corporation also uses various other types of off-balance sheet 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.
12 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) 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, 2000. The swaps are grouped by the assets or liabilities to which they have been designated. At March 31, 2000 and December 31, 1999, the notional amounts of commitments to purchase and sell U.S. Treasury and municipal bond securities related to the Corporation's trading account totaled $10 million and $4 million, respectively. These commitments, which are similar in nature to forward contracts, are not reflected in the preceding table due to the immaterial impact they have on the financial statements. Customer-Initiated and Other The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts 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, 2000 and for the year ended December 31, 1999. Customer-initiated interest rate caps, floors and swaps generally are not offset by other on- or off-balance sheet financial instruments; however, the Corporation has established authority limits for engaging in these transactions in order to minimize risk exposure. As a result, average fair values and income from this activity were not material for the three-month period ended March 31, 2000 and for the year ended December 31, 1999.
13 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts (continued) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: 2005- Dec. 31, (dollar amounts in millions) 2000 2001 2002 2003 2004 2026 Total 1999 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Variable rate asset designation: Receive fixed swaps Generic $ 400 $3,250 $2,850 $ 600 $ - $ - $7,100 $6,800 Index amortizing 132 - - - - - 132 149 Weighted average: (1) Receive rate 6.28% 5.68% 7.14% 10.01% -% -% 6.66% 6.36% Pay rate 6.13% 6.09% 7.58% 8.86% -% -% 6.91% 6.71% Fixed rate asset designation: Pay fixed swaps Generic $ 11 $ - $ - $ - $ - $ - $ 11 $ 13 Index amortizing 6 - - - - - 6 7 Amortizing - - 2 - - - 2 2 Weighted average: (1) Receive rate 6.07% -% 5.36% -% -% -% 6.01% 6.37% Pay rate 5.93% -% 6.05% -% -% -% 5.94% 5.93% Fixed Rate Deposit Designation: Receive fixed swaps Generic $ 46 $ 88 $ 1 $ - $ - $ - $ 135 $ 10 Weighted average:(1) Receive rate 5.40% 6.93% 7.05% -% -% -% 6.42% 5.16% Pay rate 2.44% 6.15% 6.15% -% -% -% 4.85% 5.01% Medium- and long-term debt designation: Generic receive fixed swaps $ 200 $ - $ 150 $ - $ - $1,150 $1,500 $1,500 Weighted average: (1) Receive rate 6.91% -% 7.37% -% -% 6.79% 6.86% 6.86% Pay rate 6.10% -% 6.09% -% -% 6.15% 6.14% 5.95% Floating/floating swaps $ 37 $ - $ - $ - $ - $ - $ 37 $ 37 Weighted average: (2) Receive rate 6.47% -% -% -% -% -% 6.47% 5.93% Pay rate 6.03% -% -% -% -% -% 6.03% 6.19% Total notional amount $ 832 $3,338 $3,003 $ 600 $ - $1,150 $8,923 $8,518 - ------------------------------------------------------------------------------------------------- (1) Variable rates are based on LIBOR, CDOR or prime rates paid or received at March 31, 2000. (2) Variable rates paid are based on LIBOR at March 31, 2000, while variable rates received are based on the two-year Constant Treasury Maturity Rate. - ------------------------------------------------------------------------------------------------- </TABLE>
14 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) Swaps Contracts Contracts Contracts --------------------- --------------------- <S> <C> <C> <C> <C> Balances at December 31, 1999 $ 8,518 $ 1,213 $ 563 $ 579 Additions 736 3,550 132 10,759 Maturities/amortizations (331) (3,494) (24) (10,682) ------- ------- ----- -------- Balances at March 31, 2000 $ 8,923 $ 1,269 $ 671 $ 656 ======= ======= ===== ======== </TABLE> Additional information regarding the nature, terms and associated risks of the above off-balance sheet derivatives and foreign exchange contracts, along with information on derivative accounting policies, can be found in the Corporation's 1999 annual report on page 38 and in Notes 1 and 18 to the consolidated financial statements. 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
15 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) 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, 2000 and 1999 are presented below. Three Months Ended March 31 <TABLE> <CAPTION> Business Individual Investment Bank Bank Bank* - ---------------------------------------------------------------------------- (dollar amounts in millions) 2000 1999 2000 1999 2000 1999 - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $27,941 $25,127 $7,031 $6,967 $ 405 $ 230 Total revenues (FTE) 273 238 293 235 63 41 Net income 111 75 93 57 6 2 Return on average assets 1.59% 1.20% 2.02% 1.27% 5.89% 3.82% Return on average common equity 22.68% 20.08% 49.73% 32.48% 7.72% 4.57% </TABLE> <TABLE> <CAPTION> Finance Other Total - ---------------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 4,063 $ 3,971 $ (151) $(212) $39,289 $36,083 Total revenues (FTE) (2) 13 - - 627 527 Net income (2) 8 (30) 17 178 159 Return on average assets (0.05)% 0.24% N/M N/M 1.81% 1.76% Return on average common equity (2.08)% 9.39% N/M N/M 21.35% 21.90% </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 would have been $9 million and $4 million, and return on average common equity would have been 10.91% and 7.60%, in 2000 and 1999, respectively. N/M - Not Meaningful
16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to Note 22 to the consolidated financial statements in the Corporation's 1999 annual report. The financial results for Munder Capital Management, the Corporation's investment advisory subsidiary, are included in results of the Investment Bank. Prior to 2000, the financial results for Munder were included in the Other category. For comparability purposes, 1999 results for the Investment Bank and the Other category have been restated to reflect this change in the organizational structure of the Corporation.
