FORM 10-Q/A
Amendment No. 2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Comerica Tower at Detroit Center
Detroit, Michigan
48226
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(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 July 31, 2002: 174,824,000 shares
-2-
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 (restated and unaudited), December
31, 2001 and June 30, 2001 (unaudited)....................................4
Consolidated Statements of Income for the six months and three months
ended June 30, 2002 (restated) and 2001 (unaudited).......................5
Consolidated Statements of Changes in Shareholders' Equity for the six
months ended June 30, 2002 (restated) and 2001 (unaudited)................7
Consolidated Statements of Cash Flows for the six months ended June 30,
2002 (restated) and 2001 (unaudited)......................................9
Notes to Consolidated Financial Statements (unaudited)............................10
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................30
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................44
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..........................................46
Signatures........................................................................47
-3-
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
June 30, December 31, June 30,
(in millions, except share data) 2002 2001 2001
---------- ------------ ----------
(unaudited) (unaudited)
(As restated-
see Note 13)
ASSETS
Cash and due from banks $ 1,748 $ 1,925 $ 1,764
Short-term investments 851 1,079 257
Investment securities available
for sale 4,463 4,291 4,026
Commercial loans 24,381 25,176 26,155
International loans 3,073 3,015 2,751
Real estate construction loans 3,397 3,258 3,118
Commercial mortgage loans 6,821 6,267 5,681
Residential mortgage loans 742 779 794
Consumer loans 1,499 1,484 1,491
Lease financing 1,239 1,217 1,123
-------- -------- --------
Total loans 41,152 41,196 41,113
Less allowance for credit losses (762) (655) (645)
-------- -------- --------
Net loans 40,390 40,541 40,468
Premises and equipment 354 353 356
Customers' liability on acceptances
outstanding 31 29 28
Accrued income and other assets 2,725 2,514 2,389
-------- -------- --------
TOTAL ASSETS $ 50,562 $ 50,732 $ 49,288
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 13,028 $ 12,596 $ 11,798
Interest-bearing deposits 25,154 24,974 25,248
-------- -------- --------
Total deposits 38,182 37,570 37,046
Short-term borrowings 755 1,986 1,427
Acceptances outstanding 31 29 27
Accrued expenses and other
liabilities 781 837 730
Medium- and long-term debt 5,921 5,503 5,307
-------- -------- --------
Total liabilities 45,670 45,925 44,537
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/01 - - 250
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at
6/30/02, 12/31/01 and 6/30/01 894 894 894
Capital surplus 356 345 340
Unearned employee stock ownership
plan - 131,954 shares at 12/31/01
and 167,566 shares at 6/30/01 - (5) (6)
Accumulated other comprehensive income 243 225 119
Retained earnings 3,631 3,448 3,211
Deferred compensation (14) (9) (11)
Less cost of common stock in
treasury - 3,699,038 shares at 6/30/02,
1,674,659 shares at 12/31/01 and
855,492 shares at 6/30/01 (218) (91) (46)
-------- -------- --------
Total shareholders' equity 4,892 4,807 4,751
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 50,562 $ 50,732 $ 49,288
======== ======== ========
See notes to consolidated financial statements.
-4-
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Three Months Ended
June 30,
------------------
(in millions, except per share data) 2002 2001
------ ------
(As restated-
see Note 13)
INTEREST INCOME
Interest and fees on loans $ 634 $ 814
Interest on investment securities 64 55
Interest on short-term investments 7 6
----- -----
Total interest income 705 875
INTEREST EXPENSE
Interest on deposits 122 243
Interest on short-term borrowings 11 25
Interest on medium- and long-term debt 41 79
----- -----
Total interest expense 174 347
----- -----
Net interest income 531 528
Provision for credit losses 173 37
----- -----
Net interest income after provision
for credit losses 358 491
NONINTEREST INCOME
Service charges on deposit accounts 57 52
Fiduciary income 44 46
Commercial lending fees 21 14
Letter of credit fees 15 15
Brokerage fees 10 12
Investment advisory revenue, net 9 14
Bank-owned life insurance 18 9
Equity in earnings of unconsolidated subsidiaries 1 3
Warrant income 2 1
Securities gains/(losses) (9) (1)
Other noninterest income 54 47
----- -----
Total noninterest income 222 212
NONINTEREST EXPENSES
Salaries and employee benefits 203 212
Net occupancy expense 31 30
Equipment expense 17 17
Outside processing fee expense 15 14
Customer services 4 11
Restructuring charge - 15
Other noninterest expenses 73 83
----- -----
Total noninterest expenses 343 382
----- -----
Income before income taxes 237 321
Provision for income taxes 76 113
----- -----
NET INCOME $ 161 $ 208
===== =====
Net income applicable to common stock $ 161 $ 205
===== =====
Basic net income per common share $0.92 $1.15
Diluted net income per common share $0.90 $1.13
Cash dividends declared on common stock $ 84 $ 78
Dividends per common share $0.48 $0.44
See notes to consolidated financial statements.
-5-
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30,
--------------------
(in millions, except per share data) 2002 2001
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(As restated-
see Note 13)
INTEREST INCOME
Interest and fees on loans $ 1,279 $ 1,679
Interest on investment securities 125 120
Interest on short-term investments 13 16
------- -------
Total interest income 1,417 1,815
INTEREST EXPENSE
Interest on deposits 244 515
Interest on short-term borrowings 22 64
Interest on medium- and long-term debt 80 196
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Total interest expense 346 775
------- -------
Net interest income 1,071 1,040
Provision for credit losses 248 109
------- -------
Net interest income after provision
for credit losses 823 931
NONINTEREST INCOME
Service charges on deposit accounts 113 102
Fiduciary income 88 91
Commercial lending fees 34 28
Letter of credit fees 29 28
Brokerage fees 20 22
Investment advisory revenue, net 19 4
Bank-owned life insurance 29 16
Equity in earnings of unconsolidated subsidiaries 4 (50)
Warrant income 4 4
Securities gains/(losses) (10) 23
Other noninterest income 100 121
------- -------
Total noninterest income 430 389
NONINTEREST EXPENSES
Salaries and employee benefits 411 426
Net occupancy expense 61 58
Equipment expense 33 37
Outside processing fee expense 30 30
Customer services 15 20
Restructuring charge - 109
Other noninterest expenses 140 159
------- -------
Total noninterest expenses 690 839
------- -------
Income before income taxes 563 481
Provision for income taxes 188 179
------- -------
NET INCOME $ 375 $ 302
======= =======
Net income applicable to common stock $ 375 $ 294
======= =======
Basic net income per common share $ 2.13 $ 1.65
Diluted net income per common share $ 2.10 $ 1.63
Cash dividends declared on common stock $ 168 $ 157
Dividends per common share $ 0.96 $ 0.88
See notes to consolidated financial statements.
