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, 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 October 31, 2000: 156,742,000 shares
2 PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> September 30, December 31, September 30, (In thousands, except share data) 2000 1999 1999 ------------ ----------- ------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 1,519,051 $ 1,201,990 $ 1,485,739 Short-term investments 170,792 612,959 188,027 Investment securities available for sale 2,692,595 2,739,464 2,125,613 Commercial loans 22,170,614 20,654,658 20,023,564 International loans 2,483,910 2,573,003 2,575,318 Real estate construction loans 2,197,799 1,709,261 1,545,168 Commercial mortgage loans 5,095,248 4,774,052 4,513,685 Residential mortgage loans 816,960 870,029 878,223 Consumer loans 1,415,889 1,350,725 1,823,635 Lease financing 854,999 761,550 718,347 ----------- ----------- ----------- Total loans 35,035,419 32,693,278 32,077,940 Less allowance for credit losses (523,575) (476,470) (463,451) ----------- ----------- ----------- Net loans 34,511,844 32,216,808 31,614,489 Premises and equipment 312,992 330,728 336,410 Customers' liability on acceptances outstanding 22,578 43,810 25,960 Accrued income and other assets 1,655,538 1,507,573 1,508,752 ----------- ----------- ----------- TOTAL ASSETS $40,885,390 $38,653,332 $37,284,990 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 6,384,881 $ 6,136,038 $ 6,430,126 Interest-bearing deposits 19,135,057 17,155,365 16,470,174 ----------- ----------- ----------- Total deposits 25,519,938 23,291,403 22,900,300 Federal funds purchased and securities sold under agreements to repurchase 2,155,228 1,332,397 956,993 Other borrowed funds 1,130,201 1,435,634 1,254,976 Acceptances outstanding 22,578 43,810 25,960 Accrued expenses and other liabilities 561,214 495,587 427,728 Medium- and long-term debt 7,650,541 8,579,857 8,355,771 ----------- ----------- ----------- Total liabilities 37,039,700 35,178,688 33,921,728 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 9/30/00, 12/31/99 and 9/30/99 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued-157,233,107 shares at 9/30/00, 12/31/99 and 9/30/99 786,166 786,166 786,166 Capital surplus 39,765 35,092 32,452 Accumulated other comprehensive income (14,879) (31,702) (22,096) Retained earnings 2,821,076 2,485,204 2,379,372 Deferred compensation (4,047) (2,955) (3,517) Less cost of common stock in treasury- 571,201 shares at 9/30/00, 715,496 shares at 12/31/99 and 896,861 shares at 9/30/99 (32,391) (47,161) (59,115) ----------- ----------- ----------- Total shareholders' equity 3,845,690 3,474,644 3,363,262 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,885,390 $38,653,332 $37,284,990 =========== =========== =========== </TABLE>
3 Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ------------------------------- (In thousands, except per share data) 2000 1999 2000 1999 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $786,074 $631,796 $2,231,971 $1,818,483 Interest on investment securities: Taxable 45,451 36,849 137,820 114,472 Exempt from federal income tax 694 1,108 2,245 3,744 -------- -------- ---------- ---------- Total interest on investment securities 46,145 37,957 140,065 118,216 Interest on short-term investments 5,496 2,183 28,082 6,173 -------- -------- ---------- ---------- Total interest income 837,715 671,936 2,400,118 1,942,872 INTEREST EXPENSE Interest on deposits 216,764 147,147 572,154 436,628 Interest on short-term borrowings 46,313 45,596 163,564 134,374 Interest on medium- and long-term debt 140,891 102,669 398,381 283,383 Net interest rate swap (income)/expense 17,280 (13,868) 29,776 (50,379) -------- -------- ---------- ---------- Total interest expense 421,248 281,544 1,163,875 804,006 -------- -------- ---------- ---------- Net interest income 416,467 390,392 1,236,243 1,138,866 Provision for credit losses 24,000 21,000 113,000 69,000 -------- -------- ---------- ---------- Net interest income after provision for credit losses 392,467 369,392 1,123,243 1,069,866 NONINTEREST INCOME Fiduciary and investment management income 78,740 60,493 234,643 175,275 Service charges on deposit accounts 45,205 43,162 134,563 127,380 Commercial lending fees 15,399 14,001 38,044 35,212 Letter of credit fees 10,023 10,321 31,892 27,832 Securities gains/(losses) (742) 49 621 1,941 Other noninterest income 53,859 42,449 183,088 154,380 -------- -------- ---------- ---------- Total noninterest income 202,484 170,475 622,851 522,020 NONINTEREST EXPENSES Salaries and employee benefits 169,818 159,932 502,818 474,982 Net occupancy expense 23,847 24,648 72,909 71,717 Equipment expense 14,557 15,320 44,242 45,613 Outside processing fee expense 13,029 11,329 37,724 36,524 Other noninterest expenses 80,288 65,621 235,732 200,308 -------- -------- ---------- ---------- Total noninterest expenses 301,539 276,850 893,425 829,144 -------- -------- ---------- ---------- Income before income taxes 293,412 263,017 852,669 762,742 Provision for income taxes 101,571 92,603 297,561 265,834 -------- -------- ---------- ---------- NET INCOME $191,841 $170,414 $ 555,108 $ 496,908 ======== ======== ========== ========== Net income applicable to common stock $187,566 $166,139 $ 542,283 $ 484,083 ======== ======== ========== ========== Basic net income per common share $1.20 $1.06 $3.47 $3.10 Diluted net income per common share $1.18 $1.05 $3.43 $3.06 Cash dividends declared on common stock $62,601 $56,226 $187,571 $168,556 Dividends per common share $0.40 $0.36 $1.20 $1.08 </TABLE>
