FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10706
Comerica Incorporated
(Exact name of registrant as specified in its charter)
Delaware 38-1998421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
|
Comerica Tower at Detroit Center
Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(313) 222-3300
(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, 1998: 155,455,000 shares
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
June 30, December 31, June 30,
(In thousands, except share data) 1998 1997 1997
------------- ------------ -------------
ASSETS
Cash and due from banks $ 2,222,463 $ 1,927,087 $ 1,949,851
Short-term investments 264,777 202,957 177,391
Investment securities available
for sale 3,396,952 4,005,962 4,808,231
Commercial loans 16,891,406 15,805,549 14,687,352
International loans 2,389,783 2,085,090 2,022,621
Real estate construction loans 981,975 940,910 867,787
Commercial mortgage loans 3,788,052 3,633,785 3,554,351
Residential mortgage loans 1,360,363 1,565,445 1,687,900
Consumer loans 1,999,634 4,347,665 4,474,213
Lease financing 591,418 516,600 430,514
----------- ----------- -----------
Total loans 28,002,631 28,895,044 27,724,738
Less allowance for credit losses (438,875) (424,147) (404,525)
----------- ----------- -----------
Net loans 27,563,756 28,470,897 27,320,213
Premises and equipment 361,003 380,157 388,827
Customers' liability on acceptances
outstanding 26,252 18,392 30,737
Accrued income and other assets 1,214,802 1,286,946 1,179,053
----------- ----------- -----------
TOTAL ASSETS $35,050,005 $36,292,398 $35,854,303
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits (noninterest-
bearing) $ 6,392,257 $ 6,761,202 $ 6,858,247
Interest-bearing deposits 16,226,376 15,825,115 15,818,294
----------- ----------- -----------
Total deposits 22,618,633 22,586,317 22,676,541
Federal funds purchased and
securities sold under
agreements to repurchase 1,049,308 592,860 500,011
Other borrowed funds 2,542,210 2,600,041 3,534,555
Acceptances outstanding 26,254 18,392 30,737
Accrued expenses and other
liabilities 324,616 446,625 373,748
Medium- and long-term debt 5,662,180 7,286,387 6,070,543
----------- ----------- -----------
Total liabilities 32,223,201 33,530,622 33,186,135
Nonredeemable preferred stock
- $50 stated value:
Authorized - 5,000,000 shares
Issued - 5,000,000 shares at
6/30/98, 12/31/97 and 6/30/97 250,000 250,000 250,000
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued-157,187,518 shares at
6/30/98, 156,815,367 shares at
12/31/97 and 105,620,404 shares
at 6/30/97 785,938 784,077 528,102
Capital surplus 14,889 - -
Unrealized gains and losses on
investment securities available
for sale (5,206) (1,937) (13,993)
Retained earnings 1,904,223 1,731,419 1,906,324
Deferred compensation (3,071) (1,783) (2,265)
Less cost of common stock in
treasury- 1,818,965 shares at
6/30/98 (119,969) - -
----------- ----------- -----------
Total shareholders' equity 2,826,804 2,761,776 2,668,168
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,050,005 $36,292,398 $35,854,303
=========== =========== ===========
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CONSOLIDATED STATEMENTS OF INCOME
Comerica Incorporated and Subsidiaries
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------------
(In thousands, except per share data) 1998 1997 1998 1997
-------- -------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $590,427 $578,441 $1,197,417 $1,124,013
Interest on investment securities:
Taxable 56,582 79,534 118,888 156,017
Exempt from federal income tax 1,927 2,937 4,020 5,992
-------- -------- ---------- ----------
Total interest on investment
securities 58,509 82,471 122,908 162,009
Interest on short-term investments 2,294 2,414 4,766 4,547
-------- -------- ---------- ----------
Total interest income 651,230 663,326 1,325,091 1,290,569
INTEREST EXPENSE
Interest on deposits 160,927 169,805 328,064 329,471
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 27,605 27,068 58,202 55,518
Other borrowed funds 17,563 29,597 30,812 56,586
Interest on medium- and long-term debt 93,879 86,501 203,707 162,182
Net interest rate swap income (13,222) (13,173) (25,780) (28,501)
-------- -------- ---------- ----------
Total interest expense 286,752 299,798 595,005 575,256
-------- -------- ---------- ----------
Net interest income 364,478 363,528 730,086 715,313
Provision for credit losses 28,000 34,000 56,000 75,000
-------- -------- ---------- ----------
Net interest income after
provision for credit losses 336,478 329,528 674,086 640,313
NONINTEREST INCOME
Income from fiduciary activities 42,009 36,173 82,744 69,249
Service charges on deposit accounts 39,517 34,995 77,967 69,949
Securities gains/(losses) 11 (234) (139) 263
Other noninterest income 67,258 50,513 123,075 111,380
-------- -------- ---------- ----------
Total noninterest income 148,795 121,447 283,647 250,841
NONINTEREST EXPENSES
Salaries and employee benefits 137,994 135,443 272,761 268,358
Net occupancy expense 21,579 22,096 44,340 45,388
Equipment expense 15,167 15,165 30,291 31,233
Telecommunications expense 6,361 6,927 12,983 14,071
Other noninterest expenses 72,198 69,628 142,797 138,946
-------- -------- ---------- ----------
Total noninterest expenses 253,299 249,259 503,172 497,996
-------- -------- ---------- ----------
Income before income taxes 231,974 201,716 454,561 393,158
Provision for income taxes 81,591 72,006 159,795 139,676
-------- -------- ---------- ----------
NET INCOME $150,383 $129,710 $ 294,766 $ 253,482
======== ======== ========== ==========
Net income applicable to common stock $146,108 $125,435 $ 286,216 $ 244,932
======== ======== ========== ==========
Basic net income per common share $0.94 $0.79 $1.83 $1.54
Diluted net income per common share $0.92 $0.78 $1.80 $1.52
Cash dividends declared on common stock $49,792 $45,341 $99,965 $91,023
Dividends per common share $0.32 $0.29 $0.64 $0.57
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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Comerica Incorporated and Subsidiaries
Nonredeem-
able Unrealized Total
Preferred Common Capital Gains/ Retained Deferred Treasury Shareholders'
(in thousands) Stock Stock Surplus (Losses) Earnings Compensation Stock Equity
--------- --------- --------- ---------- ---------- ------------ --------- -------------
BALANCES AT JANUARY 1, 1997 $250,000 $536,487 $ - $ (22,789) $1,854,116 $ (2,245) $ - $2,615,569
Net income for 1997 - - - - 253,482 - - 253,482
Nonowner changes in equity:
Unrealized holding
gains/(losses) arising
during the period - - - 13,795 - - - 13,795
Less: Reclassification
adjustment for gains/
(losses) included in
net income - - - 263 - - - 263
