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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, 2002
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10706
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Comerica Incorporated
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(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
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(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, 2002: 174,713,000 shares
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 (unaudited), December 31, 2001
and September 30, 2001 (unaudited).............................................3
Consolidated Statements of Income for the nine months and three months
ended September 30, 2002 and 2001 (unaudited)..................................4
Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended September 30, 2002 and 2001 (unaudited)...........................5
Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 and 2001 (unaudited)......................................................6
Notes to Consolidated Financial Statements (unaudited)..................................7
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................27
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................46
ITEM 4. Controls and Procedures........................................................47
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................49
ITEM 5. Other Information..............................................................50
ITEM 6. Exhibits and Reports on Form 8-K...............................................51
Signatures.............................................................................52
-2-
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
September 30, December 31, September 30,
(in millions, except share data) 2002 2001 2001
------------- ------------ -------------
(unaudited) (unaudited)
ASSETS
Cash and due from banks $ 2,171 $ 1,925 $ 2,160
Short-term investments 1,880 1,079 388
Investment securities available
for sale 4,486 4,291 4,206
Commercial loans 24,658 25,176 25,198
International loans 2,875 3,015 2,948
Real estate construction loans 3,446 3,258 3,161
Commercial mortgage loans 7,034 6,267 5,794
Residential mortgage loans 747 779 808
Consumer loans 1,541 1,484 1,509
Lease financing 1,288 1,217 1,147
---------- ---------- ----------
Total loans 41,589 41,196 40,565
Less allowance for credit losses (789) (655) (645)
---------- ---------- ----------
Net loans 40,800 40,541 39,920
Premises and equipment 356 353 350
Customers' liability on acceptances
outstanding 37 29 33
Accrued income and other assets 2,836 2,514 2,676
---------- ---------- ----------
TOTAL ASSETS $ 52,566 $ 50,732 $ 49,733
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 15,815 $ 12,596 $ 11,717
Interest-bearing deposits 24,834 24,974 25,417
---------- ---------- ----------
Total deposits 40,649 37,570 37,134
Short-term borrowings 689 1,986 1,347
Acceptances outstanding 37 29 33
Accrued expenses and other
liabilities 834 837 870
Medium- and long-term debt 5,487 5,503 5,551
---------- ---------- ----------
Total liabilities 47,696 45,925 44,935
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at
9/30/02, 12/31/01 and 9/30/01 894 894 894
Capital surplus 356 336 334
Unearned employee stock ownership
plan - 131,954 shares at 12/31/01
and 145,444 shares at 9/30/01 -- (5) (6)
Accumulated other comprehensive income 292 225 286
Retained earnings 3,565 3,448 3,329
Less cost of common stock in
treasury - 4,059,307 shares at 9/30/02,
1,674,659 shares at 12/31/01 and
687,940 shares at 9/30/01 (237) (91) (39)
---------- ---------- ----------
Total shareholders' equity 4,870 4,807 4,798
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 52,566 $ 50,732 $ 49,733
========== ========== ==========
See notes to consolidated financial statements.
-3-
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Three Months Ended
September 30,
------------------------
(in millions, except per share data) 2002 2001
-------- --------
INTEREST INCOME
Interest and fees on loans $ 625 $ 758
Interest on investment securities 63 62
Interest on short-term investments 6 3
-------- --------
Total interest income 694 823
INTEREST EXPENSE
Interest on deposits 119 214
Interest on short-term borrowings 11 26
Interest on medium- and long-term debt 36 57
-------- --------
Total interest expense 166 297
-------- --------
Net interest income 528 526
Provision for credit losses 285 58
-------- --------
Net interest income after provision
for credit losses 243 468
NONINTEREST INCOME
Service charges on deposit accounts 56 54
Fiduciary income 42 45
Commercial lending fees 16 18
Letter of credit fees 16 15
Brokerage fees 9 11
Investment advisory revenue, net 2 (3)
Bank-owned life insurance 15 9
Equity in earnings of unconsolidated subsidiaries 3 4
Warrant income 1 -
Securities gains/(losses) (6) -
Net gain on sales of businesses 12 21
Other noninterest income 50 50
-------- --------
Total noninterest income 216 224
NONINTEREST EXPENSES
Salaries and employee benefits 214 207
Net occupancy expense 31 28
Equipment expense 15 16
Outside processing fee expense 16 15
Customer services 4 10
Goodwill impairment 86 -
Restructuring charge - 18
Other noninterest expenses 67 79
-------- --------
Total noninterest expenses 433 373
-------- --------
Income before income taxes 26 319
Provision for income taxes 2 110
-------- --------
NET INCOME $ 24 $ 209
======== ========
Net income applicable to common stock $ 24 $ 205
======== ========
Basic net income per common share $ 0.14 $ 1.16
Diluted net income per common share $ 0.14 $ 1.14
Cash dividends declared on common stock $ 84 $ 78
Dividends per common share $ 0.48 $ 0.44
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30,
------------------------
(in millions, except per share data) 2002 2001
-------- --------
INTEREST INCOME
Interest and fees on loans $ 1,904 $ 2,437
Interest on investment securities 188 182
Interest on short-term investments 19 19
-------- --------
Total interest income 2,111 2,638
INTEREST EXPENSE
Interest on deposits 363 729
Interest on short-term borrowings 33 90
Interest on medium- and long-term debt 116 253
-------- --------
Total interest expense 512 1,072
-------- --------
Net interest income 1,599 1,566
Provision for credit losses 533 167
-------- --------
Net interest income after provision
for credit losses 1,066 1,399
NONINTEREST INCOME
Service charges on deposit accounts 169 156
Fiduciary income 130 136
Commercial lending fees 50 46
Letter of credit fees 45 43
Brokerage fees 29 34
Investment advisory revenue, net 21 1
Bank-owned life insurance 44 25
Equity in earnings of unconsolidated subsidiaries 7 (46)
Warrant income 5 4
Securities gains/(losses) (16) 23
Net gain on sales of businesses 12 21
Other noninterest income 150 170
-------- --------
Total noninterest income 646 613
NONINTEREST EXPENSES
Salaries and employee benefits 630 633
Net occupancy expense 92 86
Equipment expense 48 53
Outside processing fee expense 47 45
Customer services 19 30
Goodwill impairment 86 -
Restructuring charge - 127
Other noninterest expenses 207 238
-------- --------
Total noninterest expenses 1,129 1,212
-------- --------
Income before income taxes 583 800
Provision for income taxes 188 289
-------- --------
NET INCOME $ 395 $ 511
======== ========
Net income applicable to common stock $ 395 $ 499
======== ========
Basic net income per common share $ 2.25 $ 2.81
Diluted net income per common share $ 2.22 $ 2.77
Cash dividends declared on common stock $ 252 $ 235
Dividends per common share $ 1.44 $ 1.32
See notes to consolidated financial statements.
-4-
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Comerica Incorporated and Subsidiaries
Unearned
Nonredeem- Employee Accumulated
able Stock Other
(in millions, except Preferred Common Capital Ownership Comprehensive
share data) Stock Stock Surplus Plan Shares Income
--------- -------- -------- ---------- -----------
BALANCE AT JANUARY 1, 2001 $ 250 $ 888 $ 287 $ (7) $ 12
Net income - - - - -
Other comprehensive income,
net of tax - - - - 274
Total comprehensive income - - - - -
Redemption of preferred stock (250) - - - -
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 - 6 34 1 -
Recognition of stock based
compensation expense - - 13 - -
--------- -------- -------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2001 $ - $ 894 $ 334 $ (6) $ 286
========= ======== ======== ========== ===========
BALANCE AT JANUARY 1, 2002 $ - $ 894 $ 336 $ (5) $ 225
Net income - - - - -
Other comprehensive income,
net of tax - - - - 67
Total comprehensive income - - - - -
Cash dividends declared
on common stock - - - - -
Purchase of 3,536,300 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - - 5 5 -
Recognition of stock based
compensation expense - - 15 - -
--------- -------- -------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2002 $ - $ 894 $ 356 $ - $ 292
========= ======== ======== ========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(continued)
Comerica Incorporated and Subsidiaries
Total
(in millions, except Retained Treasury Shareholders'
share data) Earnings Stock Equity
---------- --------- ------------
BALANCE AT JANUARY 1, 2001 $ 3,086 $ (16) $ 4,500
Net income 511 - 511
Other comprehensive income,
net of tax - - 274
------------
Total comprehensive income - - 785
Redemption of preferred stock - - (250)
Cash dividends declared:
Preferred stock (12) - (12)
Common stock (235) - (235)
Purchase of 1,140,800 shares
of common stock - (65) (65)
Net issuance of common stock
under employee stock plans (21) 42 62
Recognition of stock based
compensation expense - - 13
----------- --------- ------------
BALANCE AT SEPTEMBER 30, 2001 $ 3,329 $ (39) $ 4,798
=========== ========= ============
BALANCE AT JANUARY 1, 2002 $ 3,448 $ (91) $ 4,807
Net income 395 - 395
Other comprehensive income,
net of tax - - 67
------------
Total comprehensive income - - 462
Cash dividends declared
on common stock (252) - (252)
Purchase of 3,536,300 shares
of common stock - (210) (210)
Net issuance of common stock
under employee stock plans (26) 64 48
Recognition of stock based
compensation expense - - 15
---------- --------- ------------
BALANCE AT SEPTEMBER 30, 2002 $ 3,565 $ (237) $ 4,870
========== ========= ============
See notes to consolidated financial statements.