4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Nonredeem- Accumulated able Other Total Preferred Common Capital Comprehensive Retained Deferred Treasury Shareholders' (in thousands) Stock Stock Surplus Income 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 - - - - 496,908 - - 496,908 Other comprehensive income, net of tax - - - (15,641) - - - (15,641) ---------- Total comprehensive income - - - - - - - 481,267 Cash dividends declared: Preferred stock - - - - (12,825) - - (12,825) Common stock - - - - (168,556) - - (168,556) Purchase of 44,082 shares of common stock - - - - - - (2,885) (2,885) Net issuance of common stock under employee stock plans - 1 7,803 - (22,744) 4 32,903 17,967 Amortization of deferred compensation - - - - - 1,681 - 1,681 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT SEPTEMBER 30, 1999 $250,000 $786,166 $ 32,452 $ (22,096) $2,379,372 $ (3,517) $ (59,115) $3,363,262 ======== ======== ========= ========= ========== ========= ========= ========== 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 - - - - 555,108 - - 555,108 Other comprehensive income, net of tax - - - 16,823 - - - 16,823 ---------- Total comprehensive income - - - - - - - 571,931 Cash dividends declared: Preferred stock - - - - (12,825) - - (12,825) Common stock - - - - (187,571) - - (187,571) Purchase of 353,547 shares of common stock - - - - - - (14,108) (14,108) Net issuance of common stock under employee stock plans - - 4,673 - (18,840) (2,645) 28,878 12,066 Amortization of deferred compensation - - - - - 1,553 - 1,553 -------- -------- --------- --------- ---------- --------- --------- ---------- BALANCES AT SEPTEMBER 30, 2000 $250,000 $786,166 $ 39,765 $ (14,879) $2,821,076 $ (4,047) $ (32,391) $3,845,690 ======== ======== ========= ========= ========== ========= ========= ========== </TABLE>
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Nine Months Ended September 30 --------------------------------- (in thousands) 2000 1999 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 555,108 $ 496,908 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 113,000 69,000 Depreciation 40,910 42,556 Net (increase) decrease in trading account securities (7,152) 1,925 Net decrease in assets held for sale 21,312 24,862 Net increase in accrued income receivable (56,780) (28,563) Net increase in accrued expenses 27,616 60,651 Net amortization of intangibles 27,323 25,417 Other, net (64,489) 39,850 ------------ ------------ Total adjustments 101,740 235,698 ------------ ------------ Net cash provided by operating activities 656,848 732,606 INVESTING ACTIVITIES: Net increase in interest-bearing deposits with banks (14,977) (32,332) Net increase in federal funds sold and securities purchased under agreements to resell (25,803) (72,842) Proceeds from sale of investment securities available for sale 8,344 3,588 Proceeds from maturity of investment securities available for sale 406,351 603,066 Purchases of investment securities available for sale (364,127) (96,633) Net increase in loans (2,408,036) (1,531,035) Fixed assets, net (23,174) (26,316) Net (increase) decrease in customers' liability on acceptances outstanding 21,232 (13,625) Net cash provided by acquisitions/sales 461,300 - ------------ ------------ Net cash used in investing activities (1,938,890) (1,166,129) FINANCING ACTIVITIES: Net increase (decrease) in deposits 2,228,535 (1,412,833) Net increase (decrease) in short-term borrowings 517,398 (1,368,184) Net increase (decrease) in acceptances outstanding (21,232) 13,625 Proceeds from issuance of medium- and long-term debt 4,789,067 5,400,000 Repayments and purchases of medium- and long-term debt (5,718,383) (2,326,488) Proceeds from issuance of common stock and other capital transactions 12,066 17,963 Purchase of common stock for treasury (14,108) (2,885) Dividends paid (194,240) (175,036) ------------ ------------ Net cash provided by financing activities 1,599,103 146,162 ------------ ------------ Net increase (decrease) in cash and due from banks 317,061 (287,361) Cash and due from banks at beginning of year 1,201,990 1,773,100 ------------ ------------ Cash and due from banks at end of period $ 1,519,051 $ 1,485,739 ============ ============ Interest paid $ 1,134,272 $ 794,391 ============ ============ Income taxes paid $ 289,426 $ 203,862 ============ ============ Noncash investing and financing activities: Loan transfers to other real estate $ 5,147 $ 4,334 ============ ============ </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 nine months ended September 30, 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. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", as amended by Statements No. 137 and 138, which the Corporation is required and intends to adopt effective January 1, 2001.