17 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Nonowner Changes in Equity Nonowner changes in equity include the change in unrealized gains and losses on investment securities available for sale and the change in the accumulated foreign currency translation adjustment. The Consolidated Statements of Changes in Shareholders' Equity include only the combined, net of tax, nonowner changes in equity. The following presents reconciliations of the components of accumulated nonowner changes in equity for the three months ended March 31, 2000 and 1999. <TABLE> <CAPTION> Three Months Ended March 31 -------------------- 2000 1999 -------- -------- <S> <C> <C> (in thousands) Net unrealized gains (losses) on investment securities available for sale: Balance at beginning of year $(32,717) $(7,688) Net unrealized holding gains (losses) arising during the period (12,542) 5,946 Less: Reclassification adjustment for gains (losses) included in net income 253 1,202 -------- ------- Change in net unrealized gains (losses) before income taxes (12,795) 4,744 Provision for income taxes (4,414) 1,349 -------- ------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax ( 8,381) 3,395 -------- ------- Balance at March 31 $(41,098) $(4,293) Accumulated foreign currency translation adjustment: Balance at beginning of year $ 1,015 $ 1,233 Net translation gains (losses) arising during the period (2,781) (857) Less: Reclassification adjustment for gains (losses) included in net income - - -------- ------- Change in translation adjustment before income taxes (2,781) (857) Provision for income taxes - - -------- ------- Change in foreign currency translation adjustment, net of tax (2,781) (857) -------- ------- Balance at March 31 $ (1,766) $ 376 -------- ------- Total accumulated nonowner changes in equity, net of taxes, at March 31 $(42,864) $(3,917) ======== ======= </TABLE>
18 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, 2000, was $178 million, up $19 million, or 12 percent, from $159 million reported for the first quarter of 1999. Diluted net income per share increased 12 percent to $1.10 from $0.98 a year ago. Return on average common shareholders' equity was 21.35 percent and return on average assets was 1.81 percent, compared to 21.90 percent and 1.76 percent, respectively, for the comparable quarter last year. 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, 2000. On a FTE basis, net interest income was $406 million for the three months ended March 31, 2000, an increase of $36 million, or 10 percent, from the comparable quarter in 1999. The increase in net interest income was primarily due to a 12 percent increase in average corporate loans and an increase in average common shareholders' equity. The net interest margin for the three months ended March 31, 2000, was 4.47 percent, a decrease of 4 basis points from 4.51 percent for the first quarter of 1999. The decrease in the net interest margin was primarily due to a reduction in net interest rate swap income and a greater reliance on medium- and long-term debt in the mix of interest-bearing liabilities. This was partially offset by an increase in the impact of net noninterest-bearing sources of funds. With core deposit balances growing at rates slower than earning assets, a greater reliance on purchased funds 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 on-balance sheet investment securities but without significant impact
19 to capital or liquidity. These instruments are designated against certain assets and liabilities, therefore, their impact on net interest income is generally offset by and should be considered in relation to the level of net interest income generated by the related on-balance sheet assets and liabilities. In addition to using interest rate swaps and other off-balance sheet instruments to control 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, 2000, the Corporation was in an asset sensitive position of $773 million (on an elasticity adjusted basis), or two 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, 2000, for a 200 basis point decline in short-term interest rates identified approximately $36 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 at risk would be approximately $16 million, or one percent. The results of these simulations are within established corporate policy guidelines.