Nonowner changes in equity
before income taxes - - - 13,532 - - - 13,532
Provision for income taxes
related to nonowner changes
in equity - - - 4,736 - - - 4,736
Nonowner changes in equity,
net of tax - - - 8,796 - - - 8,796
Net income and nonowner changes
in equity - - - - - - - 262,278
Cash dividends declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (91,023) - - (91,023)
Purchase and retirement of
2,235,350 shares of common
stock - (11,176) (18,956) - (101,701) - - (131,833)
Issuance of common stock under
employee stock plans - 2,791 18,956 - - (530) - 21,217
Amortization of deferred
compensation - - - - - 510 - 510
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT JUNE 30, 1997 $250,000 $528,102 $ - $ (13,993) $1,906,324 $ (2,265) $ - $2,668,168
======== ======== ========= ========= ========== ========= ========= ==========
BALANCES AT JANUARY 1, 1998 $250,000 $784,077 $ - $ (1,937) $1,731,419 $ (1,783) $ - $2,761,776
Net income for 1998 - - - - 294,766 - - 294,766
Nonowner changes in equity:
Unrealized holding gains/
(losses) arising during
the period - - - (5,168) - - - (5,168)
Less: Reclassification
adjustment for gains/
(losses) included in net
income - - - (139) - - - (139)
Nonowner changes in equity
before income taxes - - - (5,029) - - - (5,029)
Provision for income taxes
related to nonowner changes
in equity - - - (1,760) - - - (1,760)
Nonowner changes in equity,
net of tax - - - (3,269) - - - (3,269)
Net income and nonowner changes
in equity - - - - - - - 291,497
Cash dividends declared:
Preferred stock - - - - (8,550) - - (8,550)
Common stock - - - - (99,965) - - (99,965)
Purchase of 2,136,450 shares
of common stock - - - - - - (141,070) (141,070)
Purchase and retirement of
60,000 shares of common stock - (300) (3,182) - - - - (3,482)
Issuance of common stock under
employee stock plans - 2,161 18,071 - (13,447) (1,794) 21,101 26,092
Amortization of deferred
compensation - - - - - 506 - 506
-------- -------- --------- --------- ---------- --------- --------- ----------
BALANCES AT JUNE 30, 1998 $250,000 $785,938 $ 14,889 $ (5,206) $1,904,223 $ (3,071) $(119,969) $2,826,804
======== ======== ========= ========= ========== ========== ========= ==========
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Comerica Incorporated and Subsidiaries
Six Months Ended
June 30
---------------------------
(in thousands) 1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 294,766 $ 253,482
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 56,000 75,000
Depreciation 28,332 29,850
Restructuring charge (13,974) (33,944)
Net (increase) decrease in trading
account securities 3,979 (114)
Net increase in assets held for sale (22,464) (383)
Net (increase) decrease in accrued
income receivable 19,127 (6,403)
Net decrease in accrued expenses (194,383) (40,250)
Net amortization of intangibles 13,464 14,069
Other, net 154,483 (23,243)
------------ ------------
Total adjustments 44,564 14,582
------------ ------------
Net cash provided by operating
activities 339,330 268,064
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (20,473) 19,313
Net increase in federal funds sold
and securities purchased under agreements
to resell (22,862) (92,600)
Proceeds from sale of investment securities
available for sale 36,295 155,183
Proceeds from maturity of investment
securities available for sale 611,325 522,543
Purchases of investment securities
available for sale (100,105) (735,033)
Net increase in loans (other
than purchased loans) (1,122,522) (1,507,761)
Purchase of loans (1,115) (47,909)
Net proceeds from sale of consumer
businesses 2,006,091 -
Fixed assets, net (16,776) (11,014)
Net (increase) decrease in customers'
liability on acceptances outstanding (7,860) 2,365
------------ ------------
Net cash provided by (used in)
investing activities 1,361,998 (1,694,913)
FINANCING ACTIVITIES:
Net increase in deposits 32,316 309,368
Net increase (decrease) in short-term
borrowings 398,617 (454,625)
Net increase (decrease) in acceptances
outstanding 7,862 (2,365)
Proceeds from issuance of medium- and
long-term debt 1,500,000 3,230,000
Repayments and purchases of medium- and
long-term debt (3,124,207) (1,401,226)
Proceeds from issuance of common stock
and other capital transactions 27,886 21,747
Purchase of common stock for treasury
and retirement (144,552) (131,833)
Dividends paid (103,874) (96,126)
------------ ------------
Net cash provided by (used in)
financing activities (1,405,952) 1,474,940
------------ ------------
Net increase in cash and due from banks 295,367 48,091
Cash and due from banks at beginning of year 1,927,087 1,901,760
------------ ------------
Cash and due from banks at end of period $ 2,222,463 $ 1,949,851
============ ============
Interest paid $ 658,920 $ 572,773
============ ============
Income taxes paid $ 150,107 $ 152,185
============ ============
Noncash investing and financing activities:
Loan transfers to other real estate $ 2,355 $ 3,705
============ ============
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Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, the statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
The Corporation may use derivative financial instruments, including
foreign exchange contracts, to manage the Corporation's exposure to
interest rate and foreign currency risks. These instruments are treated
as hedges, and accounted for on an accrual basis, since there is a high
correlation with the on-balance sheet instrument being hedged. If this
correlation ceases to exist, the existing unrealized gain or loss is
amortized over the remaining term of the instrument, and future changes in
fair value are accounted for on a mark-to-market basis. Derivative
financial instruments executed as a service to customers are accounted for
on a mark-to-market basis. For further information, refer to the
Accounting Policies footnote in the Corporation's 1997 annual report.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June
15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter. The Corporation expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Corporation to
recognize all derivatives on the balance sheet at fair value. Derivatives
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 1 - Basis of Presentation and Accounting Policies (continued)
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The
Corporation has not yet determined what the effect of Statement 133 will
be on the earnings and financial position of the Corporation.
Note 2 - Investment Securities
At June 30, 1998, investment securities having a carrying value of $2.3 billion were pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $21 million.