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30,
--------------------------
(in millions) 2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income $ 395 $ 511
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 533 167
Depreciation 43 48
Net amortization of intangibles 3 26
Merger-related and restructuring charges (8) 59
(Gain)loss on investment securities available
for sale 16 (23)
Contribution to pension plan fund (74) (37)
Goodwill impairment 86 --
Net (increase) decrease in trading
account securities 50 (25)
Net decrease in assets held for sale 4 27
Net decrease in accrued income receivable 30 107
Net (increase) decrease in accrued expenses (150) 40
Net gain on sales of businesses (12) (21)
Other, net 30 (134)
------- -------
Total adjustments 551 234
------- -------
Net cash provided by
operating activities 946 745
INVESTING ACTIVITIES:
Net (increase) decrease in short-term
investments (739) 1,340
Proceeds from sale of investment securities
available for sale 384 2,330
Proceeds from maturity of investment
securities available for sale 1,250 912
Purchases of investment securities
available for sale (1,855) (3,620)
Net increase in loans (895) (524)
Fixed assets, net (51) (34)
Purchase of bank-owned life insurance (8) (107)
Net increase in customers' liability on
acceptances outstanding (8) (7)
Net cash provided by acquisitions/sales 8 21
------- -------
Net cash provided by (used in)
investing activities (1,914) 311
FINANCING ACTIVITIES:
Net increase in deposits 3,084 3,261
Net decrease in short-term borrowings (1,296) (746)
Net increase in acceptances outstanding 8 7
Proceeds from issuance of medium- and
long-term debt 1,101 1,125
Repayments and purchases of medium- and
long-term debt (1,282) (3,985)
Redemption of preferred stock -- (250)
Proceeds from issuance of common stock
and other capital transactions 56 62
Purchase of common stock (210) (65)
Dividends paid (247) (236)
------- -------
Net cash provided by (used in)
financing activities 1,214 (827)
------- -------
Net increase in cash and due from banks 246 229
Cash and due from banks at beginning of period 1,925 1,931
------- -------
Cash and due from banks at end of period $ 2,171 $ 2,160
======= =======
Interest paid $ 527 $ 1,172
======= =======
Income taxes paid $ 244 $ 218
======= =======
Noncash investing and financing activities:
Loans transferred to other real estate $ 8 $ 10
Loans transferred to loans held for sale 116 --
======= =======
See notes to consolidated financial statements.
-6-
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 accounting principles generally accepted in the
United States of America 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 of America 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, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002. 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,
2001.
Comerica merged with Imperial Bancorp (Imperial), a $7 billion (assets)
bank holding company, in the first quarter of 2001, in a transaction accounted
for as a pooling of interests.
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 are designated and qualify as hedging instruments,
the
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
Corporation designates 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. For further information, see Note 10.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". The Corporation adopted SFAS No. 142 on January 1, 2002.
Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual
impairment tests. Other intangible assets that do not have an indefinite life
continue to be amortized over their useful lives. For further information on the
adoption of SFAS No. 142, see Note 4.
In the third quarter of 2002, the Corporation adopted the fair value
method of accounting for stock options, as outlined in SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for stock options granted subsequent to
December 31, 2001. Financial results for the second quarter of 2002 have been
restated in accordance with SFAS No. 123. Under SFAS No. 123, compensation
expense equal to the fair value of stock-based compensation as of the date of
grant is recognized over the vesting period. For further information on the
adoption of SFAS No. 123, see Note 12.
NOTE 2 - INVESTMENT SECURITIES
At September 30, 2002, investment securities having a carrying value of
$2.0 billion were pledged, primarily with the Federal Reserve Bank and state and
local government agencies. Securities are pledged where permitted or required by
law to secure liabilities and public and other deposits, including deposits of
the State of Michigan of $115 million.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The following summarizes the changes in the allowance for credit
losses:
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 2002 2001
-------- --------
Balance at beginning of period $ 655 $ 608
Charge-offs (424) (165)
Recoveries 25 35
-------- --------
Net charge-offs (399) (130)
Provision for credit losses 533 167
-------- --------
Balance at end of period $ 789 $ 645
======== ========
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 include $24 million of loans which were formerly on
nonaccrual status, but were restructured and met the requirements to be restored
to an accrual basis. These restructured loans are performing in accordance with
their modified terms, but, in accordance with impaired loan disclosures, must
continue to be disclosed as impaired for the remainder of the calendar year of
the restructuring. Impaired loans averaged $647 million and $645 million for the
three and nine month periods ended September 30, 2002, compared to $561 million
and $501 million, respectively, for the comparable periods last year. The
following presents information regarding the period-end balances of impaired
loans:
(IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Total period-end impaired loans $639 $674
Less: Loans returned to accrual status
during the period 24 62
---- ----
Total period-end nonaccrual business loans $615 $612
Impaired loans requiring an allowance $443 $562
Allowance allocated to impaired loans $113 $228
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Those impaired loans not requiring an allowance represent loans for
which the fair value exceeded the recorded investment in the loan.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
In accordance with the Corporation's adoption of SFAS No. 142, the
Corporation performed the first required impairment test of goodwill and
indefinite-lived intangible assets as of January 1, 2002. Based on this test,
the Corporation was not required to record a transition adjustment upon
adoption. Goodwill was again evaluated for impairment as of July 1, 2002. As a
result of this test, the Corporation was required to record a goodwill
impairment charge of $86 million in the third quarter of 2002. This charge
resulted from the continued decline in equity markets, and its related impact on
the valuation of the Corporation's investment advisory reporting unit (Munder),
which is a part of the Investment Bank for business segment reporting purposes.
