Comerica
Annual Report 1997

Plain-text annual report

S H A R I N G S U C C E S S Comerica Incorporated 1997 Annual Report Financial Highlights Year Ended December 31 (dollar amounts in millions, except per share) Income Statement 1997 1996 Amount Percent Change Net interest income Net income Net income, excluding restructuring charge Basic net income per share Basic net income per share, excluding restructuring charge Diluted net income per common share Diluted net income per common share, excluding restructuring charge Cash dividends per common share Book value per common share Market value per share $ 1,443 530 530 3.24 3.24 3.19 3.19 1.15 16.02 60.17 $ 1,412 417 477 2.41 2.77 2.38 2.73 1.01 14.70 34.92 $ 31 113 53 .83 .47 .81 .46 .14 1.32 25.25 2% 27 11 34 17 34 17 14 9 72 Ratios Return on average common shareholders’ equity Return on average common shareholders’ equity, excluding restructuring charge Return on average assets Return on average assets, excluding restructuring charge Average common shareholders’ equity as a percentage of average assets Balance Sheet (at December 31) Total assets Total earning assets Loans Deposits Common shareholders’ equity 21.32% 15.98% 21.32 1.52 1.52 6.91 18.33 1.22 1.40 7.47 $36,292 33,104 28,895 22,586 2,512 $34,206 31,110 26,207 22,367 2,366 $2,086 1,994 2,688 219 146 6% 6 10 1 6 All per share amounts have been adjusted for the three-for-two stock split declared January 15, 1998. .Excluding restructuring charge Diluted Net Income per Share (in dollars) 3.75 3.00 2.25 1.50 0.75 Net Income (in millions) 625 500 375 250 100 .Excluding restructuring charge 0.0 93 94 95 96 97 0 93 94 95 96 97 Comerica Incorporated 1 Letter to Shareholders Comerica’s financial objec- tive is to consistently rank among the top-10 of the 50 largest bank holding compa- nies in the nation, as mea- sured by return on equity. I believe the keys to consistent top-10 performance are prof- itability, growth and quality. At Comerica, superior prof- itability is achieved through hard work and a clear focus on what we do well. We reinvest in growth business- es, rationalize those that have the potential for superi- or returns, and divest busi- nesses or activities that are not integral to our future success. Growth is achieved by emphasizing our core com- petencies. We are among the nation’s leaders in business lending. Over the last 10 years, our commercial loan growth has averaged an impressive 11 percent, with only minor fluctuations year-to-year. We will contin- ue to be a commercial loan generator going forward. Like a three-legged stool, consistent top-10 perfor- mance also requires quality. This includes credit and ser- vice quality, both of which are absolutely essential. Banks cannot consistently generate exceptional profits without being top-flight credit underwriters. To com- pete effectively, they also must be providers of quality products and services. We at Comerica are recognized industrywide for our relent- less focus on maintaining superior credit quality. We also are committed to deliv- ering the highest quality financial services. Our success is attributable to an exceptional team of employees, over 90 percent of whom are shareholders. They work hard every day to meet and exceed the expec- tations of their customers, and are determined that Comerica be recognized as a leader in the financial ser- vices industry. Dividends per Common Share (in dollars) Return on Average Common Equity (in percentages) 1.25 1.0 0.75 0.50 0.25 25.0 20.0 15.0 10.0 5.0 0.0 93 94 95 96 97 0.0 93 94 95 96 97 .Comerica .Excluding restructuring charge .Industry average (based on 50 largest U.S. bank holding companies) 2 Comerica Incorporated In terms of 1997 perfor- mance, we are pleased with the results. Net income for the year rose 27 percent to $530 million (up 11 percent, excluding the 1996 Direction 2000: Phase III restructuring charge). Return on assets was 1.52 percent and return on common equity was 21.32 percent. Our stock price rose 72 percent in 1997, out pac- ing both the Keefe 50-Bank Index (up 43 percent) and the S&P 500 Index (up 31 per- cent). We also marked our 29th consecutive year of divi- dend increases. At year-end 1997, our price- to-earnings ratio ranked 30th among the 50 largest bank holding companies in the na- tion. This ranking improved several positions during the year, but is still not in line with our financial results. We view this as an oppor- tunity for our shareholders as the market continues to take notice of our performance. During the four quarters of 1997, Comerica consistently ranked among the top-10 bank holding companies in the nation, in terms of return on common equity. Our job now is to extend consistency from quarters to years. Let me cite several examples of how we will do that. Comerica Incorporated 3 Comparison of Five Year Cumulative Total Return Among Comerica Incorporated, Keefe 50-Bank Index and S&P 500 Index (Assumes $100 Invested on 12/31/92 and Reinvestment of Dividends) Comerica Keefe S&P 500 Michigan market. I believe performance and execution will lead us to opportunities down the road. Today, acquisition pricing is very expensive. All of us at Comerica have worked too hard building the financial performance of our company to harm it with an acquisition that doesn’t measure up. In our nearly 150-year history, we have successfully integrat- ed countless mergers and acquisitions. There will be a time, a place and an opportu- nity again, but we must be selective. I appreciate your interest and I thank you for your support. Eugene A. Miller Chairman and Chief Executive Officer $400 $300 $200 $100 92 93 94 95 96 97 Our core competency is business lending. We are a leader because of the people we select, the training we provide, and the relationship orientation we emphasize, all backed up by a strong credit process. To further strengthen this core compe- tency, we are investing in the marketing, technology and talent that will enable us to enhance the services we provide. On the retail side, we are a gatherer of consumer assets and operate a dominant fran- chise in Michigan. We will continue to develop this franchise through product revisions and enhancements to our distribution system. We have invested signifi- cantly in our customer data- base. To me, having that knowledge is an important competitive advantage, par- ticularly when it is com- bined with our people. Although retail banking is important to us in Texas and California, it is mainly done on an accommodation basis. In these states, we see our- selves as the “business bank of choice.” We also will continue to grow our investment services. They are critical to our success, as they protect current relation- ships within the bank, expand existing relationships and provide incremental fee in- come. Going forward, we will become even more involved in distributing investment products and 401(k) services. As this annual report goes to press, we are wrapping up implementation of Direction 2000: Phase III. The revenue enhancements and cost reduc- tion ideas developed by Comerica employees will result in an annual pre-tax earnings impact of $110 mil- lion in 1999. By the end of the fourth quarter of 1997, we had implemented about 80 percent of the Phase III ideas, valued at 70 percent of the annual cost savings target, and 94 percent of the annual revenue target. As industry consolidation continues, I am frequently asked about Comerica’s mar- ket expansion plans. We con- tinue to look at growth areas of the country where we can prosecute our brand of bank- ing profitably, as we do in Texas and California. Both of these states have proven to be a good fit with the mature 4 Comerica Incorporated Sharing Success Nineteen ninety-seven was a tremendous year for Comerica. We share our success with our key constituencies—shareholders, customers, employees and the communities we serve. We do this for: .shareholders through appreciation of and services; our stock price—72 percent in 1997— record earnings per share, and our 29th consecutive year of dividend increases; .customers by delivering quality products .employees by sharing the financial rewards .communities we serve by forging financial of our company becoming a top financial performer on a consistent basis; and, partnerships with residents, groups and organizations. Comerica Incorporated 5 Direction 2000: Phase III on Target In 1997, employees began implementing their ideas to simplify and streamline processes at Comerica. In order to carry out plans as efficiently and effectively as possible, an implementation team was mobilized. Hard work and careful moni- toring are paying dividends. “We are right where we expected to be at this stage in the process,” notes Comerica Chairman Eugene A. Miller. The revenue enhancement and cost reduction ideas generated during Phase III will result in an annual pre-tax earnings impact of $110 million in 1999. Twenty percent of this benefit was realized in 1997, 80 percent will be realized in 1998 and the full effect in 1999. At year-end 1997, 1,600 of more than 2,000 ideas have been completed. Among them: used, and the conversion to a less-expensive enve- lope printing process; .a reduction in the type and quantity of envelopes .the use of a single provider for copier services, .implementation of more than 20 telecommuni- .the introduction of a new software product that cations ideas, which is expected to save Comerica $3 million annually; which is expected to save Comerica nearly $1 million annually; eliminates the need for microfiche and its associated costs, while reducing computer paper report volume by 75 percent; .the empowerment of branch employees with addi- tional levels of authority, and a reduction in their clerical responsibilities, so they can serve customers better; and, .a 20 percent reduction in the number of invoices processed as a result of consolidating vendors and obtaining summary billings. Comerica will complete implementation of remaining Phase III ideas by the end of the first quarter of 1998. The Board of Directors of Comerica Incorporated increased the quarterly cash dividend by 10 percent in 1997 and by 12 percent in January 1998 continuing a long history of dividend increases. Excess capital, after support- ing prudent growth in our businesses and acquisitions, is being returned to share- holders through a reduction in shares outstanding. Over the last two years, Comerica has repurchased more than 15 million shares—almost 13 percent—of Comerica’s out- standing shares. That repre- sents nearly $800 million of shareholders’ capital. We continue to believe this is the most appropriate use of excess capital from a share- holder value perspective. In 1997, the total market value of Comerica’s shares increased 68 percent to more than $9.4 billion. 6 Comerica Incorporated $75 $60 $45 $30 $15 $0 88 89 90 91 92 93 94 95 96 97 Comerica December 31 Stock Prices On January 15, 1998, Comerica directors authorized a three-for-two stock split effected in the form of a 50 percent stock dividend. The stock prices shown here have been adjusted to reflect the split. among the nation’s 50 largest bank holding companies in the nation. Comerica’s highest performance match to date—$5.1 million as a result of 1996 profits—was repeated as a result of the corporation’s strong financial performance in 1997. Phase III Results Financial Statement Impact (in millions) $110 $0 1Q97 1Q98 1Q99 Phase III will have an annual earnings impact of $110 million beginning in 1999. Approximately 20 percent of the earnings impact will come from revenue enhancements; 80 percent from cost reductions. The Direction 2000 Gainshare Incentive Plan reserves the first $10 million in savings from Phase III and distributes it in the form of stock to colleagues present during Phase III who also are with the corporation at the time it achieves an annual top-10 return on equity (ROE) performance. Comerica achieved its top-10 ROE ranking in 1997 and the Gainshare Incentive Plan pay out occurred in 1998 as the annual report went to press. Every month, 244 Key Performance Measures (KPMs) affecting external customers are monitored for quality at the corporate level. Timeliness, accuracy, respon- siveness and efficiency are among the performance mea- sures monitored. In 1997, Comerica colleagues contin- ued the upward trend in KPM ratings. The Employee Stock Purchase Plan provides col- leagues an opportunity to own Comerica stock and share the benefits of the financial results they helped create. Comerica provides a 15 percent match on quarter- ly contributions and another five percent match if the stock is kept for a two-year period without any withdraw- als. Comerica is committed to helping every colleague become an employee-owner. With the Performance Match Program, colleagues share in Comerica’s success in meeting its financial goals. The annual payout to col- leagues who are enrolled in the 401(k) Preferred Savings Plan is based on Comerica’s ROE performance and how Comerica’s ROE rates Comerica Incorporated 7 Our alliance with PaineWebber, the $60 billion securities firm with approximately 300 offices and nearly 6,300 investment executives, broad- ens Comerica’s national network for private banking services. Current relationship Pursuing relationship Comerica is ranked 8th among the top 100 SBA 7(a) lenders in the country. Our expanded retail product line provides customers with the most convenient banking options available today, giv- ing them more ways to save money when they do their banking. The “Choice” and “Premier” retail product packages reward customers with strong banking relation- ships by providing special bonuses and discounts on bank services, and non-bank benefits such as a discount dining card. The new pack- ages premiered in Michigan in late 1997. Michigan’s largest inde- pendent investment advisor, Munder Capital Manage- ment—with whom Comerica has a partnership interest— grew to $45 billion in man- aged client assets in 1997. Munder’s Micro-Cap Equity Fund recorded the second best performance among the more than 5,500 mutual funds in 1997. Comerica introduced free instant quotes on term life insurance through its web site (comerica.com). The feature provides an alternative and interactive way for people to access and learn about insur- ance products. Comerica Insurance Services offers life, disability, long-term care, group benefits, and property and casualty insurance to businesses and individuals. Consumers made more than six million purchases with the VISA Check ComeriCARD in 1997 for goods and services worth more than $300 million. The VISA Check ComeriCARD now is accepted at more than 12 million VISA merchants around the globe. The Rich Rewards Club is available to customers age 50 and over who meet mini- mum balance requirements. Benefits of membership include personalized checks at no charge, bonus interest, brokerage discounts and an exclusive travel service. In addition to our extensive branch network, customers can access Comerica in the supermarket through our ComeriMARTs; through AccessOne, our branchless banking system; by tele- phone; by ATM; and, by per- sonal computer. Through Comerica’s private bankers, customers have access to highly experienced specialists in investment management, estate planning and administration, tax, financial and retirement plan- ning, real estate and lending. Clients receive personalized, highly responsive service and an array of high quality financial products delivered in the most convenient man- ner by qualified financial professionals. 