UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
Commission file number1-10706
Comerica Incorporated
Comerica Tower at Detroit CenterDetroit, Michigan48226
(248) 371-5000
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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, 2004: 170,560,000 shares
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME (unaudited)
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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Notes to Consolidated Financial Statements (unaudited)Comerica Incorporated and Subsidiaries
Note 1 — Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Certain items in prior periods have been reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report of Comerica Incorporated and Subsidiaries (the “Corporation”) on Form 10-K for the year ended December 31, 2003.
Reclassifications
The Corporation issues personal purpose loans to individuals associated with commercial lending relationships. These loans, and their associated interest income, were previously classified with commercial loans. In the second quarter of 2004, the Corporation reclassified its personal purpose loans to residential mortgage loans and consumer loans. The financial statements and associated schedules for prior periods have been adjusted to reflect this reclassification. The impact on loan balances at December 31, 2003 was a decrease in commercial loans of approximately $1.4 billion, offset by increases in residential mortgage loans and consumer loans of approximately $0.4 billion and $1.0 billion, respectively.
The Corporation has foreign currency denominated assets and liabilities and hedges the resulting foreign currency exposure with forward foreign exchange contracts. The exchange rate related adjustments required to reflect the foreign currency denominated assets and liabilities at current U.S. dollar equivalent values and to reflect the related forward foreign exchange contracts at market value were previously classified with foreign exchange income. In the third quarter of 2004, the Corporation combined this risk management income with other risk management income, which resulted in a reclassification from foreign exchange income to other noninterest income on the Consolidated Statements of Income. The financial statements for prior periods have been adjusted to reflect this reclassification.
Derivative and Foreign Exchange Contracts
The Corporation uses derivative financial instruments, including foreign exchange contracts, to manage the Corporation’s exposure to interest rate and foreign currency risks. All derivative instruments are carried at fair value as either assets or liabilities on the balance sheet. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is determined by 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 qualify as hedging instruments, the Corporation designates the hedging instrument as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For further information, see Note 8.
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Note 1 — Basis of Presentation and Accounting Policies (continued)
Stock-Based Compensation
In 2002, the Corporation adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”), which the Corporation is applying prospectively to all stock-based compensation awards granted to employees after December 31, 2001. Options granted prior to January 1, 2002 continue to be accounted for under the intrinsic value method, as outlined in APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The effect on net income and earnings per share, if the fair value method had been applied to all outstanding and unvested awards in each period, is presented in the table below. For further information on the Corporation’s stock-based compensation plans, refer to Note 16 to the consolidated financial statements in the Corporation’s 2003 Annual Report.
Impairment
Goodwill and identified intangible assets that have an indefinite useful life are subject to impairment testing, which the Corporation conducts annually, or on an interim basis if events or changes in circumstances between annual tests indicate the assets might be impaired. The Corporation performs its annual impairment test for goodwill and identified intangible assets that have an indefinite useful life as of July 1 of each year. The impairment test involves assigning tangible assets and liabilities, identified intangible assets and goodwill to reporting units, which are a subset of the Corporation’s operating segments, and comparing the fair value of each reporting unit to its carrying value. If the fair value is less than the carrying value, a further test is required to measure the amount of impairment. The annual test of goodwill and intangible assets that have an indefinite life, performed as of July 1, 2004, did not indicate that an impairment charge was required.
The Corporation reviews finite lived intangible assets and other long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable from projected undiscounted net operating cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, the Corporation recognizes a loss to reduce the carrying amount to fair value. Additional information regarding the Corporation’s goodwill, intangible assets and impairment policies can be found in the Corporation’s 2003 Annual Report on page 55 and in Notes 1, 8 and 9 to the consolidated financial statements.
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Notes to Consolidated Financial Statements (unaudited) Comerica Incorporated and Subsidiaries
Note 2 — Investment Securities
At September 30, 2004, investment securities having a carrying value of $1,422 million were pledged where permitted or required by law to secure liabilities and public and other deposits of $401 million. This included securities of $886 million pledged with the Federal Reserve Bank to secure actual borrowings of $13 million at September 30, 2004, and potential borrowings of up to an additional $837 million. The remaining pledged securities of $536 million are primarily with state and local government agencies to secure $388 million of deposits and other liabilities, including deposits of the State of Michigan of $140 million at September 30, 2004.
Note 3 — Allowance for Loan Losses
The following summarizes the changes in the allowance for loan losses:
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Note 3 — Allowance for Loan Losses (continued)
SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” considers a loan impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans that are restructured and meet the requirements to be on accrual status are included with total impaired loans for the remainder of the calendar year of the restructuring. There were no loans included in the $358 million of impaired loans at September 30, 2004 that were restructured and met the requirements to be on accrual status. Impaired loans averaged $392 million and $448 million for the three and nine month periods ended September 30, 2004, compared to $590 million and $599 million, respectively, for the comparable periods in the prior year. The following presents information regarding the period-end balances of impaired loans:
Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investments in such loans.
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Note 4 — Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at September 30, 2004 and December 31, 2003:
The carrying value of medium- and long-term debt has been adjusted to reflect the gain or loss attributable to the risk hedged. In May 2004, Comerica Bank, a subsidiary of Comerica Incorporated, issued $250 million of 5.70% Subordinated Notes which are classified in medium- and long-term debt. The notes pay interest on June 1 and December 1 of each year, beginning with December 1, 2004, and mature June 1, 2014. Comerica Bank used the net proceeds for general corporate purposes.
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.
