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, 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 October 31, 2001: 178,082,000 shares
CONSOLIDATED BALANCE SHEETS Comerica Incorporated And Subsidiaries <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ September 30, June 30, (IN THOUSANDS, EXCEPT SHARE DATA) 2001 2001 - ------------------------------------------------------------------------------------------------------------------ ASSETS <S> <C> <C> Cash and due from banks $ 2,160,124 $ 1,763,867 Short-term investments 387,768 257,380 Investment securities available for sale 4,205,604 4,025,903 Commercial loans 25,198,212 26,155,382 International loans 2,947,753 2,751,192 Real estate construction loans 3,160,677 3,117,988 Commercial mortgage loans 5,794,369 5,681,003 Residential mortgage loans 808,471 793,631 Consumer loans 1,509,007 1,490,809 Lease financing 1,147,169 1,123,408 - ------------------------------------------------------------------------------------------------------------------ Total loans 40,565,658 41,113,413 Less allowance for credit losses (645,183) (644,877) - ------------------------------------------------------------------------------------------------------------------ Net loans 39,920,475 40,468,536 Premises and equipment 349,640 356,328 Customers' liability on acceptances outstanding 33,411 27,538 Accrued income and other assets 2,676,346 2,388,708 - ------------------------------------------------------------------------------------------------------------------ Total assets $ 49,733,368 $ 49,288,260 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 11,716,740 $ 11,797,991 Interest-bearing deposits 25,417,009 25,247,662 - ------------------------------------------------------------------------------------------------------------------ Total deposits 37,133,749 37,045,653 Short-term borrowings 1,347,418 1,427,333 Acceptances outstanding 33,411 27,538 Accrued expenses and other liabilities 870,301 730,028 Medium- and long-term debt 5,550,709 5,306,843 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 44,935,588 44,537,395 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 6/30/01, 12/31/00 and 9/30/00 -- 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued - 178,749,198 shares at 9/30/01, 178,749,198 shares at 6/30/01, 177,703,678 shares at 12/31/00 and 177,367,048 shares at 9/30/00 893,746 893,746 Capital surplus 344,491 340,232 Unearned employee stock ownership plan - 145,444 shares at 9/30/01, 167,566 shares at 6/30/01, 176,462 at 12/31/00 and 197,370 shares at 9/30/00 (5,666) (6,408) Accumulated other comprehensive income 285,825 119,135 Retained earnings 3,328,942 3,211,460 Deferred compensation (10,202) (11,251) Less cost of common stock in treasury - 687,940 shares at 9/30/01, 855,492 shares at 6/30/01, 289,387 shares at 12/31/00 and 571,201 shares at 9/30/00 (39,356) (46,049) - ------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 4,797,780 4,750,865 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 49,733,368 $ 49,288,260 ================================================================================================================== </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- December 31, September 30, (IN THOUSANDS, EXCEPT SHARE DATA) 2000 2000 - ----------------------------------------------------------------------------------------------------------- ASSETS <S> <C> <C> Cash and due from banks $ 1,930,682 $ 1,959,031 Short-term investments 1,730,158 1,747,008 Investment securities available for sale 3,890,725 3,766,544 Commercial loans 26,009,336 25,410,598 International loans 2,571,156 2,483,910 Real estate construction loans 2,915,168 2,771,393 Commercial mortgage loans 5,360,601 5,195,445 Residential mortgage loans 807,064 817,483 Consumer loans 1,477,135 1,458,089 Lease financing 1,029,164 940,241 - ----------------------------------------------------------------------------------------------------------- Total loans 40,169,624 39,077,159 Less allowance for credit losses (608,110) (613,663) - ----------------------------------------------------------------------------------------------------------- Net loans 39,561,514 38,463,496 Premises and equipment 364,246 366,224 Customers' liability on acceptances outstanding 26,668 22,578 Accrued income and other assets 2,030,063 2,002,463 - ----------------------------------------------------------------------------------------------------------- Total assets $ 49,534,056 $ 48,327,344 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 10,188,475 $ 9,899,378 Interest-bearing deposits 23,665,808 22,146,765 - ----------------------------------------------------------------------------------------------------------- Total deposits 33,854,283 32,046,143 Short-term borrowings 2,093,381 3,346,674 Acceptances outstanding 26,668 22,578 Accrued expenses and other liabilities 800,386 747,595 Medium- and long-term debt 8,259,179 7,813,677 - ----------------------------------------------------------------------------------------------------------- Total liabilities 45,033,897 43,976,667 Nonredeemable preferred stock - $50 stated value: Authorized - 5,000,000 shares Issued - 5,000,000 shares at 6/30/01, 12/31/00 and 9/30/00 250,000 250,000 Common stock - $5 par value: Authorized - 325,000,000 shares Issued - 178,749,198 shares at 9/30/01, 178,749,198 shares at 6/30/01, 177,703,678 shares at 12/31/00 and 177,367,048 shares at 9/30/00 888,519 886,835 Capital surplus 301,414 293,991 Unearned employee stock ownership plan - 145,444 shares at 9/30/01, 167,566 shares at 6/30/01, 176,462 at 12/31/00 and 197,370 shares at 9/30/00 (6,750) (7,500) Accumulated other comprehensive income 12,097 (14,987) Retained earnings 3,085,784 2,991,186 Deferred compensation (14,494) (16,457) Less cost of common stock in treasury - 687,940 shares at 9/30/01, 855,492 shares at 6/30/01, 289,387 shares at 12/31/00 and 571,201 shares at 9/30/00 (16,411) (32,391) - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 4,500,159 4,350,677 - ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 49,534,056 $ 48,327,344 =========================================================================================================== </TABLE>