8 Comerica Incorporated Investing in New Opportunities For Comerica, investing in new opportunities is key to achieving its goal of becoming a consistent top-10 performer, as measured by return on equity. Key investments in 1997 included the: .enhancing of a customer knowledge data- base and customer information system, to provide Comerica with a greater under standing of its customers, their preferences for financial services, the ways and frequency in which they access us and their profitability; broadening Comerica’s national network for personal trust services; .expansion of the PaineWebber alliance, .expansion of the Small Business .nationwide expansion of Comerica’s Administration (SBA) lending program to a national business; home banking program, giving consumers and small businesses the ability to directly access their accounts via Quicken® and QuickBooks® personal computer software; .leveraging of Comerica’s participation in the Integrion Financial Network, which provides interactive banking and electronic commerce solu- tions to member banks; demand for Comerica’s products and services; response to our customers’ desire for greater convenience; .expansion of product distribution channels in .hiring of talent to keep pace with the increasing .transition to corporate-wide electronic mail; .implementation of an expandable, flexible profit- .dedication of the human and capital resources nec- ability reporting system to meet current and future management information requirements; and, essary to prepare computer systems and applica- tions for the new millennium. Responding to the sophisti- cated needs of retail and business customers in all of our markets, Comerica devel- oped a national product link- ing a customer’s checking account to an investment account. Called the Comerica Asset Management Account for retail customers, and the Comerica Business Sweep Account for business cus- tomers, the product enables customers to earn higher interest when funds are swept daily between accounts. Comerica Incorporated 9 The Business Bank of Choice Comerica continues to combine strong commercial loan growth with consistently solid credit quality. Our business customers are primarily closely held or owner-managed companies with annual sales of less than $250 million. We also have stable, long-term financial relationships with many publicly held Fortune 1000 corporations. Comerica’s reputation in middle market bank- ing is unparalleled. Our heritage is based on lending to medium-sized businesses over many years and through numerous economic cycles. We evaluate a firm’s potential as well as its assets, looking beyond the balance sheet to such issues as position within the industry and depth of management experience. Our emphasis on the commercial market means we deliver the fullest array of corporate financial products and services. And, we do so in a con- sistent, reliable, accurate and timely manner. asset-based lending business; In 1997, Comerica fine-tuned its focus as a pre- eminent commercial lender by: .launching Comerica Business Credit, a national .developing a number of leading-edge imaging .enhancing the delivery of other treasury manage- services for corporate customers; ment products and services to business customers, including Comerica Gateway and the Comerica Purchasing Card; including automotive, energy, healthcare, real estate, high technology and entertainment; .honing our lending expertise in special industries, .capitalizing on our reputation as one of the top .offering “best in class” capital markets products, bank providers of floor plan credit through our ser- vices to automotive dealers in select U.S. markets; including private capital raising services to respond to customers’ increasing needs for creatively struc- tured finance solutions; .opening a commercial banking subsidiary in .applying to form a commercial banking subsidiary Mexico to service mid- and large-sized corporate entities; and, in Canada. “It’s a lot like treasury manage- ment from Comerica. You know where everything is. You control where everything goes.” A pioneer in image process- ing, Comerica has developed a number of leading-edge image-based services for cor- porate customers, including checks on CD-ROM and dial-up access, which enables customers to view checks and associated documents daily at their personal computers by dialing through a modem. A number of organizations transferred their Master Trust & Custody accounts to Comerica in 1997. Master Trust & Custody services include securities settlement and custody, global custody, foreign exchange, master trust reporting, on-line data access, securities lending, cash management, perfor- mance measurement and benefit payments. Comerica ranks among the nation’s leaders with more than $117 billion in trust assets under administration. 10 Comerica Incorporated Comerica Bank-Texas, founding sponsor of the Comerica Economic Forum in Dallas, and AudioNet, the largest broadcast network on the Internet, teamed to deliv- er the first live webcast of an Economic Forum featuring Andrew Young, former U.S. congressman, U.S. ambas- sador to the United Nations and mayor of Atlanta. The forum also was broadcast on C-SPAN. We introduced a new Comerica CD-ROM, “Global and Financial Risk Management,” designed to educate financial decision- makers on current topics in treasury and risk manage- ment as well as provide them insight into the technologies employed and services offered by Comerica Bank. Our new National Checking Account product enables business customers to make deposits to a single checking account at any Comerica branch in Michigan, California, Texas and Florida. This eliminates customers having to maintain multiple accounts because they con- duct business across state lines. We made enhancements to the Comerica Purchasing Card, a payment mechanism designed to help companies maintain control, while reducing the administrative costs associated with autho- rizing, tracking, paying and reconciling small dollar pur- chases. When ranked by commer- cial and industrial loans as a percentage of total assets, Comerica Incorporated is first among the top bank holding companies in the nation. Comerica Leasing Corporation expanded its national presence and achieved a record volume— more than $350 million of equipment was leased to Comerica customers in 1997. Airplanes, locomotives, bull- dozers and production equip- ment continue to be standard leases for Comerica Leasing Corporation. We added new retirement planning software, a new workbook, a new video and re-designed other educational materials for R.E.T.I.R.E. (Real Expertise to Invest Requires Education), Comerica’s product line for 401(k) and other corporate retirement plans. Comerica Incorporated 11 Comerica Bank (Michigan) received its second consecutive “Outstanding” Community Reinvestment Act rating in 1997. This year, 225 colleagues cel- ebrated service anniversaries of at least 25 years with Comerica. Give-a-Toot is an annual Comerica-sponsored effort to collect used musical instru- ments for donation to aspir- ing music students and band programs. Comerica teamed up with the Detroit Zoo in 1997 to take a “Walk on the Wild Side,” a year-long adventure to pro- mote the Zoo as one of the finest in the country. Comerica was honored by the Michigan Minority Business Development Council for the second con- secutive year in 1997 for its exemplary record in devel- oping minority business enterprises (MBEs) and for implementing a corporate- wide reporting system for tracking its business with MBEs. The “CoStars” of Comerica- Bank-Texas mobilized to build a house through Habitat for Humanity in Houston, while the “Comerica Cares” volunteers contributed their sweat equi- ty to construct a home in Detroit. Comerica is the lead lender in Detroit’s Empowerment Zone, an 18.35 square-mile area designated for intense redevelopment. Comerica has committed $500 million in lending to consumers and small- and middle market businesses in the Empowerment Zone. Comerica’s pledge is part of a lending and investment package from Detroit’s finan- cial community worth more than $1 billion. Comerica colleagues collec- tively contributed more than $1 million to United Way in 1997. Comerica embraced the opportunity to become involved in the Museum of African American History. The museum is an impressive showpiece of African American heritage and latest addition to Detroit’s bur- geoning cultural district. More than 400 employees referred at least $1 million of business to Comerica investment areas in 1997 and earned the distinction of being members of the Comerica Million Dollar Investment Club. 12 Comerica Incorporated A Company of Exceptional Employees In this highly competitive environment in which we operate, employees must continually adapt to ensure our success. Comerica’s success is due, in large part, to our 11,000 employees, who demon- strate both a willingness and an ability to change. This is especially evident as they carry out the Direction 2000: Phase III implemen- tation plans that are helping move Comerica forward. Our employees are known for their strong focus on customers, community leadership and involvement, and spirit of volunteerism. As a learning organization, Comerica encour- ages employees to continue learning every day and here, too, they are rising to the challenge. In 1996, we established the Comerica National Quality Excellence Award to recognize employ- ees who exemplify the highest standards of customer service. Award winners are nomi- nated and selected by their peers. Ten employees received quality awards in 1997. The overall winner is Colleen Hollerbach, a treasury management administrator. Not only did colleagues recognize her high performance, but customers did, too. For this distinction, Hollerbach received 250 shares of Comerica stock. The other nine finalists each received 100 shares. Comerica colleagues throughout the corporation are contributing to the growth and well-being of the communities we serve. Employees are encouraged to be active in community affairs and to hold offices in non-profit organizations, and they do so, serving as models of corporate citizenship. Our employees enrich the communities we serve by also volunteering their time and talents in other ways. Whether it’s donating blood, giving to United Way, building and painting homes or tutoring young- sters, Comerica employees contribute their time, energy and ideas for the betterment of the communi- ties where we do business. Comerica’s corporate contri- butions help support organi- zations dedicated to improv- ing the quality of life in the communities we serve. Examples of Comerica con- tributions in 1997 include donations to the Barbara Ann Karmanos Cancer Institute, of Detroit; City Year, of San Jose, Calif.; Candlelight at Old City Park, of Dallas; and, the Jewish Federation of Palm Beach County, of Boca Raton, Fla. ROAR (Recognizing Outstanding Achievement and Results) awards totaling $710,000 were presented to 3,500 employees in 1997. Comerica Incorporated 13 Comerica Incorporated Board of Directors E. Paul Casey Chairman and Managing General Partner Metapoint Partners Audit & Legal and Directors Committees James F. Cordes Retired Executive Vice President The Coastal Corporation Audit & Legal and Risk Asset Committees J. Philip DiNapoli Managing Partner DiNapoli Companies Audit & Legal and Directors Committees Max M. Fisher Investor Compensation and Risk Asset Committees John D. Lewis Vice Chairman Comerica Incorporated and Comerica Bank Executive Committee Patricia Shontz Longe, Ph.D. Economist; Senior Partner The Longe Company Audit & Legal and Directors Committees Wayne B. Lyon Chairman, President and Chief Executive Officer Lifestyle Furnishings International, Inc. Compensation and Risk Asset Committees Gerald V. MacDonald Retired Chairman and Chief Executive Officer Comerica Incorporated Risk Asset Committee Eugene A. Miller Chairman and Chief Executive Officer Comerica Incorporated and Comerica Bank Directors, Executive and Risk Asset Committees Michael T. Monahan President Comerica Incorporated and Comerica Bank Directors, Executive and Risk Asset Committees Alfred A. Piergallini President and Chief Executive Officer Gerber Products Company Audit & Legal and Compensation Committees Howard F. Sims Chairman Sims-Varner & Associates Directors and Risk Asset Committees Martin D. Walker Principal MORWAL Investments Audit & Legal and Compensation Committees Executive Officers Eugene A. Miller Chairman and Chief Executive Officer Michael T. Monahan President John D. Lewis Vice Chairman Ralph W. Babb Jr. Executive Vice President and Chief Financial Officer John R. Beran Executive Vice President and Chief Information Officer Joseph J. Buttigieg III Executive Vice President Global/Michigan Corporate Banking Richard A. Collister Executive Vice President Corporate Staff George C. Eshelman Executive Vice President Investment Bank J. Michael Fulton President and Chief Executive Officer Comerica Bank-California Dale E. Greene Executive Vice President Credit Administration Charles L. Gummer President and Chief Executive Officer Comerica Bank-Texas John R. Haggerty Executive Vice President Consumer Finance (Secured) Thomas R. Johnson Executive Vice President Credit Policy George W. Madison Executive Vice President, General Counsel and Corporate Secretary Ronald P. Marcinelli Executive Vice President Asset-Based Businesses David B. Stephens Executive Vice President Private Banking Fenton R. Talbott Executive Vice President Community Banking Marvin J. Elenbaas First Vice President and Controller James R. Tietjen Senior Vice President and General Auditor 14 Comerica Incorporated Comerica Bank- California J. Michael Fulton President and Chief Executive Officer 333 W. Santa Clara Street San Jose, California 95113 Markets: The Bay Area (San Jose to San Francisco), Santa Cruz