-6-
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 $ 301 $ (7) $ 12
Net income - - - - -
Other comprehensive income,
net of tax - - - - 107
Total comprehensive income - - - - -
Cash dividends declared:
Preferred stock - - - - -
Common stock - - - - -
Purchase of 958,200 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 6 39 1 -
Amortization of deferred
compensation - - - - -
--------- -------- -------- ---------- -----------
BALANCE AT JUNE 30, 2001 $ 250 $ 894 $ 340 $ (6) $ 119
========= ======== ======== ========== ===========
BALANCE AT JANUARY 1, 2002 $ - $ 894 $ 345 $ (5) $ 225
Net income - - - - -
Other comprehensive income,
net of tax - - - - 18
Total comprehensive income - - - - -
Cash dividends declared
on common stock - - - - -
Purchase of 3,091,500 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - - 11 5 -
Amortization of deferred
compensation - - - - -
--------- -------- -------- ---------- -----------
BALANCE AT JUNE 30, 2002
(As restated-see Note 13) $ - $ 894 $ 356 $ - $ 243
========= ======== ======== ========== ===========
See notes to consolidated financial statements.
-7-
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(continued)
Comerica Incorporated and Subsidiaries
Total
(in millions, except Retained Deferred Treasury Shareholders'
share data) Earnings Compensation Stock Equity
---------- ------------ --------- ------------
BALANCE AT JANUARY 1, 2001 $ 3,086 $ (14) $ (16) $ 4,500
Net income 302 - - 302
Other comprehensive income,
net of tax - - - 107
------------
Total comprehensive income - - - 409
Cash dividends declared:
Preferred stock (9) - - (9)
Common stock (157) - - (157)
Purchase of 958,200 shares
of common stock - - (53) (53)
Net issuance of common stock
under employee stock plans (11) (9) 23 49
Amortization of deferred
compensation - 12 - 12
---------- ----------- --------- ------------
BALANCE AT JUNE 30, 2001 $ 3,211 $ (11) $ (46) $ 4,751
========== =========== ========= ============
BALANCE AT JANUARY 1, 2002 $ 3,448 $ (9) $ (91) $ 4,807
Net income 375 - - 375
Other comprehensive income,
net of tax - - - 18
------------
Total comprehensive income - - - 393
Cash dividends declared
on common stock (168) - - (168)
Purchase of 3,091,500 shares
of common stock - - (186) (186)
Net issuance of common stock
under employee stock plans (24) (8) 59 43
Amortization of deferred
compensation - 3 - 3
---------- ---------- --------- ------------
BALANCE AT JUNE 30, 2002
(As restated-see Note 13) $ 3,631 $ (14) $ (218) $ 4,892
========== ========== ========= ============
See notes to consolidated financial statements.
-8-
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30,
------------------
(in millions) 2002 2001
------- -------
(As restated-
see Note 13)
OPERATING ACTIVITIES:
Net income $ 375 $ 302
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 248 109
Depreciation 29 33
Net amortization of intangibles 2 17
Merger-related and restructuring charges - 55
(Gain)loss on investment securities available
for sale 10 (23)
Net (increase) decrease in trading
account securities (18) 40
Net decrease in assets held for sale 41 31
Net decrease in accrued income receivable 20 64
Net decrease in accrued expenses (18) (130)
Other, net (294) (20)
------- -------
Total adjustments 20 176
------- -------
Net cash provided by
operating activities 395 478
INVESTING ACTIVITIES:
Net increase in interest-bearing
deposits with banks (35) (29)
Net decrease in federal funds sold
and securities purchased under agreements
to resell 240 1,431
Proceeds from sale of investment securities
available for sale 265 2,231
Proceeds from maturity of investment
securities available for sale 806 612
Purchases of investment securities
available for sale (1,196) (3,099)
Net increase in loans (67) (1,023)
Fixed assets, net (30) (25)
Purchase of bank-owned life insurance (8) (107)
Net increase in customers' liability on
acceptances outstanding (2) (1)
------- -------
Net cash used in
investing activities (27) (10)
FINANCING ACTIVITIES:
Net increase in deposits 619 3,181
Net decrease in short-term borrowings (1,231) (666)
Net increase in acceptances outstanding 2 1
Proceeds from issuance of medium- and
long-term debt 971 225
Repayments and purchases of medium- and
long-term debt (600) (3,222)
Proceeds from issuance of common stock
and other capital transactions 43 49
Purchase of common stock (186) (53)
Dividends paid (163) (150)
------- -------
Net cash used in financing
activities (545) (635)
------- -------
Net decrease in cash and due from banks (177) (167)
Cash and due from banks at beginning of period 1,925 1,931
------- -------
Cash and due from banks at end of period $ 1,748 $ 1,764
======= =======
Interest paid $ 352 $ 852
======= =======
Income taxes paid $ 155 $ 210
======= =======
Noncash investing and financing activities:
Loans transferred to other real estate $ 6 $ 6
======= =======
See notes to consolidated financial statements.
-9-
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 six months
ended June 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
-10-
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.
As discussed in Note 13, certain financial data in this Form 10-Q/A has
been restated. All financial data in this Form 10-Q/A reflects the impact of the
restatement.
NOTE 2 - INVESTMENT SECURITIES
At June 30, 2002, investment securities having a carrying value of $1.8
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 $98 million.
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The following summarizes the changes in the allowance for credit
losses:
SIX MONTHS ENDED
JUNE 30,
-------------------------
(IN MILLIONS) 2002 2001
-------- --------
Balance at beginning of period $ 655 $ 608
Charge-offs (156) (92)
Recoveries 15 20
-------- --------
Net charge-offs (141) (72)
Provision for credit losses 248 109
-------- --------
Balance at end of period $ 762 $ 645
======== ========
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting
by Creditors for Impairment of a Loan," considers a loan impaired when it is
probable that interest and principal payments will not be made in accordance
with the contractual terms of the loan agreements. Consistent with this
definition, all nonaccrual and reduced-rate loans (with the exception of
residential mortgage and consumer loans) are impaired. Impaired loans include $9
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
$632 million and $643 million for the quarter and six months ended June 30,
2002, respectively, compared to $471 million and $439 million for the comparable
periods last year. The following presents information regarding the period-end
balances of impaired loans:
(IN MILLIONS) JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Total period-end impaired loans $629 $674
Less: Loans returned to accrual status
during the period 9 62
---- ----
Total period-end nonaccrual business loans $620 $612
Impaired loans requiring an allowance $597 $562
Allowance allocated to impaired loans $209 $228
Those impaired loans not requiring an allowance represent loans for
which the fair value exceeded the recorded investment in the loan.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
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 will again be evaluated for impairment as of July 1, 2002. A
majority of the Corporation's goodwill is assigned to the Corporation's
investment advisory reporting unit (Munder), and equity markets (which declined
significantly in the first half of 2002) impact the valuation of this unit.