CONSOLIDATED STATEMENTS OF INCOME Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 757,797 $ 868,351 $ 2,437,100 $ 2,480,440 Interest on investment securities 62,174 66,096 182,516 189,645 Interest on short-term investments 3,450 14,527 18,919 61,037 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 823,421 948,974 2,638,535 2,731,122 INTEREST EXPENSE Interest on deposits 213,682 253,737 729,085 673,506 Interest on short-term borrowings 26,312 46,936 90,045 166,915 Interest on medium- and long-term debt 56,888 144,619 253,193 405,731 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 296,882 445,292 1,072,323 1,246,152 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 526,539 503,682 1,566,212 1,484,970 Provision for credit losses 58,000 43,300 167,000 166,794 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 468,539 460,382 1,399,212 1,318,176 NONINTEREST INCOME Fiduciary income 44,962 44,643 135,999 134,563 Investment advisory revenue, net (2,672) 34,097 1,184 100,080 Service charges on deposit accounts 53,710 47,657 156,053 140,980 Commercial lending fees 17,717 16,435 45,887 41,394 Letter of credit fees 14,985 12,777 42,731 39,469 Warrant income (16) 16,713 3,543 29,537 Securities gains/(losses) (468) 1,316 22,529 14,010 Net gain on sales of businesses 21,420 4,000 21,420 37,115 Equity in earnings of unconsolidated subsidiaries 4,473 5,358 (45,873) 13,304 Other noninterest income 61,031 61,005 204,567 190,219 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest income 215,142 244,001 588,040 740,671 NONINTEREST EXPENSES Salaries and employee benefits 198,341 215,151 608,614 636,128 Net occupancy expense 28,388 27,082 86,003 81,946 Equipment expense 16,329 19,160 53,078 56,937 Outside processing fee expense 14,804 15,465 45,195 44,178 Restructuring charge 18,246 - 126,672 - Customer services 9,606 9,240 29,524 26,240 Other noninterest expenses 79,100 89,306 238,517 263,012 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 364,814 375,404 1,187,603 1,108,441 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 318,867 328,979 799,649 950,406 Provision for income taxes 110,332 113,921 289,050 332,267 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME $ 208,535 $ 215,058 $ 510,599 $ 618,139 - ----------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 205,477 $ 210,783 $ 498,991 $ 605,314 - ----------------------------------------------------------------------------------------------------------------------- Basic net income per common share $ 1.16 $ 1.19 $ 2.81 $ 3.42 Diluted net income per common share $ 1.14 $ 1.17 $ 2.77 $ 3.37 Cash dividends declared on common stock $ 78,272 $ 62,601 $ 235,081 $ 187,571 Dividends per common share $ 0.44 $ 0.40 $ 1.32 $ 1.20 - ----------------------------------------------------------------------------------------------------------------------- </TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 510,599 $ 618,139 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 167,000 166,794 Depreciation 48,033 51,689 Restructuring charge 58,700 - Net increase in trading account securities (24,607) (22,039) Net decrease in assets held for sale 27,261 26,004 Net (increase) decrease in accrued income receivable 106,855 (73,980) Net increase in accrued expenses 40,344 55,094 Net amortization of intangibles 25,903 27,323 Other, net (300,941) (208,153) - ----------------------------------------------------------------------------------------------------------------- Total adjustments 148,548 22,732 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 659,147 640,871 INVESTING ACTIVITIES Net increase in interest-bearing deposits with banks (26,167) (14,977) Net decrease in federal funds sold and securities purchased under agreements to resell 1,365,903 134,197 Proceeds from sale of investment securities available for sale 2,330,079 5,051,321 Proceeds from maturity of investment securities available for sale 911,716 635,230 Purchases of investment securities available for sale (3,620,230) (5,663,754) Net increase in loans (other than loans purchased) (524,007) (2,853,425) Fixed assets, net (33,427) (45,066) Net (increase) decrease in customers' liability on acceptances outstanding (6,743) 21,232 Net cash provided by acquisitions/sales - 463,931 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 397,124 (2,271,311) FINANCING ACTIVITIES Net increase in deposits 3,261,047 2,850,140 Net increase (decrease) in short-term borrowings (745,963) 413,733 Net increase (decrease) in acceptances outstanding 6,743 (21,232) Proceeds from issuance of medium- and long-term debt 1,124,972 4,789,067 Repayments and purchases of medium- and long-term debt (3,984,640) (5,718,011) Redemption of preferred stock (250,000) - Proceeds from issuance of common stock and other capital transactions 61,833 20,653 Purchase of common stock (65,214) (60,399) Dividends paid (235,607) (194,240) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (826,829) 2,079,711 - ----------------------------------------------------------------------------------------------------------------- Net increase in cash and due from banks 229,442 449,271 Cash and due from banks at beginning of year 1,930,682 1,509,760 - ----------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 2,160,124 $ 1,959,031 - ----------------------------------------------------------------------------------------------------------------- Interest paid $ 1,171,775 $ 1,249,985 - ----------------------------------------------------------------------------------------------------------------- Income taxes paid $ 217,924 $ 302,067 - ----------------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Loan transfers to other real estate $ 10,218 $ 5,147 - ----------------------------------------------------------------------------------------------------------------- </TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Comerica Incorporated and Subsidiaries <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- Accumulated Nonredeemable Other Preferred Common Capital Comprehensive (IN THOUSANDS, EXCEPT SHARE DATA) Stock Stock Surplus Income - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $ 250,000 $ 889,453 $ 226,001 $ (21,704) Net income for 2000 - - - - Other comprehensive income, net of tax - - - 6,717 Total comprehensive income - - - - Common stock dividend - - 84,906 - Cash dividends declared: Preferred stock - - - - Common stock - - - - Purchase and retirement of 798,928 shares of common stock - (3,995) (26,503) - Purchase of 353,547 shares of common stock - - - - Net issuance of common stock under employee stock plans - 1,377 9,587 - Amortization of deferred compensation - - - - - --------------------------------------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 2000 $ 250,000 $ 886,835 $ 293,991 $ (14,987) ===================================================================================================================== BALANCES AT JANUARY 1, 2001 $ 250,000 $ 888,519 $ 301,414 $ 12,097 Net income for 2001 - - - - Other