Note 3 - Allowance for Credit Losses
The following analyzes the changes in the allowance for credit losses included in the consolidated balance sheets:
(in thousands) 1998 1997
--------- ---------
Balance at January 1 $ 424,147 $ 367,165
Charge offs (66,630) (59,537)
Recoveries 25,358 21,897
--------- ---------
Net charge offs (41,272) (37,640)
Provision for credit losses 56,000 75,000
--------- ---------
Balance at June 30 $ 438,875 $ 404,525
========= =========
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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 agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans averaged $79 million and $74 million for the
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 3 - Allowance for Credit Losses (continued)
quarter and six months ended June 30, 1998, compared to $52 million and
$65 million for the comparable periods last year. The following are
period-end balances:
(in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Total impaired loans $72,650 $70,470
Impaired loans requiring
an allowance 38,561 60,376
Impairment allowance 7,087 20,358
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Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan.
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 4 - Medium- and Long-term Debt
Medium- and long-term debt consisted of the following at June 30, 1998 and December 31, 1997:
(in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Parent Company
9.75% subordinated notes
due 1999 $ 74,923 $ 74,877
10.125% subordinated debentures
due 1998 - 74,965
7.25% subordinated notes due
2007 148,586 148,509
---------- ----------
Total parent company 223,509 298,351
Subsidiaries
Subordinated notes:
7.25% subordinated notes due
2007 198,200 198,100
7.875% subordinated notes due
2026 146,967 146,914
8.375% subordinated notes due
2024 147,976 147,938
7.25% subordinated notes due
2002 149,324 149,246
6.875% subordinated notes due
2008 99,258 99,220
7.125% subordinated notes due
2013 148,279 148,224
---------- ----------
Total subordinated notes 890,004 889,642
Medium-term notes:
Floating rate based on Treasury
bill indices 486,998 487,000
Floating rate based on Prime
indices 350,000 1,100,007
Floating rate based on LIBOR
indices 3,311,926 2,811,793
Floating rate based on Federal
Funds indices - 349,998
Fixed rate notes with interest
rates ranging from 5.97%
to 6.65% 399,743 1,349,596
---------- ----------
Total medium-term notes 4,548,667 6,098,394
Total subsidiaries 5,438,671 6,988,036
---------- ----------
Total medium- and long-term
debt $5,662,180 $7,286,387
========== ==========
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Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 5 - Income Taxes
The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after deducting non-taxable items, principally interest income on state and municipal securities. State and foreign taxes are then added to the federal provision.
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
June 30, 1998 December 31, 1997
------------------------------ ------------------------------
Notional/ Notional/
Contract Unrealized Fair Contract Unrealized Fair
Amount Gains Losses Value Amount Gains Losses Value
(in millions) (1) (2) (3) (1) (2) (3)
------------------------------- ------------------------------
Risk Management
Interest rate contracts
Swaps (4) $ 7,465 $159 $ (3) $ 156 $ 8,515 $137 $ (14) $ 123
Floors purchased 50 - - - 52 - - -
Foreign exchange contracts
Spot and forward 779 11 (14) (3) 445 12 (9) 3
Swaps 127 5 - 5 154 5 - 5
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 8,421 175 (17) 158 9,166 154 (23) 131
Customer Initiated and
Other
Interest rate contracts
Caps and floors
written 277 - - - 314 - - -
Caps and floors
purchased 160 - - - 32 - - -
Swaps 160 4 (4) - 150 6 (6) -
Foreign exchange contracts
Spot, forward and
options 596 6 (2) 4 1,837 37 (33) 4
------- ---- ----- ----- ------- ---- ----- -----
Total customer
initiated and other 1,193 10 (6) 4 2,333 43 (39) 4
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange
contracts $ 9,614 $185 $ (23) $ 162 $11,499 $197 $ (62) $ 135
======= ==== ===== ===== ======= ==== ===== =====
(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 customer initiated and other
derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
Futures contracts are subject to daily cash settlements; therefore, the fair value of these
instruments is zero.
(4) Includes index amortizing swaps with a notional amount of $2,851 million and $3,521
million at June 30, 1998 and December 31, 1997, respectively. These swaps had net unrealized
gains of $9 million and net unrealized losses of $4 million at June 30, 1998 and December 31,
1997, respectively. As of June 30, 1998 index amortizing swaps had an average expected life
of approximately 2 years with a stated maturity that averaged 4 years.
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Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
Interest rate risk arises in the normal course of business to the
extent there is a difference between the repricing and maturity
characteristics of interest-earning assets and interest-bearing
liabilities. This gap in the balance sheet structure reflects the
sensitivity of the Corporation's net interest income to a change in
interest rates. Foreign exchange rate risk arises from changes in the
value of certain assets and liabilities denominated in foreign currencies.
The Corporation employs on-balance sheet instruments such as investment
securities, as well as off-balance sheet derivative financial instruments
and foreign exchange contracts, to manage exposure to these and other
risks, including liquidity risk.
As an end-user, the Corporation mainly accesses the interest rate
markets to obtain off-balance sheet derivatives instruments for use
principally in connection with asset and liability management activities.
The Corporation principally utilizes interest rate swaps with the
objective of managing the sensitivity of net interest income to interest
rate fluctuations. To accomplish this objective, the Corporation
primarily uses interest rate swaps to modify the interest rate
characteristics of certain assets and liabilities (for example, from a
floating rate to a fixed rate, a fixed rate to a floating rate or from one
floating rate index to another). Management believes this strategy
achieves an optimal match between the rate maturities of assets and their
funding sources which, in turn, reduces the overall exposure of net
interest income to interest rate risk, although there can be no assurance
that such a strategy will be successful.
The following table summarizes the expected maturity distribution of
the notional amount of interest rate swaps used for risk management
purposes. The table also indicates the weighted average interest rates
associated with amounts to be received or paid on interest rate swap
agreements as of June 30, 1998. The swaps are grouped by the assets or
liabilities to which they have been designated.