Further declines in equity markets could trigger additional goodwill impairment
charges related to this unit in future quarters. The fair value of Munder used
in the determination of the impairment charge was based on a valuation prepared
by an investment banker not affiliated with the Corporation. The valuation used
a combination of valuation techniques, including discounted cash flows and the
prices of external comparable businesses.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(CONTINUED)
THREE MONTHS ENDED
(IN MILLIONS, SEPTEMBER 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 24 $ 205
Add back: Goodwill amortization, net of tax - 7
---------- ----------
Adjusted net income applicable to common stock $ 24 $ 212
========== ==========
Basic net income per common share
Reported net income applicable to
common stock $0.14 $1.16
Goodwill amortization, net of tax - 0.04
---------- ----------
Adjusted net income applicable to
common stock $0.14 $1.20
========== ==========
Diluted net income per common share
Reported net income applicable to
common stock $0.14 $1.14
Goodwill amortization, net of tax - 0.04
---------- ----------
Adjusted net income applicable to
common stock $0.14 $1.18
========== ==========
NINE MONTHS ENDED
(IN MILLIONS, SEPTEMBER 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 395 $ 499
Add back: Goodwill amortization, net of tax - 21
---------- ----------
Adjusted net income applicable to common stock $ 395 $ 520
========== ==========
Basic net income per common share
Reported net income applicable to
common stock $2.25 $2.81
Goodwill amortization, net of tax - 0.12
---------- ----------
Adjusted net income applicable to
common stock $2.25 $2.93
========== ==========
Diluted net income per common share
Reported net income applicable to
common stock $2.22 $2.77
Goodwill amortization, net of tax - 0.12
---------- ----------
Adjusted net income applicable to
common stock $2.22 $2.89
========== ==========
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(CONTINUED)
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2002, are as follows:
BUSINESS INDIVIDUAL INVESTMENT
(IN MILLIONS) BANK BANK BANK TOTAL
-------- ---------- ---------- -----
Balance at January 1, 2002 $ 90 $ 54 $ 189 $ 333
Goodwill impairment - - (86) (86)
-------- ---------- ---------- -----
Balance as of September 30, 2002 $ 90 $ 54 $ 103 $ 247
======== ========== ========== =====
NOTE 5 - ACQUIRED INTANGIBLE ASSETS
(IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
---------------------- ---------------------- ----------------------
GROSS GROSS GROSS
AMORTIZED INTANGIBLE CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------ ---------------------- ---------------------- ----------------------
Core deposit intangibles $ 28 $ 25 $ 27 $ 22 $ 27 $ 22
Other 6 5 6 5 6 5
------------------- ------------------- -------------------
Total $ 34 $ 30 $ 33 $ 27 $ 33 $ 27
=================== =================== ===================
Aggregate amortization expense for the:
Three months ended September 30, 2002 $ 1
=====
Nine months ended September 30, 2002 $ 3
=====
Year ended December 31, 2001 $ 3
=====
Three months ended September 30, 2001 $ 1
=====
Nine months ended September 30, 2001 $ 2
=====
Estimated amortization expense for the:
Year ending December 31, 2002 $ 4
Year ending December 31, 2003 2
Year ending December 31, 2004 1
Year ending December 31, 2005 -
Year ending December 31, 2006 -
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 6 - MEDIUM- AND LONG-TERM DEBT
Medium- and long-term debt consisted of the following at September 30,
2002 and December 31, 2001:
(DOLLAR AMOUNTS IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Parent Company
7.25% subordinated notes due 2007 $ 176 $ 157
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 232 216
8.375% subordinated notes due 2024 206 187
7.25% subordinated notes due 2002 150 155
6.875% subordinated notes due 2008 117 108
7.125% subordinated notes due 2013 179 168
7.875% subordinated notes due 2026 206 179
6.00% subordinated notes due 2008 284 256
7.65% subordinated notes due 2010 280 268
8.50% subordinated notes due 2009 112 102
------ ------
Total subordinated notes 1,766 1,639
Medium-term notes:
Floating rate based on LIBOR indices 2,150 2,356
Variable rate secured debt financings
due 2007 973 956
9.98% trust preferred securities due 2026 56 56
7.60% trust preferred securities due 2050 341 339
Notes payable 25 -
------ ------
Total subsidiaries 5,311 5,346
------ ------
Total medium- and long-term debt $5,487 $5,503
====== ======
The carrying value of medium- and long-term debt has been adjusted to reflect
the gain or loss attributable to the risk hedged.
NOTE 7 - 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
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 7 - INCOME TAXES (CONTINUED)
first quarter 2001 to Imperial's tax liabilities at merger date, partially
offset by a $7 million tax benefit related to the Imperial acquisition that was
recognizable immediately, but only after Imperial became part of Comerica.
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, the change in accumulated
gains and losses on cash flow hedges and the change in accumulated minimum
pension liability. The Consolidated Statements of Changes in Shareholders'
Equity include only 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, 2002 and 2001.
Total comprehensive income totaled $462 million and $785 million, for the nine
months ended September 30, 2002 and 2001, respectively, and $73 million and $376
million for the three months ended September 30, 2002 and 2001, respectively.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(IN MILLIONS) 2002 2001
-------- --------
Net unrealized gains/(losses) on investment
securities available for sale:
Balance at beginning of period $ 16 $ 8
Net unrealized holding gains/(losses)
arising during the period 37 61
Less: Reclassification adjustment for
gains/(losses) included in net income (16) 23
---- ----
Change in net unrealized gains/(losses)
before income taxes 53 38
Less: Provision for income taxes 19 13
---- ----
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax 34 25
---- ----
Balance at end of period $ 50 $ 33
---- ----
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(IN MILLIONS) 2002 2001
-------- --------
Accumulated foreign currency translation adjustment:
Balance at beginning of period $ - $ 4
Net translation gains/(losses) arising
during the period (4) (4)
Less: Reclassification adjustment for
gains/(losses) included in net income - -
---- ----
Change in translation adjustment before
income taxes (4) (4)
Less: Provision for income taxes - -
---- ----
Change in foreign currency translation
adjustment, net of tax (4) (4)
---- ----
Balance at end of period $ (4) $ -
---- ----
Accumulated net gains/(losses) on cash flow hedges:
Balance at beginning of period $209 $ -
Transition adjustment upon adoption
of accounting standard - 65
Net cash flow hedge gains/(losses)
arising during the period 346 413
Less: Reclassification adjustment for
gains/(losses) included in net income 272 89
---- ----
Change in cash flow hedges before
income taxes 74 389
Less: Provision for income taxes 26 136
---- ----
Change in cash flow hedges, net of tax 48 253
---- ----
Balance at end of period $257 $253
---- ----
Accumulated minimum pension liability adjustment:
Balance at beginning of period $ - $ -
Minimum pension liability adjustment
arising during the period (17) -
---- ----
Minimum pension liability before taxes (17) -
Less: Provision for income taxes (6) -
---- ----
Change in minimum pension liability,
net of tax (11) -
---- ----
Balance at end of period $(11) $ -
---- ----
Accumulated other comprehensive income,
net of taxes, at end of period $292 $286
==== ====
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 9 - MERGER-RELATED AND RESTRUCTURING CHARGES
The Corporation recorded merger-related and restructuring charges of
$173 million in 2001 related to the acquisition of Imperial, of which $25
million was recorded in the provision for credit losses. The remaining $148
million of charges were recorded in noninterest expenses. The Corporation also
recorded a 2001 restructuring charge of $4 million related to its subsidiary,
Official Payments Corporation (OPAY). The OPAY restructuring charge was recorded
net of the portion of the charge attributable to the minority shareholders in
OPAY. The Corporation sold its OPAY subsidiary as of July 24, 2002, therefore,
no liability remains for OPAY restructuring charges as of the sale date.
The 2001 Imperial restructuring charge included employee termination
costs, other employee related costs, a charge related to conforming policies,
facilities and operations and other charges. 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. A total of 352 employees
were terminated in 2001 as part of the restructuring plan. Other
employee-related costs included cash payments related to change in control
provisions in employment contracts and retention bonuses. Charges related to
conforming policies represented costs associated with conforming the credit and
accounting policies of Imperial with those of the Corporation. The Corporation
also incurred facilities and operations charges associated with closing excess
facilities and replacing signage. Other merger-related restructuring costs were
primarily comprised of investment banking, accounting, consulting and legal
fees. As a result of the Imperial restructuring, the Corporation's annual
savings on operating expenses are estimated to be $60 million, beginning in
2002.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 9 - MERGER-RELATED AND RESTRUCTURING CHARGES (CONTINUED)
As shown in the table below, there is no remaining liability related
to the Imperial charge as of September 30, 2002. No additional Imperial related
restructuring charges are expected.
(IN MILLIONS)
Balance at December 31, 2001 $ 8
Cash outlays (8)
--------
Balance at September 30, 2002 $ -
========
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------ ------------------------------
NOTIONAL/ NOTIONAL/
CONTRACT UNREALIZED FAIR CONTRACT UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE AMOUNT GAINS LOSSES VALUE
(IN MILLIONS) (1) (2) (2) (3) (1) (2) (2) (3)
------------------------------ ------------------------------
RISK MANAGEMENT
Interest rate contracts:
Swaps $12,230 $751 $ - $ 751 $14,497 $573 $ (2) $ 571
Foreign exchange contracts:
Spot, forward and options 510 10 (5) 5 535 10 (4) 6
Swaps 211 2 (1) 1 285 2 (17) (15)
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 721 12 (6) 6 820 12 (21) (9)
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 12,951 763 (6) 757 15,317 585 (23) 562
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 328 - (4) (4) 365 - (4) (4)
Caps and floors purchased 313 5 - 5 352 4 - 4
Swaps 1,064 28 (27) 1 981 14 (13) 1
------- ---- ----- ----- ------- ---- ----- -----
Total interest rate
contracts 1,705 33 (31) 2 1,698 18 (17) 1
------- ---- ----- ----- ------- ---- ----- -----
Foreign exchange contracts:
Spot, forward and options 1,685 32 (31) 1 2,323 35 (29) 6
Swaps 288 1 - 1 366 2 (1) 1
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 1,973 33 (31) 2 2,689 37 (30) 7
------- ---- ----- ----- ------- ---- ----- -----
Total customer-initiated
and other 3,678 66 (62) 4 4,387 55 (47) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $16,629 $829 $ (68) $ 761 $19,704 $640 $ (70) $ 570
======= ==== ===== ===== ======= ==== ===== =====
(1) Notional or contract amounts, which represent the extent of involvement in
the derivatives market, are generally used to determine the contractual cash
flows required in accordance with the terms of the agreement. These amounts are
typically not exchanged, significantly exceed amounts subject to credit or
market risk, and are not reflected in the consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current
market rates, contracts in a profitable position. Credit risk is calculated
before consideration is given to bilateral collateral agreements or master
netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally
represent the estimated amounts the Corporation would receive or pay to
terminate or otherwise settle the contracts at the balance sheet date. The fair
values of all derivatives and foreign exchange contracts are reflected in the
consolidated balance sheets.