comprehensive income, net of tax - - - 273,728 Total comprehensive income - - - - Redemption of preferred stock (250,000) - - - Cash dividends declared: Preferred stock - - - - Common stock - - - - Purchase of 1,140,800 shares of common stock - - - - Net issuance of common stock under employee stock plans - 5,227 43,077 - Amortization of deferred compensation - - - - - --------------------------------------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 2001 $ - $ 893,746 $ 344,491 $ 285,825 - --------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- Unearned Employee Stock Total Retained Ownership Deferred Treasury Shareholders' (IN THOUSANDS, EXCEPT SHARE DATA) Earnings Plan Shares Compensation Stock Equity - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCES AT JANUARY 1, 2000 $ 2,677,210 $ (3,750) $ (21,998) $ (47,161) $ 3,948,051 Net income for 2000 618,139 - - - 618,139 Other comprehensive income, net of tax - - - - 6,717 ----- Total comprehensive income - - - - 624,856 Common stock dividend (84,927) - (21) Cash dividends declared: Preferred stock (12,825) - - - (12,825) Common stock (187,571) - - - (187,571) Purchase and retirement of 798,928 shares of common stock - - - - (30,498) Purchase of 353,547 shares of common stock - - - (14,108) (14,108) Net issuance of common stock under employee stock plans (18,840) (3,750) (3,278) 28,878 13,974 Amortization of deferred compensation - - 8,819 - 8,819 - --------------------------------------------------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 2000 $ 2,991,186 $ (7,500) $ (16,457) $ (32,391) $ 4,350,677 ================================================================================================================================= BALANCES AT JANUARY 1, 2001 $ 3,085,784 $ (6,750) $ (14,494) $ (16,411) $ 4,500,159 Net income for 2001 510,599 - - - 510,599 Other comprehensive income, net of tax - - - - 273,728 ------- Total comprehensive income - - - - 784,327 Redemption of preferred stock - - - - (250,000) Cash dividends declared: Preferred stock (11,608) - - - (11,608) Common stock (235,081) - - - (235,081) Purchase of 1,140,800 shares of common stock - - - (65,214) (65,214) Net issuance of common stock under employee stock plans (20,752) 1,084 (9,072) 42,269 61,833 Amortization of deferred compensation - - 13,364 - 13,364 - --------------------------------------------------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 2001 $ 3,328,942 $ (5,666) $ (10,202) $ (39,356) $ 4,797,780 - --------------------------------------------------------------------------------------------------------------------------------- </TABLE>
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 nine months ended September 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. -6-
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. 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. -7-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 2 - Investment Securities At September 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 (164,895) (122,673) Recoveries 35,115 21,453 --------- --------- Net charge-offs (129,780) (101,220) Provision for credit losses 167,000 166,794 Foreign currency translation adjustment (147) (58) --------- --------- Balance at September 30 $ 645,183 $ 613,663 ========= ========= </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 $561 million and $501 million for the quarter and nine months ended September 30, 2001, compared to $330 million and $269 million for the comparable periods last year. The following are period-end balances: -8-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 3 - Allowance for Credit Losses (continued) <TABLE> <CAPTION> (in thousands) September 30, 2001 December 31, 2000 ------------------ ----------------- <S> <C> <C> Total impaired loans $674,997 $364,895 Impaired loans requiring an allowance 517,457 277,159 Impairment allowance 210,777 104,107 </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 September 30, 2001 and December 31, 2000: <TABLE> <CAPTION> (in thousands) September 30, 2001 December 31, 2000 ------------------ ----------------- <S> <C> <C> Parent Company 7.25% subordinated notes due 2007 $ 156,572 $ 157,414 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 221,160 198,703 7.875% subordinated notes due 2026 188,749 172,346 8.375% subordinated notes due 2024 193,812 155,071 7.25% subordinated notes due 2002 156,664 149,719 6.875% subordinated notes due 2008 110,725 103,272 7.125% subordinated notes due 2013 175,399 154,486 6.00% subordinated notes due 2008 267,429 248,238 7.65% subordinated notes due 2010 274,488 248,385 8.50% subordinated notes due 2009 105,003 99,474 ---------- ---------- Total subordinated notes 1,693,429 1,529,694 Medium-term notes: Floating rate based on Treasury indices -- 125,000 Floating rate based on Prime indices 385,200 1,320,964 Floating rate based on LIBOR indices 2,907,478 5,048,972 ---------- ---------- Total medium-term notes 3,292,678 6,494,936 Notes payable 12,641 13,445 9.98% trust preferred securities due 2026 45,389 63,690 7.60% trust preferred securities due 2050 350,000 -- ---------- ---------- Total subsidiaries 5,394,137 8,101,765 ---------- ---------- Total medium- and long-term debt $5,550,709 $8,259,179 ========== ========== </TABLE> -9-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 4 - Medium- and Long-term Debt (continued) In July 2001, Comerica issued $350,000,000 of 7.60% Trust Preferred Securities, due July 1, 2050. The securities pay cumulative dividends each quarter beginning October 1, 2001, and are callable at par any time after July 30, 2006. The balances of medium- and long-term debt at September 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 deducting non-taxable items, principally income on bank-owned life insurance and interest income on state and municipal securities. State and foreign taxes are then added to the federal provision. The effective tax rate for the nine months ended September 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. -10-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts <TABLE> <CAPTION> September 30, 2001 ------------------------------------------------------------- Notional/ Contract Unrealized Fair Amount Gains Losses Value (in millions) (1) (2) (3) ------------------------------------------------------------- <S> <C> <C> <C> <C> RISK MANAGEMENT Interest rate contracts: Caps and floors purchased $ -- $ -- $ -- $ -- Swaps 14,630 670 -- 670 Foreign exchange contracts: Spot, forward and options 590 9 (12) (3) Swaps 287 3 (15) (12) ------- ------- ------- ------- Total risk management 