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
-----------------------------------------------------------------------------------------
Remaining Expected Maturity of Risk Management Interest Rate Swaps:
2003- Dec. 31,
(dollar amounts in millions) 1998 1999 2000 2001 2002 2026 Total 1997
-----------------------------------------------------------------------------------------
Variable rate asset
designation:
Receive fixed swaps
Generic $ - $ - $ 700 $1,625 $ - $ - $2,325 $ 700
Amortizing - - - - - - - 100
Index amortizing 507 919 652 302 321 136 2,837 3,504
Weighted average: (1)
Receive rate 6.34% 6.36% 6.35% 6.06% 6.42% 6.20% 6.24% 6.33%
Pay rate 5.68% 5.69% 5.69% 5.69% 5.68% 5.66% 5.69% 5.90%
Floating/floating swaps $ - $ - $ - $ - $ - $ - $ - $ 55
Fixed rate asset designation:
Pay fixed swaps
Generic $ - $ 2 $ - $ - $ - $ - $ 2 $ 2
Index amortizing 3 2 9 - - - 14 17
Weighted average: (1)
Receive rate 5.66% 5.70% 5.66% -% -% -% 5.67% 5.97%
Pay rate 5.34% 7.21% 5.34% -% -% -% 5.76% 5.85%
Medium- and long-term debt
designation:
Generic receive fixed swaps $ 200 $ - $ 200 $ - $150 $ 900 $1,450 $2,200
Weighted average: (1)
Receive rate 5.97% -% 6.91% -% 7.37% 7.66% 7.29% 6.84%
Pay rate 5.56% -% 5.69% -% 5.69% 5.69% 5.67% 5.83%
Floating/floating swaps $ 800 $ - $ 37 $ - $ - $ - $ 837 $1,937
Weighted average: (2)
Receive rate 5.67% -% 5.55% -% -% -% 5.67% 5.73%
Pay rate 5.59% -% 5.68% -% -% -% 5.59% 5.77%
Total notional amount $1,510 $ 923 $1,598 $1,927 $471 $1,036 $7,465 $8,515
-----------------------------------------------------------------------------------------
(1) Variable rates are based on LIBOR rates paid or received at June 30, 1998.
(2) Variable rates paid are based on LIBOR at June 30, 1998, while variable rates
received are based on prime.
-----------------------------------------------------------------------------------------
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Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
The Corporation also uses various other types of off-balance sheet financial instruments to manage interest rate and foreign currency risks associated with specific assets or liabilities, including interest rate caps and floors, forward and futures interest and foreign exchange rate contracts, and foreign exchange rate swaps, which are reflected in the table above. At June 30, 1998 and December 31, 1997, the notional amounts of commitments to purchase and sell U.S. Treasury and municipal bond securities related to the Corporation's trading account totaled $78 million and $2 million, respectively. The notional amounts of commitments to sell mortgage loans totaled $30 million at December 31, 1997. No such commitments were outstanding at June 30, 1998. These commitments, which are similar in nature to forward contracts, are not reflected in the above table due to the immaterial impact they have on the financial statements.
The Corporation earns additional income by executing various
transactions, primarily foreign exchange contracts, interest rate caps and
forward rate agreements, at the request of customers. The Corporation
minimizes market risk arising from customer initiated foreign exchange
contracts and forward rate agreements by entering into offsetting
transactions. Average fair values and income from customer initiated and
other foreign exchange contracts were not material for the six-month
period ended June 30, 1998 and for the year ended December 31, 1997.
Customer initiated interest rate caps generally are not offset by
other on- or off-balance sheet financial instruments; however, the
Corporation has established authority limits for engaging in these
transactions in order to minimize risk exposure. As a result, average
fair values and income from this activity were not material for the six-
month period ended June 30, 1998 and for the year ended December 31, 1997.
Available credit lines on fixed rate credit card and check product
accounts, which expose the Corporation to the risk of a reduction in net
interest income as rates increase, totaled approximately $1.4 billion at
Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries
Note 6 - Off-Balance Sheet Derivatives and Foreign Exchange Contracts
(continued)
June 30, 1998 and $1.8 billion at December 31, 1997. Management believes that market risk exposure arising from these revolving credit commitments is very limited, however, since it is unlikely that a significant number of customers with these accounts will simultaneously borrow up to their maximum available credit lines.
The following table provides a reconciliation of the beginning and
ending notional amounts for interest rate derivatives and foreign exchange
contracts.
Customer Initiated
Risk Management and Other
--------------------- ---------------------
Interest Foreign Interest Foreign
Rate Exchange Rate Exchange
(in millions) Contracts Contracts Contracts Contracts
--------------------- ---------------------
Balances at December 31, 1997 $ 8,567 $ 599 $ 496 $ 1,837
Additions 1,627 3,241 281 18,940
Maturities/amortizations (2,624) (2,934) (180) (20,181)
Terminations (55) - - -
------- ------- ----- --------
Balances at June 30, 1998 $ 7,515 $ 906 $ 597 $ 596
======= ======= ===== ========
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Additional information regarding the nature, terms and associated risks of the above off-balance sheet derivatives and foreign exchange contracts, along with information on derivative accounting policies, can be found in the Corporation's 1997 annual report on page 33 and in Notes 1 and 18 to the consolidated financial statements.
Net income for the second quarter ended June 30, 1998 was $150
million, up $20 million, or 16 percent, from $130 million reported for the
second quarter of 1997. Diluted net income per share increased 18 percent
to $0.92 from $0.78 a year ago. Return on average common shareholders'
equity was 22.57 percent and return on average assets was 1.74 percent,
compared to 21.31 percent and 1.49 percent, respectively, for the
comparable quarter last year.
Net income for the first six months of 1998 was $1.80 per share or
$295 million, compared to $1.52 or $253 million for the same period in
1997, increases of 18 percent and 16 percent, respectively. Return on
average common shareholders' equity was 22.33 percent and return on assets
was 1.67 percent for the first six months of 1998, compared to 20.86
percent and 1.48 percent, respectively, for the first six months of 1997.
On January 15, 1998, the Corporation's board of directors declared
a three-for-two stock split, effected in the form of a 50 percent stock
dividend paid on April 1, 1998, as well as increased the quarterly cash
dividend 12 percent to $0.32 per share. All per share data included in
the financial statements and managements discussion and analysis have been
retroactively adjusted to reflect the split.
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, 1998. On a FTE basis, net interest income was $366 million for the three months ended June 30, 1998, unchanged from the comparable quarter in 1997. Net interest income and the net interest margin were both affected by the sale of $2.0 billion of indirect consumer loans and non-relationship credit card receivables. Excluding the impact of the consumer sale, net interest income would have increased 4 percent, primarily due to a 20 percent increase in average commercial loans. The net interest margin for the three months ended June 30, 1998, was 4.62
percent, an increase of 5 basis points from 4.57 percent for the second
quarter of 1997.