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - 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. 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 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 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
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
the next 3 years. Approximately 22 percent ($9 billion) of the Corporation's
outstanding loans were designated as the hedged items to interest rate swap
agreements at September 30, 2002. During the three and nine month periods ended
September 30, 2002, interest rate swap agreements designated as cash flow hedges
increased interest and fees on loans by $83 and $272 million, respectively,
compared to $53 and $89 million, respectively, for the comparable periods last
year. The ineffectiveness associated with these hedging instruments was not
significant to the Corporation's statement of income in the third quarter of
2002. If interest rates and interest curves remain at their current levels, the
Corporation expects to reclassify $186 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 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 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 and
indicates the weighted average interest rates associated with amounts to be
received or paid on interest rate swap agreements as of September 30, 2002. The
swaps are grouped by the assets or liabilities to which they have been
designated.
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
REMAINING EXPECTED MATURITY OF RISK MANAGEMENT INTEREST RATE SWAPS AS OF SEPTEMBER 30, 2002:
(DOLLAR AMOUNTS 2007- DEC. 31,
IN MILLIONS) 2002 2003 2004 2005 2006 2026 TOTAL 2001
- -----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Generic receive
fixed swaps $ 40 $4,750 $2,000 $1,800 $ 500 $ - $ 9,090 $11,069
Weighted average: (1)
Receive rate 3.09% 8.31% 7.57% 7.43% 5.83% -% 7.49% 7.68%
Pay rate 1.87% 3.75% 4.75% 4.75% 1.86% -% 3.95% 4.07%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 4 $ 13 $ - $ - $ - $ - $ 17 $ 34
Amortizing - 1 4 - - - 5 1
Weighted average: (2)
Receive rate 1.86% 1.60% 5.97% -% -% -% 2.50% 2.22%
Pay rate 2.51% 1.61% 6.68% -% -% -% 2.76% 2.56%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ - $1,468 $ - $ - $ - $ - $ 1,468 $ 1,743
Weighted average: (1)
Receive rate -% 4.22% -% -% -% -% 4.22% 4.87%
Pay rate -% 3.57% -% -% -% -% 3.57% 2.00%
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ 150 $ - $ - $ 250 $ - $ 1,250 $ 1,650 $ 1,650
Weighted average: (1)
Receive rate 7.22% -% -% 7.04% -% 6.73% 6.82% 6.82%
Pay rate 2.24% -% -% 1.75% -% 2.01% 1.99% 2.66%
Total notional amount $ 194 $6,232 $2,004 $2,050 $ 500 $ 1,250 $12,230 $14,497
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month Canadian Dollar Offered Rate (CDOR) rates in
effect at September 30, 2002. Variable rates received on pay fixed swaps are
based on prime at September 30, 2002.
(2) Variable rates received are based on three-month and six-month LIBOR or
one-month and three-month CDOR rates in effect at September 30, 2002.
-21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
The Corporation had commitments to purchase investment securities for
its trading account and available for sale portfolio totaling $522 million at
September 30, 2002 and totaling $67 million at December 31, 2001. Commitments to
sell investment securities related to the trading account totaled $22 million at
September 30, 2002, and $10 million at December 31, 2001. Outstanding
commitments expose the Corporation to both credit and market risk.
Customer-Initiated and Other
The Corporation earns additional income by executing various derivative
transactions, primarily foreign exchange contracts and interest rate contracts,
at the request of customers. Market risk inherent in customer-initiated
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. Average
fair values and income from customer-initiated and other foreign exchange
contracts and interest rate contracts were not material for the nine-month
periods ended September 30, 2002 and 2001 and for the year ended December 31,
2001.
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, 2002.
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
CUSTOMER-INITIATED
RISK MANAGEMENT AND OTHER
------------------------ -----------------------
INTEREST FOREIGN INTEREST FOREIGN
RATE EXCHANGE RATE EXCHANGE
(IN MILLIONS) CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------------------------ -----------------------
Balance at December 31, 2001 $ 14,497 $ 820 $ 1,698 $ 2,689
Additions 2,448 12,664 589 35,386
Maturities/amortizations (4,715) (12,763) (582) (36,102)
-------- -------- -------- --------
Balance at September 30, 2002 $ 12,230 $ 721 $ 1,705 $ 1,973
======== ======== ======== ========
Additional information regarding the nature, terms and associated risks
of the above derivatives and foreign exchange contracts, can be found in the
Corporation's 2001 annual report on page 40 and in Notes 1 and 20 to the
consolidated financial statements.
NOTE 11 - 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 months ended September 30, 2002 and 2001 are
presented below.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 11 - BUSINESS SEGMENT INFORMATION (CONTINUED)
Nine Months Ended September 30,
(DOLLAR AMOUNTS IN BUSINESS INDIVIDUAL INVESTMENT
MILLIONS) BANK BANK BANK*
--------------------------------------------------------
2002 2001 2002 2001 2002*** 2001**
--------------------------------------------------------
Average assets $ 35,197 $36,365 $ 8,498 $7,714 $ 297 $ 407
Total revenues (FTE) 1,352 1,212 807 807 129 57
Net income (loss) 375 375 216 208 (62) (69)
Return on average
assets 1.42% 1.38% 1.47% 1.45% (26.70)% (21.79)%
Return on average
common equity 16.68% 18.01% 29.95% 31.75% (41.11)% (33.77)%
FINANCE OTHER TOTAL
-----------------------------------------------------
2002 2001 2002 2001 2002 2001
-----------------------------------------------------
Average assets $ 4,811 $3,633 $ 1,855 $ 1,365 $50,658 $49,484
Total revenues (FTE) (66) 78 26 28 2,248 2,182
Net income (loss) (44) 37 (90) (40) 395 511
Return on average
assets (0.33)% 0.30% N/M N/M 1.04% 1.38%
Return on average
common equity (6.42)% 7.39% N/M N/M 10.79% 14.74%
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 loss would have been ($49) million and ($58) million,
and return on average common equity would have been (32.10)% and (28.41)%,
in 2002 and 2001, 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 $154 million and ($8) million, respectively, while
return on average assets and return on common equity would have been
(2.69)% and (4.16)%, respectively.
*** Net income in 2002 was reduced by a $86 million pre-tax goodwill impairment
charge at the investment advisory reporting unit (Munder) and a $5 million
pre- tax deferred distribution cost impairment charge. Excluding these
charges, Investment Bank total revenues (FTE) and net loss in 2002 would
have been $134 million and ($3) million, respectively, while return on
average assets and return on common equity would have been (1.43)% and
(2.20)%, 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 24 to
the consolidated financial statements in the Corporation's 2001 Annual Report.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 12 - STOCK-BASED COMPENSATION
In the third quarter of 2002, the Corporation adopted the fair value method
of accounting for stock options, as outlined in SFAS No. 123. Transition rules
require that all current year grants be accounted for under the fair value
method in the year of adoption, thus, the new method was applied prospectively
to all grants made after December 31, 2001. Substantially all current year
grants were issued in the second quarter of 2002. Under SFAS No. 123,
compensation expense, equal to the fair value of stock-based compensation as of
the date of grant, is recognized over the vesting period. Awards under the
Corporation's plans vest over periods ranging from one to four years. Therefore,
the expense related to stock-based compensation included in the determination
of net income for 2002 is less than which would have been recognized if the fair
value method had been applied to all awards since the original effective date of
SFAS 123. Options granted prior to January 1, 2002 continue to be accounted for
under APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The fair value of stock options granted was estimated at the date of
grant using a Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. The model may not necessarily provide a
reliable single measure of the fair value of employee and director options. The
Corporation's employee and director stock options have characteristics
significantly different from those of traded options and changes in subjective
input assumptions can materially affect the fair value estimate.