15,507 682 (27) 655 CUSTOMER-INITIATED AND OTHER Interest rate contracts: Caps and floors written 415 -- (4) (4) Caps and floors purchased 403 4 -- 4 Swaps 779 17 (16) 1 Foreign exchange contracts: Spot, forward and options 2,671 11 (13) (2) Swaps 107 -- -- -- ------- ------- ------- ------- Total customer-initiated and other 4,375 32 (33) (1) ------- ------- ------- ------- Total derivatives and foreign exchange contracts $19,882 $ 714 $ (60) $ 654 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> December 31, 2000 --------------------------------------------------------------- Notional/ Contract Unrealized Fair Amount Gains Losses Value (in millions) (1) (2) (3) ------------------------------------------------------------- <S> <C> <C> <C> <C> RISK MANAGEMENT Interest rate contracts: Caps and floors purchased $ 6,058 $ 10 $ (1) $ 9 Swaps 12,594 206 (33) 173 Foreign exchange contracts: Spot, forward and options 493 18 (6) 12 Swaps 115 1 (13) (12) ------- ------- ------- ------- Total risk management 19,260 235 (53) 182 CUSTOMER-INITIATED AND OTHER Interest rate contracts: Caps and floors written 198 -- (1) (1) Caps and floors purchased 179 1 -- 1 Swaps 493 5 (4) 1 Foreign exchange contracts: Spot, forward and options 1,827 26 (19) 7 Swaps 50 -- -- -- ------- ------- ------- ------- Total customer-initiated and other 2,747 32 (24) 8 ------- ------- ------- ------- Total derivatives and foreign exchange contracts $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. -11-
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 nine month period ended September 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 -12-
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 September 30, 2001. During the three and nine month periods ended September 30, 2001, interest rate swap agreements designated as cash flow hedges increased interest and fees on loans by $52 and $88 million, respectively. During the third 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 $180 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 Canadian subsidiary. 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 nine month periods ended September 30, 2001, the Corporation recognized $1 and $2 million, respectively, of net gains included in accumulated foreign currency translation adjustment, related to the forward foreign exchange contracts. The Corporation also uses various other types of financial instruments to -13-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) 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 September 30, 2001. The swaps are grouped by the assets or liabilities to which they have been designated. -14-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: (dollar amounts 2006- in millions) 2001 2002 2003 2004 2005 2026 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> VARIABLE RATE ASSET DESIGNATION: Receive fixed swaps Generic $ 840 $2,860 $4,750 $ 1,600 $ 600 $ 500 Weighted average: (1) Receive rate 4.93% 7.13% 8.31% 7.69% 8.07% 5.83% Pay rate 3.53% 5.09% 5.42% 6.05% 6.08% 3.73% FIXED RATE ASSET DESIGNATION: Pay fixed swaps Generic $ 31 $ - $ - $ - $ - $ - Amortizing - 1 - - - - Weighted average: (2) Receive rate 3.59% 4.18% -% -% -% -% Pay rate 4.32% 6.05% -% -% -% -% FIXED RATE DEPOSIT DESIGNATION: Generic receive fixed swaps $ 55 $1,743 $ - $ - $ - $ - Weighted average: (1) Receive rate 6.82% 4.87% -% -% -% -% Pay rate 3.50% 3.19% -% -% -% -% MEDIUM- AND LONG-TERM DEBT DESIGNATION: Generic receive fixed swaps $ - $ 150 $ - $ - $ 250 $1,250 Weighted average: (1) Receive rate -% 7.22% -% -% 7.04% 6.73% Pay rate -% 4.59% -% -% 3.57% 3.89% Floating/floating swaps $ - $ - $ - $ - $ - $ - Weighted average: (3) Receive rate -% -% -% -% -% -% Pay rate -% -% -% -% -% -% Total notional amount $ 926 $4,754 $4,750 $ 1,600 $ 850 $1,750 - ----------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------- Remaining Expected Maturity of Risk Management Interest Rate Swaps: (dollar amounts Dec. 31, in millions) Total 2000 - ------------------------------------------------------------------- <S> <C> VARIABLE RATE ASSET DESIGNATION: Receive fixed swaps Generic $11,150 $ 9,277 Weighted average: (1) Receive rate 7.53% 7.55% Pay rate 5.25% 8.14% FIXED RATE ASSET DESIGNATION: Pay fixed swaps Generic $ 31 $ 98 Amortizing 1 1 Weighted average: (2) Receive rate 3.61% 6.70% Pay rate 4.37% 6.79% FIXED RATE DEPOSIT DESIGNATION: Generic receive fixed swaps $ 1,798 $ 1,378 Weighted average: (1) Receive rate 4.93% 7.19% Pay rate 3.20% 6.66% MEDIUM- AND LONG-TERM DEBT DESIGNATION: Generic receive fixed swaps $ 1,650 $ 1,715 Weighted average: (1) Receive rate 6.82% 6.83% Pay rate 3.91% 6.76% Floating/floating swaps $ - $125 Weighted average: (3) Receive rate -% 6.72% Pay rate -% 6.59% Total notional amount $14,630 $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 September 30, 2001. Variable rates received on pay fixed swaps are based on prime. (2) Variable rate received is based on one-month CDOR at September 30, 2001. (3) Variable rate paid is based on LIBOR at September 30, 2001, while variable rate received is based on the three-month U.S. Treasury bill bond equivalent rate. -15-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 6 - Derivatives and Foreign Exchange Contracts (continued) The notional amounts of commitments to purchase and sell U.S. Treasury, U.S. government agency and municipal bond securities related to the Corporation's trading account and available for sale portfolio totaled $362 million and $3 million at September 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 nine-month period ended September 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 nine-month period ended September 30, 2001 and for the year ended December 31, 2000. -16-