Coastal, Los Angeles (Los Angeles and Orange Counties) and San Diego Offices: 31 Directors Theodore J. Biagini Of Counsel Hopkins & Carley Jack C. Carsten Principal Technology Investments Leo E. Chavez Chancellor Foothill-DeAnza Community College District Jack W. Conner Chairman Comerica Bank-California J. Philip DiNapoli Managing Partner DiNapoli Companies N. John Douglas President and Chief Executive Officer Personal Achievement Radio Holding J. Michael Fulton President and Chief Executive Officer Comerica Bank-California Drew Gibson Chairman and Chief Executive Officer Gibson Speno Company Walter T. Kaczmarek Executive Vice President Comerica Bank-California Elinor Weiss Mansfield Attorney Linda R. Meier Board Member California Water Service Company Lowell W. Morse Chairman Cypress Ventures, Inc. Edward P. Roski Jr. President Majestic Realty Company David C. White Executive Vice President Comerica Bank-California Lewis N. Wolff Chairman and Chief Executive Officer Wolff-DiNapoli Comerica Bank (Michigan) Eugene A. Miller Chairman and Chief Executive Officer Comerica Tower at Detroit Center 500 Woodward Avenue Detroit, Michigan 48226 Markets: Metropolitan Detroit, Ann Arbor, Battle Creek, Grand Rapids, Jackson, Kalamazoo, Lansing, Midland, Muskegon Offices: 261 Directors Lillian Bauder, Ph.D. Vice President Corporate Affairs Masco Corp. E. L. Cox Retired Chief Executive Officer Michigan Mutual/ Amerisure Companies Accident Fund of Michigan Peter D. Cummings President Peter D. Cummings & Associates Roger Fridholm President St. Clair Group Todd W. Herrick President and Chief Executive Officer Tecumseh Products Company David Baker Lewis Chairman Lewis & Munday, P.C. John D. Lewis Vice Chairman Comerica Incorporated and Comerica Bank Eugene A. Miller Chairman and Chief Executive Officer Comerica Incorporated and Comerica Bank Michael T. Monahan President Comerica Incorporated and Comerica Bank John W. Porter Chief Executive Officer Urban Education Alliance, Inc. Heinz C. Prechter Chairman and Founder ASC Incorporated Robert S. Taubman President and Chief Executive Officer The Taubman Company,Inc. Alfred H. Taylor Jr. Trustee, Former Chairman and Chief Executive Officer The Kresge Foundation William P. Vititoe Consultant; Former Chairman and Chief Executive Officer Washington Energy Company Gail L. Warden President and Chief Executive Officer Henry Ford Health System Kenneth L. Way Chairman and Chief Executive Officer Lear Corporation Comerica Incorporated 15 Ruben E. Esquivel Vice President Community and Corporate Relations The University of Texas Southwestern Medical Center Charles L. Gummer President and Chief Executive Officer Comerica Bank-Texas Rev. Zan W. Holmes Jr. Senior Pastor St. Luke Community United Methodist Church Jake Kamin Chairman South Texas Advisory Board Comerica Bank-Texas W. Thomas McQuaid President Performance Properties Corporation Harriet Miers President Locke Purnell Rain Harrell Raymond D. Nasher Chairman Comerica Bank-Texas; Chairman The Nasher Company Calvin E. Person Owner Calvin Person & Associates Boone Powell Jr. President and Chief Executive Officer Baylor University Medical Center Bill J. Priest, Ph.D. Chancellor Emeritus Dallas County Community College District Thomas J. Tierney Chairman Corporate Communications Center, Inc. Comerica Bank- Texas Charles L. Gummer President and Chief Executive Officer Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Markets: Dallas, Fort Worth, Austin, Houston Offices: 53 Directors Carroll Baird Retired President Mrs Baird’s Bakeries, Inc. C. Dewitt Brown Jr. President and Chief Executive Officer Dee Brown Masonry James F. Cordes Retired Executive Vice President The Coastal Corporation Thomas M. Dunning Chairman Dunning Benefit Corporation . 16 Nancy H. Canary Partner Thompson, Hine and Flory E. Paul Casey Chairman and Managing General Partner Metapoint Partners John F. Daly Retired Vice Chairman Johnson Controls Don B. Dean Retired President and Chief Executive Officer Manufacturers Bank & Trust of Florida Patricia Shontz Longe, Ph.D. Economist; Senior Partner The Longe Company Randy B. Nobles President and Chief Executive Officer Comerica Bank & Trust, FSB Bill T. Smith Jr., Esq. Attorney Bill T. Smith Jr., P.A. David B. Stephens Chairman Comerica Bank & Trust, FSB; Executive Vice President Comerica Incorporated Comerica Bank & Trust, FSB (Florida) Randy B. Nobles President and Chief Executive Officer 1800 Corporate Blvd. NW Suite 200 Boca Raton, Florida 33431 Markets: Boca Raton, Fort Lauderdale, Naples, Palm Beach Gardens, Sarasota, Tampa Offices: 6 Directors Arthur R. Bradley Retired Chairman and Chief Executive Officer Comerica Bank & Trust, FSB Comerica Incorporated Comerica Investment Services Comerica Investment Services Comerica Insurance Services, Inc. Offers life, disability, long-term care, group benefits, and property and casualty insurance to businesses and individuals. Professional Life Underwriters Services, Inc. (PLUS) Provides life insurance, annuities and disability insurance products to inde- pendent insurance agents. Comerica Securities, Inc. A full service broker-dealer that offers stocks, bonds, mutual funds and annuities to individual investors, along with investment banking services. Wilson, Kemp & Associates, Inc. Offers individualized invest- ment portfolio management services to customers in the Midwest and Florida. W. Y. Campbell & Company Provides investment banking and corporate finance services to Fortune 500 companies and middle market firms. Partnership Interest: Munder Capital Management An independent investment advisory firm. Units of Comerica Incorporated (select business offices located outside of Comerica’s primary markets) Comerica Business Credit Denver Cleveland Dayton Indianapolis International Finance Chicago Hong Kong Toronto National Dealer Services Chicago Denver Personal Trust New York City Memphis Other Comerica Components Comerica Bank- Midwest, N.A. Specializes in revolving credit loans; based in Toledo, Ohio. Comerica Leasing Corporation Provides equipment leasing and financing services for businesses throughout the United States. Comerica Trust Company of Bermuda Ltd. Offers trust services for cap- tive insurance companies and offshore mutual funds. Comerica Bank Mexico Provides a wide range of corporate banking and trade finance services to middle market and large corporate companies. Comerica Community Development Center A non-conventional financial resource for housing rehabil- itation and small business enterprise in Comerica’s Michigan markets. Comerica West Incorporated U.S. Banking-West Group originates mid-sized loans to business customers with spe- cific emphasis on the Western United States. Comerica Incorporated 17 Financial Review and Reports 1997 Financial Highlights Earnings Performance Strategic Lines of Business Balance Sheet and Capital Funds Analysis Asset Quality Asset and Liability Management Consolidated Financial Statements Notes to Consolidated Financial Statements Report of Management Report of Independent Auditors Historical Review 20 20 26 28 30 32 37 41 60 60 61 18 Comerica Incorporated Table 1: Selected Financial Data Year Ended December 31 (dollar amounts in millions, except per share data) Earnings Summary Total interest income Net interest income Provision for loan losses Securities gains Noninterest income (excluding securities gains) Restructuring charge Noninterest expenses (excluding restructuring charge) Net income Per Share of Common Stock Basic net income* Diluted net income* Cash dividends declared Common shareholders’ equity Market value Year-end Balances Total assets Total earning assets Total loans Total deposits Total borrowings Medium- and long-term debt Common shareholders’ equity Daily Average Balances Total assets Total earning assets Total loans Total deposits Total borrowings Medium- and long-term debt Common shareholders’ equity Ratios Return on average assets Return on average common shareholders’ equity Efficiency ratio Dividend payout ratio Common shareholders’ equity as a percent of average assets Excluding 1996 Restructuring Charge Net income Basic net income per share of common stock Diluted net income per share of common stock Return on average assets Return on average common shareholders’ equity Efficiency ratio Dividend payout ratio 1997 1996 1995 1994 1993 $ 2,648 1,443 146 6 $02,563 1,412 114 14 $02,614 1,300 87 12 $02,092 1,230 56 3 $01,783 1,134 69 2 522 — 1,008 530 $003.24 3.19 1.15 16.02 60.17 $36,292 33,104 28,895 22,586 10,479 7,286 2,512 $34,869 32,025 27,209 21,946 9,798 5,980 2,408 493 90 1,069 417 $002.41 2.38 1.01 14.70 34.92 $34,206 31,110 26,207 22,367 8,731 4,242 2,366 $34,195 31,370 25,352 22,258 8,850 4,745 2,554 487 — 1,086 413 $002.38 2.37 0.91 15.17 26.67 $35,470 32,051 24,442 23,167 9,319 4,644 2,608 $34,129 31,537 23,561 21,655 9,639 4,510 2,511 447 7 1,035 387 $002.20 2.19 0.83 13.64 16.25 $33,430 30,606 22,209 22,432 8,303 4,098 2,392 $31,451 29,038 20,211 21,325 7,527 2,708 2,313 447 22 1,003 341 $001.92 1.90 0.71 12.66 17.75 $30,295 27,852 19,100 20,950 6,861 1,461 2,182 $27,236 25,012 18,307 20,721 4,105 1,087 2,136 1.52% 1.22% 1.21% 1.23% 21.32 51.05 36 15.98 60.36 42 16.46 60.09 38 16.74 61.28 38 1.25% 15.94 63.68 37 6.91 7.47 7.36 7.35 7.84 4.08 4.08 18.33 55.67 37 $00,477 2.77 2.73 1.40% 18.33 55.67 37 *Net income per share in this annual report is calculated in accordance with FASB Statement 128, “Earnings Per Share.” All prior period amounts have been restated. Comerica Incorporated 19 1997 Financial Highlights Focused on Performance Return on Average Assets (in percentages) .Comerica .Excluding restructuring charge .Industry average (based on 50 largest U.S. bank holding companies) 1.75 1.50 1.25 1.00 0.75 0.50 0.25 Earned 21.32 percent on average common shareholders’ equity, compared to 15.98 percent (18.33 percent excluding the restructuring charge) in 1996. Returned 1.52 percent on average assets, compared to 1.22 percent (1.40 percent excluding the restructuring charge) in 1996. Reported Record Earnings Reported net income of $530 million, or $3.19 per share, compared with $417 million, or $2.38 per share (excluding the restructuring charge, net income increased $53 million from $477 million, or $2.73 per share) in 1996. On January 15, 1998, the Corporation declared a three- for-two stock split to be effected in the form of a stock dividend on April 1, 1998. All per share amounts have been adjusted to reflect the split. Sustained Growth Grew average total assets slightly to $35 billion (increased 4 percent excluding the sale of Comerica Bank-Illinois). Reached $21 billion in average non-consumer loans, a 12 percent increase (15 percent increase excluding the sale of Comerica Bank-Illinois). Averaged $22 billion in total deposits, in both 1997 and 1996 (1 percent increase excluding the sale of Comerica Bank-Illinois). Maintained average shareholders’ equity of $2.7 billion. Enhanced Shareholders’ Return Repurchased 3.6 million shares (or 5.4 million shares on a post-split basis) in 1997. Raised the quarterly cash dividend 12 percent to $0.29 per share. Declared annual cash dividends of $1.15 per share. Implemented Key Strategies Sold the bond indenture services business and recorded a $23 million pre-tax gain. Maintained revenue momentum while implementing Phase III of Direction 2000. 0.0 93 94 95 96 97 Earnings Performance Net Interest Income Net interest income, on a fully taxable equivalent (FTE) basis, is the difference between interest earned on assets, including certain yield related fees, and interest paid on liabilities. Adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis. Net interest income (FTE) comprised 73 percent of net revenues, compared to 74 percent in 1996 and 73 percent in 1995. Net Interest Income .Net Interest Income (FTE) .Net Interest Margin (FTE) (in millions) (percent of earning assets) 1600 1400 1200 1000 800 600 400 200 0 93 94 95 96 97 5.2 5.0 4.8 4.6 4.4 4.2 4.0 3.8 3.6 20 Comerica Incorporated Table 2: Analysis of Net Interest Income–Fully Taxable Equivalent (dollar amounts in millions) Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing 1997 1996 1995 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate $14,234 $1,174 138 81 322 133 440 33 1,953 866 3,547 1,676 4,486 447 8.25% $12,686 $1,041 102 1,541 7.07 65 707 9.38 324 3,483 9.08 153 1,960 7.90 457 4,624 9.81 24 351 7.48 8.21% $11,302 $0 989 89 1,257 6.64 52 541 9.22 297 3,157 9.29 191 2,450 7.83 461 4,569 9.88 19 285 6.82 Total loans (1) Taxable securities Securities exempt from federal income taxes Total investment securities Short-term investments Total earning assets Cash and due from banks Allowance for loan losses Accrued income and other assets Total assets Money market and NOW accounts Savings deposits Certificates of deposit Foreign office deposits (2) Total interest-bearing deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowed funds Medium- and long-term debt Other (3) Total interest-bearing sources Noninterest-bearing deposits Accrued expenses and other liabilities Preferred stock Common shareholders’ equity 2,321 309 18 327 9 2,657 232 34 361 46 673 111 98 374 (51) 1,205 8.53 6.84 9.32 6.94 6.59 8.29 3.35 2.02 5.39 5.68 4.17 5.49 5.45 6.26 — 4.65 27,209 4,490 197 4,687 129 32,025 1,686 (402) 1,560 $34,869 $06,926 1,701 6,699 805 16,131 2,017 1,801 5,980 — 25,929 5,815 467 250 2,408 Total liabilities and shareholders’ equity $34,869 25,352 5,528 295 5,823 195 31,370 1,576 (361) 1,610 $34,195 $06,913 2,026 6,887 843 16,669 2,106 1,999 4,745 — 25,519 5,589 400 133 2,554 $34,195 2,166 371 28 399 13 2,578 8.54 6.63 9.96 6.79 6.23 8.20 231 44 365 46 686 3.33 2.18 5.30 5.46 4.11 5.31 112 5.36 107 295 6.22 (49) — 1,151 4.51 2,098 473 41 514 23 2,635 217 48 344 112 721 166 136 289 2 1,314 23,561 7,226 399 7,625 351 31,537 1,500 (340) 1,432 $34,129 $06,411 2,277 6,358 1,842 16,888 2,816 2,313 4,510 — 26,527 4,767 324 — 2,511 $34,129 8.75% 7.06 9.52 9.40 7.80 10.10 6.65 8.90 6.52 10.43 6.72 6.61 8.35 3.39 2.14 5.41 6.07 4.27 5.88 5.87 6.41 — 4.95 Net interest income/rate spread (FTE) $1,452 3.64 $1,427 3.69 $1,321 3.40 FTE adjustment (4) $0,019 $1,415 $0,021 Impact of net noninterest-bearing sources of funds Net interest margin (as a percent of average earning assets) (FTE) 0.89 4.53% 0.85 4.54% 0.79 4.19% (1) Nonaccrual loans are included in average balances reported and are used to calculate rates. (2) Includes substantially all deposits by foreign depositors; deposits are in excess of $100,000. (3) Net interest rate swap (income)/expense. If swap (income)/expense were allocated, average rates on total loans would have been 8.63% in 1997, 8.66% in 1996 and 8.84% in 1995; average rates on medium- and long-term debt would have