Table II provides an analysis of net interest income for the first
six months of 1998. On a FTE basis, net interest income for the six
months ended June 30, 1998, was $734 million compared to $720 million for
the same period in 1997. This increase is primarily attributed to the
growth in commercial loans cited in the quarterly discussion. The net
interest margin for the six months ended June 30, 1998, was 4.56 percent
compared to 4.58 percent for the same period in 1997.
Net income generated by the risk management interest rate swap
portfolio resulted in a contribution of 17 basis points to the net
interest margin in the second quarter of 1998, compared to a 16 basis-
point contribution in the year-earlier quarter. The contribution for the
first six months of 1998 was 16 basis points compared to an 18 basis-point
contribution in 1997. Interest rate swaps permit management to control
the sensitivity of net interest income to fluctuations in interest rates
in a manner similar to on-balance sheet investment securities but without
significant impact to capital or liquidity. These instruments are
designated against certain assets and liabilities, therefore, their impact
on net interest income is generally offset by and should be considered in
relation to the level of net interest income generated by the related on-
balance sheet assets and liabilities.
In addition to using interest rate swaps and other off-balance sheet
instruments to control the Corporation's exposure to interest rate risk,
management attempts to monitor the effect of movements in interest rates
on net interest income by regularly performing interest sensitivity gap
and earnings simulation analyses. At June 30, 1998, the Corporation was
in an asset sensitive position of $2.6 billion (on an elasticity adjusted
basis), or 8 percent of earning assets. The earnings simulation analysis
performed at the end of the quarter reflects changes to both interest
rates and loan, investment and deposit volumes. The measurement of risk
exposure at June 30, 1998 for a 200 basis point decline in short-term
interest rates identified approximately $35 million, or 2 percent, of net
interest income at risk during the next 12 months. If short-term interest
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Three Months Ended
-------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------
Loans $28,143 $591 8.42% $27,046 $579 8.59%
Investment securities 3,500 60 6.81 4,806 84 6.90
Other earning assets 160 2 5.92 157 3 6.24
----------------------------------------------------------------------------------------------
Total earning assets 31,803 653 8.23 32,009 666 8.32
Interest-bearing deposits 15,931 161 4.05 16,412 170 4.15
Short-term borrowings 3,223 45 5.62 4,140 57 5.49
Medium- and long-term debt 6,087 94 6.18 5,525 86 6.28
Net interest rate swap (income)/
expense (1) - (13) - - (13) -
----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,241 287 4.56 $26,077 300 4.61
-------------- ---------------
Net interest income/
Rate spread (FTE) $366 3.67 $366 3.71
==== ====
FTE adjustment $ 2 $ 2
==== ====
Impact of net noninterest-bearing
sources of funds 0.95 0.86
----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.62% 4.57%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the three
months ended June 30, 1998, to the related assets and liabilities, the average yield on total loans
was 8.52 percent as of June 30, 1998, compared to 8.68 percent a year ago. The average cost of
funds for medium- and long-term debt was 5.73 percent as of June 30, 1998, compared to 5.80 percent
a year earlier.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 1 $ 11 $ 12
Investment securities (1) (23) (24)
Other earning assets (1) - (1)
------------------------------
Total earning assets (1) (12) (13)
Interest-bearing deposits 1 (10) (9)
Short-term borrowings 1 (13) (12)
Medium- and long-term debt (1) 9 8
Net interest rate swap
(income)/expense - - -
------------------------------
Total interest-bearing sources 1 (14) (13)
------------------------------
Net interest income/Rate spread (FTE) $ (2) $ 2 $ -
==============================
* Rate/Volume variances are allocated to variances due to volume.
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TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
Six Months Ended
-------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- -----------------------------
Average Average Average Average
(in millions) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------
Loans $28,530 $1,199 8.46% $26,640 $1,126 8.51%
Investment securities 3,673 125 6.83 4,776 165 6.86
Other earning assets 164 5 5.94 149 4 6.20
----------------------------------------------------------------------------------------------
Total earning assets 32,367 1,329 8.27 31,565 1,295 8.24
Interest-bearing deposits 16,116 328 4.11 16,186 329 4.10
Short-term borrowings 3,214 89 5.58 4,195 112 5.39
Medium- and long-term debt 6,618 204 6.20 5,189 162 6.29
Net interest rate swap
(income)/expense (1) - (26) - - (28) -
----------------------------------------------------------------------------------------------
Total interest-bearing
sources $25,948 595 4.62 $25,570 575 4.53
----------------- ------------------
Net interest income/
Rate spread (FTE) $ 734 3.65 $ 720 3.71
====== ======
FTE adjustment $ 4 $ 5
====== ======
Impact of net noninterest-bearing
sources of funds 0.91 0.87
----------------------------------------------------------------------------------------------
Net interest margin as a percent of
average earning assets (FTE) 4.56% 4.58%
==============================================================================================
(1) After allocation of the income or expense generated by interest rate swaps for the six
months ended June 30, 1998, to the related assets and liabilities, the average yield on total
loans was 8.55 percent as of June 30, 1998, compared to 8.63 percent a year ago. The average
cost of funds for medium- and long-term debt was 5.79 percent as of June 30, 1998 and 1997.
Increase Increase
(Decrease) (Decrease) Net
Due to Due to Increase
Rate Volume* (Decrease)
---------- ---------- ----------
(in millions)
Loans $ 9 $ 64 $ 73
Investment securities (3) (37) (40)
Other earning assets - 1 1
------------------------------
Total earning assets 6 28 34
Interest-bearing deposits 3 (4) (1)
Short-term borrowings 4 (27) (23)
Medium- and long-term debt (2) 44 42
Net interest rate swap
(income)/expense 2 - 2
------------------------------
Total interest-bearing sources 7 13 20
------------------------------
Net interest income/Rate spread (FTE) $ (1) $ 15 $ 14
==============================
* Rate/Volume variances are allocated to variances due to volume.
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rates rise 200 basis points, net interest income would be enhanced by approximately $18 million, or 1 percent. The results of these simulations are within established corporate policy guidelines.
The provision for credit losses for the second quarter of 1998 was $28 million, a decrease of $6 million from the second quarter of 1997. The provision for the first six months of 1998 was $56 million compared to $75 million for the same period in 1997. 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."