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 7,462 9,945 1,014 36,653 Maturities/amortizations (9,904) (9,676) (287) (35,752) Terminations (1,580) -- -- -- -------- -------- -------- -------- Balances at September 30, 2001 $ 14,630 $ 877 $ 1,597 $ 2,778 ======== ======== ======== ======== </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 Form 8-K/A of the Corporation's 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 nine -17-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) months ended September 30, 2001 and 2000 are presented below. Nine Months Ended September 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 $ 37,939 $35,145 $ 7,409 $6,908 $ 407 $ 390 Total revenues (FTE) 1,260 1,219 762 813 44 207 Net income 380 366 202 254 (68) 18 Return on average assets 1.33% 1.39% 1.41% 1.83% (21.50)% 5.60% Return on average common equity 17.35% 19.30% 34.10% 46.45% (33.31)% 8.55% </TABLE> <TABLE> <CAPTION> Finance Other Total - ---------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Average assets $ 5,538 $3,947 $(1,809) 37 $49,484 $46,427 Total revenues (FTE) 68 (9) 23 (2) 2,157 2,228 Net income 36 (8) (39) (12) 511 618 Return on average assets 0.27% (0.07)% N/M N/M 1.38% 1.78% Return on average common equity 7.50% (3.03)% N/M N/M 14.74% 20.78% </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 ($63) million and $26 million, and return on average common equity would have been (30.66%) and 12.84%, in 2001 and 2000, respectively. ** Net income in 2001 was reduced by a $40 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 $141 million and ($8) million, respectively, while return on average assets and return on common equity would have been (2.39%) and (3.71%), 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 $779 million and $232 million, respectively,while return on average assets and return on average common equity would have been 1.67% and 42.36%, 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 -18-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 7 - Business Segment Information (continued) consolidated financial statements in the Corporation's Form 8-K/A dated June 8, 2001. 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 nine months ended September 30, 2001 and 2000. Total comprehensive income for the nine months ended September 30, 2001 and 2000, totaled $784 million and $625 million, respectively. <TABLE> <CAPTION> Nine Months Ended September 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 60,971 22,742 Less: Reclassification adjustment for gains/(losses) included in net income 22,529 14,674 -------- -------- Change in net unrealized gains/(losses) before income taxes 38,442 8,068 Provision for income taxes 13,455 1,595 -------- -------- Change in net unrealized gains/(losses) on investment securities available for sale, net of tax 24,987 6,473 -------- -------- Balance at September 30 $ 33,003 $(16,246) -------- -------- </TABLE> -19-
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) 2001 2000 -------- -------- <S> <C> <C> Accumulated foreign currency translation adjustment: Balance at beginning of year $ 4,081 $ 1,015 Net translation gains/(losses) arising during the period (4,339) 244 Less: Reclassification adjustment for gains/(losses) included in net income -- -- --------- --------- Change in translation adjustment before income taxes (4,339) 244 Provision for income taxes -- -- --------- --------- Change in foreign currency translation adjustment, net of tax (4,339) 244 --------- --------- Balance at September 30 $ (258) $ 1,259 --------- --------- 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 412,919 -- Less: Reclassification adjustment for gains/(losses) included in net income 88,270 -- --------- --------- Change in cash flow hedges before income taxes 389,354 -- Provision for income taxes 136,274 -- --------- --------- Change in cash flow hedges, net of tax 253,080 -- --------- --------- Balance at September 30 $ 253,080 $ -- --------- --------- Accumulated other comprehensive income, net of taxes, at September 30 $ 285,825 $ (14,987) ========= ========= </TABLE> Note 9 - Restructuring Charge The Corporation recorded restructuring charges related to the acquisition of Imperial Bancorp of $18 million and $152 million for the three and nine months ended September 30,2001, respectively. The components of the charges, $25 million and $127 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 -20-
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries Note 9 - Restructuring Charge (continued) integration, which is currently targeted for completion by the end of 2001. <TABLE> <CAPTION> Restructuring Reserve Analysis Imperial Merger Other Facilities Employee Employee Conforming and (in thousands) Termination -Related Policies Operations Other Total ----------- ---------- ---------- ---------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2001 $ -- $ -- $ -- $ -- $ -- $ -- Provision charged to operating expense 35,500 39,100 39,000 20,000 18,000 151,600 Cash outlays (24,800) (24,100) -- (1,000) (18,000) (67,900) Noncash write-downs and other -- (11,100) (39,000) (17,100) -- (67,200) ------------------------------------------------------------------------------------ Balance at September 30,2001 $ 10,700 $ 3,900 $ -- $ 1,900 $ -- $ 16,500 ==================================================================================== </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 360 employees are expected to be terminated as part of the restructuring plan, 244 of which occurred in the nine month period ended September 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 $39 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 -21-
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 be not begin to be realized until the first quarter of 2002. -22-
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Net income for the quarter ended September 30, 2001, was $209 million, down seven million, or three percent, from $215 million reported for the third quarter of 2000. Quarterly diluted net income per share decreased to $1.14 from $1.17 a year ago. Return on average common shareholders' equity was 17.68 percent and return on average assets was 1.68 percent, compared to 20.87 percent and 1.83 percent, respectively, for the comparable quarter last year. Excluding restructuring charges of $18 million ($11 million or $0.06 per share, net of taxes) related to the Imperial acquisition, third quarter net income was $219 million or $1.20 per share. Return on average common equity and return on assets, excluding the restructuring charges, were 18.59 percent and 1.76 percent, respectively. Net income for the first nine months of 2001 was $2.77 per share or $511 million, compared to $3.37 or $618 million for the same period in 2000, decreases of 18 percent and 17 percent, respectively. Return on average common shareholders' equity was 14.74 percent and return on average assets was 1.38 percent for the first nine months of 2001, compared to 20.78 percent and 1.78 percent, respectively, for the first nine months of 2000. Excluding restructuring charges of $114 million after tax ($0.63 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 Corporation's investment management subsidiary), net income for the nine months ended September 30, 2001 was $659 million or $3.59 per share, increases in both net income and earnings per share of seven percent over the same period of 2000. Excluding these charges, Comerica's return on common equity was 19.11 percent and return on assets was 1.77 percent for the first nine months of 2001. -23-