7 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) 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 in net income. If a derivative is a hedge, depending on the nature of the hedge, the change in fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through net income or recognized in other comprehensive income until the hedged item is recognized in net income. The ineffective portion of a derivative's change in fair value will be immediately recognized in net income. The Corporation utilizes interest rate swaps predominantly as asset and liability management tools with the overall objective of mitigating adverse impacts to net interest income from changes in interest rates. Interest rate swaps that are used to hedge the variable cash flows from loans will be accounted for as cash flow hedges upon adoption of SFAS 133. The Corporation also utilizes interest rate swaps to hedge fixed rate deposits and medium- and long-term debt. These swaps will be accounted for as fair value hedges upon adoption of SFAS 133. The Corporation utilizes foreign exchange forward contracts and foreign exchange swap agreements to manage risk associated with foreign currency denominated assets and liabilities. The gains or losses recognized on foreign exchange contracts related to foreign currency denominated assets and liabilities provide an offset to the transaction gain or loss recognized from remeasurement of the asset or liability into the Corporation's functional currency. The Corporation has foreign exchange contracts hedging the foreign currency exposure of its net investment in foreign operations. These contracts qualify for hedge accounting treatment under SFAS 133 and the effective portion of these hedges will continue to be recorded in other comprehensive income as an offset to the currency translation adjustment that arises upon consolidation of the foreign operation. The corporation has completed a substantial portion of the work that will be required to adopt SFAS 133. However, since the Corporation is
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) adopting SFAS 133 on January 1, 2001, it is not possible to predict the actual impact on net income and other comprehensive income. Based on the Corporation's derivative positions as of September 30, 2000, the adoption would have resulted in a reduction of net income from the cumulative effect of adoption of approximately $1 million and a decrease in other comprehensive income of approximately $33 million. This calculation of the impact of the transition adjustment as of September 30, 2000, which is very sensitive to interest rates, may not be representative of the actual impact the statement may have on the Corporation at adoption on January 1, 2001. Note 2 - Investment Securities At September 30, 2000, investment securities having a carrying value of $1.6 billion were pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $53 million. 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 (77,516) (76,350) Recoveries 11,679 18,368 --------- --------- Net charge-offs (65,837) (57,982) Provision for credit losses 113,000 69,000 Foreign currency translation adjustment (58) 24 --------- --------- Balance at September 30 $ 523,575 $ 463,451 ========= ========= </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 also include $41 million of loans formerly on
9 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses (continued) nonaccrual status which were restructured and restored to an accrual basis, but in accordance with SFAS 114, must continue to be disclosed as impaired for the remainder of the year in which the restructuring occurred. Impaired loans averaged $258 million and $210 million for the quarter and nine months ended September 30, 2000, respectively, compared to $156 million and $141 million for the comparable periods last year. The following are period-end balances: <TABLE> <CAPTION> (in thousands) September 30, 2000 December 31, 1999 ------------------ ----------------- <S> <C> <C> Total impaired loans $273,532 $159,165 Impaired loans requiring an allowance 258,218 155,828 Impairment allowance 76,366 51,753 </TABLE> Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan.
10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 4 - Medium- and Long-term Debt Medium- and long-term debt consisted of the following at September 30, 2000 and December 31, 1999: <TABLE> <CAPTION> (in thousands) September 30, 2000 December 31, 1999 ------------------ ----------------- <S> <C> <C> Parent Company 7.25% subordinated notes due 2007 $ 157,698 $ 158,543 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 198,653 198,502 7.875% subordinated notes due 2026 172,565 173,217 8.375% subordinated notes due 2024 155,125 155,287 7.25% subordinated notes due 2002 149,679 149,561 6.875% subordinated notes due 2008 103,387 103,729 7.125% subordinated notes due 2013 154,573 154,834 6.00% subordinated notes due 2008 248,181 248,010 7.65% subordinated notes due 2010 248,299 - ---------- ---------- Total subordinated notes 1,430,462 1,183,140 Medium-term notes: Floating rate based on Treasury indices - 37,000 Floating rate based on Prime indices 920,993 1,224,993 Floating rate based on LIBOR indices 5,127,471 5,762,320 Fixed rate notes with interest rate of 6.65% - 199,944 ---------- ---------- Total medium-term notes 6,048,464 7,224,257 Notes payable 13,917 13,917 ---------- ---------- Total subsidiaries 7,492,843 8,421,314 ---------- ---------- Total medium- and long-term debt $7,650,541 $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.