20 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Three Months Ended ------------------------------------------------------------- March 31, 2000 March 31, 1999 ----------------------------- ----------------------------- <S> <C> <C> <C> <C> <C> <C> Average Average Average Average (dollar amounts in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- Loans $33,207 $694 8.41% $30,581 $587 7.77% Investment securities 2,672 49 7.18 2,546 42 6.55 Other earning assets 539 18 12.96 99 2 8.21 - ---------------------------------------------------------------------------------------------- Total earning assets 36,418 761 8.38 33,226 631 7.68 Interest-bearing deposits 17,121 169 3.97 16,494 150 3.68 Short-term borrowings 3,482 53 6.06 3,769 45 4.88 Medium- and long-term debt 8,444 130 6.18 6,103 85 5.59 Net interest rate swap (income)/ expense (1) - 3 - - (19) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $29,047 355 4.91 $26,366 261 4.00 -------------- --------------- Net interest income/ Rate spread (FTE) $406 3.47 $370 3.68 ==== ==== FTE adjustment $ 1 $ 1 ==== ==== Impact of net noninterest-bearing sources of funds 1.00 0.83 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.47% 4.51% ============================================================================================== </TABLE> (1) After allocation of the income or expense generated by interest rate swaps for the three months ended March 31, 2000, to the related assets and liabilities, the average yield on total loans was 8.33 percent as of March 31, 2000, compared to 7.97 percent a year ago. The average cost of funds for medium- and long-term debt was 6.05 percent as of March 31, 2000, compared to 5.33 percent a year earlier. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase Rate Volume* (Decrease) (in millions) ---------- ---------- ---------- <S> <C> <C> <C> Loans $ 52 $ 55 $ 107 Investment securities 5 2 7 Other earning assets 1 15 16 ------------------------------ Total earning assets 58 72 130 Interest-bearing deposits 10 9 19 Short-term borrowings 12 (4) 8 Medium- and long-term debt 10 35 45 Net interest rate swap (income)/expense 22 - 22 ------------------------------ Total interest-bearing sources 54 40 94 ------------------------------ Net interest income/Rate spread (FTE) $ 4 $ 32 $ 36 ============================== </TABLE> * Rate/Volume variances are allocated to variances due to volume.
21 Provision for Credit Losses The provision for credit losses was $55 million for the first quarter of 2000, compared to $20 million for the same period in 1999. The Corporation establishes this provision to maintain an adequate allowance for credit losses, which is discussed in the section entitled "Allowance for Credit Losses and Nonperforming Assets." Noninterest Income Noninterest income was $221 million for the three months ended March 31, 2000, an increase of $64 million, or 41 percent, over the same period in 1999. During the first quarter of 2000, the Corporation announced an alliance to provide third party credit card and check-accessed line of credit services to the Corporation's customers and sold $457 million of revolving check credit and bankcard loans. A gain of approximately $30 million, net of costs incurred as a result of the sale and the estimated fair value of recourse obligations inherent in the agreement, was recognized in noninterest income in the first quarter 2000. Excluding the $30 million gain, noninterest income increased 21 percent in the first quarter of 2000, compared to the first quarter of 1999. Strong investment advisory fee growth of $23 million at Munder Capital Management contributed to growth in noninterest income. Noninterest Expenses Noninterest expenses were $296 million for the first quarter ended March 31, 2000, an increase of $33 million, or 12 percent, from the first quarter of 1999. Salaries and benefits expense increased in the first quarter of 2000 over the same quarter a year ago, due primarily to annual merit increases and higher levels of revenue-related incentives. Provision for Income Taxes The provision for income taxes for the first quarter of 2000 totaled
22 $97 million, an increase of 16 percent compared to $83 million reported for the same period a year ago. The effective tax rate was 35 percent for the first quarter of 2000 and 34 percent for the first quarter of 1999. Financial Condition Total assets were $39.7 billion at March 31, 2000, compared with $36.4 billion at March 31, 1999. The Corporation has continued to generate growth in corporate loans in 2000. Since December 31, 1999, domestic commercial loans have increased $817 million, or four percent, real estate construction loans have increased $162 million, or nine percent, and commercial mortgage loans have increased $207 million, or four percent. Short-term investments decreased $409 million from year-end 1999, due primarily to the sale of bankcard and revolving check credit loans mentioned previously, which were classified as held for sale at December 31, 1999. Total liabilities increased $916 million, or three percent, since December 31, 1999 to $36.1 billion. Total deposits remained stable and totaled $23.3 billion at March 31, 2000 and December 31, 1999. Total short-term borrowings increased $1.6 billion since year-end 1999 while medium- and long-term debt decreased $679 million, or eight 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 corporate loan at the time of approval
23 and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Corporate 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 corporate loans which have deteriorated below certain levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining corporate loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent 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 $271 million at March 31, 2000 and year-end 1999. 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 Indonesian and Latin American transfer risks and the risk associated with new customer relationships. The unallocated allowance was $232 million at
24 March 31, 2000, an increase of $27 million from December 31, l999. This increase in the unallocated allowance was primarily due to increases in loan balances to healthcare customers and increased risk in the energy sector due to the volatility of energy prices. 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, 2000, the allowance for credit losses was $503 million, an increase of $27 million since December 31, 1999. The allowance as a percentage of total loans was 1.49 percent, compared to 1.46 percent at December 31, 1999. As a percentage of nonperforming assets, the allowance was 264 percent at March 31, 2000, versus 262 percent at year-end 1999. Net charge-offs for the first quarter of 2000 were $29 million, or 0.34 percent of average total loans, compared with $19 million, or 0.25 percent, for the year-earlier quarter. An analysis of the allowance for credit losses is presented in Note 5 to the year-end 1999 consolidated financial statements.