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, 2001. On a FTE basis, net interest income was $528 million for the three months ended September 30, 2001, an increase of $23 million, or five percent, from the comparable quarter in 2000. This increase was due to a five percent increase in average earning assets and a relatively stable net interest margin supported by strong growth in interest-free sources of funds. The net interest margin was 4.59 percent for the third quarter of 2001, compared with 4.61 percent for the third quarter 2000 and 4.65 percent in the second quarter of 2001. Table II provides an analysis of net interest income for the first nine months of 2001. On a FTE basis, net interest income for the first nine months ended September 30, 2001 was $1,569 million compared to $1,488 million for the same period in 2000. This increase is primarily attributed to the same factors cited in the quarterly discussion above. The net interest margin for the first nine months ended September 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 September 30, 2001, the Corporation was in a liability sensitive position of $833 million (on an elasticity adjusted basis), or two percent of earning assets. The earnings simulation analysis performed at the end of the quarter reflects changes to both interest rates and loan, investment and deposit volumes. The -24-
measurement of risk exposure at September 30, 2001, for a 200 basis point decline in short-term interest rates identified approximately $96 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 would be enhanced by approximately $60 million, or three percent. The results of these simulations are within established corporate policy guidelines. -25-
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Three Months Ended - ------------------------------------------------------------------------------------------------------ September 30, 2001 September 30, 2000 ------------------------------- ------------------------------------- (dollar amounts Average Average Average Average in millions) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans $41,397 $ 759 7.27% $39,114 $ 869 8.84% Investment securities (1) 3,989 63 6.29 3,668 67 7.15 Short-term investments 317 3 4.37 727 14 7.97 - ------------------------------------------------------------------------------------------------------ Total earning assets 45,703 825 7.17 43,509 950 8.68 Interest-bearing deposits 25,649 214 3.31 21,659 254 4.66 Short-term borrowings 2,903 26 3.60 2,735 47 6.83 Medium- and long-term debt 5,323 57 4.24 8,440 144 6.82 - ------------------------------------------------------------------------------------------------------ Total interest-bearing sources $33,875 297 3.48 $32,834 445 5.40 ------------------- ------------------- Net interest income/ Rate spread (FTE) $ 528 3.69 $ 505 3.28 ======= ======= FTE adjustment $ 1 $ 1 ======= ======= Impact of net noninterest- bearing sources of funds 0.90 1.33 - ------------------------------------------------------------------------------------------------------ Net interest margin as a percent of average earning assets (FTE) 4.59% 4.61% ====================================================================================================== </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 $(152) $ 42 $(110) Investment securities (9) 5 (4) Short-term investments (6) (5) (11) - -------------------------------------------------------------------------- Total earning assets (167) 42 (125) Interest-bearing deposits (78) 38 (40) Short-term borrowings (22) 1 (21) Medium- and long-term debt (55) (32) (87) - -------------------------------------------------------------------------- Total interest-bearing sources (155) 7 (148) - -------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $(12) $ 35 $ 23 =============================== </TABLE> * Rate/Volume variances are allocated to variances due to volume. -26-
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE) <TABLE> <CAPTION> Nine Months Ended - ----------------------------------------------------------------------------------------------------------- September 30, 2001 September 30, 2000 ------------------------------ ----------------------------------- (dollar amounts Average Average Average Average in millions) Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $41,417 $ 2,439 7.87% $38,284 $ 2,482 8.66% Investment securities(1) 3,788 183 6.48 3,632 191 6.91 Other earning assets 415 19 6.12 1,036 61 7.88 - ----------------------------------------------------------------------------------------------------------- Total earning assets 45,620 2,641 7.74 42,952 2,734 8.49 Interest-bearing deposits 24,947 729 3.91 20,784 673 4.33 Short-term borrowings 2,564 90 4.69 3,488 167 6.39 Medium- and long-term debt 6,491 253 5.21 8,366 406 6.48 - ----------------------------------------------------------------------------------------------------------- Total interest-bearing sources $34,002 1,072 4.22 $32,638 1,246 5.10 ------------------ ------------------- Net interest income/ Rate spread (FTE) $ 1,569 3.52 $ 1,488 3.39 ======= ======= FTE adjustment $ 3 $ 3 ======= ======= Impact of net noninterest-bearing sources of funds 1.08 1.23 - ----------------------------------------------------------------------------------------------------------- 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 $(227) $ 184 $ (43) Investment securities (15) 7 (8) Other earning assets (14) (28) (42) - ---------------------------------------------------------------------------- Total earning assets (256) 163 (93) Interest-bearing deposits (85) 141 56 Short-term borrowings (45) (32) (77) Medium- and long-term debt (80) (73) (153) - ---------------------------------------------------------------------------- Total interest-bearing sources (210) 36 (174) - ---------------------------------------------------------------------------- Net interest income/Rate spread (FTE) $ (46) $ 127 $ 81 ================================= </TABLE> * Rate/Volume variances are allocated to variances due to volume. -27-