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Note 6 — Accumulated Other Comprehensive Income (Loss)
Other comprehensive income includes the change in net unrealized gains and losses on investment securities available-for-sale, the change in accumulated gains and losses on cash flow hedges, the change in the accumulated foreign currency translation adjustment and the change in accumulated minimum pension liability adjustment. The Consolidated Statements of Changes in Shareholders’ Equity on page 5 include only combined other comprehensive income, net of tax. The following table presents reconciliations of the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2004 and 2003. Total comprehensive income totaled $452 million and $377 million, for the nine months ended September 30, 2004 and 2003, respectively, and $254 million and $87 million for the three months ended September 30, 2004 and 2003, respectively. The $75 million increase in total comprehensive income in the nine month period ended September 30, 2004 when compared to the same period in the prior year resulted principally from an increase in net income ($47 million) and a decrease in net unrealized losses on investment securities available-for-sale ($30 million), due to changes in the interest rate environment.
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Note 7 — Employee Benefit Plans
The components of net periodic benefit cost for the Corporation’s qualified pension plan, non-qualified pension plan and postretirement benefit plan are as follows:
In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” subsequently revised in April 2004. FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) and requires certain disclosures pending issuance of accounting guidance for the federal subsidy resulting from the Act. The Act introduces a Medicare prescription drug benefit as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. The Corporation elected to defer the accounting for the Act in accordance with FSP 106-1.
In May 2004, the FASB issued FSP 106-2, which provides guidance on the accounting for the federal subsidy resulting from the Act. FSP 106-2 requires the subsidy to be accounted for under current guidance for other postretirement benefits. As such, the effects of the subsidy on the benefits attributable to past services are accounted for as an actuarial gain. The Corporation’s entire postretirement prescription drug related liability is attributable to past services as the benefits were only provided to employees that retired prior to December 31, 1992.
The Corporation adopted the provisions of FSP 106-2 in the quarter ended September 30, 2004. In accordance with the FSP 106-2, the Corporation has determined its postretirement drug benefits to be “actuarially equivalent.” However, the enactment of the Act is not considered a “significant event;” therefore, its effects will be incorporated at December 31, 2004, the regularly scheduled measurement date for its plan assets and obligation. For further information on the Corporation’s employee benefit plans, refer to Note 17 to the consolidated financial statements in the Corporation’s 2003 Annual Report.
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Note 8 — Derivatives and Foreign Exchange Contracts
The following table presents the composition of derivative financial instruments and foreign exchange contracts, excluding commitments, held or issued for risk management and in connection with customer-initiated and other activities.
(2) Unrealized gains represent receivables from derivative counterparties, and therefore exposes the Corporation to credit risk. This risk is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. The fair values of all derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
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Note 8 — Derivatives and Foreign Exchange Contracts (continued)
Risk Management
Fluctuations in net interest income due to interest rate risk result from the composition of assets and liabilities and the mismatches in the timing of the repricing of these assets and liabilities. In addition, external factors such as interest rates, and the dynamics of yield curve and spread relationships can affect net interest income. The Corporation utilizes simulation analyses to project the sensitivity of the Corporation’s net interest income to changes in interest rates. The Corporation employs cash instruments, such as investment securities, as well as derivative financial instruments, to manage exposure to these and other risks, including liquidity risk.
As an end-user, the Corporation 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 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 interest amounts in exchange for floating rate interest payments over the life of the agreement, without an exchange of the underlying principal amount. For instruments that support a fair value hedging strategy, no ineffectiveness was required to be recorded in the statement of income.
As part of a cash flow hedging strategy, the Corporation has entered into predominantly 2 to 3 year interest rate swap agreements (weighted average original maturity of 2.7 years) 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 the next 2 to 3 years. Approximately 27 percent ($10.6 billion) of the Corporation’s outstanding loans were designated as the hedged items to interest rate swap agreements at September 30, 2004. During the three and nine month periods ended September 30, 2004, interest rate swap agreements designated as cash flow hedges increased interest and fees on loans by $45 million and $154 million, respectively, compared to $62 million and $231 million, respectively, for the comparable periods last year. Other noninterest income in the three and nine month periods ended September 30, 2004 included $2 million of ineffective cash flow hedge gains and $1 million of ineffective cash flow hedge losses, respectively. If interest rates, interest yield curves and notional amounts remain at their current levels, the Corporation expects to reclassify $35 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.
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. In addition, the Corporation uses foreign exchange forward and option contracts to protect the value of its foreign currency investment in foreign subsidiaries. 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, 2004, the Corporation recognized an immaterial amount of net gains in accumulated foreign currency translation adjustment, related to the forward foreign exchange contracts.
Management believes these strategies achieve the desired relationship 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. 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 preceding table. Such instruments include interest rate caps and floors, foreign exchange forward contracts, foreign exchange option contracts and foreign exchange cross-currency swaps.
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The following table summarizes the expected maturity distribution of the notional amount of interest rate swaps used for risk management purposes and indicates the weighted average interest rates associated with amounts to be received or paid on interest rate swap agreements as of September 30, 2004. The swaps are grouped by the assets or liabilities to which they have been designated.
Remaining Expected Maturity of Risk Management Interest Rate Swaps as of September 30, 2004:
(2) Variable rates received are based on three-month and six-month LIBOR or one-month and three-month Canadian Dollar Offered Rate (CDOR) rates in effect at September 30, 2004.
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The Corporation had commitments to purchase investment securities for its trading account and available-for-sale portfolios totaling $10 million at September 30, 2004 and $3 million at December 31, 2003. Commitments to sell investment securities related to the trading account totaled $8 million at September 30, 2004 and $2 million at December 31, 2003. Outstanding commitments expose the Corporation to both credit and market risk.
Customer-Initiated and Other
On a limited scale, fee income is earned from entering into various transactions, principally foreign exchange contracts and interest rate contracts at the request of customers. Market risk inherent in customer contracts is often mitigated by taking offsetting positions. The Corporation generally does not speculate in derivative financial instruments for the purpose of profiting in the short-term from favorable movements in market rates.