11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> September 30, 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 contracts: Caps and floors purchased $ 9 $ - $ - $ - $ - $ - $ - $ - Swaps 11,264 77 (111) (34) 8,518 17 (172) (155) Foreign exchange contracts: Spot, forward and options 715 10 (5) 5 1,098 33 (23) 10 Swaps 115 1 (18) (17) 115 - (5) (5) ------- ------- ------- ------- ------- ------- ------- ------- Total risk management 12,103 88 (134) (46) 9,731 50 (200) (150) Customer-Initiated and Other Interest rate contracts: Caps and floors written 225 - - - 166 - (1) (1) Caps and floors purchased 205 - - - 141 1 - 1 Swaps 292 2 (2) - 256 2 (2) - Foreign exchange contracts: Spot, forward and options 1,124 24 (16) 8 579 14 (11) 3 Swaps 50 - - - - - - - ------- ------- ------- ------- ------- ------- ------- ------- Total customer-initiated and other 1,896 26 (18) 8 1,142 17 (14) 3 ------- ------- ------- ------- ------- ------- ------- ------- Total derivatives and foreign exchange contracts $13,999 $ 114 $ (152) $ (38) $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.
12 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 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.
13 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 September 30, 2000. The swaps are grouped by the assets or liabilities to which they have been designated. At September 30, 2000 and December 31, 1999, the notional amounts of commitments to purchase and sell U.S. Treasury, U.S. government agency and municipal bond securities related to the Corporation's trading account totaled $75 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 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 nine-month period ended September 30, 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 nine-month period ended September 30, 2000 and for the year ended December 31, 1999.
14 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 $ - $3,250 $2,850 $2,350 $ - $ - $ 8,450 $6,800 Index amortizing 79 - - - - - 79 149 Weighted average: (1) Receive rate 5.63% 5.68% 7.14% 10.02% -% -% 7.36% 6.36% Pay rate 6.62% 6.70% 8.26% 9.49% -% -% 7.99% 6.71% Fixed rate asset designation: Pay fixed swaps Generic $ 5 $ - $ - $ - $ - $ - $ 5 $ 13 Index amortizing - - - - - - - 7 Amortizing - - 2 - - - 2 2 Weighted average: (1) Receive rate 5.88% -% 5.96% -% -% -% 5.90% 6.37% Pay rate 6.03% -% 6.05% -% -% -% 6.04% 5.93% Fixed rate deposit designation: Generic receive fixed swaps $ - $ 980 $ 73 $ - $ - $ - $ 1,053 $ 10 Weighted average:(1) Receive rate -% 7.18% 7.58% -% -% -% 7.21% 5.16% Pay rate -% 6.63% 6.62% -% -% -% 6.63% 5.01% Medium- and long-term debt designation: Generic receive fixed swaps $ - $ - $ 150 $ - $ - $1,400 $ 1,550 $1,500 Weighted average: (1) Receive rate -% -% 7.22% -% -% 6.83% 6.87% 6.86% Pay rate -% -% 6.51% -% -% 6.81% 6.78% 5.95% Floating/floating swaps $ - $ 125 $ - $ - $ - $ - $ 125 $ 37 Weighted average: (2) Receive rate -% 6.84% -% -% -% -% 6.84% 5.93% Pay rate -% 6.57% -% -% -% -% 6.57% 6.19% Total notional amount $ 84 $4,355 $3,075 $2,350 $ - $1,400 $11,264 $8,518 - --------------------------------------------------------------------------------------------------------- </TABLE> (1) Variable rates are based on LIBOR, CDOR or prime rates paid or received at September 30, 2000. (2) Variable rates paid are based on LIBOR at September 30, 2000, while variable rates received are based on the three month Treasury bill rate in effect at September 30, 2000.
15 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, 1999 $ 8,518 $ 1,213 $ 563 $ 579 Additions 3,852 9,090 188 31,983 Maturities/amortizations (1,097) (9,473) (29) (31,388) ------- ------- ----- -------- Balances at September 30, 2000 $11,273 $ 830 $ 722 $ 1,174 ======= ======= ===== ======== </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 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. 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
16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) 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. Lines of business/segment financial results for the nine months ended September 30, 2000 and 1999 are presented below. <TABLE> <CAPTION> Nine Months Ended September 30 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 $28,741 $25,752 $6,908 $7,006 $ 390 $ 242 Total revenues (FTE) 857 766 808 742 197 138 Net income 307 263 254 188 17 11 Return on average assets 1.42% 1.36% 1.83% 1.39% 5.60% 5.93% Return on average common equity 20.10% 22.47% 46.49% 35.45% 8.55% 7.39% </TABLE> <TABLE> <CAPTION> Finance Other Total - ----------------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 3,937 $ 3,739 $ 1 $ (195) $39,977 $36,544 Total revenues (FTE) (16) 20 16 (1) 1,862 1,665 Net income (11) 12 (12) 23 555 497 Return on average assets (0.10)% 0.12% N/M N/M 1.85% 1.81% Return on average common equity (4.25)% 4.82% N/M N/M 21.36% 21.95% </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 $28 million and $22 million, and return on average common equity would have been 13.44% and 14.85%, in 2000 and 1999, respectively. ** Year-to-date September 30, 2000, financial results for the Individual Bank include a $34 million gain on the sale of $457 million of revolving check credit and bankcard loans. Excluding the $34 million gain, total revenues (FTE) and net income would have been $774 million and $232 million, respectively, while return on average assets and return on average common equity would have been 1.68% and 45.45%, respectively. N/M - Not Meaningful For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to Note 22 to the consolidated financial statements in the Corporation's 1999 annual report.