THREE MONTHS ENDED
(IN MILLIONS, JUNE 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 161 $ 205
Add back: Goodwill amortization, net of tax -- 7
------- --------
Adjusted net income applicable to common stock $ 161 $ 212
======= ========
Basic net income per common share
Reported net income applicable to
common stock $ 0.92 $ 1.15
Goodwill amortization, net of tax -- 0.04
------- --------
Adjusted net income applicable to
common stock $ 0.92 $ 1.19
======= ========
Diluted net income per common share
Reported net income applicable to
common stock $ 0.90 $ 1.13
Goodwill amortization, net of tax -- 0.04
------- --------
Adjusted net income applicable to
common stock $ 0.90 $ 1.17
======= ========
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(CONTINUED)
SIX MONTHS ENDED
(IN MILLIONS, JUNE 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 375 $ 294
Add back: Goodwill amortization, net of tax -- 14
------- -------
Adjusted net income applicable to common stock $ 375 $ 308
======= =======
Basic net income per common share
Reported net income applicable to
common stock $ 2.13 $ 1.65
Goodwill amortization, net of tax -- 0.08
------- -------
Adjusted net income applicable to
common stock $ 2.13 $ 1.73
======= =======
Diluted net income per common share
Reported net income applicable to
common stock $ 2.10 $ 1.63
Goodwill amortization, net of tax -- 0.08
------- -------
Adjusted net income applicable to
common stock $ 2.10 $ 1.71
======= =======
The carrying amount of goodwill at June 30, 2002 was $333 million and
was allocated to the Corporation's business segments as follows:
(in millions)
Business Bank $ 90
Individual Bank 54
Investment Bank 189
----
Total $333
====
There were no changes in the carrying amount of goodwill during the six
months ended June 30, 2002.
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 5 - ACQUIRED INTANGIBLE ASSETS
(IN MILLIONS) JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001
---------------------- ---------------------- ----------------------
GROSS GROSS GROSS
AMORTIZED INTANGIBLE CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------ ---------------------- ---------------------- ----------------------
Core deposit intangibles $28 $24 $27 $22 $27 $21
Other 6 5 6 5 6 5
---------------------- ---------------------- ----------------------
Total $34 $29 $33 $27 $33 $26
====================== ====================== ======================
Aggregate amortization expense for the:
Three months ended June 30, 2002 $ 1
=====
Six months ended June 30, 2002 $ 2
=====
Year ended December 31, 2001 $ 3
=====
Three months ended June 30, 2001 $ 1
=====
Six months ended June 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 -
-15-
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 June 30, 2002
and December 31, 2001:
(DOLLAR AMOUNTS IN MILLIONS) JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Parent Company
7.25% subordinated notes due 2007 $ 167 $ 157
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 220 216
8.375% subordinated notes due 2024 189 187
7.25% subordinated notes due 2002 152 155
6.875% subordinated notes due 2008 110 108
7.125% subordinated notes due 2013 167 168
7.875% subordinated notes due 2026 185 179
6.00% subordinated notes due 2008 265 256
7.65% subordinated notes due 2010 272 268
8.50% subordinated notes due 2009 105 102
------ ------
Total subordinated notes 1,665 1,639
Medium-term notes:
Floating rate based on LIBOR indices 2,725 2,356
Variable rate secured debt financings
due 2007 967 956
9.98% trust preferred securities due 2026 56 56
7.60% trust preferred securities due 2050 341 339
------ ------
Total subsidiaries 5,754 5,346
------ ------
Total medium- and long-term debt $5,921 $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 by risk management interest
rate swaps that qualify as fair value hedges.
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 six months ended June 30, 2001 was affected by adjustments in
the first
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 7 - INCOME TAXES (CONTINUED)
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 six months ended June 30, 2002 and 2001. Total
comprehensive income totaled $390 million and $409 million, for the six months
ended June 30, 2002 and 2001, respectively, and $259 million and $200 million
for the three months ended June 30, 2002 and 2001, respectively.
SIX MONTHS ENDED
JUNE 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 53 21
Less: Reclassification adjustment for
gains/(losses) included in net income (10) 23
---- ----
Change in net unrealized gains/(losses)
before income taxes 63 (2)
Less: Provision for income taxes 22 (1)
---- ----
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax 41 (1)
---- ----
Balance at end of period $ 57 $ 7
---- ----
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
SIX MONTHS ENDED
JUNE 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 $ 210 $ --
Transition adjustment upon adoption
of accounting standard -- 65
Net cash flow hedge gains/(losses)
arising during the period 163 144
Less: Reclassification adjustment for
gains/(losses) included in net income 189 36
----- -----
Change in cash flow hedges before
income taxes (26) 173
Less: Provision for income taxes (9) 61
----- -----
Change in cash flow hedges, net of tax (17) 112
----- -----
Balance at end of period $ 193 $ 112
----- -----
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 $ 243 $ 119
===== =====
-18-
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.
2001 Imperial Bancorp Restructuring
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.
2001 OPAY Restructuring
The OPAY restructuring charge included employee termination costs which
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 9 - MERGER-RELATED AND RESTRUCTURING CHARGES (CONTINUED)
covered the cost of severance, outplacement and other benefits associated with
the involuntary termination of employees, primarily in corporate support and
product development areas. A total of 44 employees are expected to be severed as
part of the restructuring plan, 33 of which occurred during 2001 with the
remainder expected to be severed in the third quarter of 2002. The charge also
included facilities and operations charges associated with asset write-downs and
lease terminations for excess facilities and equipment disposed of as part of
the restructuring effort. The OPAY restructuring is expected to result in a
decrease in OPAY's annual operating expenses of $9 million, beginning in 2002.
The remaining liability related to the Imperial and OPAY
charges is shown in the table below. No additional Imperial or OPAY related
restructuring charges are expected.