Noninterest income was $149 million for the three months ended June 30, 1998, an increase of $28 million, or 23 percent over the same period in 1997. Included in second quarter 1998 noninterest income is a $9 million gain on the aforementioned sale of consumer loans and the mortgage servicing business. Excluding the effect of certain nonrecurring items and divestitures in both periods, noninterest income increased 15 percent in the second quarter of 1998 compared to the second quarter of 1997. Accounting for the majority of this increase were higher levels of fiduciary income, service charges, brokerage fees and commercial fee income. For the first six months of 1998, noninterest income was $284 million, an increase of $33 million, or 13 percent, from the first six months of 1997.
Noninterest expenses were $253 million for the second quarter ended June 30, 1998, an increase of $4 million, or 2 percent, from the second quarter of 1997. For the first six months of 1998, noninterest expenses were $503 million, an increase of $5 million, or 1 percent, from the first
six months of 1997. These nominal increases reflect management's continued focus on efficiency and recognition of the positive effects of the Corporation's Direction 2000: Phase III program to improve efficiency, revenue and customer service.
The provision for income taxes for the second quarter of 1998 totaled $82 million, an increase of 13 percent compared to $72 million reported for the same period a year ago. The provision for the first six months of 1998 was $160 million compared to $140 million for the same period in 1997. The effective tax rate was 35 percent for the second quarter and the first six months of 1998 compared to 36 percent for the comparable periods in 1997.
The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. The following table presents the financial results of these business lines for the six months ended June 30, 1998 and 1997. For a description of the business activities of each line of business and the methodologies which form the basis for these results, refer to the discussion entitled "Strategic Lines of Business" on page 26 of the Corporation's 1997 annual report.
Table III - Strategic Lines of Business Financial Results
Six Months Ended June 30
Business Individual Investment
Bank Bank Bank* Other Total
-----------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1998** 1997 1998 1997 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------
Average assets $22,129 $19,113 $8,320 $9,518 $ 41 $ 24 $4,780 $5,691 $35,270 $34,346
Total revenues (FTE) 430 378 503 505 61 50 24 38 1,018 971
Net income 175 158 143 122 3 2 (26) (29) 295 253
Return on average
assets 1.60% 1.67% 1.59% 1.39% 5.40% 4.48% -0.47% -0.51% 1.67% 1.48%
Return on average
common equity 27.66% 30.68% 37.34% 32.07% 21.61% 16.49% -10.92% -11.34% 22.33% 20.86%
* 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 would have been $5 million and $3 million, and
return on average common equity would have been 39.99% and 23.68%, in 1998 and 1997, respectively.
** Financial results for the Individual Bank for 1998 were affected by the sale of $2.0 billion of indirect
consumer loans and non-relationship credit card receivables and the mortgage servicing business. Net income
includes a $9 million gain and reflects the reduction of the Individual Bank's allowance for loan losses as
a result of the sale.
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Financial Condition
-------------------
Total assets were $35.1 billion at June 30, 1998, compared with $36.3
billion at December 31, 1997. The Corporation has continued to generate
commercial loan growth in 1998. Since December 31, 1997, commercial loans
have increased $1.1 billion, or 7 percent. Total loans decreased $892
million, or 3 percent, since year-end 1997 as a result of the sale of $2.0
billion of indirect consumer loans and certain credit card receivables in
the Individual Bank. The increase in commercial loans was partially
funded by runoff of investment securities, which declined $609 million, or
15 percent, since December 31, 1997.
Total liabilities decreased $1.3 billion, or 4 percent, to $32.2
billion since December 31, 1997. Medium- and long-term debt decreased
$1.6 billion, or 22 percent, primarily as a result of the consumer loan
sales. This decrease was partially offset by a $456 million increase in
federal funds purchased and securities sold under agreements to
repurchase.
Allowance for Credit Losses and Nonperforming Assets
----------------------------------------------------
The Corporation maintains the allowance for credit losses at a level
that in management's judgement is adequate to provide for estimated
probable credit losses inherent in on- and off-balance sheet credit
exposure. The allowance for credit losses attributable to off-balance
sheet exposure is not material. Management determines the adequacy of the
allowance for credit losses by applying projected loss ratios to the risk-
ratings of loans, both individually and by category. The projected loss
ratios incorporate such factors as recent credit loss experience, current
economic conditions and trends, geographic dispersion of borrowers, trends
in past due and nonaccrual amounts, risk characteristics of various
categories and concentrations of loans, and transfer risks. However, the
Corporation cannot assure that the actual loss ratios will not vary from
those projected.
|
At June 30, 1998, the allowance for credit losses was $439 million,
an increase of $15 million, or 3 percent, since December 31, 1997. The
allowance as a percentage of total loans increased to 1.57 percent,
compared to 1.47 percent at December 31, 1997. As a percentage of total
nonperforming assets, the allowance increased from 413 percent at year-end
1997 to 458 percent at June 30, 1998.
Net charge-offs for the second quarter of 1998 were $19 million, or
0.27 percent of average total loans, compared with $21 million, or 0.31
percent, for the year-earlier quarter. Net charge-offs for the first six
months of 1998 were $41 million, or 0.29 percent of average total loans,
compared with $38 million, or 0.28 percent, for the same period last year.
An analysis of the allowance for credit losses is presented in Note 5 to
the consolidated financial statements.
Nonperforming assets decreased $7 million, or 7 percent, since
December 31, 1997, and were categorized as follows:
|
June 30, December 31,
(in thousands) 1998 1997
------------- ------------
Nonaccrual loans:
Commercial $ 64,273 $ 58,914
International 4,500 1,000
Real estate construction 2,092 3,438
Commercial mortgage 6,405 11,088
Residential mortgage 3,744 3,719
------------- ------------
Total nonaccrual loans 81,014 78,159
Reduced-rate loans 8,260 7,583
------------- ------------
Total nonperforming loans 89,274 85,742
Other real estate 6,591 17,046
------------- ------------
Total nonperforming assets $ 95,865 $ 102,788
============= ============
Loans past due 90 days or more $ 37,423 $ 52,805
============= ============
|
Nonperforming assets as a percentage of total loans and other real estate at June 30, 1998 and December 31, 1997, were 0.34 percent and 0.36 percent, respectively.
Common shareholders' equity was up $68 million from December 31,
1997 to June 30, 1998, excluding the change in unrealized gains/(losses)
on investment securities available for sale. The increase was primarily
due to the retention of $186 million in earnings, offset by the repurchase
of 2.2 million shares of common stock under various corporate programs.