17 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income Other comprehensive income includes the change in net unrealized gains and losses on investment securities available for sale and the change in the accumulated foreign currency translation adjustment. The Consolidated Statements of Changes in Shareholders' Equity present combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the three months and nine months ended September 30, 2000 and 1999. Total comprehensive income for the three months ended September 30, 2000 and 1999, totaled $212 million and $174 million, respectively. <TABLE> <CAPTION> Three Months Ended September 30 ----------------------- (in thousands) 2000 1999 -------- -------- <S> <C> <C> Net unrealized gains (losses) on investment securities available for sale: Balance at June 30 $(33,076) $(27,118) Net unrealized holding gains (losses) arising during the period 25,316 4,497 Less: Reclassification adjustment for gains (losses) included in net income (742) 49 -------- -------- Change in net unrealized gains (losses) before income taxes 26,058 4,448 Provision for income taxes 9,120 1,526 -------- -------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax 16,938 2,922 -------- -------- Balance at September 30 $(16,138) $(24,196) Accumulated foreign currency translation adjustment: Balance at June 30 $ (2,169) $ 1,060 Net translation gains (losses) arising during the period 3,428 1,040 Less: Reclassification adjustment for gains (losses) included in net income - - -------- -------- Change in translation adjustment before income taxes 3,428 1,040 Provision for income taxes - - -------- -------- Change in foreign currency translation adjustment, net of tax 3,428 1,040 -------- -------- Balance at September 30 $ 1,259 $ 2,100 -------- -------- Accumulated other comprehensive income, net of taxes, at September 30 $(14,879) $(22,096) ======== ======== </TABLE>
18 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income (continued) <TABLE> <CAPTION> Nine Months Ended September 30 ---------------------- (in thousands) 2000 1999 -------- -------- <S> <C> <C> 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 26,127 (24,272) Less: Reclassification adjustment for gains (losses) included in net income 621 1,941 -------- -------- Change in net unrealized gains (losses) before income taxes 25,506 (26,213) Provision for income taxes 8,927 (9,705) -------- -------- Change in net unrealized gains (losses) on investment securities available for sale, net of tax 16,579 (16,508) -------- -------- Balance at September 30 $(16,138) $(24,196) Accumulated foreign currency translation adjustment: Balance at beginning of year $ 1,015 $ 1,233 Net translation gains (losses) arising during the period 244 867 Less: Reclassification adjustment for gains (losses) included in net income - - -------- -------- Change in translation adjustment before income taxes 244 867 Provision for income taxes - - -------- -------- Change in foreign currency translation adjustment, net of tax 244 867 -------- -------- Balance at September 30 $ 1,259 $ 2,100 -------- -------- Accumulated other comprehensive income, net of taxes, at September 30 $(14,879) $(22,096) ======== ======== </TABLE>
19 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Pending Acquisitions On November 1, 2000, Comerica Incorporated and Imperial Bancorp announced a definitive agreement to merge through an exchange of shares. Under the terms of the agreement, Imperial shareholders will receive 0.46 shares of Comerica common stock for each share of Imperial common stock. The combined company will have assets of approximately $48 billion. Pending regulatory and shareholder approvals, the merger is expected to be completed in the first quarter of 2001 and will be accounted for as a pooling of interests. The Corporation anticipates incurring a pre-tax, merger-related restructuring charge of approximately $145 million in connection with the acquisition. A summary of unaudited pro forma financial information giving effect to the merger is shown below. The unaudited financial information is not indicative of the results that would have been realized had the entities been a single company during these periods, nor is it indicative of the actual results the combined company will report in the future. <TABLE> <CAPTION> Nine Months Ended September 30, Year Ended December 31, (in millions of dollars, ----------------- -------------------------- except per share data) 2000 1999 1999 1998 1997 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Total average assets $46,427 $42,104 $42,662 $39,969 $38,521 Net interest income 1,490 1,336 1,817 1,720 1,645 Noninterest income 737 597 867 667 609 Noninterest expenses 1,110 999 1,359 1,237 1,176 Net income 618 546 759 651 586 Diluted earnings per share 3.37 2.96 4.13 3.51 3.11 </TABLE>
20 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net income for the quarter ended September 30, 2000, was $192 million, up $22 million, or 13 percent, from $170 million reported for the third quarter of 1999. Diluted net income per share increased 12 percent to $1.18 from $1.05 a year ago. Return on average common shareholders' equity was 21.26 percent and return on average assets was 1.89 percent, compared to 21.89 percent and 1.85 percent, respectively, for the comparable quarter last year. Net income for the first nine months of 2000 was $3.43 per share or $555 million, compared to $3.06 or $497 million, for the same period in 1999, both increases of 12 percent. Return on average common shareholders' equity was 21.36 percent and return on average assets was 1.85 percent for the first nine months of 2000, compared to 21.95 percent and 1.81 percent, respectively, for the first nine months of 1999. Net Interest Income The rate-volume