(IN MILLIONS) IMPERIAL OPAY TOTAL
-------- ------- -------
Balance at December 31, 2001 $ 8 $ 2 $ 10
Cash outlays (7) - (7)
-------- ------- -------
Balance at June 30, 2002 $ 1 $ 2 $ 3
======== ======= =======
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
JUNE 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 $12,765 $546 $ (2) $ 544 $14,497 $573 $ (2) $ 571
Foreign exchange contracts:
Spot, forward and options 444 26 (3) 23 535 10 (4) 6
Swaps 262 6 (7) (1) 285 2 (17) (15)
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 706 32 (10) 22 820 12 (21) (9)
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 13,471 578 (12) 566 15,317 585 (23) 562
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 342 - (3) (3) 365 - (4) (4)
Caps and floors purchased 328 3 - 3 352 4 - 4
Swaps 1,068 17 (16) 1 981 14 (13) 1
------- ---- ----- ----- ------- ---- ----- -----
Total interest rate
contracts 1,738 20 (19) 1 1,698 18 (17) 1
------- ---- ----- ----- ------- ---- ----- -----
Foreign exchange contracts:
Spot, forward and options 1,959 40 (44) (4) 2,323 35 (29) 6
Swaps 303 2 (5) (3) 366 2 (1) 1
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 2,262 42 (49) (7) 2,689 37 (30) 7
------- ---- ----- ----- ------- ---- ----- -----
Total customer-initiated
and other 4,000 62 (68) (6) 4,387 55 (47) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $17,471 $640 $ (80) $ 560 $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.
-21-
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 of 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
-22-
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 June 30, 2002. During the three and six month periods ended June
30, 2002, interest rate swap agreements designated as cash flow hedges increased
interest and fees on loans by $88 and $189 million, respectively, compared to
$33 and $36 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 second quarter of 2002. If interest
rates and interest curves remain at their current levels, the Corporation
expects to reclassify $181 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 June
30, 2002. The swaps are grouped by the assets or liabilities to which they have
been designated.
-23-
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 JUNE 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 $ 56 $4,750 $2,000 $1,700 $ 500 $ - $ 9,006 $11,069
Weighted average: (1)
Receive rate 2.87% 8.31% 7.57% 7.46% 5.83% -% 7.49% 7.68%
Pay rate 2.15% 3.79% 4.75% 4.75% 1.95% -% 3.96% 4.07%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 4 $ 7 $ - $ - $ - $ - $ 11 $ 34
Amortizing 1 - - - - - 1 1
Weighted average: (2)
Receive rate 2.12% 3.56% -% -% -% -% 2.98% 2.22%
Pay rate 3.07% 2.88% -% -% -% -% 2.97% 2.56%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ 630 $1,467 $ - $ - $ - $ - $ 2,097 $ 1,743
Weighted average: (1)
Receive rate 4.00% 4.22% -% -% -% -% 4.15% 4.87%
Pay rate 1.84% 3.58% -% -% -% -% 3.06% 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% -% -% 1.90% -% 2.11% 2.09% 2.66%
Total notional amount $ 841 $6,224 $2,000 $1,950 $ 500 $ 1,250 $12,765 $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 June 30, 2002. Variable rates received on pay fixed swaps are based on
prime at June 30, 2002.
(2) Variable rates received are based on one-month CDOR rates in effect at June
30, 2002.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
Commitments to purchase and sell investment securities for the
Corporation's trading account and available for sale portfolio totaled $456
million and $92 million, respectively, at June 30, 2002, and $67 million and $10
million, respectively, 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 six-month
periods ended June 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 six months ended June 30, 2002.
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 2,339 8,529 241 24,186
Maturities/amortizations (4,071) (8,643) (201) (24,613)
-------- -------- -------- --------
Balance at June 30, 2002 $ 12,765 $ 706 $ 1,738 $ 2,262
======== ======== ======== ========
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
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 six months ended June 30, 2002 and 2001 are presented
below.
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 11 - BUSINESS SEGMENT INFORMATION (CONTINUED)
Six Months Ended June 30,
(DOLLAR AMOUNTS IN BUSINESS INDIVIDUAL INVESTMENT
MILLIONS) BANK BANK BANK*
------------------------------------------------------
2002 2001 2002 2001 2002 2001**
------------------------------------------------------
Average assets $ 35,081 $35,815 $ 8,389 $7,780 $ 301 $ 409
Total revenues (FTE) 891 811 537 536 93 21
Net income (loss) 245 261 140 139 1 (55)
Return on average
assets 1.40% 1.46% 1.42% 1.45% 0.79% (25.16)%
Return on average
common equity 16.17% 20.17% 28.51% 30.85% 1.25% (39.70)%
FINANCE OTHER TOTAL
-----------------------------------------------------
2002 2001 2002 2001 2002 2001
-----------------------------------------------------
Average assets $ 4,691 $3,916 $ 1,846 $ 1,439 $50,308 $49,359
Total revenues (FTE) (24) 55 4 6 1,501 1,429
Net income (loss) (17) 29 6 (72) 375 302
Return on average
assets (0.19)% 0.36% N/M N/M 1.49% 1.22%
Return on average
common equity (3.84)% 9.19% N/M N/M 15.45% 13.20%
N/M - Not Meaningful
* Net income was reduced by charges for fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net income/(loss) would have been $8 million and ($49)
million, and return on average common equity would have been 7.56% and
(35.44)%, in 2002 and 2001, respectively.
** Net income in 2001 was reduced by a $26 million pre-tax deferred
distribution costs impairment charge and a $53 million pre-tax charge
related to long-term incentive plans at an unconsolidated subsidiary.
Excluding these charges, Investment Bank total revenues (FTE) and net loss
in 2001 would have been $94 million and ($6) million, respectively, while
return on average assets and return on common equity would have been
(2.54)% and (4.01)%, respectively.
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.
NOTE 12 - SUBSEQUENT EVENTS
On July 24, 2002, the Corporation sold its interest in its OPAY
subsidiary for $36 million, which will result in a pre-tax gain of approximately
$11 million in the third quarter 2002.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
The Corporation announced on August 6, 2002 that it will adopt, in the
third quarter of 2002, the fair value method of accounting for stock options, as
outlined in Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation". Accounting rules covering adoption of the fair value
method require application only to current year grants, substantially all of
which were in the second quarter 2002. Adoption of the fair value method is
expected to reduce 2002 quarterly net income and diluted earnings per share by
approximately $4 million (after-tax) and $0.02, respectively, beginning in the
second quarter of 2002. The full year 2002 financial impact on net income and
diluted earnings per share is estimated to be $11 million (after-tax) and $0.06,
respectively. When fully transitioned in 2006, the estimated diluted earnings
per share impact will be approximately $0.20, assuming the grants in future
years will have a similar size and value.