25 Nonperforming assets increased $9 million, or five percent, since December 31, 1999, and were categorized as follows: <TABLE> <CAPTION> March 31, December 31, 2000 1999 (in thousands) ------------- ------------ <S> <C> <C> Nonaccrual loans: Commercial $ 127,974 $ 110,606 International 36,482 44,046 Real estate construction 249 249 Commercial mortgage 8,289 9,620 Residential mortgage 509 572 ------------ ----------- Total nonaccrual loans 173,503 165,093 Reduced-rate loans 6,905 7,347 ------------ ----------- Total nonperforming loans 180,408 172,440 Other real estate 10,422 9,595 ------------ ----------- Total nonperforming assets $ 190,830 $ 182,035 ============ ========== Loans past due 90 days or more $ 39,523 $ 47,676 ============ ========== </TABLE> The increase in commercial nonaccrual loans from December 31, 1999, was primarily related to a customer in the energy industry. Nonperforming assets as a percentage of total loans and other real estate were 0.56 percent at March 31, 2000 and December 31, 1999. Capital Common shareholders' equity increased $102 million from December 31, 1999 to March 31, 2000, excluding nonowner changes in equity. The increase was primarily due to the retention of $111 million in earnings and a $4 million increase related to employee stock plan activity, offset by a $13 million decrease in equity from stock repurchase activity.
26 Capital ratios exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> March 31, December 31, 2000 1999 ------------- ------------ <S> <C> <C> Leverage ratio (3.00 - minimum) 8.24% 8.39% Tier 1 risk-based capital ratio (4.0 - minimum) 6.88 6.95 Total risk-based capital ratio (8.0 - minimum) 10.63 10.72 </TABLE> At March 31, 2000, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of "well capitalized" institutions as defined in the final rule under FDICIA. Other Matters The Corporation initiated an extensive enterprise-wide and centrally managed project to prepare its computer systems, applications and infrastructure for year 2000 readiness. The year 2000 team included the active involvement of senior executives as well as seasoned project managers and business unit liaisons from throughout the Corporation. To date, the Corporation has experienced no known significant system, supplier or customer failures attributable to the year 2000 date change. The cost of the Corporation's year 2000 project included internal and external development costs, asset impairment write-offs and the cost of software and hardware for systems that were not ready or would not have been ready by the year 2000. The year 2000 project cost, both internal and external, totaled approximately $50 million. Of the $50 million incurred, $12 million was for capital assets which the Corporation is expensing over their useful lives. The project was staffed with external resources as well as internal staff redeployed from less time-sensitive assignments. The redeployment of existing staff did not have a material adverse effect on the Corporation's business, results of operations or financial position. This report includes forward-looking statements based on
27 management's current expectations and/or the assumptions made in the earnings simulation analyses. Numerous factors could cause variances in these projections and their underlying assumptions, such as changes in interest rates, the industries where the Corporation has a concentration of loans, changes in the level of fee income, the impact of the Internet on banking, 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 continuing consolidations in the banking industry.
28 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement re: Computation of Earnings Per Share (27) Financial Data Schedule (b) Reports on Form 8-K The Corporation did not file any reports on Form 8-K during the three months ended March 31, 2000.
29 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 Date: May 15, 2000
30 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 11 Statement re: Computation of Earnings Per Share 27 Financial Data Schedule