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 June 30, 2001 ------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 1-10706 -------------------------------------- Comerica Incorporated ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 38-1998421 - ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Comerica Tower at Detroit Center Detroit, Michigan 48226 ---------------------------------------- (Address of principal executive offices) (Zip Code) (800) 521-1190 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $5 par value common stock: outstanding as of July 31, 2001: 177,975,000 shares
2 CONSOLIDATED BALANCE SHEETS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> June 30, December 31, June 30, (in thousands, except share data) 2001 2000 2000 ----------- ------------ ----------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 1,763,867 $ 1,930,682 $ 2,241,928 Short-term investments 257,380 1,730,158 1,670,302 Investment securities available for sale 4,025,903 3,890,725 3,693,395 Commercial loans 26,155,382 26,009,336 25,401,266 International loans 2,751,192 2,571,156 2,612,539 Real estate construction loans 3,117,988 2,915,168 2,576,986 Commercial mortgage loans 5,681,003 5,360,601 5,145,662 Residential mortgage loans 793,631 807,064 828,092 Consumer loans 1,490,809 1,477,135 1,438,371 Lease financing 1,123,408 1,029,164 858,065 ----------- ----------- ----------- Total loans 41,113,413 40,169,624 38,860,981 Less allowance for credit losses (644,877) (608,110) (601,117) ----------- ----------- ----------- Net loans 40,468,536 39,561,514 38,259,864 Premises and equipment 356,328 364,246 365,650 Customers' liability on acceptances outstanding 27,538 26,668 23,964 Accrued income and other assets 2,388,708 2,030,063 1,896,539 ----------- ----------- ----------- TOTAL ASSETS $49,288,260 $49,534,056 $48,151,642 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $11,797,991 $10,188,475 $10,213,363 Interest-bearing deposits 25,247,662 23,665,808 21,332,018 ----------- ----------- ----------- Total deposits 37,045,653 33,854,283 31,545,381 Short-term borrowings 1,427,333 2,093,381 3,368,570 Acceptances outstanding 27,538 26,668 23,964 Accrued expenses and other liabilities 730,028 800,386 632,998 Medium- and long-term debt 5,306,843 8,259,179 8,377,915 ----------- ----------- ----------- Total liabilities 44,537,395 45,033,897 43,948,828 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 6/30/01, 12/31/00 and 6/30/00 250,000 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued - 178,749,198 shares at 6/30/01, 177,703,678 shares at 12/31/00, and 177,777,268 shares at 6/30/00 893,746 888,519 888,886 Capital surplus 340,232 301,414 311,719 Unearned employee stock ownership plan - 167,566 shares at 6/30/01, 176,462 at 12/31/00 and 48,568 shares at 6/30/00 (6,408) (6,750) (2,250) Accumulated other comprehensive income 119,135 12,097 (32,617) Retained earnings 3,211,460 3,085,784 2,850,981 Deferred compensation (11,251) (14,494) (20,467) Less cost of common stock in treasury - 855,492 shares at 6/30/01, 289,387 shares at 12/31/00 and 761,318 shares at 6/30/00 (46,049) (16,411) (43,438) ----------- ----------- ----------- Total shareholders' equity 4,750,865 4,500,159 4,202,814 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $49,288,260 $49,534,056 $48,151,642 =========== =========== =========== </TABLE>
3 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Three Months Ended --------------------------- June 30, June 30, (in thousands, except per share data) 2001 2000 ----------- ----------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 813,970 $ 833,916 Interest on investment securities 55,717 62,102 Interest on short-term investments 4,967 14,711 ----------- ----------- Total interest income 874,654 910,729 INTEREST EXPENSE Interest on deposits 243,476 216,873 Interest on short-term borrowings 24,341 66,039 Interest on medium- and long-term debt 79,456 130,124 ----------- ----------- Total interest expense 347,273 413,036 ----------- ----------- Net interest income 527,381 497,693 Provision for credit losses 37,000 56,600 ----------- ----------- Net interest income after provision for credit losses 490,381 441,093 NONINTEREST INCOME Fiduciary income 45,611 44,721 Investment advisory revenue, net 13,345 32,154 Service charges on deposit accounts 52,429 47,571 Commercial lending fees 14,316 12,578 Letter of credit fees 14,970 13,835 Warrant income 437 5,450 Securities gains/(losses) (747) 7,257 Net gain on sales of businesses - 2,631 Equity in earnings of unconsolidated subsidiaries 2,954 5,019 Other noninterest income 59,601 70,634 ----------- ----------- Total noninterest income 202,916 241,850 NONINTEREST EXPENSES Salaries and employee benefits 203,497 209,150 Net occupancy expense 29,299 27,066 Equipment expense 17,352 18,831 Outside processing fee expense 14,564 14,226 Restructuring charge 14,122 - Customer services 10,660 8,824 Other noninterest expenses 83,318 88,145 ----------- ----------- Total noninterest expenses 372,812 366,242 ----------- ----------- Income before income taxes 320,485 316,701 Provision for income taxes 112,013 110,651 ----------- ----------- NET INCOME $ 208,472 $ 206,050 =========== =========== Net income applicable to common stock $ 204,197 $ 201,775 =========== =========== Basic net income per common share $ 1.15 $ 1.14 Diluted net income per common share $ 1.13 $ 1.12 Cash dividends declared on common stock $ 78,420 $ 62,451 Dividends per common share $ 0.44 $ 0.40 </TABLE>
4 CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Six Months Ended --------------------------- June 30, June 30, (in thousands, except per share data) 2001 2000 ----------- ----------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 1,679,303 $ 1,612,089 Interest on investment securities 120,342 123,549 Interest on short-term investments 15,469 46,510 ----------- ----------- Total interest income 1,815,114 1,782,148 INTEREST EXPENSE Interest on deposits 515,403 419,769 Interest on short-term borrowings 63,733 119,979 Interest on medium- and long-term debt 196,305 261,112 ----------- ----------- Total interest expense 775,441 800,860 ----------- ----------- Net interest income 1,039,673 981,288 Provision for credit losses 109,000 123,494 ----------- ----------- Net interest income after provision for credit losses 930,673 857,794 NONINTEREST INCOME Fiduciary income 91,037 89,920 Investment advisory revenue, net 3,856 65,983 Service charges on deposit accounts 102,343 93,323 Commercial lending fees 28,170 24,959 Letter of credit fees 27,746 26,692 Warrant income 3,559 12,824 Securities gains/(losses) 22,997 12,694 Net gain on sales of businesses - 33,115 Equity in earnings of unconsolidated subsidiaries (50,346) 7,946 Other noninterest income 143,536 129,214 ----------- ----------- Total noninterest income 372,898 496,670 NONINTEREST EXPENSES Salaries and employee benefits 410,273 420,977 Net occupancy expense 57,615 54,864 Equipment expense 36,749 37,777 Outside processing fee expense 30,391 28,713 Restructuring charge 108,426 - Customer services 19,918 17,000 Other noninterest expenses 159,417 173,706 ----------- ----------- Total noninterest expenses 822,789 733,037 ----------- ----------- Income before income taxes 480,782 621,427 Provision for income taxes 178,718 218,346 ----------- ----------- NET INCOME $ 302,064 $ 403,081 =========== =========== Net income applicable to common stock $ 293,514 $ 394,531 =========== =========== Basic net income per common share $ 1.65 $ 2.23 Diluted net income per common share $ 1.63 $ 2.20 Cash dividends declared on common stock $ 156,809 $ 124,970 Dividends per common share $ 0.88 $ 0.80 </TABLE>