Provision for Credit Losses The provision for credit losses was $58 million for the third quarter of 2001, compared to $43 million for the same period in 2000. The provision for credit losses was $167 million for the first nine month periods of both 2001 and 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 nine months ended September 30, 2001, is a $25 million merger-related charge to conform the credit policies of Imperial with Comerica. Noninterest Income Noninterest income was $215 million for the three months ended September 30, 2001, a decrease of $29 million, or 12 percent, over the same period in 2000. Third quarter 2001 noninterest income included a $21 million gain on the sale of Comerica's ownership in a ATM network provider and was reduced by an additional $14 million deferred distribution costs impairment charge discussed more fully below. Included in the third quarter 2000 noninterest income was an additional $4 million gain associated with the sale of revolving check credit and bankcard loans which occurred in the first quarter of 2000. Excluding the effects of gains and losses on securities, warrant income, and the net gains on the sales of businesses and other nonrecurring items mentioned above, noninterest income decreased six percent in the third quarter of 2001, compared with the third quarter of 2000. Certain of the Corporation's noninterest income, including investment advisory revenue and fiduciary income, is at risk to fluctuations in the market values of the underlying assets, particularly equity securities. The noninterest income decline reflects a $23 million decrease in investment advisory revenue, excluding the deferred distribution costs impairment charge, from the Corporation's Munder Capital Management subsidiary, as the -28-
market values of technology-related stocks continued declining from their record highs during the first quarter of last year. Fiduciary income remained flat, despite an overall decline in the stock market. Non-investment market-related fees, consisting of service charges, commercial lending fees and letters of credit fees increased $10 million or 12 percent on a combined basis when compared with the third quarter of 2000. For the first nine months of 2001, noninterest income was $588 million, a decrease of $153 million or 21 percent, from the first nine months of 2000. In addition to the nonrecurring items identified in the quarterly discussion above, noninterest income in the first nine months of 2001 was reduced by a $26 million deferred distribution costs impairment charge and a one-time $53 million charge related to an unconsolidated subsidiary, both of which occurred in the first quarter and are discussed more fully below. Noninterest income for the first nine 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 nine months of 2000 included a $34 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 nine month periods, noninterest income decreased four percent in the first nine months of 2001 compared to the first nine months of 2000. Consistent with the reasons cited in the quarterly discussion above, the decrease in year-to-date noninterest income after excluding nonrecurring items was primarily attributable to a $59 million decrease in investment advisory revenue from the Corporation's Munder Capital Management subsidiary, offset by an increase in non-investment market-related fees of $23 million. The Corporation recorded a combined total $40 million pre-tax deferred distribution costs impairment charge in the first and third quarters of 2001 -29-
related to the Corporation's Munder subsidiary. These charges resulted from the Corporation's continued reassessment of its ability to recover the unamortized cost of the commissions to brokers for selling certain mutual fund shares, principally shares in its Munder subsidiary's NetNet, International NetNet and Future Technology funds. Net asset values in these technology funds suffered significantly as market conditions weakened, declining 26 percent in the first quarter 2001 and over 45 percent during the third 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 over a prescribed number of years. Net remaining deferred distribution costs at September 30, 2001 were $36 million. Given net asset values at September 30, 2001, it would take a decline in total assets under management at Munder of approximately 12 percent to trigger further impairment, which at that level would be approximately $4 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 $18 million, were $365 million for the quarter ended September 30, 2001, a decrease of $11 million, or three percent, from the comparable quarter in 2000. -30-
Noninterest expenses for the third quarter of 2000 included $8 million of interest associated with the 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 noninterest expenses decreased $12 million, or three percent, in the third quarter of 2001 when compared to the same period in 2000. For the first nine months of 2001, noninterest expenses, which included $127 million of merger related restructuring charges, were $1,188 million, an increase of $79 million, or seven percent from the comparable 2000 period. In addition to the nonrecurring items identified in the quarterly discussion, noninterest expenses in the first nine months of 2000 included a $6 million contribution to Comerica's charitable foundation and an additional $4 million of interest associated with the preliminary settlement of Federal tax years prior to 1993. Excluding restructuring charges, incentives on warrant income, divestitures and the effect of large nonrecurring items, noninterest expenses decreased $11 million or one percent on a year to date basis when compared to 2000. The declines in both the quarter and year to date periods reflect a decrease in revenue related incentives. Provision for Income Taxes The provision for income taxes for the third quarter of 2001 totaled $110 million, compared to $114 million reported for the same period a year ago. The effective tax rate was 35 percent for the third quarter of 2001 and 2000. The provision for the first nine months of 2001 was $289 million compared to $332 million for the same period in 2000. The effective tax rate was 36 percent for the first nine months of 2001 and 35 percent for the first nine months of 2000. The effective tax rate in the first nine 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 -31-