NOTE 13 - RESTATEMENT OF PREVIOUSLY REPORTED RESULTS OF OPERATIONS
The Corporation restated earnings to reflect additional provision for credit
losses of $40 million ($26 million after-tax) and $22 million of additional net
charge-offs. Including the related effect of lower incentive compensation of $5
million ($3 million after-tax), second quarter 2002 earnings are reduced to $161
million, or $0.90 per diluted share, compared to previously reported earnings of
$184 million, or $1.03 per diluted share. This incremental provision followed a
regularly scheduled examination by the Federal Reserve Bank of San Francisco and
the California Department of Financial Institutions of the Comerica
Bank-California subsidiary. After discussions with the regulators in late August
through late September 2002, the Corporation determined that the California
subsidiary's second quarter 2002 credit loss reserves should be increased. These
additional net charge-offs relate to 11 loans in the Corporation's entertainment
division, 5 loans in the commercial middle market area and one over-draft
relating to a commercial middle market loan.
The components of the incremental provision were (in millions):
Provision, net of specific reserves, to cover $22 million in
additional charge-offs relating to 15 non-accruing loans, 1
substandard accruing loan and 1 overdraft $ 6
Additional reserve amounts on approximately 50 loans in the
California subsidiary's portfolio with various risk ratings,
but primarily watch list in nature 20
An increase of the unallocated reserve for performing loans 14
-----
Total incremental provision $ 40
=====
The Corporation has a longstanding policy of taking charge-offs as soon as a
loan is considered partially or fully uncollectible based on careful evaluation
of a number of risk factors. The Corporation applied this policy in good faith
in its initial determination of the level of charge-offs it would take in the
second quarter of 2002. The precise timing of when to take a charge-off,
however, involves some element of judgment as to the potential collectibility of
the loan in question. On further review in the course of the regulatory
examination process, the Corporation subsequently concluded that the 16 loans
and one over-draft referenced above should properly be reflected as second
quarter (as opposed to third quarter) charge-offs. Similarly, loan
classifications involve a degree of judgment between the various levels of
classification. The Corporation has a comprehensive program for reviewing loan
classifications throughout its portfolio of approximately 11,000 commercial
loans on a regular ongoing basis. The reclassification of approximately 50 loans
in the second quarter reflects the further review and adjustment of the credit
risk associated with the Corporation's California portfolio which the
Corporation implemented following the input it received in the course of the
above-referenced regulatory examination. Similarly, the increase in the
unallocated reserve reflects an additional weighting of risk based on the
general characteristics of the California loan portfolio which stems in large
part from the general migration of loans to higher risk categories and the
corresponding impact on the assessment of the overall character of the
portfolio. The Corporation uses quantitative metrics and qualitative factors to
validate its loan loss reserves and allowances for credit risks, including loan
categories, industry, economic factors and trends, transfer risks, risks
associated with new customers, historical loss ratios, industry norms and
expectations from banking regulators. As part of its on-going evaluation of its
allowance for credit loss methodology, including following the recent regulatory
examination, the Corporation has refined the factors which comprise the
allocated and unallocated portions of its allowances and examined its credit
quality processes to help ensure timely and appropriate charge-offs and risk
analyses, ratings and profiles. The Corporation has recently increased the
amount of senior staff supporting its credit process, is improving the
documentation and technology tools used as part of the credit process, and has
increased its focus on factors particular to the California market.
The table below provides a reconcilement reflecting adjustments, net of tax, of
net income and earnings per share for the three and six month periods ended June
30, 2002. Accordingly, capital has been adjusted for the adjustment to net
income. The table also indicates the additional charge-offs during the period
and selected pertinent balances, both as reported and as restated.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 13 - RESTATEMENT OF PREVIOUSLY REPORTED RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
(IN MILLIONS, JUNE 30, JUNE 30,
EXCEPT PER SHARE DATA) 2002 2002
---- ----
Net income, as reported $ 184 $ 398
Increase to the provision for
credit losses, net of tax (26) (26)
Reduction in salaries and benefits,
net of tax 3 3
----- -----
Net income, as restated $ 161 $ 375
===== =====
Earnings per share - basic
As reported $1.05 $2.26
As restated $0.92 $2.13
Earnings per share - diluted
As reported $1.03 $2.23
As restated $0.90 $2.10
Loan charge-offs, net of recoveries
As reported $ 59 $ 119
As restated $ 81 $ 141
AT JUNE 30,
(IN MILLIONS) 2002
----
Total loans
As reported $41,174
As restated $41,152
Allowance for credit losses
As reported $ 744
As restated $ 762
Net loans
As reported $40,430
As restated $40,390
Liabilities
As reported $45,687
As restated $45,670
Shareholders' equity
As reported $ 4,915
As restated $ 4,892
-29-
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Restatement of Operating Results
The Corporation restated earnings to reflect additional provision for credit
losses of $40 million ($26 million after-tax) and $22 million of additional net
charge-offs. Including the related effect of lower incentive compensation of $5
million ($3 million after-tax), second quarter 2002 earnings are reduced to $161
million, or $0.90 per diluted share, compared to previously reported earnings of
$184 million, or $1.03 per diluted share. This incremental provision followed a
regularly scheduled examination by the Federal Reserve Bank of San Francisco and
the California Department of Financial Institutions of the Comerica
Bank-California subsidiary. After discussions with the regulators in late August
through late September 2002, the Corporation determined that the California
subsidiary's second quarter 2002 credit loss reserves should be increased. These
additional net charge-offs relate to 11 loans in the Corporation's entertainment
division, 5 loans in the commercial middle market area and one over-draft
relating to a commercial middle market loan.
The components of the incremental provision were (in millions):
Provision, net of specific reserves, to cover $22 million in
additional charge-offs relating to 15 non-accruing loans, 1
substandard accruing loan and 1 overdraft $ 6
Additional reserve amounts on approximately 50 loans in the
California subsidiary's portfolio with various risk ratings,
but primarily watch list in nature 20
An increase of the unallocated reserve for performing loans 14
-----
Total incremental provision $ 40
=====
The Corporation has a longstanding policy of taking charge-offs as soon as a
loan is considered partially or fully uncollectible based on careful evaluation
of a number of risk factors. The Corporation applied this policy in good faith
in its initial determination of the level of charge-offs it would take in the
second quarter of 2002. The precise timing of when to take a charge-off,
however, involves some element of judgment as to the potential collectibility of
the loan in question. On further review in the course of the regulatory
examination process, the Corporation subsequently concluded that the 16 loans
and one over-draft referenced above should properly be reflected as second
quarter (as opposed to third quarter) charge-offs. Similarly, loan
classifications involve a degree of judgment between the various levels of
classification. The Corporation has a comprehensive program for reviewing loan
classifications throughout its portfolio of approximately 11,000 commercial
loans on a regular ongoing basis. The reclassification of approximately 50 loans
in the second quarter reflects the further review and adjustment of the credit
risk associated with the Corporation's California portfolio which the
Corporation implemented following the input it received in the course of the
above-referenced regulatory examination. Similarly, the increase in the
unallocated reserve reflects an additional weighting of risk based on the
general characteristics of the California loan portfolio which stems in large
part from the general migration of loans to higher risk categories and the
corresponding impact on the assessment of the overall character of the
portfolio. The Corporation uses quantitative metrics and qualitative factors to
validate its loan loss reserves and allowances for credit risks, including loan
categories, industry, economic factors and trends, transfer risks, risks
associated with new customers, historical loss ratios, industry norms and
expectations from banking regulators. As part of its on-going evaluation of its
allowance for credit loss methodology, including following the recent regulatory
examination, the Corporation has refined the factors which comprise the
allocated and unallocated portions of its allowances and examined its credit
quality processes to help ensure timely and appropriate charge-offs and risk
analyses, ratings and profiles. The Corporation has recently increased the
amount of senior staff supporting its credit process, is improving the
documentation and technology tools used as part of the credit process, and has
increased its focus on factors particular to the California market.