been 5.85% in 1997, 5.80% in 1996 and 6.14% in 1995. (4) The FTE adjustment is computed using a federal income tax rate of 35%. Comerica Incorporated 21 Net interest income (FTE) rose 2 percent to $1,452 million in 1997. This increase was due primarily to a 2 percent increase in average earning assets, which was concentrated in commer- cial loans. The significant increase in commercial loans was offset by consumer loan runoff and sales and runoff of invest- ment securities. Net interest margin for 1997 declined slightly to 4.53 percent from 4.54 percent last year. Comerica (the “Corporation”) experienced higher funding costs in 1997 as a result of a greater reliance on purchased funds in the mix of interest- bearing liabilities. This was offset by a favorable shift in earning assets to higher spread loans funded by the sales and runoff of lower yielding investment securities. Table 3: Rate-Volume Analysis–Fully Taxable Equivalent 1997 / 1996 1996 / 1995 Increase (Decrease) Increase (Decrease) Due to Rate Due to Volume* Net Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Rate Due to Volume* Net Increase (Decrease) (in millions) Interest income (FTE) Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans $05 7 1 (7) 2 (3) 2 7 Taxable securities Securities exempt from federal income taxes 10 (1) Total investment securities Short-term investments Total interest income (FTE) Interest expense Money market and NOW accounts Savings deposits Certificates of deposit Foreign office deposits Total interest-bearing deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowed funds Medium- and long-term debt Other (1) Total interest expense Net interest income (FTE) 9 1 17 1 (3) 6 2 6 4 2 2 (2) 12 $05 *Rate/volume variances are allocated to variances due to volume. (1) Net interest rate swap income. $128 29 15 5 (22) (14) 7 148 (72) (9) (81) (5) 62 — (7) (10) (2) (19) (5) (11) 77 — 42 $ 133 36 16 (2) (20) (17) 9 155 (62) (10) (72) (4) (79) 10 (10) (4) — (13) (1) (9) 79 (2) 54 $020 $.025 $ (62) (6) (2) (3) 1 (10) — (82) 12) (3) 9 (1) (74) (3) 1 (7) (11) (20) (16) (12) (9) (51) (108) $ (34) $114 19 15 30 (39) 6 5 150 (114) (10) (124) (9) 17 17 (5) 28 (55) (15) (38) (17) 15 — (55) $ (72 $ 52 13 13 27 (38) (4) 5 68 (102) (13) (115) (10) (57) 14 (4) 21 (66) (35) (54) (29) 6 (51) (163) $106 22 Comerica Incorporated At December 31, 1997, the allowance for loan losses was $424 million, an increase of $57 million since year-end 1996. The allowance as a percentage of total loans increased to 1.47 percent from 1.40 percent at December 31, 1996. The allowance as a percentage of total nonperforming assets increased significantly to 413 percent at December 31, 1997, from 263 percent at year-end 1996. An estimated allocation of the allowance for loan losses is provided in Table 9 on page 29. The allocations are made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. Net Loans Charged Off to Average Loans (in percentages) .Comerica .Industry average (based on 50 largest U.S. bank holding companies) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 93 94 95 96 97 The Corporation implemented various asset and liability management strategies in 1997 to minimize exposure to net interest margin risk, which represents the potential reduction in net interest income that may result from rate spread com- pression between, for example, prime and market rates or core deposit and money market rates. Such strategies included per- mitting investment securities to run off in order to facilitate growth in higher yielding loans. Off-balance sheet interest rate swaps were also entered into during the year to effectively fix the high yields on certain variable rate loans and alter the interest rate characteristics of debt issued throughout the year. Refer to page 32 of this financial review for additional infor- mation regarding the Corporation’s asset and liability manage- ment policies. In 1996, net interest income (FTE) increased 8 percent over 1995, benefiting from strong growth in average earning assets, primarily commercial loans. The net interest margin for 1996 increased 35 basis points from 1995, principally due to a favorable shift in the mix of earning assets. The Corporation primarily funded the growth in higher yielding loans with sales of thin margin, floating rate investment securities and runoff of fixed rate investment securities. This shifted the structure of the balance sheet, placing a greater emphasis on higher spread loans and reducing the reliance on investment securities. Provision and Allowance for Loan Losses The allowance for loan losses represents management’s assessment of possible losses inherent in the Corporation’s loan portfolio and is determined based on the application of projected loss ratios to risk-rated loans, both individually and by category. Projected loss ratios incorporate factors such as recent loan loss experience, current economic conditions and trends, geographic dispersion of borrowers, trends with respect to past due and nonaccrual amounts, risk characteristics of various categories and concentrations of loans and transfer risks. However, there can be no assurance that the actual loss ratios will not vary from those projected. The provision for loan losses reflects management’s evaluation of the adequacy of the allowance for loan losses. This evaluation is performed on a quarterly basis. The provision for loan losses was $146 million in 1997, compared to $114 million in 1996 and $87 million in 1995. The provision increase in 1997 primarily reflected loan growth and management’s intention to increase reserve ratios. Total net charge-offs increased to $89 million in 1997, compared to $85 million and $76 million in 1996 and 1995, respectively. The ratio of net loans charged off to average total loans was 0.33 percent in both 1997 and 1996. Commercial loan net charge-offs as a percentage of average commercial loans were 0.10 percent and 0.12 percent for 1997 and 1996, respectively. Consumer loan net charge-offs as a percentage of average consumer loans were 1.79 percent and 1.57 percent for 1997 and 1996, respectively. Comerica Incorporated 23 Table 4: Analysis of the Allowance for Loan Losses Year Ended December 31 (dollar amounts in millions) Balance at beginning of period Allowance of institutions and loans purchased/sold Loans charged off Domestic Commercial Real estate construction Commercial mortgage Residential mortgage Consumer International Total loans charged off Recoveries Domestic Commercial Real estate construction Commercial mortgage Consumer International Total recoveries Net loans charged off Provision for loan losses Balance at end of period Ratio of allowance for loan losses to total loans at end of period Ratio of net loans charged off during the period to average loans outstanding during the period 1997 $367 — 1996 $341 1995 $326 (3) 4 1994 $299 19 1993 $308 — 33 1 4 — 92 1 33 1 5 1 86 — 33 3 8 2 73 — 131 126 119 19 1 10 12 — 42 89 18 1 9 13 — 41 85 146 114 19 3 8 13 — 43 76 87 25 1 17 — 40 — 83 15 — 5 14 1 35 48 56 36 1 20 1 52 — 110 18 — 2 12 — 32 78 69 $424 $367 $341 $326 $299 1.47% 1.40% 1.40% 1.47% 1.56% 0.33% 0.33% 0.32% 0.24% 0.43% Noninterest Income Year Ended December 31 (in millions) Income from fiduciary activities Service charges on deposit accounts Revolving credit fees Securities gains Other Subtotal Bond indenture income Customhouse broker fees Total noninterest income 1997 1996 1995 $147 141 20 6 191 505 23 — $126 140 23 14 186 489 7 11 $119 130 36 12 160 457 6 36 $528 $507 $499 Noninterest income increased $21 million, or 4 percent, to $528 million in 1997, compared to $507 million and $499 million in 1996 and 1995, respectively. After adjusting for divestitures, securities gains and the large nonrecurring items discussed below, noninterest income rose $53 million, or 12 percent, in 1997. Income from fiduciary activities increased $14 million, or 10 percent, in 1997, compared to an increase of $8 million, or 7 percent, in 1996. The increase in 1997 reflects a significant increase in both personal trust and institutional trust income due to an expanded customer base and market performance of assets under management. Total trust assets under manage- ment increased to $117 billion at December 31, 1997, from $107 billion at year-end 1996. Discretionary funds, which rep- resent trust assets over which the Corporation has investment management authority, increased $4 billion to $30 billion from $26 billion in 1996. This increase resulted primarily from increases in the institutional trust category. Service charges on deposit accounts rose $1 million, or 1 percent, in 1997 compared to an increase of $10 million, or 8 percent, in 1996. This increase is net of a $3 million reduction in service charges resulting from the divestiture of the Illinois subsidiary in 1996. The majority of the 1997 increase related to revisions of the commercial account fee structure, growth in demand deposit activity and lower earnings credit allowances. 24 Comerica Incorporated Noninterest Income (in millions) 600 500 400 300 200 100 Noninterest Expenses Year Ended December 31 (in millions) Salaries Employee benefits Total salaries and employee benefits Net occupancy expense Equipment expense FDIC insurance expense Telecommunications expense Other Subtotal Restructuring charge 1997 1996 1995 $ 464 75 $ 475 86 $ 466 96 539 89 62 3 28 287 561 99 69 8 29 303 562 99 68 24 29 304 1,008 — 1,069 90 1,086 — 0 93 94 95 96 97 Total noninterest expenses $1,008 $1,159 $1,086 Customhouse brokerage fees decreased $11 million in 1997, due to the sale of John V. Carr & Son, Inc. in the second quarter of 1996. Revolving credit fee income decreased $3 million, or 14 percent, in 1997 compared to a $13 million, or 37 percent decrease in 1996. The lower fees in 1997 were primarily due to the transfer of fees and associated costs to a merchant services joint venture in early 1996. Income from securities gains/(losses) decreased $8 million between 1997 and 1996, primarily representing decreases in gains on the sale of Latin American debt (principally Brady bonds) and U.S. government agency securities. Other noninterest income grew $28 million, or 15 percent, in 1997. Excluding the impact of divestitures and large nonrecur- ring items in both periods, other noninterest income rose 17 percent. Accounting for the majority of this increase were higher levels of security trading and commercial fee income, as well as the implementation of new retail fees. Other nonin- terest income also increased due to management’s continued emphasis on revenue growth through sales of nontraditional bank products. Commissions and fees related to these prod- ucts increased $3 million, or 19 percent, in 1997 from $20 million in 1996. Significant nonrecurring items in other nonin- terest income include a $23 million gain on the sale of the Corporation’s bond indentures services business in 1997. Significant nonrecurring items in 1996 include a $13 million gain on the transfer of merchant services to a joint venture, $9 million of interest on a state tax refund and a $6 million gain on the sale of Comerica Bank-Illinois; offset by a $9 million write-off related to the sale of John V. Carr & Son, Inc. There were no significant nonrecurring items included in other non- interest income in 1995. Noninterest expenses decreased 13 percent to $1,008 million in 1997 (decreased 6 percent from $1,069 million, excluding the 1996 restructuring charge), compared to $1,159 million in 1996 and $1,086 million in 1995. Excluding the effect of divestitures and the large nonrecurring items discussed later, noninterest expenses remained essentially unchanged in 1997. A pre-tax restructuring charge of $90 million was recorded in 1996 in connection with a major program to improve efficien- cy, revenue and customer service. The charge included $48 million for termination benefits, $21 million for occupancy and equipment write-offs and $21 million for other costs. Esti- mated annual benefits of $110 million (cost savings of $85 million and revenue enhancements of $25 million) are antici- pated from the program. Projected completion of the imple- mentation plan is the end of the first quarter of 1998, so a substantial portion of the estimated benefits will not impact annual results until 1998, and full annual realization is not expected until 1999. As a result of the program, 1,890 employee positions, about 15 percent of total positions at year-end 1996, were identified to be eliminated by the end of Direction 2000. As of December 31, 1997, all but approxi- mately 300 of the positions have been eliminated. Reinvest- ment opportunities during the implementation phase have created 300 new positions. Implementation of the major com- ponents of the program are progressing as anticipated. During 1997, $61 million of termination benefits, occupancy and equipment write-offs and other costs were incurred and charged against the restructuring reserve. Additional informa- tion regarding the Corporation’s restructuring reserve can be found in Note 15 on page 50. Total salaries expense decreased $11 million, or 2 percent, in 1997 versus an increase of $9 million, or 2 percent, in 1996. Excluding the effect of divestitures, salaries increased slightly during the year reflecting increased incentives tied to perform- ance and annual merit increases. The number of full-time equivalent employees decreased 1,078, or 10 percent, from year-end 1996, excluding divestitures. Comerica Incorporated 25 Noninterest Expenses (in millions) 1200 1000 800 600 400 200 0 .Restructuring charge expose the Corporation to maximum losses of $50 million over the first 42 months following the sale (December 1995). Loss rates in 1996 and 1997 exceeded estimates, resulting in the additional charge for projected losses. Excluding divesti- tures and the above large nonrecurring items, other noninterest expenses increased $3 million, or less than 1 percent. The minimal increase reflects management’s continued efforts to control expenses. The Corporation’s efficiency ratio is defined as total noninter- est expenses divided by the sum of net interest revenue (FTE) and noninterest income, excluding securities gains/(losses). The ratio was 51.05 percent in 1997, compared to 60.36 percent in 1996 (55.67 percent excluding the restructuring charge) and 60.09 percent in 1995. 