analysis in Table I details the components of the change in net interest income on a fully taxable equivalent (FTE) basis for the quarter ended September 30, 2000. On a FTE basis, net interest income was $417 million for the three months ended September 30, 2000, an increase of $26 million, or seven percent, from the comparable quarter in 1999. This increase in net interest income was primarily due to a 10 percent increase in earning assets, as average business loans increased by $4 billion, or 12 percent, over last year's third quarter, as well as an increase in interest-free sources of funds. Excluding the divestiture of consumer loans in the first quarter 2000, net interest income increased $36 million, or nine percent, over the third quarter of 1999. The net interest margin for the three months ended September 30, 2000, was 4.42 percent, a decrease of 14 basis points from 4.56 percent for the third quarter of 1999. Excluding the consumer loan divestiture, the net interest margin decreased 5 basis points. The net interest margin was negatively impacted by slower growth in core deposit balances than that of earning assets, resulting
21 in a greater reliance on certificates of deposits and medium- and long- term debt in the mix of interest-bearing liabilities. This was partially offset by an increase in the impact to the margin provided by interest-free sources of funds. With core deposit balances growing at rates slower than earning assets, a greater reliance on purchased funds is expected, which will gradually reduce the margin. Table II provides an analysis of net interest income for the first nine months of 2000. On a FTE basis, net interest income for the nine months ended September 30, 2000, was $1,239 million compared to $1,143 million for the same period in 1999. The net interest margin for the nine months ended September 30, 2000, was 4.46 percent compared to 4.53 percent for the same period in 1999. The increase in net interest income and the decline in the net interest margin is primarily attributed to the factors cited in the quarterly discussion. Interest rate swaps permit management to control the sensitivity of net interest income to fluctuations in interest rates in a manner similar to on- balance sheet investment securities but without significant impact to capital or liquidity. These instruments are designated against certain assets and liabilities, therefore, their impact on net interest income is generally offset by and should be considered in relation to the level of net interest income generated by the related on-balance sheet assets and liabilities. In addition to using interest rate swaps and other off-balance sheet instruments to control 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 September 30, 2000, the Corporation was in an asset sensitive position of $417 million (on an elasticity adjusted basis), or one percent of earning assets. The earnings simulation analysis performed at the end of the quarter reflects changes to both interest rates and loan, investment and deposit volumes. The measurement of risk exposure at September 30, 2000, for a 200 basis point decline in short-term interest rates identified approximately $77 million, or four 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 $63 million, or three percent. The results of these simulations are within established corporate policy guidelines.
22 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Three Months Ended ------------------------------------------------------------- September 30, 2000 September 30, 1999 ----------------------------- ----------------------------- Average Average Average Average (dollar amounts in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $34,777 $787 9.00% $31,727 $632 7.91% Investment securities 2,607 46 7.01 2,211 39 6.85 Other earning assets 209 5 10.50 113 2 7.73 - ---------------------------------------------------------------------------------------------- Total earning assets 37,593 838 8.87 34,051 673 7.84 Interest-bearing deposits 18,715 217 4.61 16,311 147 3.58 Short-term borrowings 2,700 46 6.82 3,404 46 5.31 Medium- and long-term debt 8,270 141 6.78 7,298 103 5.59 Net interest rate swap (income)/ expense (1) - 17 - - (14) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $29,685 421 5.65 $27,013 282 4.14 -------------- --------------- Net interest income/ Rate spread (FTE) $417 3.22 $391 3.70 ==== ==== FTE adjustment $ 1 $ 1 ==== ==== Impact of net noninterest-bearing sources of funds 1.20 0.86 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.42% 4.56% ============================================================================================== </TABLE> (1) After allocation of the income or expense generated by interest rate swaps for the three months ended September 30, 2000, to the related assets and liabilities, the average yield on total loans was 8.79 percent as of September 30, 2000, compared to 8.02 percent a year ago. The average cost of funds for interest-bearing deposits was 4.58 percent as of September 30, 2000. The average cost of funds for medium- and long-term debt was 6.77 percent as of September 30, 2000, compared to 5.28 percent a year earlier. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- <S> <C> <C> <C> Loans $ 85 $ 70 $155 Investment securities 1 6 7 Other earning assets - 3 3 -------------------------- Total earning assets 86 79 165 Interest-bearing deposits 34 36 70 Short-term borrowings 13 (13) - Medium- and long-term debt 22 16 38 Net interest rate swap (income)/expense 31 - 31 -------------------------- Total interest-bearing sources 100 39 139 -------------------------- Net interest income/Rate spread (FTE) $(14) $ 40 $ 26 ========================== </TABLE> * Rate/Volume variances are allocated to variances due to volume.