Results of Operations
Net income for the quarter ended June 30, 2002, was $161 million, down
$47 million, or 23 percent, from $208 million reported for the second quarter of
2001. Quarterly diluted net income per share decreased to $0.90 from $1.13 a
year ago. Return on average common shareholders' equity was 13.11 percent and
return on average assets was 1.26 percent, compared to 18.21 percent and 1.69
percent, respectively, for the comparable quarter last year. Included in second
quarter 2002 earnings is an incremental charge of $55 million ($36 million
after-tax, or $0.20 per diluted share) related to the Corporation's Argentine
exposure. Of this charge, $45 million was recorded as provision for credit
losses, with the remainder recorded as a write-down of securities. Excluding
this charge, net income was $197 million in the second quarter, or $1.10 per
diluted share, while return on average common equity and return on average
assets were 16.05 percent and 1.55 percent, respectively. Excluding Imperial
restructuring charges in the second quarter of 2001, net income was $216
million, or $1.18 per diluted share. Return on average common equity and return
on average assets for the quarter ended June 30, 2001, excluding these charges,
were 18.94 percent and 1.75 percent, respectively.
-30-
Net income for the first six months of 2002 was $2.10 per diluted
share, or $375 million, compared to $1.63 per diluted share, or $302 million,
for the same period in 2001, increases of 29 percent and 24 percent,
respectively. Return on average common shareholders' equity was 15.45 percent
and return on average assets was 1.49 percent for the first six months of 2002,
compared to 13.20 percent and 1.22 percent, respectively, for the first six
months of 2001. Excluding the effects of the Argentine charge, net income for
the six months ended June 30, 2002 was $411 million, or $2.30 per diluted share,
while return on average common equity and return on average assets were 16.94
percent and 1.63 percent, respectively. Excluding the Imperial restructuring
charges and the effect of a one-time charge related to long-term incentive plans
at an unconsolidated subsidiary in the first half of 2001, net income was $2.39
per diluted share, or $439 million. Excluding these charges, Comerica's return
on average common equity was 19.39 percent and return on average assets was 1.78
percent, for the first six months of 2001.
Net Interest Income
The rate-volume analysis in Table I details the components of the
change in net interest income on a fully taxable equivalent (FTE) basis for the
quarter ended June 30, 2002. On a FTE basis, net interest income increased to
$532 million for the three months ended June 30, 2002, from $529 million for the
comparable quarter in 2001. Average earnings assets increased three percent when
compared to the second quarter of last year, while the net interest margin
decreased to 4.56 percent for the three months ended June 30, 2002, from 4.65
percent for the comparable three months of 2001. Four basis points of this
margin decline was related to nonaccrual loans.
Table II provides an analysis of net interest income for the first six
months of 2002. On a FTE basis, net interest income for the six months ended
-31-
June 30, 2002, was $1,073 million compared to $1,042 million for the same period
in 2001. The net interest margin for the first six months ended June 30, 2002,
increased to 4.66 percent, from 4.60 percent for the same period in 2001. The
margin increased, despite a three basis point decline related to nonaccrual
loans, and reflects a favorable interest rate environment and the impact of the
Corporation's interest rate risk management efforts. Also contributing to the
increase in margin was strong growth in average noninterest-bearing deposits, up
nine percent when compared to the first six months of 2001. This increase is
primarily attributed to strong growth in title and escrow deposits in the
California-based Financial Services business.
-32-
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
THREE MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
---------------------------- ------------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Loans $42,037 $634 6.05% $41,751 $815 7.82%
Investment securities (1) 4,419 65 5.91 3,490 55 6.41
Short-term investments 446 7 5.74 299 6 6.71
-------------------------------------------------------------
Total earning assets 46,902 706 6.04 45,540 876 7.71
Interest-bearing deposits 25,874 122 1.88 25,008 243 3.91
Short-term borrowings 2,319 11 1.96 2,213 25 4.41
Medium- and long-term debt 6,249 41 2.59 6,449 79 4.94
-------------------------------------------------------------
Total interest-bearing
sources $34,442 174 2.01 $33,670 347 4.14
--------------- ---------------
Net interest income/
rate spread (FTE) $532 4.03 $529 3.57
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net interest-free
sources of funds 0.53 1.08
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.56% 4.65%
===== =====
(1) The average rate for investment securities was computed using average
historical cost.
THREE MONTHS ENDED
JUNE 30, 2002/JUNE 30, 2001
-------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(184) $ 3 $(181)
Investment securities (4) 14 10
Short-term investments (2) 3 1
---------------------------------
Total earning assets (190) 20 (170)
Interest-bearing deposits (120) (1) (121)
Short-term borrowings (14) - (14)
Medium- and long-term debt (37) (1) (38)
---------------------------------
Total interest-bearing sources (171) (2) (173)
---------------------------------
Net interest income/rate spread (FTE) $ (19) $ 22 $ 3
=================================
* Rate/Volume variances are allocated to variances due to volume.
-33-
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
---------------------------- ------------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Loans $41,641 $1,280 6.20% $41,427 $1,680 8.18%
Investment securities (1) 4,309 126 5.90 3,685 121 6.59
Short-term investments 454 13 5.68 465 16 6.73
-------------------------------------------------------------
Total earning assets 46,404 1,419 6.16 45,577 1,817 8.03
Interest-bearing deposits 25,514 244 1.92 24,590 515 4.23
Short-term borrowings 2,414 22 1.91 2,392 64 5.37
Medium- and long-term debt 5,987 80 2.66 7,085 196 5.59
-------------------------------------------------------------
Total interest-bearing
sources $33,915 346 2.05 $34,067 775 4.59
----------------- -----------------
Net interest income/
rate spread (FTE) $1,073 4.11 $1,042 3.44
====== ======
FTE adjustment $ 2 $ 2
====== ======
Impact of net interest-free
sources of funds 0.55 1.16
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.66% 4.60%
===== =====
(1) The average rate for investment securities was computed using average
historical cost.