Fair values for customer-initiated and other derivative and foreign exchange contracts represent the net unrealized gains or losses on such contracts and are recorded in the consolidated balance sheets. Changes in fair value are recognized in the consolidated income statements. The following table provides the average unrealized gains and unrealized losses and noninterest income generated on customer-initiated and other interest rate contracts and foreign exchange contracts.
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 for the nine months ended September 30, 2004.
Additional information regarding the nature, terms and associated risks of the above derivatives and foreign exchange contracts, can be found in the Corporation’s 2003 Annual Report on page 49 and in Notes 1 and 22 to the consolidated financial statements.
Note 9 — Standby and Commercial Letters of Credit and Financial Guarantees
The total contractual amounts of standby letters of credit and financial guarantees and commercial letters of credit at September 30, 2004 and December 31, 2003, which represents the Corporation’s credit risk associated with these instruments, are shown in the table below.
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Note 9 — Standby and Commercial Letters of Credit and Financial Guarantees (continued)
Standby and commercial letters of credit and financial guarantees represent conditional obligations of the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. These contracts expire in decreasing amounts through the year 2012. Commercial letters of credit are issued to finance foreign or domestic trade transactions and are short-term in nature. The Corporation may enter into participation arrangements with third parties, that effectively reduce the maximum amount of future payments which may be required under standby letters of credit. These risk participations covered $501 million of the $6,307 million of standby letters of credit and financial guarantees outstanding at September 30, 2004. At September 30, 2004, the carrying value of the Corporation’s standby and commercial letters of credit and financial guarantees, which is included in “accrued expenses and other liabilities” on the consolidated balance sheet, totaled $76 million.
Note 10 — Contingent Liabilities
Tax Contingency
In the ordinary course of business, the Corporation enters into certain transactions that have tax consequences. From time to time, the IRS questions and/or challenges the tax position taken by the Corporation with respect to those transactions. The Corporation engaged in certain types of structured leasing transactions and a series of loans to foreign borrowers that the IRS is challenging. The Corporation believes that its tax position related to both transaction groups referred to above is proper based upon applicable statutes, regulations and case law in effect at the time of the transactions. The Corporation intends to defend its position vigorously in accordance with its view of the law controlling these activities. However, a court, or administrative authority, if presented with the transactions, could disagree with the Corporation’s interpretation of the tax law. The ultimate outcome is not known.
The Corporation currently believes it has adequate tax reserves to cover this and any other potential tax exposures the IRS could raise, based on probability assessment of various potential outcomes. Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary.
See “Part II. Item 1. Legal Proceedings” for information regarding the Corporation’s legal contingencies.
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Note 11 – Business Segment Information
The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, Small Business and Personal Financial Services, and Wealth and Institutional Management. 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. The Finance segment includes the Corporation’s securities portfolio and asset and liability management activities. This segment is responsible for managing the Corporation’s funding, liquidity and capital needs, performing interest sensitivity gap and earnings simulation analysis and executing various strategies to manage the Corporation’s exposure to liquidity, interest rate risk and foreign exchange risk. The Other category includes divested business lines, the income and expense impact of equity, cash and loan loss reserves not assigned to specific business lines, tax benefits not assigned to specific business lines and miscellaneous other expenses of a corporate nature. The loan loss reserves include the unallocated allowance for loan losses and the portion of the allowance allocated based on industry specific and geographic risks. Lines of business results are produced by the Corporation’s internal management accounting system. This system measures financial results based on the internal business unit structure of the Corporation. Information presented is not necessarily comparable with similar information for any other financial institution. The management accounting system assigns balance sheet and income statement items to each line of business using certain methodologies, which are constantly being refined. For comparability purposes, amounts in all periods are based on lines of business and methodologies in effect at September 30, 2004. These methodologies may be modified as management accounting systems are enhanced and changes occur in the organizational structure or product lines. 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 26 in the Corporation’s 2003 Annual Report. In the second quarter of 2004, the Corporation changed the assumptions used in allocating internal funding credits for deposits to better capture the value of deposits in line of business and market segment reports. Accordingly, the Corporation has adjusted current and prior year information to reflect these new assumptions. A discussion of the financial results and the factors impacting performance for the nine months ended September 30, 2004 can be found in the section entitled “Strategic Lines of Business” in “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition”.
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Note 11 – Business Segment Information (continued)
Lines of business/business segment financial results for the nine months ended September 30, 2004 and 2003 are shown in the table below.
N/M – Not Meaningful
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Note 11 — Business Segment Information (continued)
The Corporation’s management accounting system also produces market segment results for the Corporation’s four primary geographic regions: Midwest and Other Markets, Western, Texas, and Florida.
Midwest and Other Markets includes all markets in which the Corporation has operations except for the Western, Texas and Florida regions, as described below. Substantially all of the Corporation’s international operations are included in the Midwest and Other Markets segment. Currently, Michigan operations represent the significant majority of this geographic region.
The Western region consists of the states of California, Arizona, Nevada, Colorado and Washington. Currently, California operations represent the significant majority of the Western region.
The Texas and Florida regions consist of the states of Texas and Florida, respectively.
The Finance and Other Businesses segment includes the Corporation’s securities portfolio, asset and liability management activities, divested business lines, the income and expense impact of equity, cash and loan loss reserves not assigned to specific business lines/market segments, tax benefits not assigned to specific business lines/market segments and miscellaneous other expenses of a corporate nature. This segment includes responsibility for managing the Corporation’s funding, liquidity and capital needs, performing interest sensitivity gap and earnings simulation analysis and executing various strategies to manage the Corporation’s exposure to liquidity, interest rate risk and foreign exchange risk.