23 TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Nine Months Ended ------------------------------------------------------------- September 30, 2000 September 30, 1999 ----------------------------- ----------------------------- Average Average Average Average (dollar amounts in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $34,105 $2,234 8.75% $31,177 $1,820 7.80% Investment securities 2,632 141 7.01 2,383 120 6.68 Other earning assets 340 28 11.06 108 7 7.70 - ---------------------------------------------------------------------------------------------- Total earning assets 37,077 2,403 8.64 33,668 1,947 7.72 Interest-bearing deposits 17,851 572 4.28 16,244 437 3.59 Short-term borrowings 3,415 164 6.40 3,605 134 4.98 Medium- and long-term debt 8,194 398 6.49 6,869 283 5.51 Net interest rate swap (income)/ expense (1) - 30 - - (50) - - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $29,460 1,164 5.27 $26,718 804 4.02 ---------------- ----------------- Net interest income/ Rate spread (FTE) $1,239 3.37 $1,143 3.70 ====== ====== FTE adjustment $ 3 $ 4 ====== ====== Impact of net noninterest-bearing sources of funds 1.09 0.83 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.46% 4.53% ============================================================================================== </TABLE> (1) After allocation of the income or expense generated by interest rate swaps for the nine months ended September 30, 2000, to the related assets and liabilities, the average yield on total loans was 8.60 percent as of September 30, 2000, compared to 7.96 percent a year ago. The average cost of funds for interest-bearing deposits was 4.27 percent as of September 30, 2000. The average cost of funds for medium- and long-term debt was 6.41 percent as of September 30, 2000, compared to 5.23 percent as of September 30, 1999. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- <S> <C> <C> <C> Loans $221 $193 $414 Investment securities 7 14 21 Other earning assets 1 20 21 -------------------------- Total earning assets 229 227 456 Interest-bearing deposits 66 69 135 Short-term borrowings 40 (10) 30 Medium- and long-term debt 50 65 115 Net interest rate swap (income)/expense 80 - 80 -------------------------- Total interest-bearing sources 236 124 360 -------------------------- Net interest income/Rate spread (FTE) $ (7) $103 $ 96 ========================== </TABLE> * Rate/Volume variances are allocated to variances due to volume.
24 Provision for Credit Losses The provision for credit losses was $24 million for the third quarter of 2000, compared to $21 million for the same period in 1999. The provision for the first nine months of 2000 was $113 million compared to $69 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 $202 million for the three months ended September 30, 2000, an increase of $32 million, or 19 percent, over the same period in 1999. Noninterest income in the third quarter 2000 included a $4 million gain on the sale of warrants and an additional $4 million gain associated with the sale of revolving check credit and bankcard loans in the first quarter 2000. Excluding the effect of these large nonrecurring items, as well as the impact the revolving credit and bankcard loans sold had on third quarter 1999 results, noninterest income increased 17 percent in the third quarter of 2000 when compared to the same period last year, primarily due to strong investment advisory fee growth from Comerica's subsidiary, Munder Capital Management. For the first nine months of 2000, noninterest income was $623 million, an increase of $101 million, or 19 percent, from the first nine months of 1999. In addition to the nonrecurring items identified in the quarterly discussion, noninterest income for the first nine months of 2000 also included a gain of approximately $30 million on the sale of $457 million of revolving check credit and bankcard loans in the first quarter and a $6 million gain from the demutualization of an insurance carrier in the second quarter. Noninterest income for the first nine months of 1999 includes a $21 million gain on the sale of Comerica's ownership in an ATM network provider. Excluding the effect of large nonrecurring items and the revolving credit and bankcard loans divestiture, noninterest income increased 18 percent in the first nine months of 2000 when compared to the same period last year. The increase in year-to-date noninterest
25 income after excluding nonrecurring items was primarily attributable to the growth in investment advisory fee income cited above. Noninterest Expenses Noninterest expenses were $302 million for the third quarter ended September 30, 2000, an increase of $25 million, or nine percent, from the third quarter of 1999. Noninterest expenses for the third quarter of 2000 include $8 million of interest associated with preliminary settlement of Federal tax years prior to 1993 and $4 million of marketing costs to launch a new closed-end fund at Munder Capital Management. Excluding the effect of large nonrecurring items and divestitures, noninterest expenses increased $13 million, or five percent, in the third quarter of 2000 when compared to the same period in 1999. For the first nine months of 2000, noninterest expenses were $893 million, an increase of $64 million, or eight percent, from the first nine months of 1999. Excluding the effect of large nonrecurring items and divestitures, the increase in salaries and benefits expense, due to annual merit increases and higher levels of revenue-related incentives, was the primary reason for the increase in third quarter and year-to-date noninterest expenses. Provision for Income Taxes The provision for income taxes for the third quarter of 2000 totaled $102 million, an increase of 10 percent compared to $93 million reported for the same period a year ago. The provision for the first nine months of 2000 was $298 million compared to $266 million for the same period in 1999. The effective tax rate was 35 percent for the third quarter and the first nine months of 2000 and 1999.
