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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10706
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Comerica Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 38-1998421
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
$5 par value common stock:
Outstanding as of October 31, 2002: 174,713,000 shares
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 (unaudited), December 31, 2001
and September 30, 2001 (unaudited).............................................3
Consolidated Statements of Income for the nine months and three months
ended September 30, 2002 and 2001 (unaudited)..................................4
Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended September 30, 2002 and 2001 (unaudited)...........................5
Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 and 2001 (unaudited)......................................................6
Notes to Consolidated Financial Statements (unaudited)..................................7
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................27
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.....................46
ITEM 4. Controls and Procedures........................................................47
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................................49
ITEM 5. Other Information..............................................................50
ITEM 6. Exhibits and Reports on Form 8-K...............................................51
Signatures.............................................................................52
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CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
September 30, December 31, September 30,
(in millions, except share data) 2002 2001 2001
------------- ------------ -------------
(unaudited) (unaudited)
ASSETS
Cash and due from banks $ 2,171 $ 1,925 $ 2,160
Short-term investments 1,880 1,079 388
Investment securities available
for sale 4,486 4,291 4,206
Commercial loans 24,658 25,176 25,198
International loans 2,875 3,015 2,948
Real estate construction loans 3,446 3,258 3,161
Commercial mortgage loans 7,034 6,267 5,794
Residential mortgage loans 747 779 808
Consumer loans 1,541 1,484 1,509
Lease financing 1,288 1,217 1,147
---------- ---------- ----------
Total loans 41,589 41,196 40,565
Less allowance for credit losses (789) (655) (645)
---------- ---------- ----------
Net loans 40,800 40,541 39,920
Premises and equipment 356 353 350
Customers' liability on acceptances
outstanding 37 29 33
Accrued income and other assets 2,836 2,514 2,676
---------- ---------- ----------
TOTAL ASSETS $ 52,566 $ 50,732 $ 49,733
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 15,815 $ 12,596 $ 11,717
Interest-bearing deposits 24,834 24,974 25,417
---------- ---------- ----------
Total deposits 40,649 37,570 37,134
Short-term borrowings 689 1,986 1,347
Acceptances outstanding 37 29 33
Accrued expenses and other
liabilities 834 837 870
Medium- and long-term debt 5,487 5,503 5,551
---------- ---------- ----------
Total liabilities 47,696 45,925 44,935
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 178,749,198 shares at
9/30/02, 12/31/01 and 9/30/01 894 894 894
Capital surplus 356 336 334
Unearned employee stock ownership
plan - 131,954 shares at 12/31/01
and 145,444 shares at 9/30/01 -- (5) (6)
Accumulated other comprehensive income 292 225 286
Retained earnings 3,565 3,448 3,329
Less cost of common stock in
treasury - 4,059,307 shares at 9/30/02,
1,674,659 shares at 12/31/01 and
687,940 shares at 9/30/01 (237) (91) (39)
---------- ---------- ----------
Total shareholders' equity 4,870 4,807 4,798
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 52,566 $ 50,732 $ 49,733
========== ========== ==========
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Three Months Ended
September 30,
------------------------
(in millions, except per share data) 2002 2001
-------- --------
INTEREST INCOME
Interest and fees on loans $ 625 $ 758
Interest on investment securities 63 62
Interest on short-term investments 6 3
-------- --------
Total interest income 694 823
INTEREST EXPENSE
Interest on deposits 119 214
Interest on short-term borrowings 11 26
Interest on medium- and long-term debt 36 57
-------- --------
Total interest expense 166 297
-------- --------
Net interest income 528 526
Provision for credit losses 285 58
-------- --------
Net interest income after provision
for credit losses 243 468
NONINTEREST INCOME
Service charges on deposit accounts 56 54
Fiduciary income 42 45
Commercial lending fees 16 18
Letter of credit fees 16 15
Brokerage fees 9 11
Investment advisory revenue, net 2 (3)
Bank-owned life insurance 15 9
Equity in earnings of unconsolidated subsidiaries 3 4
Warrant income 1 -
Securities gains/(losses) (6) -
Net gain on sales of businesses 12 21
Other noninterest income 50 50
-------- --------
Total noninterest income 216 224
NONINTEREST EXPENSES
Salaries and employee benefits 214 207
Net occupancy expense 31 28
Equipment expense 15 16
Outside processing fee expense 16 15
Customer services 4 10
Goodwill impairment 86 -
Restructuring charge - 18
Other noninterest expenses 67 79
-------- --------
Total noninterest expenses 433 373
-------- --------
Income before income taxes 26 319
Provision for income taxes 2 110
-------- --------
NET INCOME $ 24 $ 209
======== ========
Net income applicable to common stock $ 24 $ 205
======== ========
Basic net income per common share $ 0.14 $ 1.16
Diluted net income per common share $ 0.14 $ 1.14
Cash dividends declared on common stock $ 84 $ 78
Dividends per common share $ 0.48 $ 0.44
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30,
------------------------
(in millions, except per share data) 2002 2001
-------- --------
INTEREST INCOME
Interest and fees on loans $ 1,904 $ 2,437
Interest on investment securities 188 182
Interest on short-term investments 19 19
-------- --------
Total interest income 2,111 2,638
INTEREST EXPENSE
Interest on deposits 363 729
Interest on short-term borrowings 33 90
Interest on medium- and long-term debt 116 253
-------- --------
Total interest expense 512 1,072
-------- --------
Net interest income 1,599 1,566
Provision for credit losses 533 167
-------- --------
Net interest income after provision
for credit losses 1,066 1,399
NONINTEREST INCOME
Service charges on deposit accounts 169 156
Fiduciary income 130 136
Commercial lending fees 50 46
Letter of credit fees 45 43
Brokerage fees 29 34
Investment advisory revenue, net 21 1
Bank-owned life insurance 44 25
Equity in earnings of unconsolidated subsidiaries 7 (46)
Warrant income 5 4
Securities gains/(losses) (16) 23
Net gain on sales of businesses 12 21
Other noninterest income 150 170
-------- --------
Total noninterest income 646 613
NONINTEREST EXPENSES
Salaries and employee benefits 630 633
Net occupancy expense 92 86
Equipment expense 48 53
Outside processing fee expense 47 45
Customer services 19 30
Goodwill impairment 86 -
Restructuring charge - 127
Other noninterest expenses 207 238
-------- --------
Total noninterest expenses 1,129 1,212
-------- --------
Income before income taxes 583 800
Provision for income taxes 188 289
-------- --------
NET INCOME $ 395 $ 511
======== ========
Net income applicable to common stock $ 395 $ 499
======== ========
Basic net income per common share $ 2.25 $ 2.81
Diluted net income per common share $ 2.22 $ 2.77
Cash dividends declared on common stock $ 252 $ 235
Dividends per common share $ 1.44 $ 1.32
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Comerica Incorporated and Subsidiaries
Unearned
Nonredeem- Employee Accumulated
able Stock Other
(in millions, except Preferred Common Capital Ownership Comprehensive
share data) Stock Stock Surplus Plan Shares Income
--------- -------- -------- ---------- -----------
BALANCE AT JANUARY 1, 2001 $ 250 $ 888 $ 287 $ (7) $ 12
Net income - - - - -
Other comprehensive income,
net of tax - - - - 274
Total comprehensive income - - - - -
Redemption of preferred stock (250) - - - -
Cash dividends declared:
Preferred stock - - - - -
Common stock - - - - -
Purchase of 1,140,800 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - 6 34 1 -
Recognition of stock based
compensation expense - - 13 - -
--------- -------- -------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2001 $ - $ 894 $ 334 $ (6) $ 286
========= ======== ======== ========== ===========
BALANCE AT JANUARY 1, 2002 $ - $ 894 $ 336 $ (5) $ 225
Net income - - - - -
Other comprehensive income,
net of tax - - - - 67
Total comprehensive income - - - - -
Cash dividends declared
on common stock - - - - -
Purchase of 3,536,300 shares
of common stock - - - - -
Net issuance of common stock
under employee stock plans - - 5 5 -
Recognition of stock based
compensation expense - - 15 - -
--------- -------- -------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2002 $ - $ 894 $ 356 $ - $ 292
========= ======== ======== ========== ===========
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(continued)
Comerica Incorporated and Subsidiaries
Total
(in millions, except Retained Treasury Shareholders'
share data) Earnings Stock Equity
---------- --------- ------------
BALANCE AT JANUARY 1, 2001 $ 3,086 $ (16) $ 4,500
Net income 511 - 511
Other comprehensive income,
net of tax - - 274
------------
Total comprehensive income - - 785
Redemption of preferred stock - - (250)
Cash dividends declared:
Preferred stock (12) - (12)
Common stock (235) - (235)
Purchase of 1,140,800 shares
of common stock - (65) (65)
Net issuance of common stock
under employee stock plans (21) 42 62
Recognition of stock based
compensation expense - - 13
----------- --------- ------------
BALANCE AT SEPTEMBER 30, 2001 $ 3,329 $ (39) $ 4,798
=========== ========= ============
BALANCE AT JANUARY 1, 2002 $ 3,448 $ (91) $ 4,807
Net income 395 - 395
Other comprehensive income,
net of tax - - 67
------------
Total comprehensive income - - 462
Cash dividends declared
on common stock (252) - (252)
Purchase of 3,536,300 shares
of common stock - (210) (210)
Net issuance of common stock
under employee stock plans (26) 64 48
Recognition of stock based
compensation expense - - 15
---------- --------- ------------
BALANCE AT SEPTEMBER 30, 2002 $ 3,565 $ (237) $ 4,870
========== ========= ============
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Comerica Incorporated and Subsidiaries
Nine Months Ended
September 30,
--------------------------
(in millions) 2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income $ 395 $ 511
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 533 167
Depreciation 43 48
Net amortization of intangibles 3 26
Merger-related and restructuring charges (8) 59
(Gain)loss on investment securities available
for sale 16 (23)
Contribution to pension plan fund (74) (37)
Goodwill impairment 86 --
Net (increase) decrease in trading
account securities 50 (25)
Net decrease in assets held for sale 4 27
Net decrease in accrued income receivable 30 107
Net (increase) decrease in accrued expenses (150) 40
Net gain on sales of businesses (12) (21)
Other, net 30 (134)
------- -------
Total adjustments 551 234
------- -------
Net cash provided by
operating activities 946 745
INVESTING ACTIVITIES:
Net (increase) decrease in short-term
investments (739) 1,340
Proceeds from sale of investment securities
available for sale 384 2,330
Proceeds from maturity of investment
securities available for sale 1,250 912
Purchases of investment securities
available for sale (1,855) (3,620)
Net increase in loans (895) (524)
Fixed assets, net (51) (34)
Purchase of bank-owned life insurance (8) (107)
Net increase in customers' liability on
acceptances outstanding (8) (7)
Net cash provided by acquisitions/sales 8 21
------- -------
Net cash provided by (used in)
investing activities (1,914) 311
FINANCING ACTIVITIES:
Net increase in deposits 3,084 3,261
Net decrease in short-term borrowings (1,296) (746)
Net increase in acceptances outstanding 8 7
Proceeds from issuance of medium- and
long-term debt 1,101 1,125
Repayments and purchases of medium- and
long-term debt (1,282) (3,985)
Redemption of preferred stock -- (250)
Proceeds from issuance of common stock
and other capital transactions 56 62
Purchase of common stock (210) (65)
Dividends paid (247) (236)
------- -------
Net cash provided by (used in)
financing activities 1,214 (827)
------- -------
Net increase in cash and due from banks 246 229
Cash and due from banks at beginning of period 1,925 1,931
------- -------
Cash and due from banks at end of period $ 2,171 $ 2,160
======= =======
Interest paid $ 527 $ 1,172
======= =======
Income taxes paid $ 244 $ 218
======= =======
Noncash investing and financing activities:
Loans transferred to other real estate $ 8 $ 10
Loans transferred to loans held for sale 116 --
======= =======
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See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for the nine months
ended September 30, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002. Certain items in prior
periods have been reclassified to conform to the current presentation. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the annual report of Comerica Incorporated and
Subsidiaries (the "Corporation") on Form 10-K for the year ended December 31,
2001.
Comerica merged with Imperial Bancorp (Imperial), a $7 billion (assets)
bank holding company, in the first quarter of 2001, in a transaction accounted
for as a pooling of interests.
The Corporation uses derivative financial instruments, including
foreign exchange contracts, to manage the Corporation's exposure to interest
rate and foreign currency risks. All derivative instruments are carried at fair
value as either assets or liabilities on the balance sheet. The accounting for
changes in the fair value (i.e. gains or losses) of a derivative instrument is
determined by whether it has been designated and qualifies as part of a hedging
relationship and, further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments,
the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
Corporation designates the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation. For further information, see Note 10.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". The Corporation adopted SFAS No. 142 on January 1, 2002.
Under SFAS No. 142, goodwill is no longer amortized, but is subject to annual
impairment tests. Other intangible assets that do not have an indefinite life
continue to be amortized over their useful lives. For further information on the
adoption of SFAS No. 142, see Note 4.