A discussion of the market segment financial results and the factors impacting performance for the nine months ended September 30, 2004 can be found in the section entitled “Market Segments” in “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition”.
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Market segment financial results for the nine months ended September 30, 2004 and 2003 are shown in the table below.
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Note 12 – Pending Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (“EITF”), a standard setting body working under the FASB, reached a revised consensus on EITF No. 03-01, “The Meaning of Other than Temporary Impairment and its Application to Certain Investments.” The revised consensus contained a model to be used in determining whether an investment is other-than-temporarily impaired and guidance on the recognition of other-than-temporary impairment. The other-than-temporary impairment evaluation and recognition guidance was to be effective on July 1, 2004. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date of the guidance in EITF 03-01 related to the evaluation and recognition of impairment on investments. The FASB plans to issue final authoritative guidance on this topic in the fourth quarter of 2004. When this occurs, the effect of this guidance on the Corporation’s financial condition and results of operations, if any, will be determined.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net income for the quarter ended September 30, 2004 was $196 million, an increase of $39 million or 25 percent, from $157 million reported for the third quarter of 2003. Quarterly diluted net income per share increased 27 percent to $1.13 from $0.89 a year ago. Return on average common shareholders’ equity was 15.68 percent and return on average assets was 1.55 percent, compared to 12.55 percent and 1.16 percent, respectively, for the comparable quarter last year. The increase in earnings in the third quarter of 2004 over the comparable quarter last year resulted primarily from a $83 million decrease in the provision for loan losses, partially offset by a $15 million decline in noninterest income and a $14 million decline in net interest income.
Net income for the first nine months of 2004 was $550 million, an increase of $47 million, or nine percent, from $503 million for the comparable period last year. Diluted net income per share for the first nine months of 2004 increased ten percent to $3.15 from $2.86 a year ago. Return on average common shareholders’ equity was 14.57 percent and return on average assets was 1.44 percent for the first nine months of 2004, compared to 13.39 percent and 1.25 percent, respectively, for the first nine months of 2003. The increase in earnings for the nine months ended September 30, 2004 over the same period a year ago was due primarily to a $215 million decline in the provision for loan losses, partially offset by a $125 million decline in net interest income.
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, 2004. On a FTE basis, net interest income decreased $14 million to $452 million for the three months ended September 30, 2004, from $466 million for the comparable quarter in 2003. The decrease in net interest income resulted from lower average earning assets, which decreased $3.4 billion, or seven percent, when compared to the third quarter of last year, and included a $1.6 billion decline in average short-term investments, resulting from a reduction in short-term liquidity. The net interest margin for the three months ended September 30, 2004 was 3.86%, as compared to 3.70% for the comparable period in 2003. The increase in net interest margin was the result of improved rate spreads in a higher rate environment, as well as the reduction in the low-spread short-term liquidity position held by the Corporation in the third quarter of 2004, as compared to the same period in 2003. For further discussion of the effects of market rates on net interest income, refer to “Item 3. Quantitative and Qualitative Disclosures about Market Risk”.
Table II provides an analysis of net interest income for the first nine months of 2004. On a FTE basis, net interest income for the nine months ended September 30, 2004 was $1,346 million, a decrease of $125 million, compared to $1,471 million for the same period in 2003. The decline in net interest income in the first nine months of 2004, when compared to the same period in 2003, resulted from a $2.3 billion, or five percent, decline in average earning assets. The net interest margin for the nine months ended September 30, 2004 decreased to 3.82 percent from 3.99 percent for the same period in 2003, due to interest rate swap maturities and a restructuring of the investment portfolio, designed to achieve more consistent cash flows, as well as loan spread compression experienced in the second half of 2003 and early 2004.
The Corporation expects full-year 2004 net interest margin, on average, to be about 3.85%.
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Table I — Quarterly Analysis of Net Interest Income & Rate/Volume (FTE)
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Table I — Quarterly Analysis of Net Interest Income & Rate/Volume (FTE) (continued)
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Table II – Year-to-date Analysis of Net Interest Income & Rate/Volume (FTE)
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Table II – Year-to-date Analysis of Net Interest Income & Rate/Volume (FTE) (continued)
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Provision for Loan Losses
There was no provision for loan losses for the third quarter of 2004 compared to $83 million for the same period in 2003. The provision for the first nine months of 2004 was $85 million compared to $300 million for the same period in 2003. The Corporation establishes this provision to maintain an adequate allowance for loan losses, which is discussed in the section entitled “Allowance for Loan Losses and Nonperforming Assets.” The decrease in the provision for loan losses in the three and nine month periods ended September 30, 2004 over the comparable periods last year is primarily the result of improving credit quality trends, which are reflective of improved economic conditions in the Michigan market, where the Corporation has a geographic concentration of credit. Upturns in the Southeast Michigan Purchasing Management Survey and Michigan Business Activity Indices began in the fourth quarter of 2003 and accelerated in the first half of 2004. Forward-looking indicators suggest this positive movement should continue, but not accelerate, for the remainder of 2004 and 2005.
Noninterest Income
Noninterest income was $206 million for the three months ended September 30, 2004, a decrease of $15 million, or seven percent, over the same period in 2003. Noninterest income in the third quarter of 2004 included $6 million of net securities losses, principally due to a credit-related write-down of an investment in a private equity fund that is consolidated on the Corporation’s balance sheet, and $3 million of income distributions (net of write-downs) from unconsolidated venture capital and private equity investments, compared to $4 million of net securities gains and insignificant income distributions (net of write-downs) from unconsolidated venture capital and private equity investments in the third quarter of 2003. In addition, activity-based fees, defined as service charges on deposit accounts, commercial lending fees and letter of credit fees, were $88 million for the quarter ended September 30, 2004, a decrease of $5 million from the comparable quarter in 2003.