93 94 95 96 97 Income Taxes Employee benefits expense decreased $11 million, or 12 percent, in 1997 versus an increase of $10 million, or 10 percent, in 1996. After adjusting for divestitures, employee benefits decreased 7 percent, largely due to the reduction in full-time equivalent staff levels. Net occupancy and equipment expenses, on a combined basis, decreased $17 million, or 10 percent, in 1997 versus virtually no change in 1996. After adjusting for divestitures, net occupancy and equipment expenses declined 6 percent. The Federal Deposit Insurance Corporation (FDIC) expens- es decreased significantly, by $5 million, or 63 percent, in 1997, and $16 million, or 66 percent, in 1996, primarily due to the FDIC adopting a new assessment rate schedule for Bank Insurance Fund (BIF) members in the third quarter of 1995. The new rate schedule, which continues to determine assessments based on a bank’s risk-based capital levels, vir- tually eliminated each bank’s 1996 BIF annual deposit insurance premium. Beginning in 1997, each subsidiary bank’s deposit insurance assessment rate is predicated upon the level of insurance premiums necessary to maintain the bank insurance fund ratio at a level of 1.25 percent of insured deposits, plus an amount representing interest due on the Financing Corporation bonds issued during the sav- ings and loan crisis. The BIF rate reduction described above translated into a $21 million reduction in FDIC insurance expense for the Corporation in 1996. Offsetting this savings in 1996 was a one-time charge of $5 million, representing the Corporation’s portion of an assessment levied on banks with Savings Association Insurance Fund (SAIF) insured deposits in order to recapitalize the SAIF. Deposit insurance expense will approximate $3 million in 1998 based on cur- rent deposit levels and current deposit assessment rates. Other noninterest expenses decreased $16 million in 1997, compared to a $1 million decrease in 1996. Included in other noninterest expenses in 1997 were $5 million of incremental litigation accruals. Other noninterest expenses in 1997, 1996 and 1995, included losses of $2 million, $18 million and $15 million (excluding $1 million of costs to sell), respectively, on the sale of a portion of the bankcard portfolio. Loss-sharing provisions in the sales agreement The provision for income taxes was $287 million in 1997, compared to $229 million in 1996 and $213 million in 1995. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 35.0 percent for 1997, compared to 35.4 percent in 1996 and 33.9 percent in 1995. The decrease in the effective tax over the prior year reflects greater levels of low-income housing credits. Strategic Lines of Business The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Indi- vidual Bank and the Investment Bank. Table 5 on page 27 presents the financial results of these business lines for the years ended December 31, 1997 and 1996. Lines of business results are produced by the Corporation’s internal management accounting system. This system meas- ures financial results based on the internal organizational structure of the Corporation; therefore, the information pre- sented is not necessarily comparable with similar information for any other financial institution. The management account- ing system assigns balance sheet and income statement items to each line of business using certain methodologies which are constantly being refined. For comparability purposes, both 1997 and 1996 amounts are based on methodologies in effect at December 31, 1997. These methodologies, which are briefly summarized in the following paragraph, may be modi- fied as management accounting systems are enhanced and changes occur in the organizational structure or product lines. The Corporation’s internal funds transfer pricing system records cost of funds or credit for funds using a combination of matched maturity funding for certain assets and liabilities and a blended rate based on various maturities for the remain- ing assets and liabilities. The loan loss provision is assigned based on the amount necessary to maintain an allowance for loan losses adequate for that line of business. Noninterest income and expenses directly attributable to a line of business are assigned to that business. Direct expenses incurred by areas whose services support the overall Corporation are allo- cated to the business lines as follows: Product processing expenditures are allocated based on standard unit costs applied to actual volume measurements; administrative expenses are allocated based on estimated time expended; and corporate over- head is assigned based on the ratio of a line of business’ noninter- 26 Comerica Incorporated Table 5: Strategic Lines of Business Financial Results (dollar amounts in millions) 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 Business Bank Individual Bank Investment Bank* Other Total Earnings Summary Net interest income (FTE) Provision for loan losses Noninterest income Noninterest expenses Provision for income taxes Net income (loss) Selected Average Balances Assets Loans Deposits Common equity Statistical Data Return on average assets Return on average common equity Efficiency ratio $010653 $10.621 2 122 293 163 285 (11) 129 298 180 315 $10.759 $10.776 109 277 655 102 187 82 268 602 120 223 $19,781 $17,397 16,156 18,172 3,914 3,911 941 1,057 $09,644 $19,881 9,201 17,262 707 9,042 17,084 774 $ (2) n/a 107 101 1 3 $ 27 — 40 23 $ (1) $00.42 $0.031 3 75 n/a 14 24 94 116 7 95 (20) (5) (1) (54) (11) (1) $01,452 $01,427 114 507 1,159 244 417 146 528 1,008 296 530 $22 $5,417 $6,895 (5) (5) — 1,034 911 48 889 554 17 $34,869 $34,195 27,209 25,352 21,946 22,258 2,554 2,408 1.59% 1.64% 1.24% 1.04% 4.21% (1.78)% (0.09)% (0.49)% 1.52% 1.22% 29.85 38.27 30.24 39.58 28.76 58.55 26.45 62.12 12.62 n/m (7.34) n/m (1.90) n/m (5.98) n/m 21.32 51.05 15.98 60.36 *Included in noninterest expenses are fees internally transferred to other lines of business for referrals to the Investment Bank. If excluded, Investment Bank net income would have been $6 million and $2 million and return on average common equity would have been 27.89% and 11.01%, in 1997 and 1996, respectively. *n/m Not meaningful n/a Not applicable est expenses to total noninterest expenses incurred by all business lines. Common equity is allocated based on credit, operational and business risks. and personal trust services are also provided to meet the person- al financial needs of affluent individuals (as defined by indi- vidual net income or wealth). The following discussion provides information about each line of business, along with an explanation of factors impacting 1997 performance. Overall comparability of results is impacted because of the inclusion of the results of Comerica Bank-Illinois for the first seven months of 1996. The Business Bank is comprised of middle market lending, asset- based lending, large corporate banking and international financial services. This line of business meets the needs of medium-size businesses, multinational corporations and governmental entities by offering various products and services, including commercial loans and lines of credit, deposits, cash management, capital mar- ket products, international trade finance, letters of credit, foreign exchange management services and loan syndication services. Net income increased $30 million, or 11 percent, in 1997, princi- pally due to additional net interest income resulting from 12 per- cent average loan growth, and a lower provision for loan losses. The Individual Bank includes consumer lending, consumer deposit gathering, mortgage loan origination and servicing, small business banking (annual sales under $5 million) and private banking. This line of business offers a variety of consumer prod- ucts, including deposit accounts, direct and indirect installment loans, credit cards, home equity lines of credit and residential mortgage loans. In addition, a full range of financial services is provided to small businesses and municipalities. Private lending Net income increased $36 million, or 19 percent, in 1997, principally due to lower noninterest expenses resulting from the sale of the Corporation’s Illinois subsidiary, a one-time loss on a bankcard portfolio sale and a one-time SAIF assess- ment charge for thrift bailout in 1996. Lower net interest income and noninterest income are offset by a lower provision for loan losses. Noninterest income in 1996 includes a $13 million gain on the sale of the merchant services business. The Investment Bank is responsible for the sale of mutual fund and annuity products, as well as life, disability and long- term care insurance products. This line of business also offers institutional trust products, retirement services and provides investment management and advisory services, investment banking and discount securities brokerage services. Net income increased $4 million in 1997, principally due to higher levels of institutional trust and discount brokerage fees. The Other category includes divested business lines, the income and expense impact of cash and loan loss reserves not assigned to specific business lines, miscellaneous other items of a corporate nature and certain direct expenses not allocated to business lines. The Corporation’s securities portfolio and asset and liability management activities are also reflected in these amounts. Noninterest income for 1997 includes a $23 million gain on the sale of the Corporation’s bond indenture services business. Noninterest expenses in 1996 include a $90 million restructuring charge. Comerica Incorporated 27 Table 6: Analysis of Investment Securities and Loans December 31 (in millions) Investment securities available for sale U.S. government and agency securities State and municipal securities Other securities 1997 1996 1995 1994 1993 $13,239 170 597 $13,968 228 604 $16,038 371 450 $12,674 — 232 $12,164 — 158 Total investment securities available for sale 4,006 4,800 6,859 2,906 2,322 Investment securities held to maturity U.S. government and agency securities State and municipal securities Other securities Total investment securities held to maturity — — — — — — — — — — — — 4,462 422 86 4,970 3,232 513 233 3,978 Total investment securities $14,006 $14,800 $16,859 $17,876 $16,300 Commercial loans International loans Government and official institutions Banks and other financial institutions Other Total international loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans In June 1997, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enter- prise and Related Information." The statement establishes standards for the way public business enterprises report infor- mation about operating segments in annual financial state- ments and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The statement is effective for fiscal years beginning after December 15, 1997, but need not be applied to interim financial statements in the initial year of application. Subsequent adoption of SFAS No. 131 will not have a material impact to the Corporation. Balance Sheet and Capital Funds Analysis Total assets were $36.3 billion at year-end 1997, representing a $2.1 billion increase from $34.2 billion on December 31, 1996. On an average basis, total assets remained relatively flat with $34.9 billion in 1997, compared to $34.2 billion in 1996. Earning Assets Total earning assets were $33.1 billion at year-end 1997, representing a $2.0 billion increase from $31.1 billion at December 31, 1996. On an average basis, total earning assets were $32.0 billion in 1997, compared to $31.4 billion in 1996. $15,805 $13,520 $12,041 $10,634 $19,087 6 339 1,740 2,085 941 3,634 1,565 4,348 517 11 323 1,372 1,706 751 3,446 1,744 4,634 406 6 583 796 1,385 641 3,254 2,221 4,570 330 18 660 517 1,195 414 3,056 2,436 4,215 259 143 671 322 1,136 437 2,700 1,857 3,674 209 $28,895 $26,207 $24,442 $22,209 $19,100 The average balance of domestic commercial loans, which is comprised of commercial and commercial mortgage loans, increased $1.6 billion, or 10 percent, from 1996. Real estate construction loans also rose an average $159 million, or 22 percent, in 1997. The commercial portfolio, especially small business and middle market loans, continues to grow in all the Corporation’s markets. This growth, along with an increase of approximately 30 percent in commercial loan commitments to extend credit, is attributable to effective marketing efforts, strong customer relationships and continued economic strength in the commercial loan markets. Average international loans increased $412 million, consisting largely of loans originated to facilitate trade with limited cross-border risk. The growth also reflects the increasing glob- al activity of the Corporation’s traditional customer base. Risk management practices in international lending include struc- turing bilateral arrangements or participating in bank facilities which secure repayment from sources external to the borrow- er’s country. Accordingly, such international outstandings are excluded from cross-border risk of that country. Mexican cross-border risk of $414 million, or 1.14 percent of assets, was the only country exposure exceeding 1.00 percent of assets at December 31, 1997. There were no countries with exposure between 0.75 percent and 1.00 percent of total assets at year-end 1997. Table 7 on page 29 provides additional information on the Corporation’s Mexican cross-border risk. 28 Comerica Incorporated Table 7: Mexican Cross-Border Risk December 31 (in millions) Governments and official institutions Banks and other financial institutions Commercial and industrial Total Table 8: Loan Maturities and Interest Rate Sensitivity December 31, 1997 (in millions) Commercial loans Commercial mortgage loans International loans Real estate construction loans Total Loans maturing after one year Predetermined interest rates Floating interest rates Total 1997 $141 78 295 $414 1996 $192 26 50 $268 1995 $142 42 32 $216 After One Within But Within Five Years One Year* After Five Years $12,059 1,281 1,993 650 $15,983 $3,043 1,701 90 213 $5,047 $2,064 2,983 $5,047 Total $15,805 3,634 2,085 941 $ 0703 652 2 78 $1,435 $22,465 $ 863 572 $1,435 * Includes demand loans, loans having no stated repayment schedule or maturity and overdrafts. Table 9: Allocation of the Allowance for Loan Losses 1997 1996 1995 1994 1993 December 31 (dollar amounts in millions) Allocated Allowance Percent of Total Loans Allocated Allowance Percent of Total Loans Allocated Allowance Percent of Total Loans Allocated Allowance Percent of Total Loans Allocated Allowance Percent of Total Loans Domestic Commercial Real estate construction Commercial mortgage Residential mortgage Consumer Lease financing International Unallocated Total $094 7 18 1 116 1 5 182 $424 55% 3 13 5 15 2 7 — 100% $ 98 6 27 2 120 1 3 110 $367 52% 3 13 7 18 1 6 — 100% $118 5 33 2 84 1 2 96 $341 49% 3 13 9 19 1 6 — 100% $119 6 35 2 60 1 3 100 $326 48% 2 14 11 19 1 5 — 100% $123 4 26 3 60 1 18 64 $299 48% 2 14 10 19 1 6 — 100% Average residential mortgage loans decreased $284 million primarily due to management’s decision