5 CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 (IN THOUSANDS) 2001 2000 - ---------------------------------------- -------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 302,064 $ 403,081 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 109,000 123,494 Depreciation 32,863 34,285 Restructuring charge 55,500 - Net (increase) decrease in trading account securities 40,285 (107,725) Net decrease in assets held for sale 30,666 64,181 Net (increase) decrease in accrued income receivable 63,733 (31,877) Net decrease in accrued expenses (130,426) (45,030) Net amortization of intangibles 17,304 17,935 Other, net (148,409) (158,377) -------------- ------------- Total adjustments 70,516 (103,114) -------------- ------------- Net cash provided by operating activities 372,580 299,967 INVESTING ACTIVITIES Net increase in interest-bearing deposits with banks (28,892) (209) Net decrease in federal funds sold and securities purchased under agreements to resell 1,430,719 257,727 Proceeds from sale of investment securities available for sale 2,230,547 3,963,989 Proceeds from maturity of investment securities available for sale 612,192 439,539 Purchases of investment securities available for sale (3,098,715) (4,321,845) Net increase in loans (other than loans purchased) (1,023,434) (2,615,411) Fixed assets, net (24,945) (27,533) Net (increase) decrease in customers' liability on acceptances outstanding (870) 19,846 Net cash provided by acquisitions/sales - 447,905 -------------- ------------- Net cash provided by (used in) investing activities 96,602 (1,835,992) FINANCING ACTIVITIES Net increase in deposits 3,180,644 2,349,378 Net increase (decrease) in short-term borrowings (666,048) 440,790 Net increase (decrease) in acceptances outstanding 870 (19,846) Proceeds from issuance of medium- and long-term debt 225,000 3,590,873 Repayments and purchases of medium- and long-term debt (3,221,331) (3,956,945) Proceeds from issuance of common stock and other capital transactions 47,885 13,562 Purchase of common stock (53,238) (22,271) Dividends paid (149,779) (127,348) -------------- ------------- Net cash provided by (used in) financing activities (635,997) 2,268,193 -------------- ------------- Net increase (decrease) in cash and due from banks (166,815) 732,168 Cash and due from banks at beginning of year 1,930,682 1,509,760 -------------- ------------- Cash and due from banks at end of period $ 1,763,867 $ 2,241,928 ============== ============= Interest paid $ 851,930 $ 810,492 ============== ============= Income taxes paid $ 210,287 $ 217,126 ============== ============= Noncash investing and financing activities: Loan transfers to other real estate $ 6,329 $ 3,266 ============== ============= </TABLE>
6 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Accumulated Nonredeemable Other (in thousands, except Preferred Common Capital Comprehensive Retained share data) Stock Stock Surplus Income Earnings --------- -------- -------- ------------- ---------- <S> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $250,000 $889,453 $226,001 $(21,704) $2,677,210 Net income for 2000 - - - - 403,081 Other comprehensive income, net of tax - - - (10,913) - Total comprehensive income - - - - - Common stock dividend - - 84,906 - (84,927) Cash dividends declared: Preferred stock - - - - (8,550) Common stock - - - - (124,970) Purchase and retirement of 278,898 shares of common stock - (1,394) (7,765) - - Purchase of 331,362 shares of common stock - - - - - Net issuance of common stock under employee stock plans - 827 8,577 - (10,863) Amortization of deferred compensation - - - - - -------- -------- -------- -------- ---------- BALANCES AT JUNE 30, 2000 $250,000 $888,886 $311,719 $(32,617) $2,850,981 ======== ======== ======== ======== ========== BALANCES AT JANUARY 1, 2001 $250,000 $888,519 $301,414 $ 12,097 $3,085,784 Net income for 2001 - - - - 302,064 Other comprehensive income, net of tax - - - 107,038 - Total comprehensive income - - - - - Cash dividends declared: Preferred stock - - - - (8,550) Common stock - - - - (156,808) Purchase of 958,200 shares of common stock - - - - - Net issuance of common stock under employee stock plans - 5,227 38,818 - (11,030) Amortization of deferred compensation - - - - - -------- -------- -------- -------- ---------- BALANCES AT JUNE 30, 2001 $250,000 $893,746 $340,232 $119,135 $3,211,460 ======== ======== ======== ======== ========== </TABLE>
7 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> Unearned Employee Stock Total (in thousands, except Ownership Deferred Treasury Shareholders' share data) Plan Shares Compensation Stock Equity ---------- ------------ --------- -------------- <S> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $(3,750) $(21,998) $(47,161) $3,948,051 Net income for 2000 - - - 403,081 Other comprehensive income, net of tax - - - (10,913) ---------- Total comprehensive income - - - 392,168 Common stock dividend - - - (21) Cash dividends declared: Preferred stock - - - (8,550) Common stock - - - (124,970) Purchase and retirement of 278,898 shares of common stock - - - (9,159) Purchase of 331,362 shares of common stock - - (13,112) (13,112) Net issuance of common stock under employee stock plans 1,500 (3,314) 16,835 13,562 Amortization of deferred compensation - 4,845 - 4,845 ------- -------- -------- ---------- BALANCES AT JUNE 30, 2000 $(2,250) $(20,467) $(43,438) $4,202,814 ======= ======== ======== ========== BALANCES AT JANUARY 1, 2001 $(6,750) $(14,494) $(16,411) $4,500,159 Net income for 2001 - - - 302,064 Other comprehensive income, net of tax - - - 107,038 ---------- Total comprehensive income - - - 409,102 Cash dividends declared: Preferred stock - - - (8,550) Common stock - - - (156,808) Purchase of 958,200 shares of common stock - - (53,238) (53,238) Net issuance of common stock under employee stock plans 342 (9,072) 23,600 47,885 Amortization of deferred compensation - 12,315 - 12,315 ------- -------- -------- ---------- BALANCES AT JUNE 30, 2001 $(6,408) $(11,251) $(46,049) $4,750,865 ======= ======== ======== ========== </TABLE>
8 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Certain items in prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 8-K/A of Comerica Incorporated and Subsidiaries (the "Corporation") dated June 8, 2001. Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), requires companies to recognize all of their derivative instruments as either assets or liabilities on the balance sheet position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
9 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 1 - Basis of Presentation and Accounting Policies (continued) For derivative instruments that are designated and qualifying as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. The net effect of these adjustments was immaterial. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Foreign exchange futures and forward contracts, foreign currency options, interest rate caps and interest rate swap agreements executed as a service to customers are not designated as hedging instruments. The adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative effect of an accounting change, net of tax, of $42 million in other comprehensive income.