Capital ratios exceed minimum regulatory requirements. Previously
reported risk-based capital ratios were revised as a result of corrections
to the data used to determine risk-based assets. The revised ratios at
June 30, 1998 were as follows:
June 30, 1998
-------------
Leverage ratio (3.00 - minimum) 7.52%
Tier 1 risk-based capital ratio (4.0 - minimum) 6.47
Total risk-based capital ratio (8.0 - minimum) 10.09
|
At June 30, 1998, 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.
Included in this report are forward-looking statements based on management's current expectations and/or the assumptions made in the earnings simulation analyses, but numerous factors could cause variances in these projections, and their underlying assumptions, such as changes in interest rates, the industries where the Corporation has a concentration of loans, changes in the level of fee income, economic conditions and continuing consolidations in the banking industry.
PART II. OTHER INFORMATION
(a) Exhibits
(10.1)* Employment Agreement dated May 29, 1998 between the
Corporation and Ralph W. Babb.
(10.2)* Supplemental Pension and Retiree Medical Agreement dated May
29, 1998 between the Corporation and Ralph W. Babb.
(11) Statement re: Computation of Earnings Per Share
(27) Financial Data Schedule
|
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the six months ended June 30, 1998.
* Management compensation arrangement
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/Ralph W. Babb, Jr.
--------------------------------------
Ralph W. Babb Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Marvin J. Elenbaas
--------------------------------------
Marvin J. Elenbaas
Senior Vice President and Controller
(Principal Accounting Officer)
Date: August 6, 1998
|
|
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EXHIBIT (10.1) - Employment Agreement dated May 29, 1998 between the Corporation and Ralph W. Babb
AGREEMENT, dated as of the 29th day of May, 1998, by and between COMERICA INCORPORATED, a Delaware corporation (the "Company") and RALPH W. BABB JR. (the "Executive") who resides at 2360 Heronwood Drive, Bloomfield Hills, Michigan 48302.
The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Com- pany and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Agreement Period (as defined in Section 1(b)) on which a Change of Control(as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is termi- nated prior to the date on which the Change of Control oc- curs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment.
(b) The "Agreement Period" shall mean the period commencing on the date hereof and ending on the third an- niversary of the date hereof; provided, however, that
commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Agreement Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Agreement Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then out- standing voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisi- tion directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acqui- sition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but exclud- ing, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicita- tion of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then out- standing shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combina- tion (including, without limitation, a corporation which as a result of such transaction owns the Company or all or sub- stantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then out- standing shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the last day of the thirtieth consecutive month following such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
(i) During the Employment Period, (A) the Executive's posi-
tion (including status, offices, titles and reporting re-
quirements), authority, duties and responsibilities shall be
at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Ef-
fective Date and (B) the Executive's services shall be
performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 60 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Ex- ecutive is entitled, the Executive agrees to devote reason- able attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsi- bilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal invest- ments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base sal- ary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to An- nual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year
ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's Management Incentive Plan, Long-Term Incentive Plan and/or business unit incentive plan (or any predecessor or successor plan to any thereof) as applicable, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its af- filiated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated com- panies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any
time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day pe- riod immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and poli- cies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period im- mediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an of- fice or offices of a size and with furnishings and other ap- pointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favor- able to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in ac- cordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Dis- ability. The Executive's employment shall terminate auto- matically upon the Executive's death during the Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Ex- ecutive to perform substantially the Executive's duties with the Company or one of its affiliated companies (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in il- legal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" un- less it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pur- suant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior of- ficer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to
the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in clauses (i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determina- tion of "Good Reason" made by the Executive shall be conclu- sive. Anything in this Agreement to the contrary notwith-
standing, a termination by the Executive for any reason dur- ing the 30-day period immediately following the first an- niversary of the Effective Date shall be deemed to be a ter- mination for Good Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means
(i) if the Executive's employment is terminated by the
Company for Cause, or by the Executive for Good Reason, the
date of receipt of the Notice of Termination or any later
date specified therein, as the case may be, (ii) if the
Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall
be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or
the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the
actuarial equivalent of the benefit under the
Company's qualified defined benefit retirement plan
(the "Retirement Plan") (utilizing actuarial
assumptions no less favorable to the Executive than
those in effect under the Company's Retirement
Plan immediately prior to the Effective Date), and
any excess or supplemental retirement plan in which
the Executive participates (together, the "SERP")
which the Executive would receive if the
Executive's employment continued for three years
after the Date of Termination assuming for this
purpose that (x) all accrued benefits are fully
vested, (y) the Executive is three years older and
(z) the Executive is credited with three more years
of service, and, assuming that the Executive's
compensation in each of the three years is that
required by Section 4(b)(i) and Section 4(b)(ii),
over (b) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if
any, under the Retirement Plan and the SERP as of
the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as in- curred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or pro- vided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is termi- nated by reason of the Executive's death during the Employ- ment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include,
without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such af- filiated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favor- able to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause, Etc.; Other than for Good Reason. If the
Executive's employment shall be terminated for Cause during
the Employment Period, this Agreement shall terminate
without further obligations to the Executive other than the
obligation to pay to the Executive (x) his Annual Base
Salary through the Date of Termination, (y) the amount of
any compensation previously deferred by the Executive, and
(z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment
during the Employment Period, excluding a termination for
Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obliga-
tions and the timely payment or provision of Other Benefits.
In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its af- filiated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Execu- tive about the amount of any payment pursuant to this Agree- ment), plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
Section 9) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as
the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect
thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
Notwithstanding the foregoing provisions of this Section
9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Payments do not
exceed 110% of the greatest amount (the "Reduced Amount")
that could be paid to the Executive such that the receipt of
Payments would not give rise to any Excise Tax, then no
Gross-Up Payment shall be made to the Executive and the
Payments, in the aggregate, shall be reduced to the Reduced
Amount.
(b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, in- cluding whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public ac- counting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized ac- counting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Ac- counting Firm hereunder). All fees and expenses of the Ac- counting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall ap- prise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay di- rectly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole op- tion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Execu- tive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), the
Executive becomes entitled to receive any refund with
respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to
Section 9(c), a determination is made that the Executive
shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior
to the expiration of 30 days after such determination, then
such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required
to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been ob- tained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in vio- lation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communi- cate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of con- flict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
Ralph W. Babb Jr.
2360 Heronwood Drive
Bloomfield Hills, Michigan 48302
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any pro- vision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written
agreement between the Executive and the Company, the employ- ment of the Executive by the Company is "at will" and, sub- ject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
/s/ Ralph W. Babb Jr.