For the first nine months of 2004, noninterest income was $654 million, a decrease of $13 million, or two percent, from the first nine months of 2003. In the first nine months of 2004, the Corporation recognized warrant income of $6 million, a $7 million net gain on the sale of a portion of the Corporation’s merchant card processing business and $10 million of income distributions (net of write-downs) from unconsolidated venture capital and private equity investments, compared to warrant income of $1 million and a write-down (net of income distributions) of $8 million from unconsolidated venture capital and private equity investments recognized in the nine months ended September 30, 2003. Noninterest income in the first nine months of 2003 also included $46 million in net securities gains. Activity-based fees, as defined above, declined $6 million to $268 million for the first nine months of 2004 from the comparable period in 2003.
Management currently expects low single-digit noninterest income growth, excluding securities gains, in the full-year 2004 compared to 2003.
Noninterest Expenses
Noninterest expenses were $372 million for the quarter ended September 30, 2004, a decrease of $5 million, or one percent, from the comparable quarter in 2003. The decrease in noninterest expenses is primarily due to a $7 million reduction in stock-based compensation due to employee forfeitures and revisions to employee forfeiture assumptions for stock options. Litigation and operational losses, which include traditionally defined operating losses, such as fraud or processing problems, as well as uninsured losses and losses triggered by litigation, increased $10 million in the third quarter of 2004, when compared with the third quarter of 2003. These expenses are subject to fluctuation due to timing of insurance receipts and litigation settlements. This increase was substantially offset by a decline in other noninterest expenses. Severance expense was $1 million in both the third quarter 2004 and the third quarter 2003.
Noninterest expenses for the nine months ended September 30, 2004 were $1,113 million, an increase of $9 million, or one percent, from the first nine months of 2003. Salary and employee benefits expenses increased $16 million, to $686 million in the third quarter of 2004, from $670 million in the third quarter of 2003 as a result of annual merit increases, increased levels of management incentive expense and severance expenses, partially offset by a full-time equivalent employee reduction in staff size of approximately 400 employees from September 30, 2003 to September 30, 2004. Litigation and operational losses, as defined in the quarterly discussion above, were $27 million in the first nine months of 2004, an increase of $13 million from the comparable period last year. These increases were partially offset by a decline in other noninterest expenses, including a $4 million decline in the provision for credit losses on lending-related commitments. For the first nine months of 2004, severance expense was $8 million, compared to $1 million for the same period in 2003.
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Management is currently targeting to reduce full-year 2004 noninterest expenses by $5 million — $10 million from 2003 levels, excluding severance expenses. Management expects total 2004 noninterest expenses, including severance expenses, to hold flat with 2003.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2004 was $89 million, compared to $69 million for the same period a year ago. The effective tax rate was 31 percent for both the third quarter of 2004 and 2003. The provision for the first nine months of 2004 was $250 million compared to $229 million for the same period in 2003. The effective tax rate was 31 percent for both the first nine months of 2004 and 2003. Taxes in the first nine months of 2004 were reduced by a $4 million (after-tax) adjustment to the state tax reserves that resulted from the first quarter of 2004 settlement of a tax liability with the state of California. Management currently expects the effective tax rate to be 31 percent to 32 percent for the full-year 2004.
Strategic Lines of Business
The Corporation’s operations are strategically aligned into three major lines of business: the Business Bank, Small Business and Personal Financial Services, and Wealth and Institutional Management. 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. The Other category includes items not directly associated with these lines of business or the Finance Division. Note 11 to the consolidated financial statements presents financial results of these businesses for the nine months ended September 30, 2004 and 2003. 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 26 in the Corporation’s 2003 Annual Report. In the second quarter of 2004, the Corporation changed the assumptions used in allocating internal funding credits for deposits to better capture the value of deposits in line of business and market segment reports. Accordingly, the Corporation has adjusted current and prior year information to reflect these new assumptions.
The following table presents net income (loss) by line of business.
The Business Bank’s net income increased $74 million, or 16 percent, to $526 million in the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Contributing to this increase was a $199 million decline in the provision for loan losses, primarily the result of improving credit quality trends, as discussed in “Provision for Loan Losses” above. Also contributing was a $15 million increase in noninterest income and a $21 million decrease in noninterest expenses. The increase in noninterest income was primarily due to a $20 million increase in income distributions (net of write-downs) from unconsolidated venture capital and private equity investments and a $7 million net gain on the sale of a portion of the Corporation’s merchant card processing business, partially offset by a $7 million decrease in net securities gains. The decrease in noninterest expenses was primarily due to a $13 million decline in corporate overhead expenses, a majority of which was due to timing differences between when an expense was reflected as a consolidated expense and when allocated to the segments, and a $10 million decline in salaries and related employee benefit expenses. Partially offsetting these increases to net income was a $123 million decline in net interest income, primarily due to a $2.6 billion (8 percent) decline in average loans and lower funding credits received on liabilities and equity.
Small Business and Personal Financial Services’ net income increased $9 million, or seven percent, to $136 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. The
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increase in net income was primarily due to a $14 million decline in the provision for loan losses and a $26 million decline in noninterest expenses, partially offset by a $24 million decrease in net interest income. The decline in noninterest expenses was primarily due to a $12 million decrease in corporate overhead expenses, a majority of which was due to timing differences between when an expense was reflected as a consolidated expense and when allocated to the segments, a $7 million decline in processing charges due to lower branch and other consumer related activity and a $2 million decrease in the provision for credit losses on lending-related commitments. The decline in net interest income was primarily due to lower funding credits received on liabilities and equity.