SIX MONTHS ENDED
JUNE 30, 2002/JUNE 30, 2001
-------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(402) $ 2 $(400)
Investment securities (13) 18 5
Short-term investments (6) 3 (3)
-----------------------------------
Total earning assets (421) 23 (398)
Interest-bearing deposits (270) (1) (271)
Short-term borrowings (42) - (42)
Medium- and long-term debt (102) (14) (116)
-----------------------------------
Total interest-bearing sources (414) (15) (429)
-----------------------------------
Net interest income/rate spread (FTE) $ (7) $ 38 $ 31
===================================
* Rate/Volume variances are allocated to variances due to volume.
-34-
Provision for Credit Losses
The provision for credit losses was $173 million for the second quarter
of 2002, compared to $37 million for the same period in 2001. The provision for
the first six months of 2002 was $248 million compared to $109 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." Included in the second
quarter 2002 provision is $45 million to increase reserves recorded in response
to a U.S. bank regulatory directive related to Argentina. Included in the
provision for the first six months of 2001 is a $25 million merger-related
charge to conform the credit policies of Imperial with Comerica.
Noninterest Income
Noninterest income was $222 million for the three months ended June 30,
2002, an increase of $10 million, or five percent, over the same period in 2001.
Included in second quarter 2002 noninterest income is a loss on securities of
$10 million related to the write-down of Argentine securities. The Corporation
also recognized an incremental $9 million of non-taxable proceeds from
bank-owned life insurance policies in the second quarter of 2002 from the death
of an executive. Excluding the effects of the large unusual items noted above,
other gains and losses on securities, warrant income and divestitures,
noninterest income increased $10 million, or five percent, over the same period
last year. Non-investment market-related fees, consisting of service charges,
commercial lending fees and letter of credit fees, increased $12 million, or 14
percent, on a combined basis when compared with the second quarter of 2001.
Investment advisory revenue from the Corporation's Munder subsidiary decreased
$5 million from the comparable quarter last year. This decrease was a result of
the decline in equity markets, particularly technology-related stocks, from the
second quarter of last year.
-35-
For the first six months of 2002, noninterest income was $430 million,
an increase of $41 million, or 10 percent, from the first six months of 2001.
Noninterest income in the first half of 2001 was reduced by a $26 million
deferred distribution costs impairment charge and a one-time $57 million charge
related to long-term incentive plans at an unconsolidated subsidiary.
Noninterest income in the first six 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 large unusual
items noted above, gains and losses on securities, warrant income and
divestitures, noninterest income in the first half of 2002 decreased $4 million,
or one percent, over the same period in 2001.
The Corporation's deferred distribution cost asset associated with B
share mutual fund sales was $28 million at June 30, 2002. Given net asset values
at June 30, 2002, it would take a decline of approximately 13 percent in the
assets under management at Munder associated with those costs to trigger further
impairment, which at that level would be approximately $4 million. Each
additional five percent decline results in a further impairment of $1 million.
Declines in the equity market subsequent to June 30, 2002 have approached levels
which could require an impairment charge in the third quarter of 2002 if those
equity values still exist at September 30, 2002.
Noninterest Expenses
Noninterest expenses were $343 million for the quarter ended June 30,
2002, a decrease of $39 million, or 10 percent, from the comparable quarter in
2001. Noninterest expenses in the second quarter of 2001 included merger-related
and restructuring costs related to the Imperial Bancorp acquisition of $15
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
-36-
the impact of divestitures, noninterest expenses in the second quarter of 2002
decreased by $14 million, or four percent, over the same period in 2001.
Contributing to this decline was savings in salaries and benefits of $9 million,
primarily from reduced revenue-related incentives.
For the six months ended June 30, 2002, noninterest expenses were $690
million, a decrease of $149 million, or 18 percent, from the comparable period
of 2001. Included in the first six months of 2001 were restructuring charges of
$109 million and $5 million of minority interest 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 six months of
2001 was $16 million in goodwill amortization. Excluding these items and the
impact of divestitures, noninterest expenses in the first half of 2002 decreased
by $22 million, or three percent, over the same period in 2001. This decrease is
primarily attributed to the same factors cited in the quarterly discussion with
savings in salaries and benefits of $14 million.
Provision for Income Taxes
The provision for income taxes for the second quarter of 2002 totaled
$76 million, compared to $113 million reported for the same period a year ago.
The effective tax rate was 32 percent for the second quarter of 2002, compared
to 35 percent for the same quarter of 2001. The provision for the first six
months of 2002 was $188 million compared to $179 million for the same period of
2001. The effective tax rate was 33 percent for the first six months of 2002 and
37 percent for the first six months of 2001. The effective tax rate in the first
six months of 2002 was impacted by increased non-taxable revenue on bank-owned
life insurance policies. The effective tax rate in the first six months of 2001
was affected by adjustments in the first quarter to Imperial's tax liabilities
at 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.
-37-
Financial Condition
Total assets were $50.6 billion at June 30, 2002, compared with $50.7
billion at year-end 2001 and $49.3 billion at June 30, 2001. The Corporation has
experienced a decline (less than one percent) in total loans since December 31,
2001. Management believes that this decline reflects the cautiousness of
borrowers in an uncertain economy.
Total liabilities decreased $255 million, or one percent, since
December 31, 2001, to $45.7 billion. Total deposits increased two percent to
$38.2 billion at June 30, 2002, from $37.6 billion at year-end 2001 due to
growth in noninterest-bearing deposits. Medium- and long-term debt increased
$418 million to $5.9 billion at June 30, 2002. These increases were offset in
short-term borrowings, which decreased $1.2 billion since December 31, 2001, to
$755 million at June 30, 2002.
The international portfolio contains both the risk that the customer
cannot repay and that the customer cannot obtain U.S. dollars to service their
debt. Due to this transfer risk, bank holding companies must report cross-border
outstandings in regulatory filings. Active risk management practices can
minimize risk inherent in lending arrangements, including securing repayment
from sources external to the borrower's country. While these practices have
proven to be effective, bank regulatory filings and regulatory directives on
transfer risk reserves exclude the risk minimizing effects of these practices.
While evaluating the Argentine transfer risk in the second quarter of 2002, the
Corporation elected to include bank regulatory defined cross-border risks in all
international cross-border risk disclosures. International cross-border risk at
December 31, 2001 for countries representing risk exceeding 1.00 percent of
total assets is noted in the table below. There were no countries with risk
between 0.75 percent and 1.00 percent of total assets.