In the third quarter of 2002, the Corporation adopted the fair value
method of accounting for stock options, as outlined in SFAS No. 123, "Accounting
for Stock-Based Compensation," effective for stock options granted subsequent to
December 31, 2001. Financial results for the second quarter of 2002 have been
restated in accordance with SFAS No. 123. Under SFAS No. 123, compensation
expense equal to the fair value of stock-based compensation as of the date of
grant is recognized over the vesting period. For further information on the
adoption of SFAS No. 123, see Note 12.
NOTE 2 - INVESTMENT SECURITIES
At September 30, 2002, investment securities having a carrying value of $2.0 billion were pledged, primarily with the Federal Reserve Bank and state and local government agencies. Securities are pledged where permitted or required by law to secure liabilities and public and other deposits, including deposits of the State of Michigan of $115 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The following summarizes the changes in the allowance for credit losses:
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 2002 2001
-------- --------
Balance at beginning of period $ 655 $ 608
Charge-offs (424) (165)
Recoveries 25 35
-------- --------
Net charge-offs (399) (130)
Provision for credit losses 533 167
-------- --------
Balance at end of period $ 789 $ 645
======== ========
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SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," considers a loan impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans include $24 million of loans which were formerly on nonaccrual status, but were restructured and met the requirements to be restored to an accrual basis. These restructured loans are performing in accordance with their modified terms, but, in accordance with impaired loan disclosures, must continue to be disclosed as impaired for the remainder of the calendar year of the restructuring. Impaired loans averaged $647 million and $645 million for the three and nine month periods ended September 30, 2002, compared to $561 million and $501 million, respectively, for the comparable periods last year. The following presents information regarding the period-end balances of impaired loans:
(IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Total period-end impaired loans $639 $674
Less: Loans returned to accrual status
during the period 24 62
---- ----
Total period-end nonaccrual business loans $615 $612
Impaired loans requiring an allowance $443 $562
Allowance allocated to impaired loans $113 $228
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
In accordance with the Corporation's adoption of SFAS No. 142, the Corporation performed the first required impairment test of goodwill and indefinite-lived intangible assets as of January 1, 2002. Based on this test, the Corporation was not required to record a transition adjustment upon adoption. Goodwill was again evaluated for impairment as of July 1, 2002. As a result of this test, the Corporation was required to record a goodwill impairment charge of $86 million in the third quarter of 2002. This charge resulted from the continued decline in equity markets, and its related impact on the valuation of the Corporation's investment advisory reporting unit (Munder), which is a part of the Investment Bank for business segment reporting purposes. Further declines in equity markets could trigger additional goodwill impairment charges related to this unit in future quarters. The fair value of Munder used in the determination of the impairment charge was based on a valuation prepared by an investment banker not affiliated with the Corporation. The valuation used a combination of valuation techniques, including discounted cash flows and the prices of external comparable businesses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(CONTINUED)
THREE MONTHS ENDED
(IN MILLIONS, SEPTEMBER 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 24 $ 205
Add back: Goodwill amortization, net of tax - 7
---------- ----------
Adjusted net income applicable to common stock $ 24 $ 212
========== ==========
Basic net income per common share
Reported net income applicable to
common stock $0.14 $1.16
Goodwill amortization, net of tax - 0.04
---------- ----------
Adjusted net income applicable to
common stock $0.14 $1.20
========== ==========
Diluted net income per common share
Reported net income applicable to
common stock $0.14 $1.14
Goodwill amortization, net of tax - 0.04
---------- ----------
Adjusted net income applicable to
common stock $0.14 $1.18
========== ==========
NINE MONTHS ENDED
(IN MILLIONS, SEPTEMBER 30,
-----------------------
EXCEPT PER SHARE AMOUNTS) 2002 2001
---------- ----------
Reported net income applicable to common stock $ 395 $ 499
Add back: Goodwill amortization, net of tax - 21
---------- ----------
Adjusted net income applicable to common stock $ 395 $ 520
========== ==========
Basic net income per common share
Reported net income applicable to
common stock $2.25 $2.81
Goodwill amortization, net of tax - 0.12
---------- ----------
Adjusted net income applicable to
common stock $2.25 $2.93
========== ==========
Diluted net income per common share
Reported net income applicable to
common stock $2.22 $2.77
Goodwill amortization, net of tax - 0.12
---------- ----------
Adjusted net income applicable to
common stock $2.22 $2.89
========== ==========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(CONTINUED)
The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows:
BUSINESS INDIVIDUAL INVESTMENT
(IN MILLIONS) BANK BANK BANK TOTAL
-------- ---------- ---------- -----
Balance at January 1, 2002 $ 90 $ 54 $ 189 $ 333
Goodwill impairment - - (86) (86)
-------- ---------- ---------- -----
Balance as of September 30, 2002 $ 90 $ 54 $ 103 $ 247
======== ========== ========== =====
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NOTE 5 - ACQUIRED INTANGIBLE ASSETS
(IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
---------------------- ---------------------- ----------------------
GROSS GROSS GROSS
AMORTIZED INTANGIBLE CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------ ---------------------- ---------------------- ----------------------
Core deposit intangibles $ 28 $ 25 $ 27 $ 22 $ 27 $ 22
Other 6 5 6 5 6 5
------------------- ------------------- -------------------
Total $ 34 $ 30 $ 33 $ 27 $ 33 $ 27
=================== =================== ===================
|
Aggregate amortization expense for the:
Three months ended September 30, 2002 $ 1
=====
Nine months ended September 30, 2002 $ 3
=====
Year ended December 31, 2001 $ 3
=====
Three months ended September 30, 2001 $ 1
=====
Nine months ended September 30, 2001 $ 2
=====
Estimated amortization expense for the:
Year ending December 31, 2002 $ 4
Year ending December 31, 2003 2
Year ending December 31, 2004 1
Year ending December 31, 2005 -
Year ending December 31, 2006 -
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 6 - MEDIUM- AND LONG-TERM DEBT
Medium- and long-term debt consisted of the following at September 30, 2002 and December 31, 2001:
(DOLLAR AMOUNTS IN MILLIONS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Parent Company
7.25% subordinated notes due 2007 $ 176 $ 157
Subsidiaries
Subordinated notes:
7.25% subordinated notes due 2007 232 216
8.375% subordinated notes due 2024 206 187
7.25% subordinated notes due 2002 150 155
6.875% subordinated notes due 2008 117 108
7.125% subordinated notes due 2013 179 168
7.875% subordinated notes due 2026 206 179
6.00% subordinated notes due 2008 284 256
7.65% subordinated notes due 2010 280 268
8.50% subordinated notes due 2009 112 102
------ ------
Total subordinated notes 1,766 1,639
Medium-term notes:
Floating rate based on LIBOR indices 2,150 2,356
Variable rate secured debt financings
due 2007 973 956
9.98% trust preferred securities due 2026 56 56
7.60% trust preferred securities due 2050 341 339
Notes payable 25 -
------ ------
Total subsidiaries 5,311 5,346
------ ------
Total medium- and long-term debt $5,487 $5,503
====== ======
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The carrying value of medium- and long-term debt has been adjusted to reflect the gain or loss attributable to the risk hedged.
NOTE 7 - INCOME TAXES
The provision for income taxes is computed by applying statutory federal income tax rates to income before income taxes as reported in the financial statements after deducting non-taxable items, principally income on bank-owned life insurance and interest income on state and municipal securities. State and foreign taxes are then added to the federal provision. The effective tax rate for the nine months ended September 30, 2001 was affected by adjustments in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 7 - INCOME TAXES (CONTINUED)
first quarter 2001 to Imperial's tax liabilities at merger date, partially offset by a $7 million tax benefit related to the Imperial acquisition that was recognizable immediately, but only after Imperial became part of Comerica.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Other comprehensive income includes the change in net unrealized gains and losses on investment securities available for sale, the change in the accumulated foreign currency translation adjustment, the change in accumulated gains and losses on cash flow hedges and the change in accumulated minimum pension liability. The Consolidated Statements of Changes in Shareholders' Equity include only combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the nine months ended September 30, 2002 and 2001. Total comprehensive income totaled $462 million and $785 million, for the nine months ended September 30, 2002 and 2001, respectively, and $73 million and $376 million for the three months ended September 30, 2002 and 2001, respectively.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(IN MILLIONS) 2002 2001
-------- --------
Net unrealized gains/(losses) on investment
securities available for sale:
Balance at beginning of period $ 16 $ 8
Net unrealized holding gains/(losses)
arising during the period 37 61
Less: Reclassification adjustment for
gains/(losses) included in net income (16) 23
---- ----
Change in net unrealized gains/(losses)
before income taxes 53 38
Less: Provision for income taxes 19 13
---- ----
Change in net unrealized gains/(losses)
on investment securities available
for sale, net of tax 34 25
---- ----
Balance at end of period $ 50 $ 33
---- ----
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(IN MILLIONS) 2002 2001
-------- --------
Accumulated foreign currency translation adjustment:
Balance at beginning of period $ - $ 4
Net translation gains/(losses) arising
during the period (4) (4)
Less: Reclassification adjustment for
gains/(losses) included in net income - -
---- ----
Change in translation adjustment before
income taxes (4) (4)
Less: Provision for income taxes - -
---- ----
Change in foreign currency translation
adjustment, net of tax (4) (4)
---- ----
Balance at end of period $ (4) $ -
---- ----
Accumulated net gains/(losses) on cash flow hedges:
Balance at beginning of period $209 $ -
Transition adjustment upon adoption
of accounting standard - 65
Net cash flow hedge gains/(losses)
arising during the period 346 413
Less: Reclassification adjustment for
gains/(losses) included in net income 272 89
---- ----
Change in cash flow hedges before
income taxes 74 389
Less: Provision for income taxes 26 136
---- ----
Change in cash flow hedges, net of tax 48 253
---- ----
Balance at end of period $257 $253
---- ----
Accumulated minimum pension liability adjustment:
Balance at beginning of period $ - $ -
Minimum pension liability adjustment
arising during the period (17) -
---- ----
Minimum pension liability before taxes (17) -
Less: Provision for income taxes (6) -
---- ----
Change in minimum pension liability,
net of tax (11) -
---- ----
Balance at end of period $(11) $ -
---- ----
Accumulated other comprehensive income,
net of taxes, at end of period $292 $286
==== ====
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 9 - MERGER-RELATED AND RESTRUCTURING CHARGES
The Corporation recorded merger-related and restructuring charges of
$173 million in 2001 related to the acquisition of Imperial, of which $25
million was recorded in the provision for credit losses. The remaining $148
million of charges were recorded in noninterest expenses. The Corporation also
recorded a 2001 restructuring charge of $4 million related to its subsidiary,
Official Payments Corporation (OPAY). The OPAY restructuring charge was recorded
net of the portion of the charge attributable to the minority shareholders in
OPAY. The Corporation sold its OPAY subsidiary as of July 24, 2002, therefore,
no liability remains for OPAY restructuring charges as of the sale date.
The 2001 Imperial restructuring charge included employee termination
costs, other employee related costs, a charge related to conforming policies,
facilities and operations and other charges. Employee termination costs included
the cost of severance, outplacement and other benefits associated with the
involuntary termination of employees, primarily senior management and employees
in corporate support and data processing functions. A total of 352 employees
were terminated in 2001 as part of the restructuring plan. Other
employee-related costs included cash payments related to change in control
provisions in employment contracts and retention bonuses. Charges related to
conforming policies represented costs associated with conforming the credit and
accounting policies of Imperial with those of the Corporation. The Corporation
also incurred facilities and operations charges associated with closing excess
facilities and replacing signage. Other merger-related restructuring costs were
primarily comprised of investment banking, accounting, consulting and legal
fees. As a result of the Imperial restructuring, the Corporation's annual
savings on operating expenses are estimated to be $60 million, beginning in
2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 9 - MERGER-RELATED AND RESTRUCTURING CHARGES (CONTINUED)
As shown in the table below, there is no remaining liability related to the Imperial charge as of September 30, 2002. No additional Imperial related restructuring charges are expected.