10 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 2 - Investment Securities At June 30, 2001, investment securities having a carrying value of $1.9 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 $76 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) 2001 2000 --------- --------- <S> <C> <C> Balance at January 1 $ 608,110 $ 548,147 Charge-offs (91,871) (81,392) Recoveries 19,667 10,908 --------- --------- Net charge-offs (72,204) (70,484) Provision for credit losses 109,000 123,494 Foreign currency translation adjustment (29) (40) --------- --------- Balance at June 30 $ 644,877 $ 601,117 ========= ========= </TABLE> The provision for credit losses in 2001 included a $25 million merger- related charge to conform the credit policies of Imperial Bancorp (Imperial), a $7 billion bank holding company acquired January 29, 2001, with Comerica. Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," considers a loan impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreements. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans averaged $471 million and $439 million for the quarter and six months ended June 30, 2001, compared to $254 million and $240 million for the comparable periods last year. The following are period-end balances:
11 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses (continued) <TABLE> <CAPTION> (in thousands) June 30, 2001 December 31, 2000 ------------- ----------------- <S> <C> <C> Total impaired loans $466,826 $364,895 Impaired loans requiring an allowance 401,400 277,159 Impairment allowance 164,477 104,107 </TABLE> Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan. Note 4 - Medium- and Long-term Debt Medium- and long-term debt consisted of the following at June 30, 2001 and December 31, 2000: <TABLE> <CAPTION> (in thousands) June 30, 2001 December 31, 2000 ------------- ----------------- <S> <C> <C> Parent Company 7.25% subordinated notes due 2007 $ 156,856 $ 157,414 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 208,826 198,703 7.875% subordinated notes due 2026 174,261 172,346 8.375% subordinated notes due 2024 180,477 155,071 7.25% subordinated notes due 2002 154,724 149,719 6.875% subordinated notes due 2008 104,218 103,272 7.125% subordinated notes due 2013 162,327 154,486 6.00% subordinated notes due 2008 248,501 248,238 7.65% subordinated notes due 2010 263,374 248,385 8.50% subordinated notes due 2009 97,911 99,474 9.98% junior subordinated debentures due 2026 57,255 63,690 ---------- ---------- Total subordinated notes 1,651,874 1,593,384 Medium-term notes: Floating rate based on Treasury indices -- 125,000 Floating rate based on Prime indices 1,199,986 1,320,964 Floating rate based on LIBOR indices 2,286,016 5,048,972 ---------- ---------- Total medium-term notes 3,486,002 6,494,936 Notes payable 12,111 13,445 ---------- ---------- Total subsidiaries 5,149,987 8,101,765 ---------- ---------- Total medium- and long-term debt $5,306,843 $8,259,179 ========== ========== </TABLE>
12 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 4 - Medium- and Long-term Debt (continued) The balances of medium- and long-term debt at June 30, 2001 include the fair values of risk management interest rate swap contracts modifying the interest rate characteristics of the debt. Note 5 - Income Taxes The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after adjusting for non-taxable items, principally income on bank- owned life insurance and goodwill. State and foreign taxes are then added to the federal provision. The effective tax rate for the six months ended June 30, 2001 was affected by adjustments in the first quarter 2001 to Imperial Bancorp's tax liabilities at merger date, partially offset by a $7 million tax benefit related to the Imperial Bancorp acquisition that was recognizable immediately, but only after Imperial became part of Comerica.
13 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ------------------------------ ------------------------------ Notional/ Notional/ Contract Unrealized Fair Contract Unrealized Fair Amount Gains Losses Value Amount Gains Losses Value (in millions) (1) (2) (3) (1) (2) (3) ------------------------------ ------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> RISK MANAGEMENT Interest rate contracts: Caps and floors purchased $ 7 $ - $ - $ - $ 6,058 $ 10 $ (1) $ 9 Swaps 14,540 329 (8) 321 12,594 206 (33) 173 Foreign exchange contracts: Spot, forward and options 645 4 (16) (12) 493 18 (6) 12 Swaps 281 2 (22) (20) 115 1 (13) (12) ------- ---- ------ ----- ------- ---- ----- ----- Total risk management 15,473 335 (46) 289 19,260 235 (53) 182 CUSTOMER-INITIATED AND OTHER Interest rate contracts: Caps and floors written 405 - (2) (2) 198 - (1) (1) Caps and floors purchased 394 2 - 2 179 1 - 1 Swaps 643 10 (10) - 493 5 (4) 1 Foreign exchange contracts: Spot, forward and options 1,819 25 (22) 3 1,827 26 (19) 7 Swaps 427 2 (2) - 50 - - - ------- ---- ------ ---- ------- ---- ----- ----- Total customer-initiated and other 3,688 39 (36) 3 2,747 32 (24) 8 ------- ---- ----- ----- ------- ---- ----- ----- Total derivatives and foreign exchange contracts $19,161 $374 $ (82) $ 292 $22,007 $267 $ (77) $ 190 ======= ==== ====== ===== ======= ==== ===== ===== </TABLE> (1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets. (2) Represents credit risk, which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk. (3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. In 2001, the fair values of all derivatives and foreign exchange contracts are reflected in the consolidated balance sheets, as required by SFAS No. 133. In 2000, only the fair values of customer-initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
14 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) Risk Management Interest rate risk arises in the normal course of business due to differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. This gap in the balance sheet structure reflects the sensitivity of the Corporation's net interest income to a change in interest rates. Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs cash instruments, such as investment securities, as well as derivative financial instruments and foreign exchange contracts, to manage exposure to these and other risks, including liquidity risk. As an end-user, the Corporation mainly accesses the interest rate markets to obtain derivative instruments for use principally in connection with asset and liability management activities. As part of a fair value hedging strategy, the Corporation has entered into interest rate swap agreements for interest rate risk management purposes. The interest rate swap agreements utilized, effectively modify the Corporation's exposure to interest rate risk by converting fixed-rate deposits and debt to a floating rate. These agreements involve the receipt of fixed rate of interest amounts in exchange for floating rate interest payments over the life of the agreement, without an exchange of the underlying principal amount. No ineffectiveness was required to be recorded on these hedging instruments in the statement of income for the quarter and six month period ended June 30, 2001. As part of a cash flow hedging strategy, the Corporation entered into predominantly 3-year interest rate swap agreements that effectively convert a portion of its existing and forecasted floating-rate loans to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest income over
15 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) the next 3 years. Approximately 27% ($11 billion) of the Corporation's outstanding loans were designated as the hedged items to interest rate swap agreements at June 30, 2001. During the three and six month periods ended June 30, 2001, interest rate swap agreements designated as cash flow hedges increased interest and fees on loans by $33 and $36 million, respectively. During the second quarter 2001 the ineffectiveness of these hedging instruments was insignificant to the Corporation's statement of income. If interest rates and interest curves remain at their current levels, the Corporation expects to reclassify $104 million of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months due to receipt of variable interest associated with the existing and forecasted floating-rate loans. Management believes these strategies achieve an optimal match between the rate maturities of assets and their funding sources which, in turn, reduces the overall exposure of net interest income to interest rate risk, although there can be no assurance that such strategies will be successful. In addition, the Corporation uses forward foreign exchange contracts to protect the value of its investments in a foreign subsidiaries in Canada and the United Kingdom. Realized and unrealized gains and losses from these hedges are not included in the statement of income, but are shown in the accumulated foreign currency translation adjustment account included in other comprehensive income, with the related amounts due to or from counterparties included in other liabilities or other assets. During the three and six month periods ended June 30, 2001, the Corporation recognized $1 million of net losses and $1 million of net gains, respectively, in the accumulated foreign currency translation adjustment related to the forward foreign exchange contracts.