Wealth and Institutional Management’s net income increased $28 million, or 77 percent, to $64 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. The increase in net income is primarily the result of a $20 million decline in the provision for loan losses and a $12 million increase in noninterest income, largely due to increases in fiduciary income and investment advisory fees.
The net loss for the Finance division was $121 million for the nine months ended September 30, 2004, compared to a net loss of $78 million for the nine months ended September 30, 2003. The higher net loss resulted primarily from a $40 million decline in net securities gains.
The net loss for the Other category was $55 million for the nine months ended September 30, 2004, compared to a net loss of $34 million for the nine months ended September 30, 2003. The primary reason for the higher net loss was an $18 million increase in unallocated loan loss provision.
Market Segments
The Corporation’s management accounting system also produces market segment results for the Corporation’s four primary geographic regions: Midwest and Other Markets, Western, Texas, and Florida. Note 11 to the consolidated financial statements presents financial results of these market segments for the nine months ended September 30, 2004 and 2003.
The following table presents net income (loss) by market segment.
Midwest and Other Markets’ net income increased $87 million, or 27 percent, to $412 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Contributing to this increase was a $177 million decline in the provision for loan losses, primarily the result of improving credit quality trends, as discussed in “Provision for Loan Losses” above. Also contributing were a $16 million increase in noninterest income and an $18 million decline in noninterest expenses. The increase in noninterest income was primarily due to a $19 million increase in income distributions (net of write-downs) from unconsolidated venture capital and private equity investments, offset by a $6 million decrease in net securities gains. The decrease in noninterest expenses was primarily due to a $17 million decline in corporate overhead expenses, a majority of which was due to timing differences between when an expense was reflected as a consolidated expense and when allocated to the segments. Partially offsetting these increases to net income was an $81 million decline in net interest income, primarily due to a $1.9 billion (8 percent) decline in average loans and lower funding credits received on liabilities and equity.
The Western Region’s net income increased $12 million, or six percent, to $229 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Contributing to this increase were a $41 million decline in the provision for loan losses and a $24 million decline in noninterest expenses. The decline in noninterest expenses was primarily due to a $9 million decline in corporate overhead expenses, a majority of which was due to timing differences between when an expense was reflected as a consolidated expense and when allocated to the
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segments, and a $9 million decrease in salaries and related employee benefits expenses. Partially offsetting these increases to net income was a $50 million decline in net interest income, primarily from lower funding credits received on liabilities and equity, and a $477 million (4 percent) decline in loan balances. Of the $50 million decline in net interest income, $29 million was due to lower title and escrow deposits in the Corporation’s Financial Services Group.
The Texas Region’s net income increased $9 million, or 14 percent, to $72 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Contributing to this increase was a $16 million decline in the provision for loan losses and an $11 million decline in noninterest expenses. The decline in noninterest expenses was primarily due to $4 million decrease in corporate overhead expenses, a $2 million decrease in salaries and related employee benefits expenses and a $2 million decrease in the provision for credit losses on lending-related commitments. Partially offsetting these increases to net income was a $14 million decline in net interest income, primarily due to a $438 million (10 percent) decline in average deposits, which reduced the region’s funding credits.
The Florida Region’s net income increased $3 million, or 30 percent, to $13 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Noninterest expenses decreased $3 million, primarily due to insurance proceeds related to a legal settlement.
The net loss for the Finance and Other Businesses segment was $176 million for the nine months ended September 30, 2004, compared to a net loss of $112 million for the nine months ended September 30, 2003. The higher net loss was primarily due to a $40 million decline in net securities gains and an $18 million increase in unallocated loan loss provision.
Financial Condition
Total assets were $53.0 billion at September 30, 2004 compared with $52.6 billion at year-end 2003 and $54.8 billion at September 30, 2003. Total period end loans decreased one percent from December 31, 2003 to September 30, 2004. Within loans, on an average basis, there was growth in the Private Banking (13 percent), Specialty Businesses (9 percent) and National Dealer Services (6 percent) loan portfolios, from the fourth quarter 2003 to the third quarter 2004. Average loans declined in the same periods in the Global Corporate Banking (11 percent) and Personal Financial Services (7 percent) loan portfolios. Short-term investments increased $1.0 billion from December 31, 2003 to September 30, 2004 as a result of the significant increase in short-term deposits discussed below.
Management currently expects a mid-single digit decrease in average loans in 2004, when compared to 2003 levels. Year-end 2004 loan balances are expected to remain flat when compared to year-end 2003.
Total liabilities increased $441 million, or one percent, from $47.5 billion at December 31, 2003, to $47.9 billion at September 30, 2004. Total deposits increased two percent to $42.2 billion at September 30, 2004, from $41.5 billion at year-end. Deposits in the Corporation’s Financial Services Group, which benefit from high home mortgage financing and refinancing activity and some of which are not expected to be long-lived, increased to $9.8 billion at September 30, 2004 from $7.0 billion at December 31, 2003, primarily due to strong mortgage business activity. Medium- and long-term debt decreased $400 million to $4.4 billion at September 30, 2004 from year-end levels, as a result of the maturity of $750 million of medium-term notes, partially offset by the issuance of $100 million in medium-term notes and the issuance of $250 million of subordinated notes.