(IN MILLIONS)
Balance at December 31, 2001 $ 8
Cash outlays (8)
--------
Balance at September 30, 2002 $ -
========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------ ------------------------------
NOTIONAL/ NOTIONAL/
CONTRACT UNREALIZED FAIR CONTRACT UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE AMOUNT GAINS LOSSES VALUE
(IN MILLIONS) (1) (2) (2) (3) (1) (2) (2) (3)
------------------------------ ------------------------------
RISK MANAGEMENT
Interest rate contracts:
Swaps $12,230 $751 $ - $ 751 $14,497 $573 $ (2) $ 571
Foreign exchange contracts:
Spot, forward and options 510 10 (5) 5 535 10 (4) 6
Swaps 211 2 (1) 1 285 2 (17) (15)
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 721 12 (6) 6 820 12 (21) (9)
------- ---- ----- ----- ------- ---- ----- -----
Total risk management 12,951 763 (6) 757 15,317 585 (23) 562
CUSTOMER-INITIATED AND OTHER
Interest rate contracts:
Caps and floors written 328 - (4) (4) 365 - (4) (4)
Caps and floors purchased 313 5 - 5 352 4 - 4
Swaps 1,064 28 (27) 1 981 14 (13) 1
------- ---- ----- ----- ------- ---- ----- -----
Total interest rate
contracts 1,705 33 (31) 2 1,698 18 (17) 1
------- ---- ----- ----- ------- ---- ----- -----
Foreign exchange contracts:
Spot, forward and options 1,685 32 (31) 1 2,323 35 (29) 6
Swaps 288 1 - 1 366 2 (1) 1
------- ---- ----- ----- ------- ---- ----- -----
Total foreign exchange
contracts 1,973 33 (31) 2 2,689 37 (30) 7
------- ---- ----- ----- ------- ---- ----- -----
Total customer-initiated
and other 3,678 66 (62) 4 4,387 55 (47) 8
------- ---- ----- ----- ------- ---- ----- -----
Total derivatives and
foreign exchange contracts $16,629 $829 $ (68) $ 761 $19,704 $640 $ (70) $ 570
======= ==== ===== ===== ======= ==== ===== =====
|
(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are generally used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk, and are not reflected in the consolidated balance sheets.
(2) Represents credit risk, which is measured as the cost to replace, at current market rates, contracts in a profitable position. Credit risk is calculated before consideration is given to bilateral collateral agreements or master netting arrangements that effectively reduce credit risk.
(3) The fair values of derivatives and foreign exchange contracts generally represent the estimated amounts the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date. The fair values of all derivatives and foreign exchange contracts are reflected in the consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
Risk Management
Fluctuations in net interest income due to interest rate risk result
from the composition of assets and liabilities and the mismatches in the timing
of the repricing of these assets and liabilities. In addition, external factors
such as interest rates, and the dynamics of yield curve and spread relationships
can affect net interest income. The Corporation utilizes simulation analyses to
project the sensitivity of the Corporation's net interest income to changes in
interest rates. Foreign exchange rate risk arises from changes in the value of
certain assets and liabilities denominated in foreign currencies. The
Corporation employs cash instruments, such as investment securities, as well as
derivative financial instruments and foreign exchange contracts, to manage
exposure to these and other risks, including liquidity risk.
As an end-user, the Corporation accesses the interest rate markets to
obtain derivative instruments for use principally in connection with asset and
liability management activities. As part of a fair value hedging strategy, the
Corporation has entered into interest rate swap agreements for interest rate
risk management purposes. The interest rate swap agreements effectively modify
the Corporation's exposure to interest rate risk by converting fixed-rate
deposits and debt to a floating rate. These agreements involve the receipt of
fixed rate interest amounts in exchange for floating rate interest payments over
the life of the agreement, without an exchange of the underlying principal
amount. For instruments that support a fair value hedging strategy, no
ineffectiveness was required to be recorded in the statement of income.
As part of a cash flow hedging strategy, the Corporation has entered
into predominantly 3-year interest rate swap agreements that effectively convert
a portion of its existing and forecasted floating-rate loans to a fixed-rate
basis, thus reducing the impact of interest rate changes on future interest
income over
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
the next 3 years. Approximately 22 percent ($9 billion) of the Corporation's
outstanding loans were designated as the hedged items to interest rate swap
agreements at September 30, 2002. During the three and nine month periods ended
September 30, 2002, interest rate swap agreements designated as cash flow hedges
increased interest and fees on loans by $83 and $272 million, respectively,
compared to $53 and $89 million, respectively, for the comparable periods last
year. The ineffectiveness associated with these hedging instruments was not
significant to the Corporation's statement of income in the third quarter of
2002. If interest rates and interest curves remain at their current levels, the
Corporation expects to reclassify $186 million of net gains on derivative
instruments from accumulated other comprehensive income to earnings during the
next twelve months due to receipt of variable interest associated with the
existing and forecasted floating-rate loans.
Management believes these strategies achieve an optimal relationship
between the rate maturities of assets and their funding sources which, in turn,
reduces the overall exposure of net interest income to interest rate risk,
although, there can be no assurance that such strategies will be successful. The
Corporation also uses various other types of financial instruments to mitigate
interest rate and foreign currency risks associated with specific assets or
liabilities, which are reflected in the table above. Such instruments include
interest rate caps and floors, foreign exchange forward contracts, and foreign
exchange cross-currency swaps.
The following table summarizes the expected maturity distribution of the
notional amount of interest rate swaps used for risk management purposes and
indicates the weighted average interest rates associated with amounts to be
received or paid on interest rate swap agreements as of September 30, 2002. The
swaps are grouped by the assets or liabilities to which they have been
designated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------------
REMAINING EXPECTED MATURITY OF RISK MANAGEMENT INTEREST RATE SWAPS AS OF SEPTEMBER 30, 2002:
(DOLLAR AMOUNTS 2007- DEC. 31,
IN MILLIONS) 2002 2003 2004 2005 2006 2026 TOTAL 2001
-----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE ASSET
DESIGNATION:
Generic receive
fixed swaps $ 40 $4,750 $2,000 $1,800 $ 500 $ - $ 9,090 $11,069
Weighted average: (1)
Receive rate 3.09% 8.31% 7.57% 7.43% 5.83% -% 7.49% 7.68%
Pay rate 1.87% 3.75% 4.75% 4.75% 1.86% -% 3.95% 4.07%
FIXED RATE ASSET
DESIGNATION:
Pay fixed swaps
Generic $ 4 $ 13 $ - $ - $ - $ - $ 17 $ 34
Amortizing - 1 4 - - - 5 1
Weighted average: (2)
Receive rate 1.86% 1.60% 5.97% -% -% -% 2.50% 2.22%
Pay rate 2.51% 1.61% 6.68% -% -% -% 2.76% 2.56%
FIXED RATE DEPOSIT
DESIGNATION:
Generic receive
fixed swaps $ - $1,468 $ - $ - $ - $ - $ 1,468 $ 1,743
Weighted average: (1)
Receive rate -% 4.22% -% -% -% -% 4.22% 4.87%
Pay rate -% 3.57% -% -% -% -% 3.57% 2.00%
MEDIUM- AND LONG-TERM
DEBT DESIGNATION:
Generic receive
fixed swaps $ 150 $ - $ - $ 250 $ - $ 1,250 $ 1,650 $ 1,650
Weighted average: (1)
Receive rate 7.22% -% -% 7.04% -% 6.73% 6.82% 6.82%
Pay rate 2.24% -% -% 1.75% -% 2.01% 1.99% 2.66%
Total notional amount $ 194 $6,232 $2,004 $2,050 $ 500 $ 1,250 $12,230 $14,497
|
(1) Variable rates paid on receive fixed swaps are based on one-month and
three-month LIBOR or one-month Canadian Dollar Offered Rate (CDOR) rates in
effect at September 30, 2002. Variable rates received on pay fixed swaps are
based on prime at September 30, 2002.
(2) Variable rates received are based on three-month and six-month LIBOR or
one-month and three-month CDOR rates in effect at September 30, 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVES AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
The Corporation had commitments to purchase investment securities for its trading account and available for sale portfolio totaling $522 million at September 30, 2002 and totaling $67 million at December 31, 2001. Commitments to sell investment securities related to the trading account totaled $22 million at September 30, 2002, and $10 million at December 31, 2001. Outstanding commitments expose the Corporation to both credit and market risk.
Customer-Initiated and Other
The Corporation earns additional income by executing various derivative transactions, primarily foreign exchange contracts and interest rate contracts, at the request of customers. Market risk inherent in customer-initiated contracts is often mitigated by taking offsetting positions. The Corporation generally does not speculate in derivative financial instruments for the purpose of profiting in the short-term from favorable movements in market rates. Average fair values and income from customer-initiated and other foreign exchange contracts and interest rate contracts were not material for the nine-month periods ended September 30, 2002 and 2001 and for the year ended December 31, 2001.
Derivative and Foreign Exchange Activity
The following table provides a reconciliation of the beginning and ending notional amounts for interest rate derivatives and foreign exchange contracts for the nine months ended September 30, 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 10 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS (CONTINUED)
CUSTOMER-INITIATED
RISK MANAGEMENT AND OTHER
------------------------ -----------------------
INTEREST FOREIGN INTEREST FOREIGN
RATE EXCHANGE RATE EXCHANGE
(IN MILLIONS) CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------------------------ -----------------------
Balance at December 31, 2001 $ 14,497 $ 820 $ 1,698 $ 2,689
Additions 2,448 12,664 589 35,386
Maturities/amortizations (4,715) (12,763) (582) (36,102)
-------- -------- -------- --------
Balance at September 30, 2002 $ 12,230 $ 721 $ 1,705 $ 1,973
======== ======== ======== ========
|
Additional information regarding the nature, terms and associated risks of the above derivatives and foreign exchange contracts, can be found in the Corporation's 2001 annual report on page 40 and in Notes 1 and 20 to the consolidated financial statements.
NOTE 11 - BUSINESS SEGMENT INFORMATION
The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business are differentiated based on the products and services provided. In addition to the three major lines of business, the Finance Division is also reported as a segment. Lines of business results are produced by the Corporation's internal management accounting system. This system measures financial results based on the internal organizational structure of the Corporation; information presented is not necessarily comparable with any other financial institution. Lines of business/segment financial results for the nine months ended September 30, 2002 and 2001 are presented below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 11 - BUSINESS SEGMENT INFORMATION (CONTINUED)
Nine Months Ended September 30,
(DOLLAR AMOUNTS IN BUSINESS INDIVIDUAL INVESTMENT
MILLIONS) BANK BANK BANK*
--------------------------------------------------------
2002 2001 2002 2001 2002*** 2001**
--------------------------------------------------------
Average assets $ 35,197 $36,365 $ 8,498 $7,714 $ 297 $ 407
Total revenues (FTE) 1,352 1,212 807 807 129 57
Net income (loss) 375 375 216 208 (62) (69)
Return on average
assets 1.42% 1.38% 1.47% 1.45% (26.70)% (21.79)%
Return on average
common equity 16.68% 18.01% 29.95% 31.75% (41.11)% (33.77)%
|
FINANCE OTHER TOTAL
-----------------------------------------------------
2002 2001 2002 2001 2002 2001
-----------------------------------------------------
Average assets $ 4,811 $3,633 $ 1,855 $ 1,365 $50,658 $49,484
Total revenues (FTE) (66) 78 26 28 2,248 2,182
Net income (loss) (44) 37 (90) (40) 395 511
Return on average
assets (0.33)% 0.30% N/M N/M 1.04% 1.38%
Return on average
common equity (6.42)% 7.39% N/M N/M 10.79% 14.74%
|
N/M - Not Meaningful
* Net income was reduced by charges for fees internally transferred to other
lines of business for referrals to the Investment Bank. If excluded,
Investment Bank net loss would have been ($49) million and ($58) million,
and return on average common equity would have been (32.10)% and (28.41)%,
in 2002 and 2001, respectively.
** Net income in 2001 was reduced by a $40 million pre-tax deferred
distribution costs impairment charge and a $53 million pre-tax charge
related to long-term incentive plans at an unconsolidated subsidiary.
Excluding these charges, Investment Bank total revenues (FTE) and net loss
in 2001 would have been $154 million and ($8) million, respectively, while
return on average assets and return on common equity would have been
(2.69)% and (4.16)%, respectively.
*** Net income in 2002 was reduced by a $86 million pre-tax goodwill impairment
charge at the investment advisory reporting unit (Munder) and a $5 million
pre- tax deferred distribution cost impairment charge. Excluding these
charges, Investment Bank total revenues (FTE) and net loss in 2002 would
have been $134 million and ($3) million, respectively, while return on
average assets and return on common equity would have been (1.43)% and
(2.20)%, respectively.
For a description of the business activities of each line of business and the methodologies, which form the basis for these results, refer to Note 24 to the consolidated financial statements in the Corporation's 2001 Annual Report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 12 - STOCK-BASED COMPENSATION
In the third quarter of 2002, the Corporation adopted the fair value method
of accounting for stock options, as outlined in SFAS No. 123. Transition rules
require that all current year grants be accounted for under the fair value
method in the year of adoption, thus, the new method was applied prospectively
to all grants made after December 31, 2001. Substantially all current year
grants were issued in the second quarter of 2002. Under SFAS No. 123,
compensation expense, equal to the fair value of stock-based compensation as of
the date of grant, is recognized over the vesting period. Awards under the
Corporation's plans vest over periods ranging from one to four years. Therefore,
the expense related to stock-based compensation included in the determination
of net income for 2002 is less than which would have been recognized if the fair
value method had been applied to all awards since the original effective date of
SFAS 123. Options granted prior to January 1, 2002 continue to be accounted for
under APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The fair value of stock options granted was estimated at the date of
grant using a Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. The model may not necessarily provide a
reliable single measure of the fair value of employee and director options. The
Corporation's employee and director stock options have characteristics
significantly different from those of traded options and changes in subjective
input assumptions can materially affect the fair value estimate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) COMERICA INCORPORATED AND SUBSIDIARIES
NOTE 12 - STOCK-BASED COMPENSATION (CONTINUED)
The fair value of the 2002 options granted was estimated at $15.53-$18.07 using an option valuation model with the following weighted average assumptions:
Risk-free interest rate 4.69% Expected dividend yield 2.65% Expected volatility factors of the market price of Comerica common stock 33% Expected option life (in years) 4.8 |
The net income and diluted earnings per share impacts were $7 million and $0.04, respectively, for the nine months ended September 30, 2002, and $4 million and $0.02, respectively, for the three months ended September 30, 2002.