16 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) The Corporation also uses various other types of financial instruments to mitigate interest rate and foreign currency risks associated with specific assets or liabilities, which are reflected in the table above. Such instruments include interest rate caps and floors, foreign exchange forward contracts, and foreign exchange cross-currency swaps. The following table summarizes the expected maturity distribution of the notional amount of interest rate swaps used for risk management purposes. The table also indicates the weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements as of June 30, 2001. The swaps are grouped by the assets or liabilities to which they have been designated.
17 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) Remaining Expected Maturity of Risk Management Interest Rate Swaps: (dollar amounts Dec. 31, in millions)) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------- 2006- Dec 31, 2001 2002 2003 2004 2005 2026 Total 2000 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> VARIABLE RATE ASSET DESIGNATION: Receive fixed swaps Generic $ 1,625 $2,860 $4,750 $ 900 $ 500 $ 500 $11,135 $ 9,277 Weighted average: (1) Receive rate 5.37% 7.13% 8.31% 8.02% 8.13% 5.83% 7.43% 7.55% Pay rate 4.12% 5.77% 6.05% 6.93% 6.93% 4.57% 5.74% 8.14% FIXED RATE ASSET DESIGNATION: Pay fixed swaps Generic $ 38 $ - $ - $ - $ - $ - $ 38 $ 98 Amortizing - 1 - - - - 1 1 Weighted average: (2) Receive rate 4.44% 4.68% -% -% -% -% 4.41% 6.70% Pay rate 4.43% 6.05% -% -% -% -% 4.47% 6.79% FIXED RATE DEPOSIT DESIGNATION: Generic receive fixed swaps $ 378 $1,313 $ - $ - $ - $ 25 $ 1,716 $ 1,378 Weighted average: (1) Receive rate 7.02% 5.14% -% -% -% 7.00% 5.58% 7.19% Pay rate 3.92% 3.99% -% -% -% 4.24% 3.98% 6.66% MEDIUM- AND LONG-TERM DEBT DESIGNATION: Generic receive fixed swaps $ - $ 150 $ - $ - $ 250 $1,250 $ 1,650 $ 1,715 Weighted average: (1) Receive rate -% 7.22% -% -% 7.04% 6.73% 6.82% 6.83% Pay rate -% 4.59% -% -% 5.39% 4.72% 4.81% 6.76% Floating/floating swaps $ - $ - $ - $ - $ - $ - $ - $ 125 Weighted average: (3) Receive rate -% -% -% -% -% -% -% 6.72% Pay rate -% -% -% -% -% -% -% 6.59% Total notional amount $ 2,041 $4,324 $4,750 $ 900 $ 750 $1,775 $14,540 $12,594 </TABLE> (1) Variable rates paid on receive fixed swaps are based on one-month and three-month LIBOR or one-month CDOR rates in effect at June 30, 2001. Variable rates received on pay fixed swaps are based on prime. (2) Variable rate received is based on one-month CDOR at June 30, 2001. (3) Variable rate paid is based on LIBOR at June 30, 2001, while variable rate received is based on the three-month U.S. Treasury bill bond equivalent rate.
18 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) The notional amounts of commitments to purchase and sell U.S. Treasury, U.S. government agency and municipal bond securities related to the Corporation's trading account and available for sale portfolio totaled $39 million and $3 million at June 30, 2001 and December 31, 2000, respectively. These commitments, which are short-term and similar in nature to forward contracts, are not reflected in the preceding table due to the immaterial impact on the financial statements. Customer-Initiated and Other The Corporation earns additional income by executing various transactions, primarily foreign exchange contracts and interest rate caps, floors and swaps to accommodate the needs of customers requesting such services. The Corporation minimizes market risk arising from customer-initiated foreign exchange contracts by entering into offsetting transactions. Average fair values and income from customer-initiated and other foreign exchange contracts were not material for the six-month period ended June 30, 2001 and for the year ended December 31, 2000. Customer-initiated interest rate caps, floors and swaps generally are not offset by other financial instruments; however, the Corporation has established authority limits for engaging in these transactions in order to minimize risk exposure. As a result, average fair values and income from this activity were not material for the six-month period ended June 30, 2001 and for the year ended December 31, 2000.
19 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) Derivative and Foreign Exchange Activity The following table provides a reconciliation of the beginning and ending notional amounts for interest rate derivatives and foreign exchange contracts. <TABLE> <CAPTION> Customer-Initiated Risk Management and Other --------------------- ---------------------- Interest Foreign Interest Foreign Rate Exchange Rate Exchange (in millions) Contracts Contracts Contracts Contracts --------- --------- --------- ---------- <S> <C> <C> <C> <C> Balances at December 31, 2000 $18,652 $ 608 $ 870 $ 1,877 Additions 6,195 5,952 846 24,746 Maturities/amortizations (8,770) (5,634) (274) (24,377) Terminations (1,530) -- -- -- ------- ------- ------ -------- Balances at June 30, 2001 $14,547 $ 926 $ 1,442 $ 2,246 ======= ======= ======= ======= </TABLE> Additional information regarding the nature, terms and associated risks of the above derivatives and foreign exchange contracts, can be found in Note 19 to the consolidated financial statements included in the Corporation's Form 8-K/A dated June 8, 2001. Note 7 - Business Segment Information The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business are differentiated based on the products and services provided. In addition to the three major lines of business, the Finance Division is also reported as a segment. Lines of business results are produced by the Corporation's internal management accounting system. This system measures financial results based on the internal organizational structure of the Corporation; information presented is not necessarily comparable with any other financial institution. Lines of business/segment financial results for the six months ended June 30, 2001 and 2000 are presented below.