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 12 - STOCK-BASED COMPENSATION (CONTINUED)
The fair value of the 2002 options granted was estimated at $15.53-$18.07
using an option valuation model with the following weighted average assumptions:
Risk-free interest rate 4.69%
Expected dividend yield 2.65%
Expected volatility factors of the market
price of Comerica common stock 33%
Expected option life (in years) 4.8
The net income and diluted earnings per share impacts were $7 million
and $0.04, respectively, for the nine months ended September 30, 2002, and $4
million and $0.02, respectively, for the three months ended September 30, 2002.
-26-
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, 2002 was $24 million,
down $185 million, or 89 percent, from $209 million reported for the third
quarter of 2001. Quarterly diluted net income per share decreased to $0.14 from
$1.14 a year ago. Return on average common shareholders' equity was 1.93 percent
and return on average assets was 0.19 percent, compared to 17.68 percent and
1.68 percent, respectively, for the comparable quarter last year. The decline in
earnings in the third quarter 2002 from the comparable quarter last year
resulted primarily from a $227 million ($148 million after-tax, or $0.84 per
diluted share) increase in provision for credit losses due to the continued
uncertainty of an economic recovery and higher noninterest expenses resulting
from a third quarter 2002 goodwill impairment charge of $86 million ($56 million
after-tax, or $0.31 per diluted share), partially offset by third quarter 2001
Imperial restructuring charges of $18 million ($11 million after-tax, or $0.06
per diluted share).
Net income for the first nine months of 2002 was $2.22 per diluted
share, or $395 million, compared to $2.77 per diluted share, or $511 million,
for the same period in 2001, decreases of 20 percent and 23 percent,
respectively. Return on average common shareholders' equity was 10.79 percent
and return on average assets was 1.04 percent for the first nine months of 2002,
compared to 14.74 percent and 1.38 percent, respectively, for the first nine
months of 2001. The decline in earnings in the nine months ended September 30,
2002 from the comparable period last year resulted from a $366 million ($238
million after-tax, or $1.34 per diluted share) increase in provision for credit
losses primarily for the reasons cited in the quarterly discussion in the
preceding paragraph and Argentine transfer risk reserves associated with a
second quarter U.S. bank regulatory directive. The third quarter 2002 goodwill
impairment charge
-27-
discussed above and a decrease in securities gains and losses also contributed
to the earnings decline. Partially offsetting the decline in earnings was a $33
million increase in net interest income over the comparable period last year and
unusual items in 2001, including a one-time charge related to long-term
incentive plans at an unconsolidated subsidiary of $53 million ($34 million
after-tax, or $0.19 per diluted share) and Imperial restructuring charges
totaling $152 million ($114 million after-tax, or $0.63 per diluted share),
partially offset the earnings decline.
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, 2002. On a FTE basis, net interest income increased
to $529 million for the three months ended September 30, 2002, from $527 million
for the comparable quarter in 2001. Average earning assets increased three
percent when compared to the third quarter of last year, while the net interest
margin decreased to 4.46 percent for the three months ended September 30, 2002,
from 4.59 percent for the comparable three months of 2001. The margin decline
was primarily due to compressed loan spreads, partially offset by the benefit
from a 16 percent increase in average noninterest-bearing deposits. This
increase is primarily attributed to the strong growth of title and escrow
deposits in the California-based Financial Services business.
Table II provides an analysis of net interest income for the first nine
months of 2002. On a FTE basis, net interest income for the nine months ended
September 30, 2002, was $1,602 million compared to $1,569 million for the same
period in 2001. This increase was due to a two percent increase in average
earning assets and a relatively stable net interest margin supported by strong
growth in average noninterest-bearing deposits, up 12 percent when compared to
the first nine months of 2001 for the same reason cited in the quarterly
discussion. The net interest margin for the first nine months ended September
30, 2002, decreased to 4.59 percent, from 4.60 percent for the same period in
2001.
-28-
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
THREE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------------------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Commercial loans $25,473 $297 4.62% $26,343 $427 6.43%
International loans 2,997 35 4.63 2,809 49 6.92
Real Estate construction loans 3,415 50 5.83 3,127 60 7.64
Commercial mortgage loans 6,921 107 6.12 5,705 107 7.44
Residential mortgage loans 746 13 7.11 796 15 7.54
Consumer loans 1,514 24 6.43 1,494 30 8.01
Lease financing 1,252 17 5.40 1,123 18 6.31
Business loan swap income - 83 - - 53 -
-------------------------------------------------------------
Total loans 42,318 626 5.87 41,397 759 7.27
Investment securities (1) 4,395 63 5.81 3,989 62 6.29
Short-term investments 456 6 5.35 317 3 4.37
-------------------------------------------------------------
Total earning assets 47,169 695 5.86 45,703 824 7.17
Cash and due from banks 1,752 1,800
Allowance for credit losses (776) (663)
Other assets 3,202 2,889
------- -------
Total assets $51,347 $49,729
======= =======
Money market and NOW accounts $13,643 51 1.49 $10,035 61 2.40
Savings deposits 1,598 4 0.98 1,354 5 1.34
Certificates of deposit 9,805 58 2.33 13,455 138 4.08
Foreign office time deposits 780 7 3.42 805 10 4.99
-------------------------------------------------------------
Interest-bearing deposits 25,826 120 1.84 25,649 214 3.31
Short-term borrowings 2,016 9 1.88 2,903 26 3.60
Medium- and long-term debt 5,810 37 2.54 5,323 57 4.24
-------------------------------------------------------------
Total interest-bearing
sources 33,652 166 1.96 33,875 297 3.48
--------------- ---------------
Noninterest-bearing deposits 11,901 10,225
Other liabilities 855 815
Preferred stock - 166
Common shareholders' equity 4,939 4,648
------- -------
Total liabilities and
shareholders' equity $51,347 $49,729
======= =======
Net interest income/
rate spread (FTE) $529 3.90 $527 3.69
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net interest-free
sources of funds 0.56 0.90
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.46% 4.59%
===== =====
(1) The average rate for investment securities was computed using average
historical cost.
-29-
THREE MONTHS ENDED
SEPTEMBER 30, 2002/SEPTEMBER 30, 2001
--------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(146) $ 13 $(133)
Investment securities (5) 6 1
Short-term investments 1 2 3
---------------------------------
Total earning assets (150) 21 (129)
Interest-bearing deposits (86) (8) (94)
Short-term borrowings (13) (4) (17)
Medium- and long-term debt (23) 3 (20)
---------------------------------
Total interest-bearing sources (122) (9) (131)
---------------------------------
Net interest income/rate spread (FTE) $ (28) $ 30 $ 2
=================================
* Rate/Volume variances are allocated to variances due to volume.
-30-
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
NINE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
----------------------------- ----------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Commercial loans $25,344 $ 904 4.77% $26,683 $1,466 7.34%
International loans 3,038 109 4.78 2,714 164 8.05
Real estate construction loans 3,337 146 5.83 3,047 194 8.51
Commercial mortgage loans 6,672 311 6.23 5,605 333 7.96
Residential mortgage loans 753 41 7.21 795 46 7.65
Consumer loans 1,495 74 6.66 1,484 96 8.66
Lease financing 1,230 50 5.44 1,089 52 6.41
Business loan swap income - 272 - - 88 -
-------------------------------------------------------------
Total loans 41,869 1,907 6.09 41,417 2,439 7.87
Investment securities (1) 4,338 188 5.87 3,788 183 6.48
Short-term investments 455 19 5.57 415 19 6.12
-------------------------------------------------------------
Total earning assets 46,662 2,114 6.06 45,620 2,641 7.74
Cash and due from banks 1,741 1,805
Allowance for credit losses (716) (649)
Other assets 2,971 2,708
------- -------
Total assets $50,658 $49,484
======= =======
Money market and NOW accounts $12,374 134 1.45 $ 9,769 203 2.78
Savings deposits 1,672 13 1.05 1,332 14 1.40
Certificates of deposits 10,783 196 2.43 13,203 482 4.88
Foreign office time deposits 790 20 3.38 643 30 6.36
-------------------------------------------------------------
Interest-bearing deposits 25,619 363 1.90 24,947 729 3.91
Short-term borrowings 2,280 33 1.90 2,564 90 4.69
Medium- and long-term debt 5,928 116 2.62 6,491 253 5.21
-------------------------------------------------------------
Total interest-bearing
sources 33,827 512 2.02 34,002 1,072 4.22
----------------- -----------------
Noninterest-bearing deposits 11,112 9,941
Other liabilities 840 805
Preferred stock - 222
Common shareholders' equity 4,879 4,514
------- -------
Total liabilities and
shareholders' equity $50,658 $49,484
======= =======
Net interest income/
rate spread (FTE) $1,602 4.04 $1,569 3.52
====== ======
FTE adjustment $ 3 $ 3
====== ======
Impact of net interest-free
sources of funds 0.55 1.08
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.59% 4.60%
===== =====
(1) The average rate for investment securities was computed using average
historical cost.