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations
Net income for the quarter ended September 30, 2002 was $24 million, down $185 million, or 89 percent, from $209 million reported for the third quarter of 2001. Quarterly diluted net income per share decreased to $0.14 from $1.14 a year ago. Return on average common shareholders' equity was 1.93 percent and return on average assets was 0.19 percent, compared to 17.68 percent and 1.68 percent, respectively, for the comparable quarter last year. The decline in earnings in the third quarter 2002 from the comparable quarter last year resulted primarily from a $227 million ($148 million after-tax, or $0.84 per diluted share) increase in provision for credit losses due to the continued uncertainty of an economic recovery and higher noninterest expenses resulting from a third quarter 2002 goodwill impairment charge of $86 million ($56 million after-tax, or $0.31 per diluted share), partially offset by third quarter 2001 Imperial restructuring charges of $18 million ($11 million after-tax, or $0.06 per diluted share).
Net income for the first nine months of 2002 was $2.22 per diluted share, or $395 million, compared to $2.77 per diluted share, or $511 million, for the same period in 2001, decreases of 20 percent and 23 percent, respectively. Return on average common shareholders' equity was 10.79 percent and return on average assets was 1.04 percent for the first nine months of 2002, compared to 14.74 percent and 1.38 percent, respectively, for the first nine months of 2001. The decline in earnings in the nine months ended September 30, 2002 from the comparable period last year resulted from a $366 million ($238 million after-tax, or $1.34 per diluted share) increase in provision for credit losses primarily for the reasons cited in the quarterly discussion in the preceding paragraph and Argentine transfer risk reserves associated with a second quarter U.S. bank regulatory directive. The third quarter 2002 goodwill impairment charge
discussed above and a decrease in securities gains and losses also contributed to the earnings decline. Partially offsetting the decline in earnings was a $33 million increase in net interest income over the comparable period last year and unusual items in 2001, including a one-time charge related to long-term incentive plans at an unconsolidated subsidiary of $53 million ($34 million after-tax, or $0.19 per diluted share) and Imperial restructuring charges totaling $152 million ($114 million after-tax, or $0.63 per diluted share), partially offset the earnings decline.
Net Interest Income
The rate-volume analysis in Table I details the components of the change in net interest income on a fully taxable equivalent (FTE) basis for the quarter ended September 30, 2002. On a FTE basis, net interest income increased to $529 million for the three months ended September 30, 2002, from $527 million for the comparable quarter in 2001. Average earning assets increased three percent when compared to the third quarter of last year, while the net interest margin decreased to 4.46 percent for the three months ended September 30, 2002, from 4.59 percent for the comparable three months of 2001. The margin decline was primarily due to compressed loan spreads, partially offset by the benefit from a 16 percent increase in average noninterest-bearing deposits. This increase is primarily attributed to the strong growth of title and escrow deposits in the California-based Financial Services business.
Table II provides an analysis of net interest income for the first nine months of 2002. On a FTE basis, net interest income for the nine months ended September 30, 2002, was $1,602 million compared to $1,569 million for the same period in 2001. This increase was due to a two percent increase in average earning assets and a relatively stable net interest margin supported by strong growth in average noninterest-bearing deposits, up 12 percent when compared to the first nine months of 2001 for the same reason cited in the quarterly discussion. The net interest margin for the first nine months ended September 30, 2002, decreased to 4.59 percent, from 4.60 percent for the same period in 2001.
TABLE I - QUARTERLY ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
THREE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------------------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Commercial loans $25,473 $297 4.62% $26,343 $427 6.43%
International loans 2,997 35 4.63 2,809 49 6.92
Real Estate construction loans 3,415 50 5.83 3,127 60 7.64
Commercial mortgage loans 6,921 107 6.12 5,705 107 7.44
Residential mortgage loans 746 13 7.11 796 15 7.54
Consumer loans 1,514 24 6.43 1,494 30 8.01
Lease financing 1,252 17 5.40 1,123 18 6.31
Business loan swap income - 83 - - 53 -
-------------------------------------------------------------
Total loans 42,318 626 5.87 41,397 759 7.27
Investment securities (1) 4,395 63 5.81 3,989 62 6.29
Short-term investments 456 6 5.35 317 3 4.37
-------------------------------------------------------------
Total earning assets 47,169 695 5.86 45,703 824 7.17
Cash and due from banks 1,752 1,800
Allowance for credit losses (776) (663)
Other assets 3,202 2,889
------- -------
Total assets $51,347 $49,729
======= =======
Money market and NOW accounts $13,643 51 1.49 $10,035 61 2.40
Savings deposits 1,598 4 0.98 1,354 5 1.34
Certificates of deposit 9,805 58 2.33 13,455 138 4.08
Foreign office time deposits 780 7 3.42 805 10 4.99
-------------------------------------------------------------
Interest-bearing deposits 25,826 120 1.84 25,649 214 3.31
Short-term borrowings 2,016 9 1.88 2,903 26 3.60
Medium- and long-term debt 5,810 37 2.54 5,323 57 4.24
-------------------------------------------------------------
Total interest-bearing
sources 33,652 166 1.96 33,875 297 3.48
--------------- ---------------
Noninterest-bearing deposits 11,901 10,225
Other liabilities 855 815
Preferred stock - 166
Common shareholders' equity 4,939 4,648
------- -------
Total liabilities and
shareholders' equity $51,347 $49,729
======= =======
Net interest income/
rate spread (FTE) $529 3.90 $527 3.69
==== ====
FTE adjustment $ 1 $ 1
==== ====
Impact of net interest-free
sources of funds 0.56 0.90
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.46% 4.59%
===== =====
|
(1) The average rate for investment securities was computed using average historical cost.
THREE MONTHS ENDED
SEPTEMBER 30, 2002/SEPTEMBER 30, 2001
--------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(146) $ 13 $(133)
Investment securities (5) 6 1
Short-term investments 1 2 3
---------------------------------
Total earning assets (150) 21 (129)
Interest-bearing deposits (86) (8) (94)
Short-term borrowings (13) (4) (17)
Medium- and long-term debt (23) 3 (20)
---------------------------------
Total interest-bearing sources (122) (9) (131)
---------------------------------
Net interest income/rate spread (FTE) $ (28) $ 30 $ 2
=================================
|
* Rate/Volume variances are allocated to variances due to volume.
TABLE II - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME & RATE/VOLUME (FTE)
NINE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
----------------------------- ----------------------------
(DOLLAR AMOUNTS AVERAGE AVERAGE AVERAGE AVERAGE
IN MILLIONS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------
Commercial loans $25,344 $ 904 4.77% $26,683 $1,466 7.34%
International loans 3,038 109 4.78 2,714 164 8.05
Real estate construction loans 3,337 146 5.83 3,047 194 8.51
Commercial mortgage loans 6,672 311 6.23 5,605 333 7.96
Residential mortgage loans 753 41 7.21 795 46 7.65
Consumer loans 1,495 74 6.66 1,484 96 8.66
Lease financing 1,230 50 5.44 1,089 52 6.41
Business loan swap income - 272 - - 88 -
-------------------------------------------------------------
Total loans 41,869 1,907 6.09 41,417 2,439 7.87
Investment securities (1) 4,338 188 5.87 3,788 183 6.48
Short-term investments 455 19 5.57 415 19 6.12
-------------------------------------------------------------
Total earning assets 46,662 2,114 6.06 45,620 2,641 7.74
Cash and due from banks 1,741 1,805
Allowance for credit losses (716) (649)
Other assets 2,971 2,708
------- -------
Total assets $50,658 $49,484
======= =======
Money market and NOW accounts $12,374 134 1.45 $ 9,769 203 2.78
Savings deposits 1,672 13 1.05 1,332 14 1.40
Certificates of deposits 10,783 196 2.43 13,203 482 4.88
Foreign office time deposits 790 20 3.38 643 30 6.36
-------------------------------------------------------------
Interest-bearing deposits 25,619 363 1.90 24,947 729 3.91
Short-term borrowings 2,280 33 1.90 2,564 90 4.69
Medium- and long-term debt 5,928 116 2.62 6,491 253 5.21
-------------------------------------------------------------
Total interest-bearing
sources 33,827 512 2.02 34,002 1,072 4.22
----------------- -----------------
Noninterest-bearing deposits 11,112 9,941
Other liabilities 840 805
Preferred stock - 222
Common shareholders' equity 4,879 4,514
------- -------
Total liabilities and
shareholders' equity $50,658 $49,484
======= =======
Net interest income/
rate spread (FTE) $1,602 4.04 $1,569 3.52
====== ======
FTE adjustment $ 3 $ 3
====== ======
Impact of net interest-free
sources of funds 0.55 1.08
----- -----
Net interest margin as a percent of
average earning assets (FTE) 4.59% 4.60%
===== =====
|
(1) The average rate for investment securities was computed using average historical cost.
NINE MONTHS ENDED
SEPTEMBER 30, 2002/SEPTEMBER 30, 2001
--------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) NET
DUE TO DUE TO INCREASE
(IN MILLIONS) RATE VOLUME* (DECREASE)
---------- ---------- ----------
Loans $(548) $ 16 $(532)
Investment securities (19) 24 5
Short-term investments (2) 2 -
-----------------------------------
Total earning assets (569) 42 (527)
Interest-bearing deposits (357) (9) (366)
Short-term borrowings (53) (4) (57)
Medium- and long-term debt (126) (11) (137)
-----------------------------------
Total interest-bearing sources (536) (24) (560)
-----------------------------------
Net interest income/rate
spread (FTE) $ (33) $ 66 $ 33
===================================
|
* Rate/Volume variances are allocated to variances due to volume.
Provision for Credit Losses
The provision for credit losses was $285 million for the third quarter of 2002, compared to $58 million for the same period in 2001. The provision for the first nine months of 2002 was $533 million compared to $167 million for the same period in 2001. The Corporation establishes this provision to maintain an adequate allowance for credit losses, which is discussed in the section entitled "Allowance for Credit Losses and Nonperforming Assets." The significant increase in the provision for credit losses in the third quarter 2002 resulted from the continued uncertainty in the economy and a decision to sell certain loans. The economic uncertainty has impacted many of the Corporation's customers, as evidenced by a higher allowance, even after increased net charge-offs. The third quarter 2002 provision for credit losses also included $104 million to cover charge-offs in conjunction with management's decision to sell certain loans. These loans were reclassified from loans to short-term investments during the quarter and total $116 million net of charge-offs at September 30, 2002. Also included in the provision for credit losses for the first nine months of 2002 is an increase in reserves for Argentina. Included in the provision for the first nine months of 2001 is a $25 million merger-related charge to conform the credit policies of Imperial with Comerica.
Noninterest Income
Noninterest income was $216 million for the three months ended September 30, 2002, a decrease of $8 million, or four percent, over the same period in 2001. Included in third quarter 2002 noninterest income is a pre-tax gain of $12 million related to the sale of the Corporation's OPAY subsidiary and a $5 million impairment charge on deferred distribution costs related to the Corporation's Munder Capital Management subsidiary (Munder), further discussed below. Included in the third quarter 2001 is a pre-tax gain of $21 million on the sale of the Corporation's ownership in an ATM network provider and a $14 million impairment
charge on deferred distribution costs. Excluding the effects of the gains on
sale of businesses and impairment charges, gains and losses on securities,
warrant income and divestitures, noninterest income decreased $3 million, or two
percent, over the same period last year. Certain of the Corporation's
noninterest income, primarily fiduciary income and investment advisory revenue,
is at risk to fluctuations in the market values of underlying assets,
particularly equity securities. Other income, primarily brokerage service fees,
is at risk to changes in the level of market activity. The noninterest income
decline reflects a $10 million decrease in this market-related revenue,
excluding the deferred distribution costs impairment charges in both periods.
This decrease was partially offset by increased revenue on bank-owned life
insurance due to death benefits received and increased earnings on policies
held.
The Corporation recorded a $5 million pre-tax deferred distribution
costs impairment charge in the third quarter of 2002 related to the
Corporation's Munder subsidiary. This charge resulted from a continued
reassessment of the recoverability of the unamortized cost of commissions to
brokers for selling Class B mutual fund shares. Net asset values in these funds
have declined as general market conditions continued to weaken. This prompted
the Corporation's revaluation of expected future cash flows from the funds,
which are based on a percentage of assets under management and early redemption
fees over a prescribed number of years. Net remaining deferred distribution
costs at September 30, 2002 were $20 million. Given net asset values at
September 30, 2002, it would take a decline of approximately 10 percent in the
assets under management associated with those costs to trigger further
impairment, which at that level would be approximately $2 million. Each
additional five percent decline results in a further impairment of $1 million.