20 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) Six Months Ended June 30 <TABLE> <CAPTION> (dollar amounts in Business Individual Investment millions) Bank Bank Bank* - ------------------------------------------------------------------------------------- 2001 2000 2001 2000*** 2001** 2000 - ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $38,101 $34,854 $7,352 $6,909 $409 $363 Total revenues (FTE) 853 802 508 552 11 137 Net income 247 248 133 170 (57) 17 Return on average assets 1.30% 1.43% 1.38% 1.84% (25.93) 8.68% Return on average common equity 17.41% 19.99% 33.69% 46.45% (40.91)% 12.87% </TABLE> <TABLE> <CAPTION> Finance Other Total - ------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 4,594 $4,040 $(1,097) (66) $49,359 $46,100 Total revenues (FTE) 43 (9) -- (2) 1,415 1,480 Net income 23 (7) (44) (25) 302 403 Return on average assets 0.28% (0.09)% N/M N/M 1.22% 1.75% Return on average common equity 7.84% (3.75)% N/M N/M 13.20% 20.73% </TABLE> N/M - Not Meaningful * Net income was reduced by charges for fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income/(loss) would have been ($54) million and $21 million, and return on average common equity would have been (38.57%) and 16.17%, in 2001 and 2000, respectively. ** Net income in 2001 was reduced by a $26 million pre-tax deferred distribution costs impairment charge and a $53 million pre-tax charge related to long-term incentive plans at an unconsolidated subsidiary. Excluding these charges, Investment Bank total revenues (FTE) and net loss in 2001 would have been $94 million and ($6) million, respectively, while return on average assets and return on common equity would have been (2.54%) and (4.01%), respectively. ***Year-to-date June 30, 2000, financial results for the Individual Bank include a $30 million gain on the sale of $457 million of revolving check credit and bankcard loans. Excluding the $30 million gain, total revenues (FTE) and net income would have been $522 million and $150 million, respectively, while return on average assets and return on average common equity would have been 1.62% and 40.89%, respectively. For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to Note 23 to the consolidated financial statements in the Corporation's Form 8-K/A dated June 8, 2001.
21 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income Other comprehensive income includes the change in net unrealized gains and losses on investment securities available for sale, the change in the accumulated foreign currency translation adjustment and the change in accumulated gains and losses on cash flow hedges. The Consolidated Statements of Changes in Shareholders' Equity present combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the six months ended June 30, 2001 and 2000. Total comprehensive income for the six months ended June 30, 2001 and 2000, totaled $409 million and $392 million, respectively. <TABLE> <CAPTION> Six Months Ended June 30 -------------------- (in thousands) 2001 2000 -------- -------- <S> <C> <C> Net unrealized gains/(losses) on investment securities available for sale: Balance at beginning of year $ 8,016 $(22,719) Net unrealized holding gains/(losses) arising during the period 20,885 1,160 Less: Reclassification adjustment for gains/(losses) included in net income 22,997 14,454 ------- -------- Change in net unrealized gains/(losses) before income taxes (2,112) (13,294) Provision for income taxes (739) (5,565) ------- -------- Change in net unrealized gains/(losses) on investment securities available for sale, net of tax (1,373) (7,729) ------- -------- Balance at June 30 $ 6,643 $(30,448) Accumulated foreign currency translation adjustment: Balance at beginning of year $ 4,081 $ 1,015 Net translation gains/(losses) arising during the period (4,369) (3,184) Less: Reclassification adjustment for gains/(losses) included in net income -- -- ------- -------- Change in translation adjustment before income taxes (4,369) (3,184) Provision for income taxes -- -- ------- -------- Change in foreign currency translation adjustment, net of tax (4,369) (3,184) ------- -------- Balance at June 30 $ (288) $(2,169) </TABLE>
22 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 8 - Accumulated Other Comprehensive Income (continued) <TABLE> <CAPTION> Six Months Ended June 30 -------------------- (in thousands) 2001 2000 -------- -------- <S> <C> <C> Accumulated net gains/(losses) on cash flow hedges: $ -- $ -- Balance at beginning of period Transition adjustment upon adoption Of accounting standard 64,705 -- Net cash flow hedge gains/(losses) Arising during the period 144,399 -- Less: Reclassification adjustment for gains/(losses) included in net income 35,596 -- -------- -------- Change in cash flow hedges before income taxes 173,508 -- Provision for income taxes 60,728 -- -------- -------- Change in cash flow hedges, net of tax Balance at June 30 $112,780 $ -- -------- -------- Accumulated other comprehensive income, net of taxes, at June 30 $119,135 $(32,617) ======== ======== </TABLE> Note 9 - Restructuring Charge The Corporation recorded restructuring charges related to the acquisition of Imperial Bancorp of $14 million and $134 million for the three and six months ended June 30, 2001, respectively. The components of the charges, $25 million and $109 million of which were recorded in the provision for credit losses and noninterest expenses, respectively, are shown in the table below. The Corporation expects to incur additional merger-related restructuring charges in 2001 in connection with the combining of Comerica and Imperial Bancorp. Restructuring charges are expected to total $169 million by the end of integration, which is currently targeted for completion in the first quarter of 2002.
23 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Restructuring Charge (continued) Restructuring Reserve Analysis Imperial Merger <TABLE> <CAPTION> Other Facilities Employee Employee Conforming and (in thousands) Termination -Related Policies Operations Other Total ----------- ---------- ---------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2001 $ -- $ -- $ -- $ -- $ -- $ -- Provision charged to operating expense 33,000 33,500 38,000 12,500 16,500 133,500 Cash outlays (18,000) (18,000) - (500) (16,500) (53,000) Noncash write-downs and other -- (11,000) (38,000) (10,000) -- (59,000) -------------------------------------------------------------------- Balance at June 30, 2001 $ 15,000 $ 4,500 $ -- $ 2,000 $ -- $ 21,500 ==================================================================== </TABLE> Employee termination costs included the cost of severance, outplacement and other benefits associated with the involuntary termination of employees, primarily senior management and employees in corporate support and data processing functions. Approximately 350 employees are expected to be terminated as part of the restructuring plan, 107 of which occurred in the six month period ended June 30, 2001. Other employee-related costs include cash payments related to change in control provisions in employment contracts and retention bonuses. The charge related to conforming policies represents costs associated with conforming the credit and accounting policies of Imperial with those of the Corporation. Of the $38 million charge associated with conforming policies, $25 million was included in the provision for credit losses on the statement of income in the first quarter of 2001. The remaining amounts applied against the liability for conforming policies related primarily to a gain on the sale of Imperial's merchant bankcard business, as required under an existing alliance agreement and adjusting commercial equipment lease residual values. The Corporation incurred facilities and operations charges associated with closing excess facilities and replacing signage. Other merger-related restructuring
24 Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Restructuring Charge (continued) costs were primarily comprised of investment banking, accounting, consulting and legal fees. The Corporation expects to realize annual noninterest expense savings totaling $60 million upon completion of its integration effort, the full effect of which will not begin to be realized until the second quarter of 2002.