-38-
INTERNATIONAL CROSS-BORDER RISK
OUTSTANDINGS
--------------------------------------------------------------
GOVERNMENTS BANKS AND COMMERCIAL AFTER RISK
AND OFFICIAL OTHER FINANCIAL AND MITIGATING
(IN MILLIONS) INSTITUTIONS INSTITUTIONS INDUSTRIAL TOTAL PRACTICES
---------------------------------------------------------------------------------
Mexico
June 30, 2002 $17 $ 9 $1,230 $1,256 $940
December 31, 2001 17 25 1,207 1,249 858
December 31, 2000 11 40 1,032 1,083 626
December 31, 1999 5 69 1,149 1,223 591
Brazil
June 30, 2002 $37 $307 $ 239 $ 583 $427
December 31, 2001 31 322 236 589 443
TOTAL EXPOSURE (INCLUDING UNFUNDED COMMITMENTS AND LETTERS OF CREDIT)
AFTER RISK
MITIGATING
(IN MILLIONS) TOTAL PRACTICES
---------------------------------------------------------------------------------
Mexico
June 30, 2002 $1,333 $1,017
December 31, 2001 1,329 938
Brazil
June 30, 2002 $ 686 $ 530
December 31, 2001 712 566
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
-39-
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 $621 million at
June 30, 2002, an increase of $75 million from year-end 2001. This increase was
primarily attributable to the $45 million of reserves provided during the second
quarter of 2002 in response to a U.S. bank regulatory directive related to the
Corporation's Argentine exposure and an increase in allocation to business
loans, which were not individually evaluated for impairment at June 30, 2002.
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,
high technology and energy industries, as well as Latin American transfer risks
and the risk associated with new customer relationships. The unallocated
allowance was $141 million at June 30, 2002, an increase of $32 million from
-40-
December 31, 2001.
The Corporation is closely monitoring its Argentine exposure as a
result of recent political and economic events in that country. The total
Argentine exposure at June 30, 2002, was $115 million and consisted of $90
million of loans, $16 million of securities and $9 million of unfunded
commitments. This represents a decrease of $104 million from total Argentine
exposure of $219 million at December 31, 2001. At June 30, 2002, the Corporation
had $24 million of loans and $4 million in securities related to Argentina that
were reported in nonperforming assets.
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 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.
At June 30, 2002, the allowance for credit losses was $762 million, an
increase of $107 million since December 31, 2001. The allowance as a percentage
of total loans was 1.85 percent, compared to 1.59 percent at December 31, 2001.
As a percentage of nonperforming assets, the allowance was 119 percent at June
30, 2002, versus 105 percent at year-end 2001.
Net charge-offs for the second quarter of 2002 were $81 million, or
0.78 percent of average total loans, compared with $37 million, or 0.35 percent,
for
-41-
the second quarter of 2001. Nonperforming assets increased $11 million, or two
percent, since December 31, 2001, and were categorized as follows:
JUNE 30, DECEMBER 31,
(IN MILLIONS) 2002 2001
------------ ------------
Nonaccrual loans:
Commercial $467 $467
International 118 109
Real estate construction 18 10
Commercial mortgage 14 18
Residential mortgage - -
Consumer 3 5
Lease financing 3 8
---- ----
Total nonaccrual loans 623 617
Reduced-rate loans -- --
---- ----
Total nonperforming loans 623 617
Other real estate 11 10
Nonaccrual debt securities 4 --
---- ----
Total nonperforming assets $638 $627
==== ====
Loans past due 90 days or more $ 66 $ 44
==== ====
Loans to customers in the entertainment industry comprised 10 percent
of nonperforming loans at June 30, 2002, and was the only industry
classification comprising more than 10 percent of nonperforming loans. Five
credits in excess of $10 million were added to nonperforming loans during the
second quarter 2002, the largest of which was an automotive industry loan
totaling $16 million. Approximately 34 percent of total nonperforming loans at
June 30, 2002 were Shared National Credit Program (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 June 30, 2002. Nonperforming assets
as a percentage of total loans and other real estate were 1.55 percent at June
30, 2002 and 1.52 percent at December 31, 2001.
-42-
Capital
Common shareholders' equity increased $67 million from December 31,
2001 to June 30, 2002, excluding other comprehensive income. The increase was
primarily due to the retention of $207 million of current year earnings. The
effect of employee stock plan activity, which increased common shareholders'
equity $43 million, partially offset the decrease in equity of $186 million that
resulted from repurchasing approximately 3.1 million shares of common stock
during the first six months of 2002.
Capital ratios exceed minimum regulatory requirements as follows:
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Tier 1 common capital ratio 7.46% 7.30%
Tier 1 risk-based capital ratio (4.00% - minimum) 8.14 7.98
Total risk-based capital ratio (8.00% - minimum) 11.93 11.70
Leverage ratio (3.00% - minimum) 9.40 9.36
At June 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.
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
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.
-43-
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. Interest rate swaps permit management to manage the
sensitivity of net interest income to fluctuations in interest rates in a manner
similar to investment securities, but without significant impact to capital or
liquidity. 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 June 30, 2002 for a 200 basis point
decline in short-term interest rates identified approximately $42 million, or
two percent, of forecasted net interest income at risk over the next 12 months.
If short-term interest rates rise 200 basis points, forecasted net interest
income would be unaffected by this change.
Secondarily, the Corporation utilizes a traditional interest
sensitivity gap measure and economic value of equity analysis to help identify
interest rate risk exposure. At June 30, 2002, all three measures of interest
rate risk were within established corporate policy guidelines, which limits
adverse changes to no more than five percent of management's most likely net
interest income forecast. 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.
-44-
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.
-45-
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: Computation of Net Income Per Common Share
(99.1) CEO Certification of Periodic Report
(99.2) CFO Certification of Periodic Report
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three
months ended June 30, 2002.
-46-
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, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A for the period
ended June 30, 2002 of Comerica Incorporated;
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; and
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 controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 27, 2002 /s/ Ralph W. Babb, Jr.
-------------------------------------
Ralph W. Babb, Jr.
Chairman, President and Chief Executive Officer
-47-
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Elizabeth S. Acton, Chief Financial Officer of Comerica Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q/A for the period
ended June 30, 2002 of Comerica Incorporated;
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; and
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 controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 27, 2002 /s/ Elizabeth S. Acton
----------------------------------
Elizabeth S. Acton
Chief Financial Officer
-48-
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: December 27, 2002
-49-
Exhibit No. Exhibit Description
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(11) Statement re: Computation of Net Income Per Common Share
(99.1) CEO Certification of Periodic Report
(99.2) CFO Certification of Periodic Report