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RALPH W. BABB JR.
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COMERICA INCORPORATED
By /s/ Richard S. Collister
-----------------------------
Date: May 29, 1998
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EXHIBIT - (10.2) - Supplemental Pension and Retiree Medical Agreement dated May 29, 1998 between the Corporation and Ralph W. Babb
AGREEMENT by and between Comerica Incorporated, a Delaware corporation (the "Company") and Ralph W. Babb Jr. (the "Executive") dated as of the 29th day of May, 1998.
In addition to the Executive's participation in
all qualified and nonqualified retirement plans, practices,
policies and programs applicable generally to peer
executives of the Company (the "Pension Plans"), the Company
shall provide the Executive with the "Supplemental Pension".
The Supplemental Pension, which shall be paid from the
Benefit Equalization Plan for Employees of Comerica
Incorporated, as amended, shall be an amount equal to the
excess of (x) the monthly pension calculated pursuant to the
formula in effect from time to time under the Comerica
Incorporated Retirement Plan, as amended, to which the
Executive would have been entitled under the Pension Plans
had his service with Mercantile-Bancorporation, Inc. been
service with the Company for all purposes thereunder less
the aggregate pensions the Executive receives under the
defined benefit pension plans, whether qualified or
nonqualified, maintained by MBI in which the Executive
participates, over (y) the Executive's monthly pension
payable under the Pension Plans taking into account only
actual service with the Company. The Supplemental Pension
shall vest upon the earliest to occur of (a) June 1, 2000,
(b) a Change in Control of the Company, (c) a termination of
the Executive's employment by the Company without Cause or
by the Executive for Good Reason or (d) the Executive's
death or Disability. For purposes of this Agreement, all
terms not specifically defined herein shall have the
meanings ascribed to them in the Employment Agreement
between the Company and the Executive dated as of June 1,
1995, and the term "Change in Control" shall have the
meaning ascribed to it in the Executive Officer Employment
Agreement between the Company and the Executive dated as of
May 29, 1998 (the "Employment Agreement").
The Company shall provide the Executive and his spouse with retiree medical and accidental insurance coverage for their lifetimes on a basis no less favorable than such benefits are provided to the Executive and his spouse as of the date hereof. The Executive shall vest in such benefits upon the earliest to occur of (a) a Change in Control of the Company, (b) June 1, 2000, (c) a termination by the Company of the Executive's employment without Cause or by the Executive for Good Reason or (d) the Executive's death or Disability.
The Initial Option Grant shall become immediately exercisable upon the Executive's death or Disability and the Initial Restricted Stock Grant shall immediately vest upon the Executive's death or Disability.
The provisions of this Agreement shall survive a Change in Control of the Company and shall be in addition to any benefits provided by the Employment Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
COMERICA INCORPORATED
By /s/ Richard S. Collister
---------------------------
/s/ Ralph W. Babb Jr.
---------------------------
|
Exhibit (11) - Statement Re: Computation of Earnings Per Share
COMPUTATION OF EARNINGS PER SHARE
Comerica Incorporated and Subsidiaries
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Basic:
Average shares outstanding 155,992 158,289 156,353 159,090
======== ======== ======== ========
Net income $150,383 $129,710 $294,766 $253,482
Less preferred stock dividends 4,275 4,275 8,550 8,550
-------- -------- -------- --------
Net income applicable to common
stock $146,108 $125,435 $286,216 $244,932
======== ======== ======== ========
Basic net income per share $0.94 $0.79 $1.83 $1.54
Diluted:
Average shares outstanding 155,992 158,289 156,353 159,090
Noninvested stock 209 205 199 207
Common stock equivalent:
Net effect of the assumed
exercise of stock options 2,812 2,213 2,839 2,250
-------- -------- -------- --------
Diluted average shares 159,013 160,707 159,391 161,547
======== ======== ======== ========
Net income $150,383 $129,710 $294,766 $253,482
Less preferred stock dividends 4,275 4,275 8,550 8,550
-------- -------- -------- --------
Net income applicable to common
stock $146,108 $125,435 $286,216 $244,932
======== ======== ======== ========
Diluted net income per share $0.92 $0.78 $1.80 $1.52
|
| ARTICLE 9 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 1998 FORM 10-Q FOR COMERICA INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD START | JAN 01 1998 |
| PERIOD END | JUN 30 1998 |
| CASH | 2,222,463 |
| INT BEARING DEPOSITS | 23,792 |
| FED FUNDS SOLD | 172,663 |
| TRADING ASSETS | 5,123 |
| INVESTMENTS HELD FOR SALE | 3,396,952 |
| INVESTMENTS CARRYING | 0 |
| INVESTMENTS MARKET | 0 |
| LOANS | 28,002,631 |
| ALLOWANCE | 438,875 |
| TOTAL ASSETS | 35,050,005 |
| DEPOSITS | 22,618,633 |
| SHORT TERM | 3,591,518 |
| LIABILITIES OTHER | 350,870 |
| LONG TERM | 5,662,180 |
| COMMON | 785,938 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 250,000 |
| OTHER SE | 1,790,866 |
| TOTAL LIABILITIES AND EQUITY | 35,050,005 |
| INTEREST LOAN | 1,197,417 |
| INTEREST INVEST | 122,908 |
| INTEREST OTHER | 4,766 |
| INTEREST TOTAL | 1,325,091 |
| INTEREST DEPOSIT | 328,064 |
| INTEREST EXPENSE | 595,005 |
| INTEREST INCOME NET | 730,086 |
| LOAN LOSSES | 56,000 |
| SECURITIES GAINS | (139) |
| EXPENSE OTHER | 503,172 |
| INCOME PRETAX | 454,561 |
| INCOME PRE EXTRAORDINARY | 294,766 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 294,766 |
| EPS PRIMARY | 1.83 |
| EPS DILUTED | 1.80 |
| YIELD ACTUAL | 4.56 |
| LOANS NON | 81,014 |
| LOANS PAST | 37,423 |
| LOANS TROUBLED | 8,260 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 424,147 |
| CHARGE OFFS | 66,630 |
| RECOVERIES | 25,358 |
| ALLOWANCE CLOSE | 438,875 |
| ALLOWANCE DOMESTIC | 194,262 |
| ALLOWANCE FOREIGN | 5,796 |
| ALLOWANCE UNALLOCATED | 238,817 |