25 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net income for the quarter ended June 30, 2001, was $208 million, down two million, or less than one percent, from $206 million reported for the second quarter of 2000. Diluted net income per share increased to $1.13 from $1.12 a year ago. Return on average common shareholders' equity was 18.21 percent and return on average assets was 1.69 percent, compared to 20.80 percent and 1.77 percent, respectively, for the comparable quarter last year. Excluding restructuring charges of $14 million ($8 million or $0.05 per share, net of taxes) related to the Imperial acquisition, second quarter net income was $216 million or $1.18 per share. Return on average common equity and return on assets, excluding the restructuring charges, were 18.94 percent and 1.75 percent, respectively. Net income for the first six months of 2001 was $1.63 per share or $302 million, compared to $2.20 or $403 million for the same period in 2000, decreases of 26 percent and 25 percent, respectively. Return on average common shareholders' equity was 13.20% and return on average assets was 1.22% for the first six months of 2001, compared to 20.73% and 1.75%, respectively, for the first six months of 2000. Excluding restructuring charges of $103 million after tax (0.57 per share) and the effect of a first quarter one-time $34 million after tax (0.19 per share) charge related to long-term incentive plans at an unconsolidated subsidiary of Munder Capital Management (the company's investment management subsidiary), net income for the first half was $439 million or $2.39 per share, increases in both net income and earnings per share of nine percent over the same period of 2000. Excluding these charges, Comerica's return on common equity was 19.39 percent and return on assets was 1.78 percent for the first six months of 2001.
26 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 June 30, 2001. On a FTE basis, net interest income was $528 million for the three months ended June 30, 2001, an increase of $29 million, or 6 percent, from the comparable quarter in 2000. This increase was due to 6 percent increase in average earning assets and a stable net interest margin supported by strong growth in interest-free sources of funds. The net interest margin was 4.65 percent for the second quarter of 2001 and 2000, compared with 4.55 percent in the first quarter of 2001. Table II provides an analysis of net interest income for the first six months of 2001. On a FTE basis, net interest income for the first six months ended June 30, 2001 was $1,042 million compared to $983 million for the same period in 2000. This increase is primarily attributed to the same factors cited in quarterly discussion. The net interest margin for the first six months ended June 30, 2001, was 4.60 percent compared to 4.62 percent for the same period in 2000. Interest rate swaps permit management to manage the sensitivity of net interest income to fluctuations in interest rates in a manner similar to investment securities but without significant impact to capital or liquidity. In addition to using interest rate swaps and other instruments to manage 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 June 30, 2001, the Corporation was in a liability sensitive position of $43 million (on an elasticity adjusted basis), or less than 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
27 measurement of risk exposure at June 30, 2001, for a 200 basis point decline in short-term interest rates identified approximately $28 million, or one percent, of forecasted net interest income at risk during the next 12 months. If short-term interest rates rise 200 basis points, forecasted net interest income would be enhanced by approximately $24 million, or one percent. The results of these simulations are within established corporate policy guidelines.
28 TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Three Months Ended - ---------------------------------------------------------------------------------------------- June 30, 2001 June 30, 2000 ----------------------------- ----------------------------- (dollar amounts Average Average Average Average in millions) Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $41,751 $814 7.82% $38,487 $834 8.72% Investment securities (1) 3,490 56 6.41 3,677 63 6.71 Short-term investments 299 5 6.71 863 15 6.87 - ---------------------------------------------------------------------------------------------- Total earning assets 45,540 875 7.71 43,027 912 8.51 Interest-bearing deposits 25,008 244 3.91 20,467 217 4.26 Short-term borrowings 2,213 24 4.41 4,148 66 6.40 Medium- and long-term debt 6,449 79 4.94 8,039 130 6.51 - ---------------------------------------------------------------------------------------------- Total interest-bearing sources $33,670 347 4.14 $32,654 413 5.09 -------------- --------------- Net interest income/ Rate spread (FTE) $528 3.57 $499 3.42 ==== ==== FTE adjustment $ 1 $ 1 ==== ==== Impact of net noninterest-bearing sources of funds 1.08 1.23 - ---------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.65% 4.65% ============================================================================================== </TABLE> (1) The average rate for investment securities was computed using average historical cost. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- <S> <C> <C> <C> Loans $(84) $ 64 $(20) Investment securities (3) (4) (7) Short-term investments - (10) (10) - --------------------------------------------------------------------------- Total earning assets (87) 50 (37) Interest-bearing deposits (25) 52 27 Short-term borrowings (21) (21) (42) Medium- and long-term debt (31) (20) (51) - --------------------------------------------------------------------------- Total interest-bearing sources (77) 11 (66) - --------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $(10) $ 39 $ 29 ================================== </TABLE> * Rate/Volume variances are allocated to variances due to volume.
29 TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Six Months Ended - ------------------------------------------------------------------------------------------- June 30, 2001 June 30, 2000 ---------------------------- -------------------------- (dollar amounts Average Average Average Average in millions) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $41,427 $1,680 8.18% $37,865 $1,613 8.56% Investment securities(1) 3,685 121 6.59 3,614 124 6.79 Other earning assets 465 16 6.73 1,191 47 7.85 - ------------------------------------------------------------------------------------------- Total earning assets 45,577 1,817 8.03 42,670 1,784 8.39 Interest-bearing deposits 24,590 515 4.23 20,341 420 4.15 Short-term borrowings 2,392 64 5.37 3,869 120 6.24 Medium- and long-term debt 7,085 196 5.59 8,330 261 6.30 - ------------------------------------------------------------------------------------------- Total interest-bearing sources $34,067 775 4.59 $32,540 801 4.95 ---------------- -------------- Net interest income/ Rate spread (FTE) $1,042 3.44 $ 983 3.44 ====== ====== FTE adjustment $ 2 $ 2 ====== ====== Impact of net noninterest-bearing sources of funds 1.16 1.18 - ------------------------------------------------------------------------------------------- Net interest margin as a percent of average earning assets (FTE) 4.60% 4.62% =========================================================================================== </TABLE> (1) The average rate for investment securities was computed using average historical cost. <TABLE> <CAPTION> Increase Increase (Decrease) (Decrease) Net Due to Due to Increase (in millions) Rate Volume* (Decrease) ---------- ---------- ---------- <S> <C> <C> <C> Loans $ (77) $ 144 $ 67 Investment securities (6) 3 (3) Other earning assets (10) (21) (31) - ---------------------------------------------------------------------------- Total earning assets (93) 126 33 Interest-bearing deposits (8) 103 95 Short-term borrowings (17) (39) (56) Medium- and long-term debt (30) (35) (65) - ---------------------------------------------------------------------------- Total interest-bearing sources (55) 29 (26) - ---------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $ (38) $ 97 $ 59 ================================= </TABLE> * Rate/Volume variances are allocated to variances due to volume.