26 Financial Condition Total assets were $40.9 billion at September 30, 2000, compared with $37.3 billion at September 30, 1999. In accordance with its business lending focus, the Corporation continued to generate strong growth in business loans in 2000. Since December 31, 1999, domestic commercial loans have increased $1.5 billion, or seven percent, real estate construction loans have increased $489 million, or 29 percent, and commercial mortgage loans have increased $321 million, or seven percent. Short-term investments decreased $442 million from year-end 1999, primarily due to the sale of bankcard and revolving check credit loans in the first quarter 2000, which were classified as held for sale at December 31, 1999. Total liabilities increased $1.9 billion, or five percent, since December 31, 1999 to $37.0 billion. Total deposits increased to $25.5 billion at September 30, 2000 from $23.3 billion at December 31, 1999, primarily due to growth in certificates of deposit. Total short-term borrowings increased $517 million, or 19 percent, since year-end 1999, while medium- and long-term debt decreased $929 million, or 11 percent. Allowance for Credit Losses and Nonperforming Assets The allowance for credit losses represents management's assessment of probable losses inherent in the Corporation's loan portfolio, including all binding commitments to lend. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Business loans are defined as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. A detailed credit quality review is performed quarterly on large business loans which have deteriorated below certain
27 levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent charge-off experience, current economic conditions and trends, geographic dispersion of borrowers, and trends with respect to past due and nonaccrual amounts. The allocated reserve was $328 million at September 30, 2000, an increase of $57 million from year-end 1999. This increase was attributable to an increase in the specific portion of the allowance for certain large business loans with deteriorated credit risk at September 30, 2000. 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 $196 million at September 30, 2000, a decrease of $9 million from December 31, 1999. 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.
28 At September 30, 2000, the allowance for credit losses was $524 million, an increase of $47 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 218 percent at September 30, 2000, versus 262 percent at year-end 1999. Net charge-offs for the third quarter of 2000 were $21 million, or 0.24 percent of average total loans, compared with $18 million, or 0.23 percent, for the year-earlier quarter. Net charge-offs for the first nine months of 2000 were $66 million, or 0.26 percent of average total loans, compared to $58 million, or 0.25 percent, for the same period last year. An analysis of the allowance for credit losses is presented in note 5 to the year-end 1999 consolidated financial statements. Nonperforming assets increased $58 million, or 32 percent, since December 31, 1999, and were categorized as follows: <TABLE> <CAPTION> September 30, December 31, (in thousands) 2000 1999 ------------ ----------- <S> <C> <C> Nonaccrual loans: Commercial $ 177,011 $ 110,606 International 36,770 44,046 Real estate construction 4,947 249 Commercial mortgage 16,790 9,620 Residential mortgage 503 572 ------------ ---------- Total nonaccrual loans 236,021 165,093 Reduced-rate loans 299 7,347 ------------ ---------- Total nonperforming loans 236,320 172,440 Other real estate 4,181 9,595 ------------ ---------- Total nonperforming assets $ 240,501 $ 182,035 ============ ========== Loans past due 90 days or more $ 53,338 $ 47,676 ============ ========== </TABLE> Nonperforming assets as a percentage of total loans and other real estate were 0.69 percent at September 30, 2000 and 0.56 percent at December 31, 1999. No industry represented more than 15 percent of total nonperforming loans at September 30, 2000.
29 Capital Common shareholders' equity increased $354 million from December 31, 1999 to September 30, 2000, excluding other comprehensive income. The increase was primarily due to the retention of $355 million in earnings. Capital ratios exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> September 30, December 31, 2000 1999 ------------ ----------- <S> <C> <C> Leverage ratio (3.00 - minimum) 8.71% 8.39% Tier 1 risk-based capital ratio (4.0 - minimum) 7.03 6.95 Total risk-based capital ratio (8.0 - minimum) 11.08 10.72 </TABLE> At September 30, 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 This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analysis. Numerous factors could cause variances in these projections, and their underlying assumptions, such as changes in interest rates, the 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 related credit conditions, and continuing consolidations in the banking industry. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
30 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement re: Computation of Earnings Per Share (27) Financial Data Schedule (b) Reports on Form 8-K 1. A report on Form 8-K, dated July 25, 2000, was filed under report item number 5, concerning the announcement that the outside members of the Board of Directors of Comerica Bank have joined the Board of Directors of Comerica Incorporated.
31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMERICA INCORPORATED -------------------------------------- (Registrant) /s/ Ralph W. Babb Jr. -------------------------------------- Ralph W. Babb Jr. Vice Chairman and Chief Financial Officer (Principal Financial Officer) /s/ Marvin J. Elenbaas -------------------------------------- Marvin J. Elenbaas Senior Vice President and Controller (Principal Accounting Officer) Date: November 14, 2000
32 Exhibit Index ------------- <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 11 Statement re: Computation of Earnings Per Share 27 Financial Data Schedule </TABLE>