-31-
NINE MONTHS ENDED
SEPTEMBER 30, 2002/SEPTEMBER 30, 2001
--------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(548) $ 16 $(532)
Investment securities (19) 24 5
Short-term investments (2) 2 -
-----------------------------------
Total earning assets (569) 42 (527)
Interest-bearing deposits (357) (9) (366)
Short-term borrowings (53) (4) (57)
Medium- and long-term debt (126) (11) (137)
-----------------------------------
Total interest-bearing sources (536) (24) (560)
-----------------------------------
Net interest income/rate
spread (FTE) $ (33) $ 66 $ 33
===================================
* Rate/Volume variances are allocated to variances due to volume.
-32-
Provision for Credit Losses
The provision for credit losses was $285 million for the third quarter
of 2002, compared to $58 million for the same period in 2001. The provision for
the first nine months of 2002 was $533 million compared to $167 million for the
same period in 2001. 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." The significant increase
in the provision for credit losses in the third quarter 2002 resulted from the
continued uncertainty in the economy and a decision to sell certain loans. The
economic uncertainty has impacted many of the Corporation's customers, as
evidenced by a higher allowance, even after increased net charge-offs. The third
quarter 2002 provision for credit losses also included $104 million to cover
charge-offs in conjunction with management's decision to sell certain loans.
These loans were reclassified from loans to short-term investments during the
quarter and total $116 million net of charge-offs at September 30, 2002. Also
included in the provision for credit losses for the first nine months of 2002 is
an increase in reserves for Argentina. Included in the provision for the first
nine months of 2001 is a $25 million merger-related charge to conform the credit
policies of Imperial with Comerica.
Noninterest Income
Noninterest income was $216 million for the three months ended
September 30, 2002, a decrease of $8 million, or four percent, over the same
period in 2001. Included in third quarter 2002 noninterest income is a pre-tax
gain of $12 million related to the sale of the Corporation's OPAY subsidiary and
a $5 million impairment charge on deferred distribution costs related to the
Corporation's Munder Capital Management subsidiary (Munder), further discussed
below. Included in the third quarter 2001 is a pre-tax gain of $21 million on
the sale of the Corporation's ownership in an ATM network provider and a $14
million impairment
-33-
charge on deferred distribution costs. Excluding the effects of the gains on
sale of businesses and impairment charges, gains and losses on securities,
warrant income and divestitures, noninterest income decreased $3 million, or two
percent, over the same period last year. Certain of the Corporation's
noninterest income, primarily fiduciary income and investment advisory revenue,
is at risk to fluctuations in the market values of underlying assets,
particularly equity securities. Other income, primarily brokerage service fees,
is at risk to changes in the level of market activity. The noninterest income
decline reflects a $10 million decrease in this market-related revenue,
excluding the deferred distribution costs impairment charges in both periods.
This decrease was partially offset by increased revenue on bank-owned life
insurance due to death benefits received and increased earnings on policies
held.
The Corporation recorded a $5 million pre-tax deferred distribution
costs impairment charge in the third quarter of 2002 related to the
Corporation's Munder subsidiary. This charge resulted from a continued
reassessment of the recoverability of the unamortized cost of commissions to
brokers for selling Class B mutual fund shares. Net asset values in these funds
have declined as general market conditions continued to weaken. This prompted
the Corporation'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, 2002 were $20 million. Given net asset values at
September 30, 2002, it would take a decline of approximately 10 percent in the
assets under management associated with those costs to trigger further
impairment, which at that level would be approximately $2 million. Each
additional five percent decline results in a further impairment of $1 million.
For the first nine months of 2002, noninterest income was $646 million,
an increase of $33 million, or five percent, from the first nine months of 2001.
In addition to the unusual items cited above, noninterest income for the first
-34-
nine months of 2002 included $9 million of non-taxable proceeds from bank-owned
life insurance policies from the death of an executive. Noninterest income in
the first nine months of 2001 was reduced by a total of $40 million of deferred
distribution costs impairment charges and a one-time $57 million charge related
to long-term incentive plans at an unconsolidated subsidiary. Noninterest income
in the first nine months of 2001 also included $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
risk-reduction criteria. Excluding the effect of the large unusual items noted
above, gains and losses on securities, warrant income and divestitures,
noninterest income in the first nine months of 2002 decreased $5 million, or one
percent, over the same period in 2001. Market-related income revenue declined
$26 million, excluding the deferred distribution costs impairment charges in
both periods, for the reasons cited in the quarterly discussion. This was offset
by increases in service charges on deposit accounts, reflecting the benefit of
lower earnings credit allowances provided to business customers, and higher
levels of revenue on bank-owned life insurance.
Noninterest Expenses
Noninterest expenses were $433 million for the quarter ended September
30, 2002, an increase of $60 million, or 16 percent, from the comparable quarter
in 2001. Noninterest expenses in the third quarter of 2002 include a goodwill
impairment charge of $86 million as a result of the Corporation's annual
evaluation of goodwill in accordance with SFAS No. 142 and a $6 million charge
related to the Corporation's third quarter 2002 adoption of the fair value
method of accounting for stock options. Additional information on the goodwill
impairment charge and the adoption of the fair value method of accounting for
stock options can be found in Notes 4 and 12, respectively, to the unaudited
consolidated financial statements in this report. Noninterest expenses in the
-35-
third quarter of 2001 included merger-related and restructuring costs related to
the Imperial Bancorp acquisition of $18 million and goodwill amortization of $8
million. Goodwill amortization was discontinued January 1, 2002, as a result of
new accounting rules. Excluding these items and the impact of divestitures,
noninterest expenses in the third quarter of 2002 decreased by $3 million, or
one percent, over the same period in 2001. Contributing to this decline was
savings in customer services expense of $6 million due to reduced credits
provided to customers as a result of the lower interest rate environment.
For the nine months ended September 30, 2002, noninterest expenses were
$1,129 million, a decrease of $83 million, or seven percent, from the comparable
period of 2001. Included in the first nine months of 2002 was a total charge of
$11 million related to the Corporation's adoption of the fair value method of
accounting for stock options and the goodwill impairment charge discussed above.
Included in the first nine months of 2001 were restructuring charges totaling
$127 million and a reduction in other noninterest expenses of $5 million that
resulted from recording the minority interest holders' share of the long-term
incentive plan charge discussed in noninterest income above. Also affecting the
first nine months of 2001 was $24 million in goodwill amortization. Excluding
these items and the impact of divestitures, noninterest expenses in the first
nine months of 2002 decreased by $21 million, or two percent, over the same
period in 2001. This decrease is primarily attributed to lower salaries and
benefits of $10 million, due primarily to reduced revenue related incentives,
and a reduction in customer services expense of $11 million for the reasons
cited in the quarterly discussion.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2002 totaled $2
million, compared to $110 million reported for the same period a year ago. The
effective tax rate was eight percent for the third quarter of 2002, compared to
-36-
35 percent for the same quarter of 2001. The provision for the first nine months
of 2002 was $188 million compared to $289 million for the same period of 2001.
The effective tax rate was 32 percent for the first nine months of 2002 and 36
percent for the first nine months of 2001. The low effective tax rate in the
third quarter 2002 resulted from the significant reduction in income before
income taxes, which increased the proportion of permanent tax differences to
pre- tax income. The effective tax rate in the first nine months of 2002 was
impacted by increased non-taxable revenue on bank-owned life insurance policies.
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 the merger
date, partially offset by a $7 million tax benefit related to the Imperial
acquisition that was immediately recognizable, but only after Imperial became
part of Comerica.