30 Provision for Credit Losses The provision for credit losses was $37 million for the second quarter of 2001, compared to $57 million for the same period in 2000. The provision for the first six months of 2001 was $109 million compared to $123 million for the same period in 2000. The Corporation establishes this provision to maintain an adequate allowance for credit losses, which is discussed in the section entitled "Allowance for Credit Losses and Nonperforming Assets." Included in the provision for credit losses for the six months ended is a $25 million merger- related charge to conform the credit policies of Imperial with Comerica. Noninterest Income Noninterest income was $203 million for the three months ended June 30, 2001, a decrease of $39 million, or 16 percent, over the same period in 2000. The second quarter 2000 noninterest income included a $6 million nonrecurring gain from the demutualization of an insurance carrier. Excluding the effects of gains and losses on securities, warrant income, net gains on the sales of businesses and the nonrecurring gain mentioned above, noninterest income decreased 8 percent in the second quarter of 2001, compared with the second quarter of 2000. This reflects a $19 million decrease in investment advisory revenue from the Corporation's Munder Capital Management subsidiary, as the market values of technology-related stocks declined from their record highs during the first quarter of last year. Despite weakness in stock market-related segments, strong gains were recorded in commercial lending fees (14 percent) and service charges on deposit accounts (10 percent), when compared with the second quarter of 2000. For the first six months of 2001, noninterest income was $373 million, a decrease of $124 million or 25 percent, from the first six months of 2000. In addition to the nonrecurring items identified in the quarterly discussion, noninterest income in the first six months of 2001 was reduced by a $26 million deferred distribution costs impairment charge ($17 million after-tax)
31 and a one-time $53 million charge ($34 million after-tax) related to an unconsolidated subsidiary, both of which are discussed more fully below. Noninterest income for the first six months of 2001 also included gains of $23 million from securities sales and $11 million in net gains resulting from the purchase and subsequent sale, all within the first quarter, of interest rate derivative contracts which failed to meet the Corporation's stringent risk- reduction criteria. Noninterest income in the first six months of 2000 included a $30 million gain associated with the sale of revolving check credit and bankcard loans. Excluding the effect of securities gains, warrant income and large, nonrecurring items in both six month periods, noninterest income decreased three percent in the first six months of 2001 compared to the first six months of 2000. The decrease in year-to-date noninterest income after excluding nonrecurring items was primarily attributable to a $36 million decrease in investment advisory revenue from the Corporation's Munder Capital Management subsidiary, cited above. In the first quarter of 2001, the Corporation recorded a $26 million pre-tax deferred distribution costs impairment charge related to the Corporation's Munder subsidiary. This charge resulted from the Corporation's reassessment of its ability to recover the unamortized cost of the commissions to brokers for selling certain shares, principally shares in its Munder subsidiaries NetNet, International NetNet and Future Technology funds. Net asset values in these technology funds suffered as market conditions weakened significantly following the peak in the first half of 2000. After a fourth quarter 2000 impairment charge of $7 million, this sector of the equity markets declined another 26 percent in the first quarter 2001. This prompted Comerica's revaluation of expected future cash flows from the funds, which are based on a percentage of assets under management and early redemption fees. Given net asset values at June 30, 2001, it would take a decline of approximately 25 percent to trigger further
32 impairment, which at that level would be approximately $8 million. Also in the first quarter of 2001, the Corporation recorded a $53 million pre-tax charge related to long-term incentive plans at a United Kingdom subsidiary, Framlington Holdings Limited, of which Munder is a minority owner. In May 2000, the announcement that the majority owner of Framlington was being acquired triggered a change-in-control provision which fully vested all options and restricted shares held by employees of Framlington. In March 2001, all outstanding options held by employees were exercised and their shares mandatorily purchased by Framlington, requiring U.S. accounting recognition of the expense. The pre-tax charge, included in equity in earnings of unconsolidated subsidiaries, reflects Munder's portion of the resulting expense. Noninterest Expenses Noninterest expenses, which included a merger-related restructuring charge of $14 million, were $373 million for the quarter ended June 30, 2001, an increase of $7 million, or two percent, from the comparable quarter in 2000. For the six months of 2001, noninterest expenses, which included $108 million of merger related restructuring charges, were $823 million, an increase of $90 million, or 12 percent from the comparable 2000 period. Excluding the restructuring charges and a $6 million contribution to Comerica's charitable foundation in the second quarter of 2000, noninterest expenses decreased $2 million, or less than one percent for the quarter over the comparable period last year and $13 million or two percent on a year to date basis when compared to 2000. The declines in both periods reflect a decrease in revenue related incentives. Provision for Income Taxes The provision for income taxes for the second quarter of 2001 totaled $112 million, compared to $111 million reported for the same period a year ago. The effective tax rate was 35 percent for the second quarter of 2001 and 2000. The
33 provision for the first six months of 2001 was $179 million compared to $218 million for the same period in 2000. The effective tax rate was 37 percent for the first six months of 2001 and 35 percent for the first six months of 2000. The effective tax rate in the first six months of 2001 was affected by adjustments in the first quarter to Imperial's tax liabilities at merger date, partially offset by a $7 million tax benefit related to the Imperial Bancorp acquisition that was immediately recognizable, but only after Imperial became part of Comerica. Financial Condition Total assets were $49.3 billion at June 30, 2001, compared with $49.5 billion at year-end 2000 and $48.2 billion at June 30, 2000. The Corporation has experienced two percent growth in total business loans since December 31, 2000, with the most significant increases in the commercial mortgage and real estate construction categories, which increased $320 million or six percent and $203 million or seven percent, respectively. Total loan growth of $944 million was primarily funded by a reduction in short-term investments. Total liabilities decreased $497 million, or one percent, since December 31, 2000 to $44.5 billion. Total deposits increased $3.1 billion to $37.0 billion at June 30, 2001 from $33.9 billion at December 31, 2000, primarily due to strong growth in noninterest-bearing deposits and certificates of deposit issued in denominations in excess of $100,000 through brokers or to institutional investors. The growth in noninterest-bearing deposits resulted primarily from increased title and escrow company deposits from home mortgage financing and refinancing activity. The increase in deposits was largely offset by declines in short-term borrowings, which decreased $666 million, or 32 percent, since year-end 2000, and medium- and long-term debt, which decreased $3.0 billion, or 36 percent. In July 2001, Comerica issued $350,000,000 of 7.60% Trust Preferred Securities. The securities pay cumulative dividends each quarter beginning