For the first nine months of 2002, noninterest income was $646 million, an increase of $33 million, or five percent, from the first nine months of 2001. In addition to the unusual items cited above, noninterest income for the first
nine months of 2002 included $9 million of non-taxable proceeds from bank-owned life insurance policies from the death of an executive. Noninterest income in the first nine months of 2001 was reduced by a total of $40 million of deferred distribution costs impairment charges and a one-time $57 million charge related to long-term incentive plans at an unconsolidated subsidiary. Noninterest income in the first nine months of 2001 also included $11 million in net gains resulting from the purchase and subsequent sale, all within the first quarter, of interest rate derivative contracts which failed to meet the Corporation's risk-reduction criteria. Excluding the effect of the large unusual items noted above, gains and losses on securities, warrant income and divestitures, noninterest income in the first nine months of 2002 decreased $5 million, or one percent, over the same period in 2001. Market-related income revenue declined $26 million, excluding the deferred distribution costs impairment charges in both periods, for the reasons cited in the quarterly discussion. This was offset by increases in service charges on deposit accounts, reflecting the benefit of lower earnings credit allowances provided to business customers, and higher levels of revenue on bank-owned life insurance.
Noninterest Expenses
Noninterest expenses were $433 million for the quarter ended September 30, 2002, an increase of $60 million, or 16 percent, from the comparable quarter in 2001. Noninterest expenses in the third quarter of 2002 include a goodwill impairment charge of $86 million as a result of the Corporation's annual evaluation of goodwill in accordance with SFAS No. 142 and a $6 million charge related to the Corporation's third quarter 2002 adoption of the fair value method of accounting for stock options. Additional information on the goodwill impairment charge and the adoption of the fair value method of accounting for stock options can be found in Notes 4 and 12, respectively, to the unaudited consolidated financial statements in this report. Noninterest expenses in the
third quarter of 2001 included merger-related and restructuring costs related to the Imperial Bancorp acquisition of $18 million and goodwill amortization of $8 million. Goodwill amortization was discontinued January 1, 2002, as a result of new accounting rules. Excluding these items and the impact of divestitures, noninterest expenses in the third quarter of 2002 decreased by $3 million, or one percent, over the same period in 2001. Contributing to this decline was savings in customer services expense of $6 million due to reduced credits provided to customers as a result of the lower interest rate environment.
For the nine months ended September 30, 2002, noninterest expenses were $1,129 million, a decrease of $83 million, or seven percent, from the comparable period of 2001. Included in the first nine months of 2002 was a total charge of $11 million related to the Corporation's adoption of the fair value method of accounting for stock options and the goodwill impairment charge discussed above. Included in the first nine months of 2001 were restructuring charges totaling $127 million and a reduction in other noninterest expenses of $5 million that resulted from recording the minority interest holders' share of the long-term incentive plan charge discussed in noninterest income above. Also affecting the first nine months of 2001 was $24 million in goodwill amortization. Excluding these items and the impact of divestitures, noninterest expenses in the first nine months of 2002 decreased by $21 million, or two percent, over the same period in 2001. This decrease is primarily attributed to lower salaries and benefits of $10 million, due primarily to reduced revenue related incentives, and a reduction in customer services expense of $11 million for the reasons cited in the quarterly discussion.
Provision for Income Taxes
The provision for income taxes for the third quarter of 2002 totaled $2 million, compared to $110 million reported for the same period a year ago. The effective tax rate was eight percent for the third quarter of 2002, compared to
35 percent for the same quarter of 2001. The provision for the first nine months of 2002 was $188 million compared to $289 million for the same period of 2001. The effective tax rate was 32 percent for the first nine months of 2002 and 36 percent for the first nine months of 2001. The low effective tax rate in the third quarter 2002 resulted from the significant reduction in income before income taxes, which increased the proportion of permanent tax differences to pre- tax income. The effective tax rate in the first nine months of 2002 was impacted by increased non-taxable revenue on bank-owned life insurance policies. The effective tax rate in the first nine months of 2001 was affected by adjustments in the first quarter to Imperial's tax liabilities at the merger date, partially offset by a $7 million tax benefit related to the Imperial acquisition that was immediately recognizable, but only after Imperial became part of Comerica.
Financial Condition
Total assets were $52.6 billion at September 30, 2002, compared with $50.7 billion at year-end 2001 and $49.7 billion at September 30, 2001. The Corporation has experienced an increase (one percent) in total loans since December 31, 2001. Management believes that this slight increase reflects the cautiousness of borrowers in an uncertain economy. Weak loan demand, coupled with an increase in noninterest-bearing deposits, resulted in an increase in short-term investments of $801 million since year-end 2001. This increase was primarily attributable to higher amounts of federal funds sold.
Total liabilities increased $1.8 billion, or four percent, since December 31, 2001, to $47.7 billion. Total deposits increased eight percent to $40.6 billion at September 30, 2002, from $37.6 billion at year-end 2001 due to growth in noninterest-bearing deposits. The growth in noninterest-bearing deposits is primarily attributed to the strong growth of title and escrow deposits in the California-based Financial Services business. The deposit increase was partially offset in short-term borrowings, which decreased $1.3 billion since
December 31, 2001, to $689 million at September 30, 2002. Medium- and long-term debt decreased $16 million to $5.5 billion at September 30, 2002.
Allowance for Credit Losses and Nonperforming Assets
The allowance for credit losses represents management's assessment of probable losses inherent in the Corporation's loan portfolio, including all binding commitments to lend. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. The Corporation defines business loans as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. The Corporation performs a detailed credit quality review quarterly on large business loans which have deteriorated below certain levels of credit risk and allocates a specific portion of the allowance to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent charge-off experience, current economic conditions and trends, and trends with respect to past due and nonaccrual amounts. The allocated allowance was $540 million at September 30, 2002, a decrease of $6 million from year-end 2001. This decrease was attributable, in part, to the decision to sell certain nonperforming loans in the third quarter 2002. These loans were written down to net realizable value and
transferred to short-term investments, thus eliminating the need for an allocated allowance. Offsetting this reduction was increased reserves related to Argentine and non-trade Brazilian exposure.
Actual loss ratios experienced in the future could vary from those projected. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. An unallocated allowance is maintained to capture these probable losses. The unallocated portion of the loss reserve reflects management's view that the reserve should have a margin that recognizes the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocated methodology discussed above, involves the exercise of judgement. Factors which were considered in the evaluation of the adequacy of the Corporation's unallocated reserve include portfolio exposures to the healthcare, technology and life sciences, entertainment and energy industries, as well as Latin American transfer risks and the risk associated with new customer relationships. The unallocated allowance was $249 million at September 30, 2002, an increase of $140 million from December 31, 2001. This increase results from the Corporation's belief that the continued uncertainty of an economic recovery, and its impact on the Corporation's customers, requires increased unallocated coverage for all factors considered in the unallocated allowance.
Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment of the portfolio. Unanticipated economic events, including political, economic and regulatory stability in countries where the Corporation has a concentration of loans, could cause changes in the credit characteristics of the portfolio and result in an unanticipated increase in the
allocated allowance. Inclusion of other portfolio exposures in the unallocated allowance, as well as significant increases in the current portfolio exposures, could increase the amount of the unallocated allowance. Either of these events, or some combination, may result in the need for additional provision for credit losses in order to maintain an allowance that complies with credit risk and accounting policies.
The Corporation is closely monitoring its Argentine and Brazilian exposure as a result of recent political and economic events in those countries. The total Argentine exposure at September 30, 2002, was $103 million and consisted of $83 million of loans, $11 million of securities and $9 million of unfunded commitments. This represents a decrease of $116 million from total Argentine exposure of $219 million at December 31, 2001. Allocations in the allowance for credit losses cover approximately 50 percent of loans and unfunded commitments. The total Brazilian exposure at September 30, 2002, was $576 million and consisted of $447 million of loans, $52 million of securities and $77 million of unfunded commitments. This represents a decrease of $136 million from total Brazilian exposure of $712 million at December 31, 2001. Allocations in the allowance for credit losses cover approximately five percent of loans and unfunded commitments. At September 30, 2002, the Corporation had $39 million of loans and $8 million in securities related to Argentina and $5 million of loans related to Brazil that were reported in nonperforming assets.
At September 30, 2002, the allowance for credit losses was $789 million, an increase of $134 million since December 31, 2001. The allowance as a percentage of total loans was 1.90 percent, compared to 1.59 percent at December 31, 2001. As a percentage of nonperforming assets, the allowance was 123 percent at September 30, 2002, versus 105 percent at year-end 2001.
The continued uncertainty in the economy, and its impact on the Corporation's customers, has required increased levels of allowance to be maintained on the Corporation's business loans. These increased allowance levels
have also impacted the allowance coverage of nonperforming assets.
Net charge-offs for the third quarter of 2002 were $258 million, or 2.44 percent of average total loans, compared with $58 million, or 0.56 percent, for the third quarter of 2001. The increase in net charge-offs was attributable to the decision to sell certain nonperforming loans in the third quarter 2002 and the continued uncertainty of an economic recovery, and its impact on the Corporation's customers. Net charge-offs in the third quarter 2002 on loans transferred to short-term investments totaled $104 million. Nonperforming assets increased $13 million, or two percent, since December 31, 2001, and were categorized as follows:
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 2002 2001
------------ ------------
Nonaccrual loans:
Commercial $ 365 $ 467
International 101 109
Real estate construction 17 10
Commercial mortgage 15 18
Residential mortgage 1 -
Consumer 4 5
Lease financing 1 8
Nonaccrual loans held for sale 116 -
------------ ------------
Total nonaccrual loans 620 617
Reduced-rate loans - -
------------ ------------
Total nonperforming loans 620 617
Other real estate 12 10
Nonaccrual debt securities 8 -
------------ ------------
Total nonperforming assets $ 640 $ 627
============ ============
Loans past due 90 days or more $ 51 $ 44
============ ============
|
Loans to customers in the automotive industry comprised 12 percent of nonperforming loans at September 30, 2002, and was the only industry classification comprising more than 10 percent of nonperforming loans. Six credits in excess of $10 million were added to nonperforming loans during the third quarter 2002. The largest nonaccrual loan at September 30, 2002, was to an automotive supplier totaling $24 million. Approximately 46 percent of total nonperforming assets at September 30, 2002 were Shared National Credit Program
(SNC) loans. SNC loans are large credits shared by multiple financial institutions and reviewed by regulatory authorities at the lead or agent bank level. These loans comprised approximately 20 percent of total loans at September 30, 2002. Nonperforming assets as a percentage of total loans and other real estate were 1.54 percent at September 30, 2002 and 1.52 percent at December 31, 2001.
The following table presents a roll-forward of nonaccrual loans from December 31, 2001 to September 30, 2002, based on an analysis of nonaccrual loans with book balances greater than $2 million.
(IN MILLIONS)
Nonaccrual loans at December 31, 2001 $617
Loans transferred to nonaccrual 548
Net loans charged off (399)
Loans transferred to accrual status (39)
Loans sold (17)
Payments/Other (90)*
----
Nonaccrual loans at September 30, 2002 $620
====
|
* Net change related to nonaccrual loans with balances less than $2 million, other than net charge-offs, included in Payments/Other.
During the third quarter 2002, $276 million of loans were transferred to nonaccrual status. Included were 35 loans with balances greater than $2 million. Six of these loans were greater than $10 million (totaling $124 million) to customers in the manufacturing and service sectors.
Assuming the economy remains unchanged from current levels, the Corporation's management expects that nonperforming assets will decrease slightly to between $550-625 million by December 31, 2002. The reduction in nonperforming assets that will result from the expected sale of $116 million of loans held for sale will be partially offset by assets transferred to nonaccrual. Charge-offs are expected to decline significantly from third quarter 2002 levels in the fourth quarter of 2002, and are projected to be in the $60-80 million range. As of November 7, 2002, the Corporation had sold $112 million of the $116 million of nonaccrual loans categorized as held for sale at September 30, 2002. Gains
and losses resulting from the sale of this portfolio of loans are not expected to be material.
Capital
Common shareholders' equity, excluding the $67 million increase in other comprehensive income, remained relatively flat from December 31, 2001 to September 30, 2002. The retention of $143 million of current year earnings and the effect of employee stock plan activity, which increased common shareholders' equity $63 million, were offset by the decrease in equity of $210 million that resulted from repurchasing approximately 3.5 million shares of common stock in the open market during the first nine months of 2002.
Capital ratios exceed minimum regulatory requirements as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ -----------
Tier 1 common capital ratio 7.32% 7.30%
Tier 1 risk-based capital ratio (4.00% - minimum) 7.99% 7.98
Total risk-based capital ratio (8.00% - minimum) 11.71% 11.70
Leverage ratio (3.00% - minimum) 9.25% 9.36
|
At September 30, 2002, the capital ratios of all the Corporation's banking subsidiaries exceeded the minimum ratios required of "well capitalized" institutions as defined in the final rule under FDICIA.