Allowance for Loan Losses and Nonperforming Assets
The allowance for loan losses represents management’s assessment of probable losses inherent in the Corporation’s loan portfolio. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by senior management. The Corporation performs a detailed credit quality review quarterly on large business loans and certain large personal purpose loans to individuals that have deteriorated below certain levels of credit risk, and may allocate a specific portion of the allowance to such loans based upon this review. The Corporation defines business loans as those belonging to the commercial, real estate construction, commercial mortgage, lease financing and international loan portfolios. A portion of the allowance is allocated to the remaining business loans by applying projected loss ratios, based on numerous factors identified below, to the loans within each risk rating. In addition, a portion of the allowance is allocated to these remaining loans based on industry specific and geographic risks inherent in certain portfolios, including portfolio exposures to automotive suppliers, retailers, contractors, technology-related,
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entertainment, air transportation and healthcare industries, small business administration loans and certain Latin American risks. The portion of the allowance allocated to loans originated in the Personal Financial Services division 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, trends with respect to past due and nonaccrual amounts, and are supported by underlying analysis, including information from certain portfolios on migration and loss given default studies from each geographic market. The allocated portion of the allowance was $657 million at September 30, 2004, a decrease of $105 million from December 31, 2003.
Actual loss ratios experienced in the future may vary from those projected. The uncertainty occurs because factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of projected loss ratios or identified industry specific and geographic risks. An unallocated portion of the allowance is maintained to capture these probable losses. The unallocated allowance reflects management’s view that the allowance should recognize the margin for error inherent in the process of estimating expected loan losses. Factors that were considered in the evaluation of the adequacy of the Corporation’s unallocated allowance include the imprecision in the risk rating system, limited historical perspective in the application of the Corporation’s recently enhanced portfolio analytic tools and the risk associated with new customer relationships. The unallocated portion of the allowance was $72 million at September 30, 2004, an increase of $31 million from December 31, 2003.
The total allowance, including the unallocated amount, is available to absorb losses from any segment within the portfolio. Unanticipated economic events, including political, economic and regulatory stability in countries where the Corporation has a concentration of loans, could cause changes in the credit characteristics of the portfolio and result in an unanticipated increase in the allocated allowance. Inclusion of other industry specific and geographic portfolio exposures in the allocated allowance, as well as significant increases in the current portfolio exposures, could also increase the amount of the allocated allowance. Any of these events, or some combination, may result in the need for additional provision for loan losses in order to maintain an adequate allowance.
At September 30, 2004, the allowance for loan losses was $729 million, a decrease of $74 million from $803 million at December 31, 2003. The allowance for loan losses as a percentage of total period-end loans decreased to 1.83 percent from 1.99 percent at December 31, 2003. The Corporation also had an allowance for credit losses on lending-related commitments of $24 million and $33 million, at September 30, 2004 and December 31, 2003, respectively, which is recorded in “accrued expenses and other liabilities” on the consolidated balance sheets. These lending-related commitments include unfunded loan commitments and letters of credit.
Nonperforming assets at September 30, 2004 were $388 million, as compared to $538 million at December 31, 2003, a decrease of $150 million, or 28 percent. The allowance for loan losses as a percentage of nonperforming assets increased to 188 percent at September 30, 2004, from 149 percent at December 31, 2003.
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Nonperforming assets at September 30, 2004 and December 31, 2003 were categorized as follows:
The following table presents a summary of changes in nonaccrual loans.
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Loans with balances greater than $2 million transferred to nonaccrual status were $106 million in the third quarter of 2004, up from $63 million and $92 million in the second and first quarters of 2004, respectively. There were two loans greater than $10 million transferred to nonaccrual during the third quarter of 2004. These loans totaled $30 million and are to companies in the automotive industry, one of which was an international customer.
The following table presents a summary of total internally classified nonaccrual and watch list loans (generally consistent with regulatory defined special mention, substandard and doubtful loans) at September 30, 2004, June 30, 2004 and December 31, 2003. Consistent with the decrease in nonaccrual loans from December 31, 2003 to September 30, 2004, total nonaccrual and watch list loans decreased both in dollars and as a percentage of the total loan portfolio.
The following table presents a summary of nonaccrual loans at September 30, 2004 and loans transferred to nonaccrual and net charge-offs during the three months ended September 30, 2004, based on the Standard Industrial Classification (SIC) code.
Shared National Credit Program (SNC) loans comprised approximately 17 percent of total nonperforming loans at September 30, 2004 and 20 percent at December 31, 2003. SNC loans are facilities greater than $20 million shared by three or more federally supervised financial institutions which are reviewed by regulatory authorities at the agent bank level. SNC loans comprised approximately 15 percent and 14 percent of total loans at September 30, 2004 and December 31, 2003, respectively. SNC loans comprised approximately $1 million of third quarter 2004 total net charge-offs.
Net charge-offs for the third quarter of 2004 were $33 million, or 0.33 percent of average total loans, compared with $83 million, or 0.79 percent, for the third quarter of 2003. The carrying value of nonaccrual loans as a percentage of contractual value declined to 53 percent at September 30, 2004 compared to 58 percent at December 31, 2003. There was no provision for loan losses for the third quarter of 2004, compared to $83 million for the same period in 2003.
Management currently expects full-year 2004 average net charge-offs to be approximately 50 basis points.
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Capital
Common shareholders’ equity was $5.0 billion at September 30, 2004, a decrease of $74 million from December 31, 2003. The following table presents a summary of changes in common shareholders’ equity in the first nine months of 2004:
See “Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” for information regarding the Corporation’s stock repurchases.
The Corporation’s capital ratios exceed minimum regulatory requirements as follows:
At September 30, 2004, the Corporation and its banking subsidiaries exceeded the ratios required to be considered “well capitalized” (total risk-based capital, tier 1 risk-based capital and leverage ratios greater than 10 percent, 6 percent and 5 percent, respectively).