34 October 1, 2001, and are callable any time after July 30, 2006. The Corporation will use the proceeds from the issuance to retire in total the $250,000,000 of preferred stock outstanding at June 30, 2001 and for other general corporate purposes. On August 1, 2001, the Corporation provided notice to the holders of the preferred stock that the preferred stock would be redeemed on August 31, 2001. 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 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
35 respect to past due and nonaccrual amounts. The allocated reserve was $502 million at June 30, 2001, an increase of $59 million from year-end 2000. This increase was attributable to the specific portion of the allowance associated with the quarterly credit quality review of certain large business loans with deteriorated credit risk at June 30, 2001, but not from any geographic or industry concentration. Actual loss ratios experienced in the future could vary from those projected. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. To ensure a higher degree of confidence, an unallocated allowance is also maintained. The unallocated portion of the loss reserve reflects management's view that the reserve should have a margin that recognizes the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgement. Factors which were considered in the evaluation of the adequacy of the Corporation's unallocated reserve include portfolio exposures to the healthcare, high technology and energy industries, customers engaged in sub-prime lending, as well as Latin American transfer risks and the risk associated with new customer relationships. The unallocated allowance was $143 million at June 30, 2001, a decrease of $22 million from December 31, 2000. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment of the portfolio. At June 30, 2001, the allowance for credit losses was $645 million, an increase of $37 million since December 31, 2000. The allowance as a percentage
36 of total loans was 1.57 percent, compared to 1.51 percent at December 31, 2000. As a percentage of nonperforming assets, the allowance was 134 percent at June 30, 2001, versus 179 percent at year-end 2000. Net charge-offs for the second quarter of 2001 were $37 million, or 0.35 percent of average total loans, compared with $37 million, or 0.38 percent, for the year-earlier quarter. Nonperforming assets increased $141 million, or 42 percent, since December 31, 2000, and were categorized as follows: <TABLE> <CAPTION> June 30, December 31, (in thousands) 2001 2000 ------------- ------------ <S> <C> <C> Nonaccrual loans: Commercial $ 382,170 $ 244,390 International 42,855 57,929 Real estate construction 5,417 4,542 Commercial mortgage 32,955 17,398 Residential mortgage 285 185 Consumer 3,550 3,080 Lease financing 3,429 3,837 ------------- ------------ Total nonaccrual loans 470,661 331,361 Reduced-rate loans 248 2,306 ------------- ------------ Total nonperforming loans 470,909 333,667 Other real estate 9,579 5,577 ------------- ------------ Total nonperforming assets $ 480,488 $ 339,244 ============= ============ Loans past due 90 days or more $ 83,114 $ 36,176 ============= ============ </TABLE> Nonperforming assets as a percentage of total loans and other real estate were 1.17 percent at June 30, 2001 and 0.84 percent at December 31, 2000. The increase in nonperforming assets was not significant to any geographic or industry concentration. Capital Common shareholders' equity increased $144 million from December 31, 2000 to June 30, 2001, excluding other comprehensive income. The increase was primarily due to the retention of $137 million of current year earnings. The effect of employee stock plan activity, which increased common shareholders' equity $48 million, was offset by repurchasing approximately 900,000 shares of common stock in the second quarter of 2001. This repurchase nearly completes the one million shares authorized for repurchase by the Board of Director's current
37 resolutions. Capital ratios exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> June 30, December 31, 2001 2000 ----------- ----------- <S> <C> <C> <C> Leverage ratio (3.00 - minimum) 8.92% 8.74% Tier 1 risk-based capital ratio (4.0 - minimum) 7.51 7.35 Total risk-based capital ratio (8.0 - minimum) 11.25 11.11 </TABLE> At June 30, 2001, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of "well capitalized" institutions as defined in the final rule under FDICIA. Other Matters In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Corporation has not completed its analysis of the impact of the application of the nonamortization provisions of the Statement to net income. Current goodwill amortization approximates $27 million after tax ($0.15 per share) on an annual basis. The Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation
38 analysis. Such statements reflect the view of Comerica's management, as of the date of this report, with respect to future events and are subject to risks and uncertainties, such as changes in Comerica's plans, objectives, expectations and intentions and do not purport to speak as of any other date. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Corporation's actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences are changes in interest rates, changes in the industries in which the Corporation has a significant number or principal amount of loans, changes in the level of fee revenues, changes in the accounting treatment of any particular item, the entry of new competitors into the banking industry as a result of the enactment of the Gramm-Leach-Bliley Act of 1999, changing economic conditions and related credit and market conditions, difficulty integrating Imperial Bancorp or retaining key personnel and other factors. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
39 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Comerica's Annual Meeting of Stockholders was held on May 22, 2001. At the meeting, shareholders of Comerica: 1. Elected seven Class II Directors for three-year terms expiring in 2004 or upon the election and qualification of their successors; 2. Approved amendments to the Amended and Restated Comerica Incorporated 1997 Long-Term Incentive Plan (the "LTIP"); and 3. Approved amendments to the Amended and Restated Comerica Incorporated Management Incentive Plan (the "MIP"). The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter is set forth below, as are the number of broker non-votes, where applicable. <TABLE> <CAPTION> For Against/Withheld Abstained Broker Non-Votes <S> <C> <C> <C> <C> 1. ELECTION OF DIRECTORS James F. Cordes 150,648,062 2,030,408 Peter D. Cummings 150,622,467 2,056,003 Todd W. Herrick 149,707,864 2,970,606 Eugene A. Miller 151,025,232 1,653,238 William P. Vititoe 150,604,275 2,074,195 Martin D. Walker 150,548,190 2,130,280 Kenneth L. Way 150,684,943 1,993,527 2. AMENDMENT OF THE LTIP 111,863,763 1,993,527 1,439,481 19,582,779 3. AMENDMENT OF THE MIP 138,829,309 12,418,619 1,430,542 -0- </TABLE>
40 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits (11) Statement re: Computation of Earnings Per Share (b) Reports on Form 8-K 1. A report on Form 8-K dated April 27, 2001, was filed under report item number 9 to file the press release announcing the company's earnings for the period ended March 31, 2001. 2. A report on Form 8-K/A dated June 8, 2001, was filed under report item number 5 to file the Company's restated financial statements and management's discussion and analysis reflecting the merger of Imperial Bancorp and Comerica Holdings Incorporated, a wholly owned subsidiary of Comerica Incorporated.
41 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: August 13, 2001
42 Exhibit Index ------------- <Table> <Caption> Exhibit No. Description - ----------- ----------- <S> <C> 11 Statement re: Computation of Earnings Per Share </Table>