to sell the majority of mortgage originations. Average consumer loans, comprised of installment, revolving credit and bankcard loans, declined $138 million. Average installment loan balances decreased $106 million, while average revolving credit loans decreased $39 million. Average bankcard loans were relatively unchanged during the period. Average investment securities declined to $4.7 billion in 1997, compared to $5.8 billion in 1996, reflecting sales and runoff of securities primarily to fund growth in higher-yielding loans and to divest lower earning variable rate assets. Average U.S. government and agency securities decreased $1.2 billion and average state and municipal securities decreased $97 million, while average other securities increased $194 million. The Corporation shifted away from purchasing on-balance sheet securities to balance interest rate sensitivity and preserve net interest margin to purchasing off-balance sheet interest rate swaps that accomplish the same interest risk reduction objec- tive. The decline in U.S. government and agency securities principally resulted from sales and paydowns, while the tax- Comerica Incorporated 29 exempt portfolio of state and municipal securities continued to decrease as reduced tax advantages for these types of securi- ties deterred additional investment. Other securities consist primarily of collateralized mortgage obligations (CMOs), Brady bonds and Eurobonds. The increase in other securities during the year was largely a result of Eurobonds. Other Earning Assets Short-term investments in interest-bearing deposits with banks, federal funds sold and securities purchased under agreements to resell provide a range of maturities under one year to supplement corporate liquidity. Interest-bearing deposits with banks are investments with banks in developed countries or foreign banks’ international banking facilities located in the United States. Federal funds sold provide a vehicle to control the reserve position and serve correspondent banks, as well as offer supplemental earnings opportunities. As a result of the emphasis on higher-yielding loans, short- term investments declined on average $37 million during 1997. Loans held for sale totaled $41 million at the end of 1997, up slightly from $38 million in 1996. Table 10: Maturity Distribution of Domestic Certificates of Deposit of $100,000 and Over December 31 (in millions) Three months or less Over three months to six months Over six months to twelve months Over twelve months Total 1997 $1,380 395 350 171 $2,296 Deposits and Borrowed Funds Average deposits declined $312 million, or 1 percent, from 1996. Excluding the impact of divestitures, deposits increased 1 percent. Average demand deposits grew $226 million, or 4 percent, from 1996, largely due to the growth in related commercial loan business. Average certificates of deposit decreased $188 million, or 3 percent, from 1996. With deposit balances declining slightly, there was increased reliance on medium-term debt (both domestic and European), and long-term debt to provide the necessary funding to support expanding loan volumes. Medium-term debt provides the Corpo- ration a funding source with maturities ranging from one month to 15 years and durations that are similar to deposit liabilities. Long-term subordinated notes help maintain the bank’s total capital ratio at the level that qualifies for the lowest FDIC risk- based insurance premium and allow the Corporation to take advantage of acquisition activity. Medium-term debt increased $2.8 billion representing the net result of the issuance of $5.4 billion and the maturity of $2.6 billion of notes during 1997. Long-term debt increased $200 million from the issuance of subordinated notes during 1997. Further information on the Cor- poration’s medium- and long-term debt is included in Note 9 of the consolidated financial statements on page 46. Capital Shareholders’ equity was $2.8 billion at December 31, 1997. During the year, the Corporation authorized the repurchase of up to 12 million shares (or 18 million shares on a post-split basis) of Comerica common stock. Coupled with other authorizations to acquire shares, Comerica repurchased 4 million shares equal- ing more than $242 million of capital during 1997. At December 31, 1997, the Corporation had remaining authorization to pur- chase 15 million shares (or 22 million shares on a post-split basis) of common stock. The remaining change in capital is the net effect of increases in capital from retained earnings of $332 million, $36 million of common stock for employee stock plans and a change of $21 million in nonowner equity, principally a change in value of available for sale securities. The Corporation declared common dividends totaling $181 million on net income applicable to common stock of $513 million, representing a dividend payout ratio of 36 percent. The payout ratio in 1996 was 42 percent (37 percent excluding the after-tax impact of the restructuring charge). The Corporation has targeted a payout ratio of between 30 to 40 percent, although this target is constantly reassessed by the board of directors in light of changing market and industry conditions. On January 15, 1998, the Corporation’s board of directors declared a three-for-two stock split, effected in the form of a 50 percent stock dividend to be paid April 1, 1998, as well as increased the quarterly cash dividend 10 percent to $0.32 per share. At December 31, 1997, the Corporation and all of its banking subsidiaries exceeded the capital ratios required for an institu- tion to be considered “well capitalized” by the standards developed under the Federal Deposit Insurance Corporation Improvement Act of 1991. See Note 17 of the consolidated financial statements on page 51 for the capital ratios. Asset Quality Nonperforming Assets The Corporation’s policies regarding nonaccrual loans reflect the importance of identifying troubled loans early. Consumer loans are directly charged off no later than 180 days past due, Nonperforming Assets to Loans and Other Real Estate (in percentages) .Comerica .Industry average (based on 50 largest U.S. bank holding companies) 5.0 4.0 3.0 2.0 1.0 0.0 93 94 95 96 97 30 Comerica Incorporated Table 11: Analysis of Investment Securities Portfolio–Fully Taxable Equivalent † Maturity December 31, 1997 (dollar amounts in millions) Available for sale U.S. Treasury U.S. government and agency State and municipal securities Other bonds, notes and debentures Federal Reserve Bank stock and other investments* Total investment securities available for sale Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Weighted Average Maturity Yrs./Mos. $ 46 6.09 % $ 27 5.54 % $ — —% $ — — % $ 73 5.90% 1/1 125 7.08 194 7.10 185 7.02 2,662 6.57 3,166 6.65 10/8 43 5.90 87 6.41 32 6.23 8 6.40 170 6.25 108 9.36 177 7.71 127 7.43 84 8.85 496 8.19 — — — — 2 — 99 — 101 — 3/3 6/3 — $322 7.55 % $485 7.08 % $346 7.10% $2,853 6.64 % $4,006 6.81% 9/8 * Balances are excluded in the calculation of total yield. † Based on final contractual maturity. Table 12: Summary of Nonperforming Assets and Past Due Loans December 31 (dollar amounts in millions) Nonperforming assets Nonaccrual loans Commercial loans International loans Real estate construction loans Real estate mortgage loans (principally commercial) Total nonaccrual loans Reduced-rate loans Total nonperforming loans Other real estate Total nonperforming assets Nonperforming loans as a percentage of total loans Nonperforming assets as a percentage of total loans and other real estate Allowance for loan losses as a percentage of total nonperforming assets Loans past due 90 days—domestic 1997 1996 1995 1994 1993 $ 59 1 3 15 78 8 86 17 $ 72 — 3 28 103 8 111 29 $ 87 — 7 37 131 3 134 29 $ 89 — 17 56 162 2 164 40 $ 71 — 19 64 154 5 159 50 $103 $140 $163 $204 $209 0.30% 0.42% 0.55% 0.74% 0.83% 0.36% 0.53% 0.67% 0.92% 1.09% 413% 263% 209% 160% 143% $ 53 $ 52 $ 39 $ 57 $ 46 or earlier if deemed uncollectible. Loans other than consumer are generally placed on nonaccrual status when management determines that principal or interest may not be fully col- lectible, but no later than when the loan is 90 days past due on principal or interest unless it is fully collateralized and in the process of collection. Loan amounts in excess of probable future cash collections are charged off at the time the loan is placed on nonaccrual status to an amount that represents man- agement’s assessment of the ultimate collectibility of the loan. Interest previously accrued but not collected on nonaccrual loans is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Nonperforming assets as a percent of total loans and other real estate were 0.36 percent and 0.53 percent at year-end 1997 and 1996, respectively. This decline reflects the continued improve- ment in the quality of the loan portfolio, favorable economic con- ditions in the Corporation’s markets, and other real estate sales. Comerica Incorporated 31 Nonaccrual loans at December 31, 1997, decreased 24 per- cent to $78 million from year-end 1996. The nonaccrual loan table below indicates the percentage of nonaccrual loan value to original contractual value and demonstrates the conservative and prompt nature of the corporate charge-off and payment application policy. Other real estate owned (ORE) declined significantly to $17 million, as two large sales more than offset ORE additions. Geographic Distribution December 31, 1997 (in millions) Michigan California Texas Florida Other Total Real Estate Construction Commercial Mortgage $396 160 303 19 63 $941 $2,189 565 375 150 355 $3,634 Nonaccrual Loans December 31 (dollar amounts in millions) Carrying value Contractual value Carrying value as a percentage of contractual value Concentration of Credit 1997 $078 119 1996 $103 147 66% 70% Loans to companies and individuals involved with the auto- motive industry, including suppliers, manufacturers and deal- ers, represented the largest significant industry concentration at December 31, 1997. These loans totaled $4.3 billion, or 15 percent of total loans at December 31, 1997, and included floor plan loans to automobile dealers of $1,408 million and $1,209 million at December 31, 1997 and 1996, respectively. All other industry concentrations individually represented less than 5 percent of total loans at year-end 1997. Automotive industry loans at year-end 1996 totaled approximately $4.3 billion, or 16 percent, of total loans. The Corporation has successfully operated in the Michigan economy in spite of a loan concentration and several down- turns in the auto industry. There were no automotive industry- related loans larger than $6 million on nonaccrual status as of year-end 1997. In addition, there were no significant automo- tive industry-related charge-offs during the year. Commercial Real Estate Lending The real estate construction loan portfolio contains loans made to long-time customers in local markets with satisfactory project completion experience. The portfolio has approxi- mately 922 loans, of which 72 percent have balances of less than $1 million. The largest real estate construction loan has a balance of approximately $28 million. The commercial mortgage loan portfolio, 45 percent of which relates to owner-occupied properties, also consists of loans to long-time customers. Of the approximately 7,229 loans in the portfolio, 89 percent have balances under $1 million and the largest loan has a balance of approximately $28 million. Additionally, the Corporation’s policy requires a 75 percent or less loan-to-value (LTV) ratio for all commercial mortgage and real estate construction loans. This policy is within bank regulatory limits. The geographic distribution of the real estate construction and commercial mortgage loan portfolios is also an important determinant in evaluating credit risk. The following table indicates the diversification of the portfolios throughout the markets served by the Corporation. Asset and Liability Management The Corporation has a material exposure to interest rate risk, which it actively manages. The principle objective of asset and liability management is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. The Corporation utilizes various on- and off-balance sheet financial instruments to manage the extent to which net inter- est income may be affected by fluctuations in interest rates. Corporate policies and risk limits pertaining to asset and lia- bility management activities are established by the Asset Lia- bility Policy Committee (ALPC) and approved by the board of directors. Adherence to these policies is governed by the ALPC, which is comprised of executive and senior manage- ment from various areas of the Corporation, including finance, lending, investments and deposit gathering, who meet regular- ly to execute asset and liability management strategies. Interest Rate Sensitivity Interest rate risk arises in the normal course of business due to differences in the repricing and maturity characteristics of assets and liabilities. Since no single measurement system sat- isfies all management objectives, a combination of techniques are used to manage interest rate risk, including simulation analysis, asset and liability repricing schedules and duration of equity. The results of these interest rate risk measurement sys- tems are reviewed regularly by the ALPC. Net interest income is frequently evaluated under various balance sheet and interest rate scenarios. The results of this analysis provide the information needed to assess the proper balance sheet structure. An unexpected change in the pace of economic activity, whether domestically or internationally, could translate into a materially different interest rate environ- ment than currently expected. A process is maintained where management evaluates “base” net interest income under what is believed to be the most likely balance sheet structure and interest rate environment. This “base” net interest income is then evaluated against interest rate scenarios that are taken up and down 200 basis points from the most likely rate environ- ment. In addition, adjustments to asset prepayment levels, yield curves and overall balance sheet mix and growth 32 Comerica Incorporated assumptions are made to be consistent with each interest rate environment. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of higher or lower interest rates on net interest income. Actual results may differ from simulated results due to timing, mag- nitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this analysis. The measurement of risk exposure at year-end 1997 for a 200-basis-point decline in short-term interest rates identified approximately $35 million of net interest income at risk during 1998. If short-term interest rates rise 200 basis points, the Corporation would have approximately $22 million of net interest income at risk. Year-end 1996 net interest income at risk was measured at $9 million and $15 million, respectively, for a 200-basis-point decline and rise in interest rates. The change in exposure is the result of differences in the economic scenarios in the shocked environments, and there- fore differences in the timing and magnitude of rate changes. Further, yield curve differences create faster amortization on certain loans, securities and interest rate swaps in the 1997 rate shock. Corporate policy limits adverse change to no more than 5 percent of management’s most likely net interest income forecast. In either case, the Corporation is within the policy guideline. While most assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require adjustments to more accurately reflect repricing and cash flow behavior. Assumptions based on historical pricing relation- ships and anticipated market reactions are made to certain core deposit categories to reflect the elasticity of the changes in the related interest rates relative to changes in market inter- est rates. In addition, estimates are made concerning early loan and security repayments. Prepayment assumptions are based on the expertise of portfolio managers along with input from financial markets. Consideration is given to current and future interest rate levels. While management recognizes the limited ability of a traditional gap schedule to accurately por- tray interest rate risk, adjustments are made to provide a more accurate picture of the Corporation’s interest rate risk profile. This additional interest rate risk measurement tool provides a directional outlook on the impact of changes in interest rates. As market rates approach expected turning points, manage- ment adjusts the interest rate sensitivity of the Corporation. This sensitivity is measured as a percentage of earning assets. The operating range for interest rate sensitivity, on an elastici- ty-adjusted basis, is between an asset sensitive position of 10 percent of earning assets and a liability sensitive position of 10 percent of earning assets. The table on page 34 shows the interest sensitivity gap as of year-end 1997 and 1996. The report reflects the contractual repricing and payment schedules of assets and liabilities, including an estimate of all early loan and security repayments which adds $1.0 billion of rate sensitivity to the 1997 year-end gap. In addition, the schedule identifies the adjustment for the price elasticity on certain core deposits. Risk Management Derivative Financial Instruments and Foreign Exchange Contracts Risk Management Notional Activity (in millions) Balances at December 31, 1995 Additions Maturities/amortizations Balances at December 31, 1996 Additions Maturities/amortizations Balances at December 31, 1997 Interest Rate Contracts Foreign Exchange Contracts $6,119 4,026 (1,925) $8,220 3,857 (3,510) $8,567 Totals $6,398 8,788 (6,484) $8,702 9,572 (9,108) $ 279 4,762 (4,559) $ 482 5,715 (5,598) $ 599 $9,166 The Corporation remained modestly asset sensitive throughout 1997, as asset sensitivity generated by continued investment security amortization was offset by a shortening in the average maturity of the certificate of deposit portfolio. The Corporation had a one-year asset sensitive gap of $1,156 million, or 3 percent of earning assets, as of December 31, 1997. This compares to a $547 million asset sensitive gap, or 2 percent of earning assets, on December 31, 1996. Management antici- pates material growth in asset sensitivity throughout 1998, and will continue to look at both on- and off-balance sheet alterna- tives to hedge this increased asset sensitivity and achieve the desired interest rate risk profile for the Corporation. The Corporation utilizes interest rate swaps predominantly as asset and liability management tools with the overall objec- tives of managing the sensitivity of net interest income to changes in interest rates. To accomplish this objective, interest rate swaps are used primarily to modify the interest rate char- acteristics of certain assets and liabilities (e.g., from a floating rate to a fixed rate, a fixed rate to a floating rate, or from one floating rate index to another). This strategy assists manage- ment in achieving interest rate risk objectives. At December 31, 1997 and 1996, the notional amount of risk management interest rate swaps totaled $8,515 million and $8,015 million, respectively. The fair value of risk manage- ment interest rate swaps at December 31, 1997, was a positive $123 million, compared to a negative $55 million at Decem- ber 31, 1996. For the year ended December 31, 1997, risk management interest rate swaps generated $52 million in net interest income, compared to $49 million in net interest income for the year ended December 31, 1996. These off-bal- ance sheet instruments represented 74 percent and 82 percent of total derivative financial instruments and foreign exchange contracts, including commitments, at year-end 1997 and 1996, respectively. Table 14 on page 35 summarizes the expected maturity distri- bution of the notional amount of risk management interest rate swaps and provides the weighted average interest rates associ- ated with amounts to be received or paid as of December 31, 1997. The swaps have been grouped by the assets and liabili- ties to which they have been designated. Comerica Incorporated 33 Table 13: Schedule of Rate Sensitive Assets and Liabilities (dollar amounts in millions) Assets Cash and due from banks Short-term investments Investment securities Commercial loans (including lease financing) International loans Real estate related loans Consumer loans Total loans Other assets Total assets Liabilities Deposits Noninterest-bearing Savings Money market and NOW Certificates of deposit Foreign office Total deposits Short-term borrowings Medium- and long-term debt Other liabilities Total liabilities Shareholders’ equity December 31, 1997 Interest Sensitivity Period December 31, 1996 Interest Sensitivity Period Within Over One Year One Year Over Within Total One Year One Year Total $0000— $01,927 7 2,783 196 1,223 $01,927 203 4,006 $0000— $01,902 5 3,372 98 1,428 $01,902 103 4,800 14,742 2,085 3,907 2,100 22,834 742 1,580 — 2,233 2,248 16,322 2,085 6,140 4,348 6,061 28,895 12,489 1,706 3,662 2,201 20,058 1,437 — 2,279 2,433 13,926 1,706 5,941 4,634 6,149 26,207 519 1,261 615 579 1,194 $24,995 $11,297 $36,292 $ 22,199 $12,007 $34,206 $00,459 — 5,570 5,562 309 $06,302 1,601 1,724 1,059 — $06,761 1,601 7,294 6,621 309 $ 00,570 — 5,351 5,056 295 $06,143 1,770 1,631 1,550 1 $06,713 1,770 6,982 6,606 296 11,900 10,686 22,586 11,272 11,095 22,367 3,193 5,961 149 — 1,325 316 3,193 7,286 465 4,489 2,842 177 — 1,400 315 4,489 4,242 492 21,203 12,327 33,530 18,780 12,810 31,590 (1) 2,763 2,762 (23) 2,639 2,616 Total liabilities and shareholders’ equity $21,202 $15,090 $36,292 $ 18,757 $15,449 $34,206 Sensitivity impact of interest rate swaps Sensitivity impact of unsettled swap and security purchases Interest sensitivity gap Gap as a percentage of earning assets Sensitivity impact from elasticity adjustments (1) $ (4,377) $ 4,377 — $ (4,676) $ 4,676 —) (584) (2)% 1,740 — 584 2% (1,740) — — — — (43) 43 (1,277) (4)% 1,824 1,277 4% (1,824) Interest sensitivity gap with elasticity adjustments Gap as a percentage of earning assets $01,156 $(1,156) 3% (3)% — $ 00,547 — 2% $01(547) (2)% — — — — — — — (1) Elasticity adjustments for NOW, savings and money market deposit accounts are based on historical pricing relationships dating back to 1985 as well as expected future pricing relationships. 34 Comerica Incorporated Table 14: Remaining Expected Maturity of Risk Management Interest Rate Swaps (amounts in millions) 1998 1999 2000 2001 2002 2003- 2026 Dec. 31 1996 Total Variable Rate Asset Designation: Receive fixed swaps Generic Amortizing Index amortizing Weighted average: (1) Receive rate Pay rate $0,0— $0,0— $0,700 — 736 100 1,054 — 1,054 $0,0— $0,0— $0,0— $0,700 100 3,504 — 235 — 300 — 125 $0 0— 184 5,014 6.27% 6.36% 6.33% 6.42% 6.49% 6.22% 6.33% 6.11% 5.88% 5.88% 5.91% 5.86% 5.93% 5.99% 5.90% 5.56% Floating/floating swaps (3) $0,0— $0,0— $0,055 $0,0— $0,0— $0,0— $0,055 $0 025 Fixed Rate Asset Designation: Pay fixed swaps Generic Index amortizing Weighted average: (1) Receive rate Pay rate Medium- and Long-term Debt Designation: $0,0— $0,002 3 5 $0,0— $0,0— $0,0— $0,0— $0,002 17 — — — 9 $0,002 40 5.97% 5.95% 5.97% 5.34% 6.70% 5.34% —% —% —% —% —% 5.97% 5.60% —% 5.85% 5.35% Generic receive fixed swaps $0,950 $0,0— $0,200 $0,0— $0,150 $0,900 $2,200 $2,350 Weighted average: (1) Receive rate Pay rate Floating/floating swaps Weighted average: (2) Receive rate Pay rate 5.97% 5.75% —% 6.91% —% 5.88% —% 7.37% 7.66% 6.84% 6.62% —% 5.85% 5.89% 5.83% 5.53% $1,900 $0,0— $00,37 $0,0— $0,0— $0,0— $1,937 $ 400 5.73% 5.77% —% 5.92% —% 5.77% —% —% —% —% —% 5.73% 5.32% —% 5.77% 5.39% Total notional amount $4,009 $ 1,059 $1,737 $0,300 $0,385 $1,025 $8,515 $8,015 (1) Variable rates paid or received are based primarily on one-month and three-month LIBOR rates paid or received at December 31, 1997. (2) Variable rates paid are based on LIBOR at December 31, 1997, while variable rates received are based on prime. (3) Variable rate paid was 5.85%, based on LIBOR at December 31, 1997, while variable rate received represents the return on a principal only total return swap. This return is based on principal paydowns of the referenced security as well as changes in market value. Comerica Incorporated 35 In addition to interest rate swaps, the Corporation employs various other types of off-balance sheet derivative and foreign exchange contracts to mitigate exposures to interest rate and foreign currency risks associated with specific assets and lia- bilities (e.g., loans or deposits denominated in foreign curren- cies, mortgages held for sale and originated mortgage servicing rights). Such instruments include interest rate caps and floors, purchased put options, foreign exchange forward contracts, foreign exchange generic swap agreements and cross-currency swaps. The aggregate notional amounts of these risk management derivative and foreign exchange con- tracts at December 31, 1997 and 1996, were $651 million and $687 million, respectively. In 1997, the FASB issued a revised Exposure Draft on accounting for derivative and similar financial instruments and for hedging activities. This Exposure Draft would introduce significant volatility in earnings and could affect how the Cor- poration balances interest rate sensitivity in the future. Man- agement has expressed concern to the FASB of the potential adverse impact on managing interest rate risk and earnings from this Exposure Draft. Further information regarding risk management derivative financial instruments and foreign cur- rency exchange contracts is provided in Notes 1, 8, 9 and 18 to the consolidated financial statements. Liquidity Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or acquisition of addi- tional funds. Liquidity requirements are satisfied with various funding sources, including a $7.5 billion medium-term note program which allows the Michigan, California and Texas banks to issue debt between one month and 15 years. The Michigan bank has an additional $2 billion European note program. At year-end 1997, unissued debt related to the two programs totaled $3.1 billion. In addition, liquid assets totaled $6.1 billion, at December 31, 1997. The Corporation also had available $1.1 billion from a collateralized borrowing account with the Federal Reserve Bank at year-end 1997. Purchased funds at December 31, 1997, excluding certificates of deposit with maturities beyond one year and medium- and long-term debt, approximated $5.6 billion. Another source of liquidity for the parent company is divi- dends from its subsidiaries. As discussed in Note 17 to the consolidated financial statements on page 51, subsidiary banks are subject to regulation and may be limited in their ability to pay dividends or transfer funds to the holding company. Dur- ing 1998, the subsidiary banks can pay dividends up to $361 million plus current net profits without prior regulatory approval. One measure of current parent company liquidity is investment in subsidiaries, as a percent of shareholders’ equi- ty. An amount over 100 percent represents the reliance on sub- sidiary dividends to repay liabilities. As of December 31, 1997, the ratio was 109 percent. Customer Initiated and Other Derivative Financial Instruments and Foreign Exchange Contracts On a limited basis, the Corporation writes interest rate caps and enters into foreign exchange contracts and interest rate swaps to accommodate the needs of customers requesting Customer Initiated and Other Notional Activity (in millions) Balances at December 31, 1995 Additions Maturities/amortizations Balances at December 31, 1996 Additions Maturities/amortizations Interest Rate Contracts Foreign Exchange Contracts $363 237 (210) $390 464 (358) $ 0320 37,571 (37,247) $ 0644 43,462 (42,269) Totals) $ 683) 37,808) (37,457) $ 1,034) 43,926) (42,627) Balances at December 31, 1997 $496 $ 1,837 $ 2,333) such services. At December 31, 1997 and 1996, customer- initiated activity represented 20 percent and 11 percent, respectively, of total derivative and foreign exchange con- tracts, including commitments. Refer to Note 18 to the con- solidated financial statements on page 51 for further information regarding customer-initiated and other derivative financial instruments and foreign exchange contracts. Other Matters In February, 1997, the FASB issued Statement on Financial Accounting Standards (SFAS) No. 128 on “Earnings Per Share.” The statement changes the computation, presentation and disclosure requirements for earnings per share and is effective for the 1997 financial statements. The Corporation has adopted the statement and all prior period earnings per share presented have been restated in accordance with the new disclosure requirements. The Corporation recognizes the need to manage its operations so that year 2000 software failures, miscalculations or errors will not adversely impact its business. The Corporation, with the assistance of outside consultants, is working to identify, evaluate, implement and test changes to computer systems and applications necessary to achieve a year 2000 date conversion with no impact on customers or disruption to business opera- tions. The Corporation expects to conclude remediation of the majority of its systems by the end of 1998, with completion of the remaining systems in the first half of 1999. Testing, which is ongoing, will be completed on these last systems in the sec- ond half of 1999. The Corporation projects the amount of year 2000 expense to be in the range of $25-$30 million, of which approximately 25 percent was expensed in 1996 and 1997. The problem caused by the year 2000 creates risk for the Cor- poration from unforeseen problems in its own computer sys- tems and from third parties such as customers or vendors. Such failures of the Corporation and/or third parties’ computer systems could have a material impact on the Corporation’s ability to conduct its business. Forward looking statements in this annual report to sharehold- ers are based on current expectations and/or the assumptions made in the earnings simulation analyses, but numerous factors could cause variances in these projections, and their underlying assumptions, such as changes in interest rates, year 2000 expenses and changes in industries where the Cor- poration has a concentration in loans. 