Critical Accounting Policies
The Corporation’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements included in the Corporation’s 2003 Annual Report, as updated in Note 1 to the unaudited consolidated financial statements in this report. These policies require numerous estimates and strategic or economic assumptions, which may prove inaccurate or subject to variations. Changes in underlying factors, assumptions or estimates could have a material impact on the Corporation’s future financial condition and results of operations. The most critical of these significant accounting policies are the policies for allowance for loan losses, pension plan accounting and goodwill. These policies are reviewed with the Audit and Legal Committee of the Corporation’s Board of Directors and are discussed more fully on pages 53-55 of the Corporation’s 2003 Annual Report. As of the date of this report, the Corporation does not believe that there has been a material change in the nature or categories of its critical accounting policies or its estimates and assumptions from those discussed in its 2003 Annual Report.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Net interest income is the predominant source of revenue for the Corporation. Interest rate risk arises primarily through the Corporation’s core business activities of extending loans and accepting deposits. The Corporation actively manages its material exposure to interest rate risk. Management attempts to evaluate the effect of movements in interest rates on net interest income and uses interest rate swaps and other instruments to manage its interest rate risk exposure. The primary tool used by the Corporation in determining its exposure to interest rate risk is net interest income simulation analysis. The net interest income simulation analysis performed at the end of each quarter reflects changes to both interest rates and loan, investment and deposit volumes. Management evaluates “base” net interest income under what is believed to be the most likely balance sheet structure and interest rate environment. This “base” net interest income is then evaluated against interest rate scenarios that increase and decrease 200 basis points (but no lower than zero percent) from the most likely rate environment. For purposes of this analysis, the rise or decline in short-term interest rates occurs ratably over four months. The measurement of risk exposure at September 30, 2004 for a decline in short-term interest rates to zero percent identified approximately $71 million, or four percent, of forecasted net interest income at risk over the next 12 months. If short-term interest rates rise 200 basis points, forecasted net interest income would be enhanced by approximately $103 million, or six percent. Corresponding measures of risk exposure at December 31, 2003 were approximately $41 million of net interest income at risk for a decline in rates to zero percent and an approximately $82 million enhancement of net interest income for a 200 basis point rise in rates. Corporate policy limits adverse change to no more than five percent of management’s most likely net interest income forecast and the Corporation is operating within this policy guideline.
Secondarily, the Corporation utilizes an economic value of equity analysis and a traditional interest sensitivity gap measure as alternative measures of interest rate risk exposure. At September 30, 2004, all three measures of interest rate risk were within established corporate policy guidelines.
At September 30, 2004, the Corporation had a $127 million portfolio of indirect (through funds) private equity and venture capital investments, and had commitments of $55 million to fund additional investments in future periods. The value of these investments is at risk to changes in equity markets, general economic conditions and a variety of other factors. The majority of these investments are not marketable and are reported in other assets. The investments are individually reviewed for impairment on a quarterly basis, by comparing the carrying value to the estimated fair value. The Corporation bases estimates of fair value for the majority of its indirect private equity and venture capital investments on the percentage ownership in the fair value of the entire fund, as reported by the fund management. In general, the Corporation does not have the benefit of the same information regarding the fund’s underlying investments as does fund management. Therefore, after indication that fund management adheres to accepted, sound and recognized valuation techniques, the Corporation generally utilizes the fair values assigned to the underlying portfolio investments by fund management. For those funds where fair value is not reported by fund management, the Corporation derives the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund management, the Corporation gives consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy, and other qualitative information, as available. The uncertainty in the economy and equity markets may affect the values of the fund investments.
Certain components of the Corporation’s noninterest income, primarily fiduciary income and investment advisory revenue, are at risk to fluctuations in the market values of underlying assets, particularly equity securities. Other components of noninterest income, primarily brokerage fees, are at risk to changes in the level of market activity.
For further discussion of market risk, see Note 8 and pages 46-52 of the Corporation’s 2003 Annual Report.
ITEM 4. Controls and Procedures
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Forward-looking statements
This report includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All statements regarding the Corporation’s expected financial position, strategies and growth prospects and general economic conditions expected to exist in the future are forward-looking statements. The words, “anticipates,” “believes,” “feels,” “expects,” “estimates,” “seeks,” “strives,” “plans,” “intends,” “outlook,” “forecast,” “position,” “target,” “mission,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “aspiration,” “outcome,” “continue,” “remain,” “maintain,” “trend” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions as they relate to the Corporation or its management, are intended to identify forward-looking statements.
The Corporation cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date the statement is made, and the Corporation does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to factors mentioned elsewhere in this report or previously disclosed in the Corporation’s SEC reports (accessible on the SEC’s website at www.sec.gov or on the Corporation’s website at www.comerica.com), the following factors, among others, could cause actual results to differ materially from forward-looking statements and future results could differ materially from historical performance. The Corporation cautions that these factors are not exclusive.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Corporation and certain of its subsidiaries are subject to various pending or threatened legal proceedings, including certain purported class actions, arising out of the normal course of business or operations. In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual outcome of these matters will be. However, based on current knowledge and after consultation with legal counsel, management believes that current reserves are adequate and the amount of any incremental liability arising from these matters will not have a material adverse effect on the Corporation’s consolidated financial condition or results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On December 1, 2003, the Corporation announced it would resume its share repurchase program pursuant to its August 2001 Board of Directors’ resolutions, authorizing the repurchase of up to 10 million shares of the Corporation’s outstanding common stock. On March 23, 2004, the Board of Directors of the Corporation authorized the additional purchase of up to 10 million shares of Comerica Incorporated outstanding common stock. All share repurchases under the Corporation’s share repurchase program are transacted in the open market and are within the scope of Rule 10b-18, which provides a safe harbor for purchases in a given day if an issuer of equity securities satisfies the manner, timing, price and volume conditions of the rule when purchasing its own common shares in the open market. The following table summarizes the Corporation’s share repurchase activity for the nine months ended September 30, 2004.
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ITEM 6. Exhibits
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SIGNATURES
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.
Date: November 5, 2004
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EXHIBIT INDEX