acquisition that was immediately recognizable, but only after Imperial became part of Comerica. Financial Condition Total assets were $49.7 billion at September 30, 2001, compared with $49.5 billion at year-end 2000 and $48.3 billion at September 30, 2000. The Corporation has experienced less than one percent growth in total business loans since December 31, 2000. Despite the weakening economy and level business loan growth, certain business loan categories have continued to increase. The most significant growth occurred in the commercial mortgage and real estate construction categories, which increased eight percent each or $434 million and $246 million, respectively. These increases were offset by a three percent decrease in the commercial loan category. Total loan growth of $396 million was primarily funded by a reduction in short-term investments. Total liabilities decreased $98 million, less than one percent, since December 31, 2000, to $44.9 billion. Total deposits increased $3.2 billion to $37.1 billion at September 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 $746 million, or 36 percent, since year-end 2000, and medium- and long-term debt, which decreased $2.7 billion, or 33 percent. In July 2001, Comerica issued $350,000,000 of 7.60% Trust Preferred Securities which are classified in medium- and long-term debt. The securities pay cumulative dividends each quarter beginning October 1, 2001, and are callable any time after July 30, 2006. The Corporation used the proceeds from the -32-
issuance to redeem and retire in total the $250,000,000 of preferred stock that was outstanding and for other general corporate purposes. 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 respect to past due and nonaccrual amounts. The allocated reserve was $525 million at September 30, 2001, an increase of $82 million from year-end 2000. This increase was attributable to an increased impairment allowance required as a result of the quarterly credit quality review of certain large business loans -33-
with deteriorated credit risk at September 30, 2001. Actual loss ratios experienced in the future could vary from those projected. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. To ensure a higher degree of confidence, an unallocated allowance is also maintained. The unallocated portion of the loss reserve reflects management's view that the reserve should have a margin that recognizes the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgement. Factors which were considered in the evaluation of the adequacy of the Corporation's unallocated reserve include portfolio exposures to the healthcare, high technology and energy industries, as well as Latin American transfer risks and the risk associated with new customer relationships. The unallocated allowance was $120 million at September 30, 2001, a decrease of $45 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 September 30, 2001, the allowance for credit losses was $645 million, an increase of $37 million since December 31, 2000. The allowance as a percentage of total loans was 1.59 percent, compared to 1.51 percent at December 31, 2000. As a percentage of nonperforming assets, the allowance was 105 percent at September 30, 2001, versus 179 percent at year-end 2000. Net charge-offs for the third quarter of 2001 were $58 million, or 0.56 percent of average total loans, compared with $31 million, or 0.31 percent, for the year-earlier quarter. Nonperforming assets increased $276 million, or 81 -34-
percent, since December 31, 2000, and were categorized as follows: <TABLE> <CAPTION> September 30, December 31, (in thousands) 2001 2000 ------------- ------------ <S> <C> <C> Nonaccrual loans: Commercial $ 457,781 $ 233,408 International 95,151 68,911 Real estate construction 15,265 4,542 Commercial mortgage 29,649 17,398 Residential mortgage 311 185 Consumer 4,258 3,080 Lease financing 2,824 3,837 ------------- ------------ Total nonaccrual loans 605,239 331,361 Reduced-rate loans 247 2,306 ------------- ------------ Total nonperforming loans 605,486 333,667 Other real estate 10,050 5,577 ------------- ------------ Total nonperforming assets $ 615,536 $ 339,244 ============= ============ Loans past due 90 days or more $ 49,312 $ 36,176 ============= ============ </TABLE> Nonperforming assets as a percentage of total loans and other real estate were 1.52 percent at September 30, 2001 and 0.84 percent at December 31, 2000. Nonperforming assets to companies and individuals involved with the automotive industry represented the largest industry concentration, comprising approximately 12% of total nonperforming assets at September 30, 2001. Capital Common shareholders' equity increased $274 million from December 31, 2000 to September 30, 2001, excluding other comprehensive income. The increase was primarily due to the retention of $264 million of current year earnings. The effect of employee stock plan activity, which increased common shareholders' equity $62 million, was offset by repurchasing in total approximately 1,200,000 shares of common stock in the second and third quarters of 2001. Capital ratios exceed minimum regulatory requirements as follows: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------ ------------- <S> <C> <C> Leverage ratio (3.00 - minimum) 9.31% 8.74% Tier 1 risk-based capital ratio (4.0 - minimum) 7.97 7.35 Total risk-based capital ratio (8.0 - minimum) 11.75 11.11 </TABLE> At September 30, 2001, the capital ratios of all the Corporation's banking -35-
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. Application of the nonamortization provisions of the Statement is expected to result in an annual increase in net income of $28 million ($0.16 per share). Based on the conditions that existed at September 30, 2001, the Corporation does not expect to record a transition adjustment at January 1, 2002. The Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets, upon adoption of the Standard, as of January 1, 2002. Forward-looking statements This report includes forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analysis. Such statements reflect the view of Comerica's management, as of the date of this report, with respect to future events and are subject to risks and uncertainties, such as changes in Comerica's plans, objectives, expectations and intentions and do not purport to speak as of any other date. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Corporation's actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such -36-
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 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. -37-
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 July 17, 2001, was filed under report item number 9, filing the press release announcing Comerica's earnings for the quarter ended June 30, 2001. 2. A report on form 8-K, dated July 31, 2001, filing certain documents relating to Comerica's offering of 7.60% Trust Preferred Securities of Comerica Capital Trust I. -38-
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 13, 2001 -39-
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Number Exhibit Description - -------- -------------------- <S> <C> 11 Statement re: Computation of Earnings Per Share </TABLE>