Financial Condition
Total assets were $52.6 billion at September 30, 2002, compared with
$50.7 billion at year-end 2001 and $49.7 billion at September 30, 2001. The
Corporation has experienced an increase (one percent) in total loans since
December 31, 2001. Management believes that this slight increase reflects the
cautiousness of borrowers in an uncertain economy. Weak loan demand, coupled
with an increase in noninterest-bearing deposits, resulted in an increase in
short-term investments of $801 million since year-end 2001. This increase was
primarily attributable to higher amounts of federal funds sold.
Total liabilities increased $1.8 billion, or four percent, since
December 31, 2001, to $47.7 billion. Total deposits increased eight percent to
$40.6 billion at September 30, 2002, from $37.6 billion at year-end 2001 due to
growth in noninterest-bearing deposits. The growth in noninterest-bearing
deposits is primarily attributed to the strong growth of title and escrow
deposits in the California-based Financial Services business. The deposit
increase was partially offset in short-term borrowings, which decreased $1.3
billion since
-37-
December 31, 2001, to $689 million at September 30, 2002. Medium- and long-term
debt decreased $16 million to $5.5 billion at September 30, 2002.
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. The Corporation defines business
loans as those belonging to the commercial, international, real estate
construction, commercial mortgage and lease financing categories. The
Corporation performs a detailed credit quality review quarterly on large
business loans which have deteriorated below certain levels of credit risk and
allocates a specific portion of the allowance 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, and
trends with respect to past due and nonaccrual amounts. The allocated allowance
was $540 million at September 30, 2002, a decrease of $6 million from year-end
2001. This decrease was attributable, in part, to the decision to sell certain
nonperforming loans in the third quarter 2002. These loans were written down to
net realizable value and
-38-
transferred to short-term investments, thus eliminating the need for an
allocated allowance. Offsetting this reduction was increased reserves related to
Argentine and non-trade Brazilian exposure.
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. An
unallocated allowance is maintained to capture these probable losses. 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,
technology and life sciences, entertainment and energy industries, as well as
Latin American transfer risks and the risk associated with new customer
relationships. The unallocated allowance was $249 million at September 30, 2002,
an increase of $140 million from December 31, 2001. This increase results from
the Corporation's belief that the continued uncertainty of an economic recovery,
and its impact on the Corporation's customers, requires increased unallocated
coverage for all factors considered in the unallocated allowance.
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. 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
-39-
allocated allowance. Inclusion of other portfolio exposures in the unallocated
allowance, as well as significant increases in the current portfolio exposures,
could increase the amount of the unallocated allowance. Either of these events,
or some combination, may result in the need for additional provision for credit
losses in order to maintain an allowance that complies with credit risk and
accounting policies.
The Corporation is closely monitoring its Argentine and Brazilian
exposure as a result of recent political and economic events in those countries.
The total Argentine exposure at September 30, 2002, was $103 million and
consisted of $83 million of loans, $11 million of securities and $9 million of
unfunded commitments. This represents a decrease of $116 million from total
Argentine exposure of $219 million at December 31, 2001. Allocations in the
allowance for credit losses cover approximately 50 percent of loans and unfunded
commitments. The total Brazilian exposure at September 30, 2002, was $576
million and consisted of $447 million of loans, $52 million of securities and
$77 million of unfunded commitments. This represents a decrease of $136 million
from total Brazilian exposure of $712 million at December 31, 2001. Allocations
in the allowance for credit losses cover approximately five percent of loans and
unfunded commitments. At September 30, 2002, the Corporation had $39 million of
loans and $8 million in securities related to Argentina and $5 million of loans
related to Brazil that were reported in nonperforming assets.
At September 30, 2002, the allowance for credit losses was $789
million, an increase of $134 million since December 31, 2001. The allowance as a
percentage of total loans was 1.90 percent, compared to 1.59 percent at December
31, 2001. As a percentage of nonperforming assets, the allowance was 123 percent
at September 30, 2002, versus 105 percent at year-end 2001.
The continued uncertainty in the economy, and its impact on the
Corporation's customers, has required increased levels of allowance to be
maintained on the Corporation's business loans. These increased allowance levels
-40-
have also impacted the allowance coverage of nonperforming assets.
Net charge-offs for the third quarter of 2002 were $258 million, or
2.44 percent of average total loans, compared with $58 million, or 0.56 percent,
for the third quarter of 2001. The increase in net charge-offs was attributable
to the decision to sell certain nonperforming loans in the third quarter 2002
and the continued uncertainty of an economic recovery, and its impact on the
Corporation's customers. Net charge-offs in the third quarter 2002 on loans
transferred to short-term investments totaled $104 million. Nonperforming assets
increased $13 million, or two percent, since December 31, 2001, and were
categorized as follows:
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 2002 2001
------------ ------------
Nonaccrual loans:
Commercial $ 365 $ 467
International 101 109
Real estate construction 17 10
Commercial mortgage 15 18
Residential mortgage 1 -
Consumer 4 5
Lease financing 1 8
Nonaccrual loans held for sale 116 -
------------ ------------
Total nonaccrual loans 620 617
Reduced-rate loans - -
------------ ------------
Total nonperforming loans 620 617
Other real estate 12 10
Nonaccrual debt securities 8 -
------------ ------------
Total nonperforming assets $ 640 $ 627
============ ============
Loans past due 90 days or more $ 51 $ 44
============ ============
Loans to customers in the automotive industry comprised 12 percent of
nonperforming loans at September 30, 2002, and was the only industry
classification comprising more than 10 percent of nonperforming loans. Six
credits in excess of $10 million were added to nonperforming loans during the
third quarter 2002. The largest nonaccrual loan at September 30, 2002, was to an
automotive supplier totaling $24 million. Approximately 46 percent of total
nonperforming assets at September 30, 2002 were Shared National Credit Program
-41-
(SNC) loans. SNC loans are large credits shared by multiple financial
institutions and reviewed by regulatory authorities at the lead or agent bank
level. These loans comprised approximately 20 percent of total loans at
September 30, 2002. Nonperforming assets as a percentage of total loans and
other real estate were 1.54 percent at September 30, 2002 and 1.52 percent at
December 31, 2001.
The following table presents a roll-forward of nonaccrual loans from
December 31, 2001 to September 30, 2002, based on an analysis of nonaccrual
loans with book balances greater than $2 million.
(IN MILLIONS)
Nonaccrual loans at December 31, 2001 $617
Loans transferred to nonaccrual 548
Net loans charged off (399)
Loans transferred to accrual status (39)
Loans sold (17)
Payments/Other (90)*
----
Nonaccrual loans at September 30, 2002 $620
====
* Net change related to nonaccrual loans with balances less than $2
million, other than net charge-offs, included in Payments/Other.
During the third quarter 2002, $276 million of loans were transferred
to nonaccrual status. Included were 35 loans with balances greater than $2
million. Six of these loans were greater than $10 million (totaling $124
million) to customers in the manufacturing and service sectors.
Assuming the economy remains unchanged from current levels, the
Corporation's management expects that nonperforming assets will decrease
slightly to between $550-625 million by December 31, 2002. The reduction in
nonperforming assets that will result from the expected sale of $116 million of
loans held for sale will be partially offset by assets transferred to
nonaccrual. Charge-offs are expected to decline significantly from third quarter
2002 levels in the fourth quarter of 2002, and are projected to be in the $60-80
million range. As of November 7, 2002, the Corporation had sold $112 million of
the $116 million of nonaccrual loans categorized as held for sale at September
30, 2002. Gains
-42-
and losses resulting from the sale of this portfolio of loans are not expected
to be material.
Capital
Common shareholders' equity, excluding the $67 million increase in
other comprehensive income, remained relatively flat from December 31, 2001 to
September 30, 2002. The retention of $143 million of current year earnings and
the effect of employee stock plan activity, which increased common shareholders'
equity $63 million, were offset by the decrease in equity of $210 million that
resulted from repurchasing approximately 3.5 million shares of common stock in
the open market during the first nine months of 2002.
Capital ratios exceed minimum regulatory requirements as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ -----------
Tier 1 common capital ratio 7.32% 7.30%
Tier 1 risk-based capital ratio (4.00% - minimum) 7.99% 7.98
Total risk-based capital ratio (8.00% - minimum) 11.71% 11.70
Leverage ratio (3.00% - minimum) 9.25% 9.36
At September 30, 2002, the capital ratios of all the Corporation's
banking subsidiaries exceeded the minimum ratios required of "well capitalized"
institutions as defined in the final rule under FDICIA.