Accounting Policies
The Corporation's consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements included in the Corporation's 2001 Annual Report, as updated in Note 1 to the unaudited consolidated financial statements in this report. These policies require numerous estimates and strategic or economic assumptions which may prove inaccurate or subject to variations and may significantly affect the Corporation's reported results for the period or in future periods. Changes in
underlying factors, assumptions or estimates in any of these areas could have a material impact on the Corporation's future financial condition and results of operations. In management's opinion, some of these areas have a more significant impact than others on the Corporation's financial reporting. This is because these policies apply to areas of relatively greater business importance, to matters for which there is a range of possible outcomes and/or require a more subjective decision-making process on the part of management. For the Corporation, these areas currently include accounting for the allowance for credit losses, pension costs, private equity and venture capital investments, deferred distribution costs and goodwill.
Pension assumptions will be evaluated and reset prior to January 1, 2003. Equity markets and interest environments impact these assumptions. Declines in equity markets in recent years and the current low-interest-rate environment will impact pension expense for 2003. The Corporation's pension assumptions for 2002 included a 10 percent long-term rate of return on plan assets and a 7.4 percent discount rate. For each 0.25 percentage point change in the long-term rate of return assumption, pension expense changes by approximately $2 million. For each 0.25 percentage point change in the discount rate assumption, pension expense changes by approximately $4 million. For more information on pension assumptions, refer to Note 15 to the consolidated financial statements included in the Corporation's 2001 annual report.
Other Matters
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement covers legal obligations that are identifiable by the entity upon acquisition and construction, and during the operating life of a long-lived asset. Identified retirement obligations would be recorded as a liability with a corresponding amount capitalized as part of the asset's carrying amount. The capitalized retirement cost asset would be
amortized to expense over the asset's useful life. The Statement is effective January 1, 2003 for calendar year companies. The Corporation does not believe that the impact of adoption of SFAS No. 143 will have a material impact on the Corporation's financial position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Net interest income is the predominant source of revenue for the Corporation. Interest rate risk arises primarily through the Corporation's core business activities of extending loans and accepting deposits. The Corporation actively manages its material exposure to interest rate risk. Management attempts to evaluate the effect of movements in interest rates on net interest income and uses interest rate swaps and other instruments to manage its interest rate risk exposure. The primary tool used by the Corporation in determining its exposure to interest rate risk is net interest income simulation analysis. The net interest income simulation analysis performed at the end of each quarter reflects changes to both interest rates and loan, investment and deposit volumes. The measurement of risk exposure at September 30, 2002 for a 200 basis point decline in short-term interest rates identified approximately $108 million, or 4.9%, of forecasted net interest income at risk over the next 12 months. If short-term interest rates rise 200 basis points, forecasted net interest income would be enhanced by approximately $145 million, or 6.6%.
Secondarily, the Corporation utilizes a traditional interest sensitivity gap measure and economic value of equity analysis as alternative measures of interest rate risk exposure. At September 30, 2002, all three measures of interest rate risk were within established corporate policy guidelines. For further discussion of interest rate risk, and other market risks, see Note 10 and pages 37-41 of the Corporation's 2001 Annual Report.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Corporation's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on the evaluation, such officers have concluded that, as of the Evaluation Date, the Corporation's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Corporation's internal controls or in other factors that could significantly affect such controls.
Forward-looking statements
This report includes forward-looking statements as that term is used in securities laws. All statements regarding Comerica's expected financial position, strategies and growth prospects and general economic conditions expected to exist in the future are forward-looking statements. The words, "anticipates", "believes", "estimates", "seeks", "plans", "intends" and similar expressions, as they relate to Comerica or its management, are intended to identify forward-looking statements. Although Comerica believes that the expectations reflected in these forward-looking statements are reasonable and has based these expectations on the beliefs and assumptions Comerica has made, such expectations may prove incorrect. Numerous factors, including unknown risks and uncertainties, could cause variances in these projections and their underlying assumptions. Such factors are changes in interest rates, changes in the accounting or tax treatment of any particular item, changes in industries in which Comerica has a concentration of loans, or the political, economic and regulatory stability in countries where Comerica operates, changes in the level of fee income, changes in general economic conditions and related credit and market conditions and the impact of regulatory responses to any of the foregoing. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward- looking statements are made.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Several of the Corporation's banking subsidiaries are member banks of Visa U.S.A., Inc. ("Visa"). Several U.S. merchants have filed class action suits against Visa under U.S. federal antitrust law. The Corporation and its subsidiaries are not parties to these suits. However, the Corporation's banking subsidiaries, which are member banks of Visa, may be affected by these suits. The following description of the suits is based primarily on disclosures in the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed by MasterCard Incorporated ("MasterCard") with the Securities and Exchange Commission on August 14, 2002.
Commencing in October 1996, several class action suits were brought by a number of U.S. merchants against MasterCard and Visa. Those suits were later consolidated in the U.S. District Court for the Eastern District of New York. The plaintiffs challenge MasterCard's and Visa's rules requiring merchants who accept their credit cards to accept their debit cards. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance of credit cards and have conspired to monopolize the point-of-sale debit card market. Plaintiffs allege that the plaintiff class has been forced to pay unlawfully high prices for debit and credit card transactions. There are related consumer class actions pending in two state courts that have been stayed pending developments in the merchants' suits. MasterCard and Visa have denied the merchants' allegations. The district court granted the plaintiffs' motion for class certification, a panel of the Second Circuit Court of Appeals affirmed, and on June 6, 2002, the U.S. Supreme Court denied MasterCard's and Visa's petition for a writ of certiorari on the issue of class certification. Recent press reports place the plaintiffs' estimated damage claims at approximately $13.0 billion to $15.0 billion, or more, before mandatory trebling under U.S. federal antitrust law. These figures reflect claims asserted and should not be construed
as an acknowledgement of the reliability of the figures presented. Trial is currently scheduled for April 2003.
The Corporation and its subsidiaries are not parties to these suits and therefore will not be directly liable for any amount related to these suits. However, if a judgment is entered against Visa, then Visa may seek to assess the associations' member banks, including the Corporation's banking subsidiaries, to obtain funds to satisfy the judgment. In addition, because a judgment against the associations could adversely affect the business operations of the member banks, they may be compelled by business necessity to assist Visa to satisfy the judgment. The outcome of these suits, the amount of any possible judgment against the associations, and the effects on the associations' member banks, including the Corporation's banking subsidiaries, resulting from these suits, cannot be determined at this time.
In addition to the above, the Corporation and its subsidiaries are subject to various pending or threatened legal proceedings, arising out of the normal course of business. In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual outcome of these matters will be. However, the Corporation believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the Corporation's consolidated financial condition or results of operations.
ITEM 5. Other Information.
As previously announced, Eugene A. Miller retired as Chairman of the Board of Directors of Comerica on October 1, 2002. In order to ensure a stable transition, Mr. Miller will continue to make himself available to Comerica and will continue to receive certain benefits in accordance with a Supplemental Benefit Agreement entered into between Comerica and Mr. Miller as of September 19, 2002 and filed as an exhibit hereto.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Bylaws of Comerica Incorporated
(10.1*) Supplemental Benefit Agreement dated September 19, 2002, between Comerica Incorporated and Eugene A. Miller
(11) Statement re: Computation of Net Income Per Common Share
(99.1) Chairman, President and CEO Certification of Periodic Report
(99.2) CFO Certification of Periodic Report
* Management compensation arrangement
(b) Reports on Form 8-K
A report on Form 8-K, dated August 13, 2002, was filed under report items number 7 and 9, announcing and including the certified sworn statements made by the Corporation's principal executive officer and principal financial officer regarding facts and circumstances relating to the Corporation's filings under the Securities Exchange Act of 1934, pursuant to Securities and Exchange Commission Order No. 4-460.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMERICA INCORPORATED
(Registrant)
/s/ Elizabeth S. Acton ----------------------------------------- Elizabeth S. Acton |
Chief Financial Officer
/s/ Marvin J. Elenbaas ----------------------------------------- Marvin J. Elenbaas |
Senior Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 2002
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ralph W. Babb, Jr., Chairman, President and Chief Executive Officer of Comerica Incorporated (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant for the period ended September 30, 2002 (the "Quarterly Report");
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Ralph W. Babb, Jr.
---------------------------------------
Ralph W. Babb, Jr.
Chairman, President and Chief Executive
Officer
|
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Elizabeth S. Acton, Chief Financial Officer of Comerica Incorporated (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant for the period ended September 30, 2002 (the "Quarterly Report");
2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Elizabeth S. Acton
------------------------
Elizabeth S. Acton
Chief Financial Officer
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10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-3.1 Amended and Restated Bylaws of Comerica Incorporated
EX-(10.1*) Supplemental Benefit Agreement dated September 19, 2002,
between Comerica Incorporated and Eugene A. Miller
EX-(11) Statement re: Computation of Net Income Per Common Share
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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EXHIBIT 3.1
AS AMENDED AND RESTATED
ON SEPTEMBER 24, 2002
AMENDED AND RESTATED
BYLAWS
OF
COMERICA INCORPORATED
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders of this Corporation shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.
SECTION 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of stockholders shall be held on the third Friday of May of each year, if not a legal holiday, and, if a legal holiday, then on the next secular day following, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At said meeting, stockholders shall elect by a plurality vote the directors to be elected at such meeting, and shall transact such other business as may properly be brought before the meeting.
SECTION 3. NOTICE OF MEETING OF STOCKHOLDERS. Written notice of every meeting of stockholders stating the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to
each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.
SECTION 4. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
SECTION 5. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Corporation's certificate of incorporation, may be called by the Chairman of the Board of Directors or, during the absence or disability of the Chairman or while that office is vacant, by the President; and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning, in the aggregate, at least seventy-five percent (75%) in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote at such special meeting. Such request shall state the purpose or purposes of the proposed meeting.
SECTION 6. QUORUM OF STOCKHOLDERS. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Corporation's certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
SECTION 7. REQUIRED VOTE. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which a different vote is required by statute, these bylaws or by the Corporation's certificate of incorporation.
SECTION 8. ONE VOTE PER SHARE. Unless otherwise provided in the Corporation's certificate of incorporation or in a certificate filed pursuant to Section 151(g) of the General Corporation Law of Delaware, as amended, each stockholder shall at every meeting of the stockholders be entitled to one vote, in person or by proxy, for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted after three (3) years from its date, unless the proxy provides for a longer period.
SECTION 9. NATURE OF BUSINESS. At any meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors or by any stockholder who complies with the procedures set forth in this Section 9. No business may be transacted at any meeting of stockholders, other than business that is either:
(a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof);
(b) otherwise properly brought before such meeting of stockholders by or at the direction of the Board of Directors (or any duly authorized committee thereof); or
(c) in the case of an annual meeting of stockholders, otherwise properly
brought before such meeting by any stockholder (i) who is a stockholder
of record on the date of the giving of the notice provided for in this
Section 9 and on the record date for the determination of stockholders
entitled to vote at such annual meeting of stockholders; and (ii) who
complies with the notice procedures set forth in this Section 9.
Time of Stockholder's Notice. In addition to any other applicable requirements,
such as the requirements set forth in Article III, Section 12 of the
Corporation's bylaws regarding director candidate nominations, for business to
be properly brought before an annual meeting of stockholders by a stockholder,
such stockholder must have given timely notice thereof in proper written form to
the Secretary of the Corporation. To be timely, a stockholder's notice to the
Secretary of the Corporation must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
immediately preceding year's annual meeting of stockholders; provided, however,
that in the event that the date of the annual meeting of stockholders is more
than thirty (30) days before or more than sixty (60) days after such anniversary
date, notice by the stockholder in order to be timely must be so received not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such annual meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such annual meeting or the tenth
(10th) day following the day on which public announcement of the date of such
meeting of stockholders was first made. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. For purpose of this
Section 9, "public announcement" shall mean disclosure in a press release
reported by the
Dow Jones News Service, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Notwithstanding anything in the second sentence of the immediately preceding paragraph to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary or mailed and received at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.
Form of Stockholder's Notice. To be in proper written form, a stockholder's notice to the Secretary of the Corporation must set forth as to each matter such stockholder proposes to bring before the annual meeting of stockholders: (a) a brief description of the business desired to be brought before the annual meeting of stockholders and the reasons for conducting such business at the annual meeting of stockholders; (b) the name and address of such stockholder and beneficial owner, if any, as they appear on the Corporation's books; (c) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available and shall have occurred); (d) as of the date of such notice, a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business; (e) any other information which would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for the proposal pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder if such stockholder were engaged in such a solicitation; and (f) a representation that such stockholder intends to appear in person or by proxy at the annual meeting of stockholders to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting of stockholders in accordance with the procedures set forth in this Section 9, provided, however, that once business has been properly brought before the annual meeting of stockholders in accordance with such procedures, nothing in this Section 9 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting of stockholders determines that business was not properly brought before the annual meeting of stockholders in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. When a meeting is
adjourned to another time or place, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than thirty (30) days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which case notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the original meeting as originally notified.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. The business of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by statute or by the Corporation's certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders.