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 2001 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 and may significantly affect the
Corporation's reported results for the period or in future periods. Changes in
-43-
underlying factors, assumptions or estimates in any of these areas could have a
material impact on the Corporation's future financial condition and results of
operations. In management's opinion, some of these areas have a more significant
impact than others on the Corporation's financial reporting. This is because
these policies apply to areas of relatively greater business importance, to
matters for which there is a range of possible outcomes and/or require a more
subjective decision-making process on the part of management. For the
Corporation, these areas currently include accounting for the allowance for
credit losses, pension costs, private equity and venture capital investments,
deferred distribution costs and goodwill.
Pension assumptions will be evaluated and reset prior to January 1,
2003. Equity markets and interest environments impact these assumptions.
Declines in equity markets in recent years and the current low-interest-rate
environment will impact pension expense for 2003. The Corporation's pension
assumptions for 2002 included a 10 percent long-term rate of return on plan
assets and a 7.4 percent discount rate. For each 0.25 percentage point change in
the long-term rate of return assumption, pension expense changes by
approximately $2 million. For each 0.25 percentage point change in the discount
rate assumption, pension expense changes by approximately $4 million. For more
information on pension assumptions, refer to Note 15 to the consolidated
financial statements included in the Corporation's 2001 annual report.
Other Matters
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Statement covers legal obligations that are
identifiable by the entity upon acquisition and construction, and during the
operating life of a long-lived asset. Identified retirement obligations would be
recorded as a liability with a corresponding amount capitalized as part of the
asset's carrying amount. The capitalized retirement cost asset would be
-44-
amortized to expense over the asset's useful life. The Statement is effective
January 1, 2003 for calendar year companies. The Corporation does not believe
that the impact of adoption of SFAS No. 143 will have a material impact on the
Corporation's financial position or results of operations.
-45-
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. The measurement of risk exposure at September 30, 2002 for a 200 basis
point decline in short-term interest rates identified approximately $108
million, or 4.9%, 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 $145 million, or 6.6%.
Secondarily, the Corporation utilizes a traditional interest
sensitivity gap measure and economic value of equity analysis as alternative
measures of interest rate risk exposure. At September 30, 2002, all three
measures of interest rate risk were within established corporate policy
guidelines. For further discussion of interest rate risk, and other market
risks, see Note 10 and pages 37-41 of the Corporation's 2001 Annual Report.
-46-
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Corporation's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Corporation's disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on the evaluation,
such officers have concluded that, as of the Evaluation Date, the Corporation's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Corporation (including its
consolidated subsidiaries) required to be included in the Corporation's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in the Corporation's internal controls or in other
factors that could significantly affect such controls.
-47-
Forward-looking statements
This report includes forward-looking statements as that term is used in
securities laws. All statements regarding Comerica'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", "estimates", "seeks", "plans", "intends" and similar
expressions, as they relate to Comerica or its management, are intended to
identify forward-looking statements. Although Comerica believes that the
expectations reflected in these forward-looking statements are reasonable and
has based these expectations on the beliefs and assumptions Comerica has made,
such expectations may prove incorrect. Numerous factors, including unknown risks
and uncertainties, could cause variances in these projections and their
underlying assumptions. Such factors are changes in interest rates, changes in
the accounting or tax treatment of any particular item, changes in industries in
which Comerica has a concentration of loans, or the political, economic and
regulatory stability in countries where Comerica operates, changes in the level
of fee income, changes in general economic conditions and related credit and
market conditions and the impact of regulatory responses to any of the
foregoing. Forward-looking statements speak only as of the date they are made.
Comerica 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.
-48-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Several of the Corporation's banking subsidiaries are member banks of
Visa U.S.A., Inc. ("Visa"). Several U.S. merchants have filed class action suits
against Visa under U.S. federal antitrust law. The Corporation and its
subsidiaries are not parties to these suits. However, the Corporation's banking
subsidiaries, which are member banks of Visa, may be affected by these suits.
The following description of the suits is based primarily on disclosures in the
Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed by
MasterCard Incorporated ("MasterCard") with the Securities and Exchange
Commission on August 14, 2002.
Commencing in October 1996, several class action suits were brought by
a number of U.S. merchants against MasterCard and Visa. Those suits were later
consolidated in the U.S. District Court for the Eastern District of New York.
The plaintiffs challenge MasterCard's and Visa's rules requiring merchants who
accept their credit cards to accept their debit cards. Plaintiffs claim that
MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance
of credit cards and have conspired to monopolize the point-of-sale debit card
market. Plaintiffs allege that the plaintiff class has been forced to pay
unlawfully high prices for debit and credit card transactions. There are related
consumer class actions pending in two state courts that have been stayed pending
developments in the merchants' suits. MasterCard and Visa have denied the
merchants' allegations. The district court granted the plaintiffs' motion for
class certification, a panel of the Second Circuit Court of Appeals affirmed,
and on June 6, 2002, the U.S. Supreme Court denied MasterCard's and Visa's
petition for a writ of certiorari on the issue of class certification. Recent
press reports place the plaintiffs' estimated damage claims at approximately
$13.0 billion to $15.0 billion, or more, before mandatory trebling under U.S.
federal antitrust law. These figures reflect claims asserted and should not be
construed
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as an acknowledgement of the reliability of the figures presented. Trial is
currently scheduled for April 2003.
The Corporation and its subsidiaries are not parties to these suits and
therefore will not be directly liable for any amount related to these suits.
However, if a judgment is entered against Visa, then Visa may seek to assess the
associations' member banks, including the Corporation's banking subsidiaries, to
obtain funds to satisfy the judgment. In addition, because a judgment against
the associations could adversely affect the business operations of the member
banks, they may be compelled by business necessity to assist Visa to satisfy the
judgment. The outcome of these suits, the amount of any possible judgment
against the associations, and the effects on the associations' member banks,
including the Corporation's banking subsidiaries, resulting from these suits,
cannot be determined at this time.
In addition to the above, the Corporation and its subsidiaries are
subject to various pending or threatened legal proceedings, arising out of the
normal course of business. 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, the Corporation believes, based on current
knowledge and after consultation with counsel, that the outcome of such matters
will not have a material adverse effect on the Corporation's consolidated
financial condition or results of operations.
ITEM 5. Other Information.
As previously announced, Eugene A. Miller retired as Chairman of the
Board of Directors of Comerica on October 1, 2002. In order to ensure a stable
transition, Mr. Miller will continue to make himself available to Comerica and
will continue to receive certain benefits in accordance with a Supplemental
Benefit Agreement entered into between Comerica and Mr. Miller as of September
19, 2002 and filed as an exhibit hereto.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Bylaws of Comerica Incorporated
(10.1*) Supplemental Benefit Agreement dated September 19, 2002,
between Comerica Incorporated and Eugene A. Miller
(11) Statement re: Computation of Net Income Per Common Share
(99.1) Chairman, President and CEO Certification of Periodic Report
(99.2) CFO Certification of Periodic Report
* Management compensation arrangement
(b) Reports on Form 8-K
A report on Form 8-K, dated August 13, 2002, was filed under report
items number 7 and 9, announcing and including the certified sworn
statements made by the Corporation's principal executive officer and
principal financial officer regarding facts and circumstances relating
to the Corporation's filings under the Securities Exchange Act of 1934,
pursuant to Securities and Exchange Commission Order No. 4-460.
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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.
COMERICA INCORPORATED
(Registrant)
/s/ Elizabeth S. Acton
-----------------------------------------
Elizabeth S. Acton
Chief Financial Officer
/s/ Marvin J. Elenbaas
-----------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 2002
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CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ralph W. Babb, Jr., Chairman, President and Chief Executive Officer of
Comerica Incorporated (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant
for the period ended September 30, 2002 (the "Quarterly Report");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal
-53-
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Ralph W. Babb, Jr.
---------------------------------------
Ralph W. Babb, Jr.
Chairman, President and Chief Executive
Officer
-54-
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Elizabeth S. Acton, Chief Financial Officer of Comerica Incorporated (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant
for the period ended September 30, 2002 (the "Quarterly Report");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal
-55-
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Elizabeth S. Acton
------------------------
Elizabeth S. Acton
Chief Financial Officer
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10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-3.1 Amended and Restated Bylaws of Comerica Incorporated
EX-(10.1*) Supplemental Benefit Agreement dated September 19, 2002,
between Comerica Incorporated and Eugene A. Miller
EX-(11) Statement re: Computation of Net Income Per Common Share
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002