SECTION 2. LOCATION OF MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware.
SECTION 3. ORGANIZATION MEETING OF BOARD. The first meeting of each newly elected Board of Directors shall be held at the place of holding the annual meeting of stockholders, and immediately following the same, for the purpose of electing officers and transacting any other business properly brought before it, provided that the organization meeting in any year may be held at a different time and place than that herein provided by a consent of a majority of the directors of such new Board of Directors. No notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present, unless said meeting is not held at the place of holding and immediately following the annual meeting of stockholders.
SECTION 4. REGULAR MEETINGS OF BOARD. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors.
SECTION 5. SPECIAL MEETINGS OF BOARD. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, or, during the absence or disability of the Chairman or while that office is vacant, by the President on one (1) day's notice to each director; and special meetings shall be called by the President or Secretary on like notice on the written request of five (5) or more directors.
SECTION 6. QUORUM AND REQUIRED VOTE. At all meetings of the Board of Directors a majority of the total number of directors shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Corporation's certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
SECTION 7. CONSENT OF DIRECTORS IN LIEU OF MEETING. Unless otherwise restricted by the Corporation's certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.
SECTION 8. COMMITTEES OF DIRECTORS.
(a) General Authority. The Board of Directors may, to the fullest extent permitted by Section 141(c)(2) of the Delaware General Corporation Law as the same may be hereinafter amended from time to time, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not (s)he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these bylaws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters (except as permitted by Delaware General Corporation Law as the same may be hereinafter amended from time to time): (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required to be submitted to stockholders for approval; or (ii) adopting, amending or repealing any bylaw of the Corporation.
(b) Corporate Governance and Nominating Committee. The Board of Directors shall establish a Corporate Governance and Nominating Committee of the Board of Directors. The Corporate Governance and Nominating Committee may: (i) nominate candidates for election as directors of the Corporation at any meeting of stockholders called for election of directors (an "Election Meeting"); (ii) nominate candidates to fill any vacancies on the Board of Directors which may exist from time to time; and (iii) have such other powers and authority as the Board of Directors may delegate to it from time to time.
(c) Compensation Committee. The Board of Directors shall establish a Compensation Committee of the Board of Directors. The Compensation Committee shall have such powers and authority as the Board of Directors may delegate to it from time to time.
(d) Audit and Legal Committee. The Board of Directors shall establish an Audit and Legal Committee of the Board of Directors. The Audit and Legal Committee shall have such powers and authority as the Board of Directors may delegate to it from time to time.
SECTION 9. COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
SECTION 10. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Corporation's certificate of incorporation, the Board of Directors shall have authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.
SECTION 11. PARTICIPATION IN MEETING BY TELEPHONE OR OTHER ELECTRONIC MEDIA. Unless otherwise restricted by the Corporation's certificate of incorporation or these bylaws, members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or committee by means of conference telephone, internet conferencing or similar communications equipment by means of which all persons participating in the meeting can hear or otherwise communicate with each other, and such participation in a meeting shall constitute presence in person at such meeting.
SECTION 12. NOMINATIONS OF DIRECTOR CANDIDATES. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Corporation's certificate of incorporation with respect to the right of directors to fill any vacancies on the Board of Directors, and the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, and shall be made:
(a) by or at the direction of the Board of Directors (or any duly authorized committee thereof, including the Corporate Governance and Nominating Committee); or
(b) by any stockholder of the Corporation: (i) who is a stockholder of
record on the date of the giving of the notice provided for in this
Section 12 and on the record date for the
determination of stockholders entitled to vote at such meeting; and
(ii) who complies with the notice procedures set forth in this Section
12.
In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary of the Corporation must be delivered to or mailed and received at the principal executive offices of the Corporation:
(a) in the case of an annual meeting of stockholders, not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the immediately preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the annual meeting of stockholders is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder in order to be timely must be so received not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting of stockholders was first made; and
(b) in the case of a special meeting of stockholders called for the purpose of electing directors, not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. For purpose of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, or reported in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
To be in proper written form, a stockholder's notice to the Secretary of the Corporation must set forth:
(a) as to each person whom the stockholder proposes to nominate for election as a director: (i) the name, age, business address and residence address of the person; (ii) the principal occupation or employment of the person; (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person as of the record date for the meeting (if such date shall then have been made publicly available and shall have occurred) and as of the date of such
notice; and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; and
(b) as to the stockholder giving the notice: (i) the name and address of such stockholder and beneficial owner, if any, as they appear on the Corporation's books; (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available and shall have occurred) and as of the date of such notice; (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nominations are to be made by such stockholder; (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by the written consent to such nomination of each person proposed as a nominee and such person's written consent to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 12, or as otherwise provided in the Corporation's certificate of incorporation with respect to the right of directors to fill any vacancies on the Board of Directors, and the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.
ARTICLE IV
NOTICES
SECTION 1. NOTICE. Whenever any notice is required to be given to any director or stockholder under any provision of statute or of the Corporation's certificate of incorporation or of these bylaws, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given orally in person or by electronic mail to the
electronic mail address, if any, provided by such director, telegram, telex, radiogram or cablegram, and such notice shall be deemed to be given when the recipient receives the notice personally, by telephone or internet or when the notice, addressed as provided above, has been delivered to the company, or to the equipment transmitting such notice.
SECTION 2. WAIVER OF NOTICE. Whenever any notice is required to be given under any provision of statute or of the Corporation's certificate of incorporation or of these bylaws, a written waiver thereof, signed (manually or electronically by electronic mail) by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Corporation's certificate of incorporation or these bylaws. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
ARTICLE V
OFFICERS
SECTION 1. SELECTION. The Board of Directors may appoint such officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by or at the direction of the Board of Directors. The officers so appointed may include a Chairman of the Board, President, one or more Vice Chairmen, one or more Vice Presidents (including Executive, Senior, First, regular and Assistant Vice Presidents), a Secretary and a Treasurer, and one or more lesser officers as may be deemed appropriate. The Chief Executive Officer also may appoint officers of the level of Senior Vice President and below and such agents as the Chief Executive Officer shall deem necessary, at any time, which officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by or at the direction of the Board of Directors or the Chief Executive Officer. Any number of offices may be held by the same person, unless the Certificate of Incorporation otherwise provides.
SECTION 2. COMPENSATION. The salaries of all executive officers of the Corporation shall be fixed by the Board of Directors or by the Compensation Committee or another authorized committee of the Board of Directors.
SECTION 3. TERM, REMOVAL AND VACANCIES. Each officer of the Corporation shall hold office until his or her successor is elected and qualified, or until his or her earlier resignation or removal from office. Any officer elected or appointed by the Board of Directors may be removed from office at any time, with or without cause, by the affirmative vote of a
majority of the Board of Directors. Any officer also may be removed from office at any time by the Chief Executive Officer. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors or by the Chief Executive Officer.
SECTION 4. CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER.
(a) Chief Executive Officer. At the first meeting of each newly-elected Board of Directors, the Board of Directors shall designate the Chairman of the Board or President as the Chief Executive Officer of the Corporation; provided, however, that if a motion is not made and carried to change the designation, the designation shall be same as the designation for the preceding year; provided, further, that the designation of the Chief Executive Officer may be changed at any regular or special meeting of the Board of Directors. The Chief Executive Officer shall be responsible to the Board of Directors for the general supervision and management of the business and affairs of the Corporation. The Chairman of the Board or President who is not the Chief Executive Officer shall be subject to the authority of the Chief Executive Officer, but shall exercise all of the powers and discharge all of the duties of the Chief Executive Officer, during the absence or disability of the Chief Executive Officer.
(b) Chief Operating Officer. At any meeting of the Board of Directors, the Board of Directors may designate a Chief Operating Officer of the Corporation. The Chief Operating Officer shall perform all duties incident to that office and such other duties as may be delegated to him or her by or at the direction of the Board of Directors, the Executive Committee of the Board of Directors, or the Chief Executive Officer.
SECTION 5. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be selected by, and from among the membership of, the Board of Directors. He or she shall preside at all meetings of the stockholders and of the Board of Directors. He or she shall perform all other duties and functions incident to the office of Chairman of the Board of Directors, and such other duties and functions as may be assigned to him or her from time to time by the Board of Directors. He or she shall be, ex officio, a member of all standing committees except the Compensation Committee, the Corporate Governance and Nominating Committee and the Audit and Legal Committee. Ex officio members of standing committees shall have all the same rights (including, without limitation, the right to vote) and all the same responsibilities as any other member thereof. Except where by law the signature of the President of this Corporation is required, the Chairman of the Board of Directors shall possess the same power and authority as the President to sign all certificates, contracts, instruments, papers and documents of every conceivable kind and character whatsoever, in the name and on behalf of this Corporation, which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all of the powers and discharge all of the duties of the President.
SECTION 6. PRESIDENT. The President shall be selected by the Board of Directors. During the absence or disability of the Chairman of the Board of Directors, or while such office
is vacant, the President shall perform all duties and functions, and while so acting shall have all of the powers and authority of the Chairman of the Board of Directors. The President shall perform all duties incident to the office of President, and such other duties as may be prescribed by or at the direction of the Board of Directors, the Executive Committee of the Board of Directors, or the Chief Executive Officer. The President shall be, ex officio, a member of all standing committees except the Compensation Committee, the Corporate Governance and Nominating Committee and the Audit and Legal Committee. Ex officio members of standing committees shall have all the same rights (including, without limitation, the right to vote) and all the same responsibilities as any other member thereof.
SECTION 7. VICE CHAIRMEN. One or more Vice Chairmen (who need not be members of the Board of Directors) may be selected by the Board of Directors. The Vice Chairmen shall perform all duties incident to their office, and such other duties as may be delegated to them by or at the direction of the Board of Directors, any executive committee, or the Chief Executive Officer.
SECTION 8. SECRETARY. The Secretary or an Assistant Secretary, or, during their absence or disability, a Secretary Pro Tem designated by the Board of Directors or the Chief Executive Officer, shall attend all meetings of the Board of Directors and all meetings of the stockholders, shall record all the proceedings thereof in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, all notices required by statute, bylaw or resolution, and shall perform such other duties incident to his or her office or as may be prescribed by or at the direction of the Board of Directors or the Chief Executive Officer. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary and Assistant Secretaries shall have authority to affix the same to any instrument when its use is required or appropriate.
SECTION 9. ASSISTANT SECRETARIES. The Assistant Secretary or Assistant Secretaries shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary, and shall perform such other duties and have such other powers incident to his or her office or as may be prescribed from time to time by or at the direction of the Board of Directors or the Chief Executive Officer.
SECTION 10. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by or at the direction of the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by or at the direction of the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall deliver to the
Corporation, and shall keep in force, a bond, in such form and amount, and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his or her office and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation.
SECTION 11. ASSISTANT TREASURERS. The Assistant Treasurer or Assistant Treasurers shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer, and shall perform such other duties and have such other powers incident to his or her office or as may be prescribed from time to time by or at the direction of the Board of Directors or the Chief Executive Officer.
SECTION 12. INDEMNIFICATION AND INSURANCE.
(a) To the fullest extent permitted by these bylaws and by applicable law and regulation, as presently existing or hereafter amended, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Any person who is or was an agent of the Corporation may be indemnified to the same extent as provided above. In addition, in the event any such action, suit or proceeding is threatened or instituted against a spouse to whom a director or officer is legally married at the time the director or officer is covered under the indemnification provided herein, which action, suit or proceeding arises solely out of his or her status as the spouse of a director or officer, including, without limitation, an action, suit or proceeding that seeks damages recoverable from marital community property of the director or officer and his or her spouse, property owned jointly by them or property purported to have been transferred from the director or officer to his or her spouse, then the spouse of the director or officer shall be indemnified to the same extent as provided above. At the Corporation's election, and in its sole discretion, any person who is or was the spouse of an employee or agent of the Corporation may be indemnified to the same extent as provided above. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, raise any inference that he or she had reasonable cause to believe that his or her conduct was unlawful.
(b) To the fullest extent permitted by these bylaws and by applicable law and regulation, as presently existing or hereafter amended, the Corporation shall indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that he or she is or was a director or officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Any person who is or was an agent of the Corporation may be indemnified to the same extent as provided above. In addition, in the event any such action or suit is threatened or instituted against a spouse to whom a director or officer is legally married at the time the director or officer is covered under the indemnification provided herein, which action or suit arises solely out of his or her status as the spouse of a director or officer, including, without limitation, an action or suit that seeks damages recoverable from marital community property of the director or officer and his or her spouse, property owned jointly by them or property purported to have been transferred from the director or officer to his or her spouse, then the spouse of the director or officer shall be indemnified to the same extent as provided above. At the Corporation's election, and in its sole discretion, any person who is or was the spouse of an employee or agent of the Corporation may be indemnified to the same extent as provided above.
(c) To the extent that a present or former director, officer, or spouse of the director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this Section, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this Section (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, spouse of the director or officer, employee, agent or spouse of the employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this Section. Unless prohibited by applicable law or regulation, or otherwise required by Section 18(k) of the Federal Deposit Insurance Act, as amended, such determination shall be made with respect to a person who is a director or officer or the spouse of a director or officer at the time of the determination (a "D&O Claimant") by Independent Legal Counsel (as defined below) in a written opinion to the Board of Directors, a copy of which shall be delivered to the D&O Claimant, as follows:
1. the Disinterested Directors (as defined below) shall select Independent Legal Counsel by majority vote, even if such Disinterested Directors constitute less than a quorum, and direct that the determination be made by such counsel (or, if there are no Disinterested Directors, the full Board of Directors shall select Independent Legal Counsel by majority vote and shall direct that the determination be made by such counsel); unless there shall have occurred within two years prior to the date of the commencement of the Proceeding for which indemnification is claimed a "Change of Control" as defined in the Amended and Restated Comerica Incorporated 1997 Long-Term Incentive Plan as in effect on September 24, 2002 (or, if applicable, as in effect on such later date as determined by written agreement between the Corporation and the D&O Claimant), in which case the Independent Legal Counsel shall be selected by the D&O Claimant unless the D&O Claimant shall request that such selection be made by the Board of Directors. If it is so determined that the D&O Claimant is entitled to indemnification, payment to the D&O Claimant shall be made within 10 days after such determination.
2. the term "Disinterested Directors" shall mean directors that are not and were not parties, and who are not and were not threatened to be made parties, to such Proceeding;
3. "Independent Legal Counsel" shall mean a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and that, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the D&O Claimant in an action to determine the D&O Claimant's rights under this Section.
Such determination may be made with respect to any person other than a D&O Claimant seeking indemnification under subsections (a) and (b) of this Section by the Corporation's Chairman, Chief Executive Officer, President, Vice Chairman or General Counsel, or by their designees.
(e) Expenses (including attorney's fees) incurred by an officer, director or spouse of an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer or spouse to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Section. Such expenses (including attorneys' fees) incurred by former directors or officers, their spouses or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or Disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office.
(g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, spouse of a director or officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Section.
(h) For the purposes of this Section, references to "the Corporation" include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers, spouses of directors or officers, and employees or agents, so that any person who is or was a director, officer, spouse of a director or officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.
(i) For purposes of this Section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Section.
(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent, and with respect to any spouse of a director or officer, shall continue following the time the director or officer spouse ceases to be a director or officer even if the marriage of the individuals terminates prior to the end of the period of coverage, and shall inure to the benefit of the heirs, executors and administrators of such a person.
(k) The Court of Chancery shall have exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this Section or under any agreement, vote of stockholders or Disinterested Directors, or otherwise. The Court of Chancery may summarily determine the Corporation's obligation to advance expenses (including attorneys' fees).
ARTICLE VI
STOCK AND TRANSFERS
SECTION 1. CERTIFICATES OF STOCK. Shares of the Corporation's stock may be
certificated or uncertificated, as provided under Delaware law at any time. All
certificated shares of stock shall exhibit on the certificate the holders' name
and number of shares and shall be signed by, or in the name of the Corporation
by the Chairman or a Vice Chairman of the Board of Directors, or the President
or a Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation. Any or all the
signatures on the certificate may be by facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if such person were such officer, transfer agent or
registrar at the date of issue. All holdings of shares of stock of the
Corporation shall be numbered and shall be entered into the books of the
Corporation as they are issued. If the Corporation shall be authorized to issue
more than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof, and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation may issue to represent such class or series of stock or, in the case
of uncertificated shares, contained in a written notice that shall be sent to
the registered owner within a reasonable time after the issuance or transfer of
such uncertificated stock, provided that, except as otherwise provided in
Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the
Corporation may issue to represent such class or series of stock or, in the case of uncertificated shares, contained in the written notice sent to the registered holder as set forth above, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof, and the qualifications, limitations or restrictions of such preferences and/or rights.
SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing the issuance of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against it with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 3. TRANSFERS OF STOCK. The Corporation shall make transfers of stock on the Corporation's books only by the record holder of such stock or by his or her duly authorized agent or attorney-in-fact, and, in the case of stock represented by a certificate, upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer.
SECTION 4. FIXING RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 5. REGISTERED STOCKHOLDERS. The Corporation shall have the right to treat the person registered on its books as the owner of shares as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. The Board of Directors, subject to any restrictions contained in its Certificate of Incorporation, may declare and pay any dividends upon the shares of its capital stock either (a) out of surplus as defined in and computed in accordance with the provisions of the governing statute, or (b) in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock, subject to the provisions of the statute and of the Corporation's certificate of incorporation.
SECTION 2. RESERVES. The Board of Directors shall have power and authority to set apart, out of any funds available for dividends, such reserve or reserves, for any proper purpose, as the Board of Directors in its discretion shall approve, and the Board of Directors shall have the power and authority to abolish any reserve created by the Board of Directors.
SECTION 3. VOTING SECURITIES. Unless otherwise directed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, or, in the case of their absence or inability to act, the Vice Chairmen or Vice Presidents, in order of their seniority, shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or to execute in the name or on behalf of the Corporation, a proxy authorizing an agent or attorney-in-fact for the Corporation to attend and vote at any meetings of security holders of Corporations in which the Corporation may hold securities, and at such meetings (s)he or his or her duly authorized agent or attorney-in-fact shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors by resolution from time to time may confer like power upon any other person or persons.
SECTION 4. CHECKS. All checks, drafts and orders for the payment of money shall be signed in the name of the Corporation in such manner and by such officer or officers or such other person or persons as the Board of Directors shall from time to time designate for that purpose.
SECTION 5. CONTRACTS, CONVEYANCES, ETC. When the execution of any contract, conveyance or other instruments has been authorized without specification of the executing officers, the Chairman of the Board, Chief Executive Officer, President, any Vice Chairman or any Vice President, and the Secretary or any Assistant Secretary, may execute the same in the name and on behalf of this Corporation and may affix the corporate seal thereto. The Board of Directors shall have power to designate the officers and agents of this Corporation or any of its subsidiaries or affiliates who shall have authority to execute any instrument on behalf of this Corporation.
SECTION 6. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
SECTION 7. SEAL. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal" and "Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.
SECTION 8. MICHIGAN CONTROL SHARE STATUTE. Pursuant to Section 794 of the Michigan Business Corporation Act ("MBCA"), Chapter 7B of the MBCA shall not apply to the Corporation or control share acquisitions (as such term is defined in Section 791 of the MBCA) of the shares of the Corporation's capital stock.
ARTICLE VIII
AMENDMENTS
SECTION 1. AMENDMENT BY REGULAR VOTE. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Corporation's certificate of incorporation, at any regular meeting of the stockholders or of the Board of Directors, or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws is contained in the notice of such special meeting.
SECTION 2. AMENDMENT BY 75% VOTE. The affirmative vote of 75% of the total Board of Directors is required to alter, amend, repeal, add to or otherwise change the effects of Article V, Section 12; or this Article VIII, Section 2 of the Corporation's bylaws.
EXHIBIT 10.1
SUPPLEMENTAL BENEFIT AGREEMENT
THIS AGREEMENT is made by and between Comerica Incorporated, a Delaware corporation (the "Company"), and Eugene A. Miller (the "Executive") as of the 19th day of September, 2002.
WHEREAS, the Company has employed the Executive since 1955 and the Executive intends to retire as Chairman of the Board of the Company in September, 2002; and
WHEREAS, in order to enable a stable transition and ensure that the Executive will continue to be available to the Company, the Company wishes to provide the Executive with the benefits set forth in this Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree as follows:
1. Retiree Medical and Dental Benefits. The Company shall provide the Executive and his spouse with medical and dental benefits for the remainder of their respective lifetimes that are substantially similar to those provided to the Executive and his spouse under the Comerica group healthcare plan at the date of execution of this Agreement; provided, however, that such benefits shall be coordinated with any medical benefits the Executive or his spouse may become entitled to receive from a subsequent employer, Medicare, Social Security or any similar source applying generally accepted procedures for the coordination of benefits. Such benefits shall vest upon the date of the Executive's retirement as Chairman of the Board of the Company (the "Date of Retirement").
2. Administrative and Security Services. The Company shall continue to provide the Executive with administrative and security services for the following time periods (collectively, "Administrative and Security Services"):
A. For a period beginning on the Executive's Date of Retirement and ending on the three-year anniversary of the Date of Retirement (the "Three Year Period"): (i) continuing computer technological services, equipment and maintenance, (ii) monitoring, including home security, and (iii) the service and other fees relating to the foregoing at the Executive's home and office locations; and
B. For a period beginning on the Executive's Date of Retirement and ending on the five-year anniversary of such Date of Retirement, continuing office space and administrative support in a mutually agreeable location as well as the Executive's parking at the Company's headquarters.
3. Club Memberships. During the Three Year Period, the Company shall continue to provide the Executive with club dues and other fees related to the Executive's membership in the clubs to which the Executive currently belongs and for which the Company currently pays such dues and fees.
4. Tax Return Preparation. For the 2002, 2003 and 2004 calendar years, the Company shall continue to pay for the preparation of federal, state and local tax returns for the Executive and his spouse on the same basis as such services are currently provided by the Company.
5. Reimbursement of Company-Related Expenses. The Company shall reimburse the Executive for all other reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, Company business, including, but not limited to, those matters set forth in Section 6 hereof.
6. Cooperation. The Executive agrees to cooperate with the Company and its affiliates following his retirement by making himself available to testify or be deposed in any action or proceeding relating to the Company or its affiliates, and to assist the Company by providing information and meeting with representatives of the Company or its affiliates, as may be reasonably requested by the Company from time to time. The Executive further agrees to make himself available on occasion, at the Executive's convenience in the Executive's discretion, to attend Company-sponsored corporate and business functions, as may be reasonably requested by the Company.
7. Confidentiality. The Executive will hold in a fiduciary capacity for the benefit of the Company all secret or confidential information relating to the Company or any of its affiliates that is not public knowledge (other than as a result of the Executive's violation of this Section 7) ("Confidential Information"). The Executive shall not divulge Confidential Information at any time, except with the prior written consent of the Company or as otherwise required by law or legal process.
8. Binding Effect. This Agreement shall extend to and be binding upon and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. The Company shall require any successor (whether direct or indirect) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to fully perform this Agreement. This Agreement may not be assigned by the Executive.
9. 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 affiliates, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or its affiliates.
10. Survival. The provisions of this Agreement shall survive a Change in Control of the Company, as defined in the Amended and Restated 1997 Long Term Incentive Plan. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto.
IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date and year first above written.
EXECUTIVE COMERICA INCORPORATED
/s/Eugene A. Miller By: /s/ Ralph W. Babb, Jr.
----------------------------- --------------------------------------
Eugene A. Miller Ralph W. Babb, Jr.
President and Chief Executive Officer
By: /s/ James R. Tietjen
--------------------------------------
James R. Tietjen
Senior Vice President
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EXHIBIT (11) - STATEMENT RE: COMPUTATION OF NET INCOME PER COMMON SHARE
COMPUTATION OF NET INCOME PER COMMON SHARE
COMERICA INCORPORATED AND SUBSIDIARIES
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
BASIC:
Average shares outstanding 174 178 176 178
======== ======== ======== ========
Net income $ 24 $209 $395 $511
Less preferred stock dividends - 4 - 12
-------- -------- -------- --------
Net income applicable to common
stock $ 24 $205 $395 $499
======== ======== ======== ========
Basic net income per common share $0.14 $1.16 $2.25 $2.81
DILUTED:
Average shares outstanding 174 178 176 178
Nonvested stock - - - -
Common stock equivalent:
Net effect of the assumed
exercise of stock options 2 2 2 2
-------- -------- -------- --------
Diluted average shares 176 180 178 180
======== ======== ======== ========
Net income $ 24 $209 $395 $511
Less preferred stock dividends - 4 - 12
-------- -------- -------- --------
Net income applicable to common
stock $ 24 $205 $395 $499
======== ======== ======== ========
Diluted net income per common share $0.14 $1.14 $2.22 $2.77
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EXHIBIT (99.1) CEO CERTIFICATION OF PERIODIC REPORT
CERTIFICATION OF PERIODIC REPORT
I, Ralph W. Babb, Jr. of Comerica Incorporated (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 12, 2002
/s/ Ralph W. Babb, Jr.
---------------------------
Ralph W. Babb, Jr.
Chairman, President and
Chief Executive Officer
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EXHIBIT (99.2) CFO CERTIFICATION OF PERIODIC REPORT
CERTIFICATION OF PERIODIC REPORT
I, Elizabeth S. Acton of Comerica Incorporated (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 12, 2002
/s/ Elizabeth S. Acton
--------------------------
Elizabeth S. Acton
Chief Financial Officer
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