36 Comerica Incorporated Consolidated Balance Sheets Comerica Incorporated and Subsidiaries December 31 (in thousands, except share data) Assets Cash and due from banks Short-term investments Investment securities available for sale Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans Less allowance for loan losses Net loans Premises and equipment Customers’ liability on acceptances outstanding Accrued income and other assets Total assets Liabilities and Shareholders’ Equity Demand deposits (noninterest-bearing) Interest-bearing deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowed funds Acceptances outstanding Accrued expenses and other liabilities Medium- and long-term debt Total liabilities Nonredeemable preferred stock—$50 stated value Authorized—5,000,000 shares Issued—5,000,000 shares in 1997 and 1996 Common stock—$5 par value Authorized—250,000,000 shares Issued— 156,815,367 shares in 1997 and 107,297,345 shares in 1996 Capital surplus Unrealized gains and losses on investment securities available for sale Retained earnings Deferred compensation Total shareholders’ equity Total liabilities and shareholders’ equity See notes to consolidated financial statements. 1997 1996 $01,927,087 $01,901,760 202,957 103,607 4,005,962 4,800,034 15,805,549 2,085,090 940,910 3,633,785 1,565,445 4,347,665 516,600 13,520,246 1,706,388 750,760 3,445,562 1,743,876 4,634,258 405,618 28,895,044 26,206,708 (424,147) (367,165) 28,470,897 25,839,543 380,157 18,392 1,286,946 407,663 33,102 1,120,362 $36,292,398 $34,206,071 $06,761,202 15,825,115 $06,712,985 15,654,188 22,586,317 22,367,173 592,860 2,600,041 18,392 446,625 7,286,387 1,395,540 3,093,651 33,102 459,267 4,241,769 33,530,622 31,590,502 250,000 250,000 784,077 —1 (1,937) 1,731,419 (1,783) 536,487 —1 (22,789) 1,854,116 (2,245) 2,761,776 2,615,569 $36,292,398 $34,206,071 Comerica Incorporated 37 Consolidated Statements of Income Comerica Incorporated and Subsidiaries Year Ended December 31 (in thousands, except per share data) Interest Income Interest and fees on loans Interest on investment securities Taxable Exempt from federal income tax Total interest on investment securities Interest on short-term investments Total interest income Interest Expense Interest on deposits Interest on short-term borrowings Federal funds purchased and securities sold under agreements to repurchase Other borrowed funds Interest on medium- and long-term debt Net interest rate swap (income)/expense Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest Income Income from fiduciary activities Service charges on deposit accounts Customhouse broker fees Revolving credit fees Securities gains Other noninterest income Total noninterest income Noninterest Expenses Salaries and employee benefits Net occupancy expense Equipment expense FDIC insurance expense Telecommunications expense Restructuring charge Other noninterest expenses Total noninterest expenses Income before income taxes Provision for income taxes Net Income Net income applicable to common stock Basic net income per common share Diluted net income per common share Cash dividends declared on common stock Dividends per common share See notes to consolidated financial statements. 1997 1996 1995 $2,317,844 $2,160,981 $2,090,854 310,399 10,797 321,196 372,331 17,443 473,759 26,189 389,774 499,948 8,363 12,025 23,122 2,647,403 2,562,780 2,613,924 673,265 685,539 721,475 110,752 98,258 374,022 (51,670) 111,729 107,155 294,990 (48,911) 165,544 135,667 288,990 2,365 1,204,627 1,150,502 1,314,041 1,442,776 146,000 1,412,278 114,000 1,299,883 86,500 1,296,776 1,298,278 1,213,383 147,336 141,078 — 19,439 5,695 214,404 527,952 538,926 89,380 61,759 3,029 28,010 — 286,882 133,482 140,436 10,764 22,670 13,588 186,014 506,954 560,784 99,211 68,827 8,139 29,092 90,000 302,973 125,038 130,249 36,086 36,248 11,748 159,356 498,725 562,159 98,945 67,872 23,817 29,644 — 303,977 1,007,986 1,159,026 1,086,414 816,742 286,266 646,206 229,045 625,694 212,328 $0,530,476 $0,417,161 $0,413,366 $0,513,376 $0,408,136 $0,413,366 $3.24 3.19 0,0$2.41 0,002.38 $2.38 2.37 $0,181,272 $1.15 $0,170,067 $1.01 $0,158,309 $0.91 38 Comerica Incorporated Consolidated Statements of Changes in Shareholders’ Equity Comerica Incorporated and Subsidiaries (in thousands, except share data) Non- redeemable Preferred Common Stock Stock Capital Surplus Unrealized Gains and (Losses) on Investment Securities Available for Sale Retained Earnings Compensation Total Deferred Treasury Shareholders’ Equity Stock Balances at January 1, 1995 $250,0— $596,473 $526,838 $(55,039) $1,390,405 $(1,786) $(65,111) $2,391,780 Net income for 1995 Nonowner changes in equity: Unrealized holding gains/(losses) arising during the period Less: Reclassification adjustment for gains/(losses) included in net income Nonowner changes in equity before income taxes Provision for income taxes related to nonowner changes in equity Nonowner changes in equity, net of tax Net income and nonowner changes in equity Cash dividends declared on common stock Purchase of 1,405,500 shares of common stock Purchase and retirement of 4,200,000 shares of common stock Issuance of common stock for: Employee stock plans Acquisitions Amortization of deferred compensation — — — — — — — — — — — — — — — — — — — — — — — — — — — — (21,000) (118,931) — — — — — — 1,261 ) 1,450 — — 413,366 90,053. 11,748. 78,305. 27,407. 50,898. —. — — — — — — —. —. —. —. —. —. (158,309) — — (4,482) — — —. —. —. —. —. —. —. —. —. 413,366 —. —. —. —. —. —. —. 90,053 11,748 78,305 27,407 50,898 464,264 (158,309) —. (38,725) (38,725) —. —. (139,931) (1,034) —. 846. 14,957. 75,650. —. 10,702 77,100 846 Balances at December 31, 1995 $5000,— $575,473 $410,618 $ (4,141) $ 1,640,980 $(1,974) $(13,229) $2,607,727 Net income for 1996 Nonowner changes in equity: Unrealized holding gains/(losses) arising during the period Less: Reclassification adjustment for gains/(losses) included in net income Nonowner changes in equity before income taxes Provision for income taxes related to nonowner changes in equity Nonowner changes in equity, net of tax Net income and nonowner changes in equity Issuance of preferred stock Cash dividends declared: Preferred stock Common stock Purchase and retirement of 12,176,496 shares of common stock Issuance of common stock for: Employee stock plans Acquisitions Amortization of deferred compensation — — — — — — — 250,000 — — — — — — — — — — — — — — — — — — — (3,256) — — — (60,883) (519,924) — 897 — 21,000 — — 14,090 ) 98,472 — —. 417,161 (15,101) 13,588. (28,689) (10,041) (18,648) — — — — — — — — — — (9,025) — (170,067) — — — — (5,065) (20,076) 208 — —. —. —. —. —. —. —. —. —. —. —. 417,161 —. —. —. —. —. —. —. —. —. (15,101) 13,588 (28,689) (10,041) (18,648) 398,513 246,744 (9,025) (170,067) —. (36,324) (622,196) (1,197) —. 926. 40,295. 9,258. —. 34,009 128,938 926 Balances at December 31, 1996 $250,000 $536,487 $526,8— $(22,789) $ 1,854,116 $ (2,245) $ .5,1—) $2,615,569 Net income for 1997 Nonowner changes in equity: Unrealized holding gains/(losses) arising during the period Less: Reclassification adjustment for gains/(losses) included in net income Nonowner changes in equity before income taxes Provision for income taxes related to nonowner changes in equity Nonowner changes in equity, net of tax Net income and nonowner changes in equity Cash dividends declared: Preferred stock Common stock Purchase and retirement of 3,618,479 shares of common stock Issuance of common stock under Employee stock plans Amortization of deferred compensation Stock split (three-for-two) — — — — — — — — — — — — — — — — — — — — — — — — — — — — (18,092) (30,750) 4,323 — — — — 261,359 30,750 — — — 530,476 37,775 05,695 32,080 11,228 20,852 — — — — — — — — (17,100) — (181,273) — (193,450) 9 — — — — (261,359) —. —. —. —. —. —. —. —. —. —. (531) 993 —. —. 530,476 —. —. —. —. —. —. —. —. —. —. —. —. 37,775 5,695 32,080 11,228 20,852 551,328 (17,100) (181,273) (242,292) 34,551 993 — Balances at December 31, 1997 $250,000 $ 784,077 $ 0001— $ 0(1,937) $ 1,731,419 $ (1,783) $ .000,—. $ 2,761,776 ( ) Indicates deduction. See notes to consolidated financial statements. Comerica Incorporated 39 Consolidated Statements of Cash Flows Comerica Incorporated and Subsidiaries Year Ended December 31 (in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses Depreciation Restructuring charge Net (increase) decrease in trading account securities Net (increase) decrease in loans held for sale Net (increase) decrease in accrued income receivable Net increase (decrease) in accrued expenses Net amortization of intangibles Funding for employee benefit plans Other, net Total adjustments Net cash provided by (used in) operating activities Investing Activities Net (increase) decrease in interest-bearing deposits with banks Net (increase) decrease in federal funds sold and securities purchased under agreements to resell Proceeds from sale of investment securities available for sale Proceeds from maturity of investment securities available for sale Purchases of investment securities available for sale Proceeds from maturity of investment securities held to maturity Purchases of investment securities held to maturity Net increase in loans (other than loans purchased) Purchase of loans Fixed assets, net Net (increase) decrease in customers’ liability on acceptances outstanding Net cash provided by acquisitions/sales Net cash provided by (used in) investing activities Financing Activities Net increase (decrease) in deposits Net increase (decrease) in short-term borrowings Net increase (decrease) in acceptances outstanding Proceeds from issuance of medium- and long-term debt Repayments and purchases of medium- and long-term debt Proceeds from issuance of preferred stock Proceeds from issuance of common stock Purchase of common stock for treasury and retirement Dividends paid Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Interest paid Income taxes paid Noncash investing and financing activities Loan transfers to other real estate Stock issued for acquisitions See notes to consolidated financial statements. 1997 1996 1995 $0 530,476 $0 417,161 $0 413,366 146,000 58,529 (61,237) (3,093) (2,666) (23,730) 54,330 28,375 — (121,519) 114,000 66,776 90,000 4,659 473,493 924 (39,720) 30,803 (25,000) 187,438 86,500 64,014 (6,127) (6,336) (420,015) (26,749) 96,645 29,016 (200,000) (178,874) 74,989 903,373 (561,926) 605,465 1,320,534 (148,560) 24,010 (3,705) 363,870 (117,601) 238,506 1,456,447 (924,509) — — (2,615,226) (162,128) (31,023) 14,710 — 4,898 1,211,250 1,531,012 (643,796) — — (1,852,199) (77,805) (46,038) (12,341) 200,459 (122,498) 103,531 837,412 (211,222) 788,620 (223,579) (1,908,266) (48,349) (62,334) 13,097 19,224 (2,116,814) 311,735 (450,494) 219,144 (1,296,290) (14,710) 5,600,000 (2,555,382) — 22,584 (243,258) (195,412) (825,859) (129,056) 12,341 2,251,000 (2,553,650) 246,744 35,206 (622,196) (173,414) 130,276 468,754 (13,097) 2,960,000 (2,418,171) — 11,736 (178,656) (155,726) 1,536,676 (1,758,884) 805,116 25,327 1,901,760 (126,615) 2,028,375 206,062 1,822,313 $1,927,087 $1,901,760 $2,028,375 $1,161,812 $1,201,146 $1,274,101 $0,266,428 $0,212,530 $0,180,134 $0,017,076 $0,010,534 $0,023,908 $0,128,9— $0,128,938 $0,077,100 40 Comerica Incorporated Notes to Consolidated Financial Statements Comerica Incorporated and Subsidiaries 1 Accounting Policies Organization Comerica Incorporated is a registered bank holding company headquartered in Detroit, Michigan. The Corporation’s prin- cipal lines of business are the Business Bank, the Individual Bank and the Investment Bank. The core businesses are tailored to each of the Corporation’s four primary geographic markets: Michigan, Texas, California and Florida. The accounting and reporting policies of Comerica Incor- porated and its subsidiaries conform to generally accepted accounting principles and prevailing practices within the bank- ing industry. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from these estimates. The following is a summary of the more significant account- ing and reporting policies. and stated at fair value with unrealized gains and losses, net of income taxes, reported as a component of shareholders’ equity. Trading account securities are carried at market value. Real- ized and unrealized gains or losses on trading securities are included in noninterest income. Gains or losses on the sale of securities are computed based on the adjusted cost of the specific security. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation, computed on the straight-line method, is charged to operations over the estimat- ed useful lives of the properties. Leasehold improvements are amortized over the terms of their respective leases or the esti- mated useful lives of the improvements, whichever is shorter. Consolidation Allowance for Loan Losses The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of all significant intercompany accounts and transactions. Prior years’ financial statements are reclassified to conform with current financial statement presentation. For acquisitions accounted for as pooling-of-interests combi- nations, the historical consolidated financial statements are restated to include the accounts and results of operations. For acquisitions using the purchase method of accounting, the assets acquired and liabilities assumed are adjusted to fair market values at the date of acquisition, and the resulting net discount or premium is accreted or amortized into income over the remaining lives of the relevant assets and liabilities. Goodwill representing the excess of cost over the net book value of identifiable assets acquired is amortized on a straight- line basis over periods ranging from 10 to 30 years (weighted average of 17 years). Core deposit intangible assets are amor- tized on an accelerated method over 10 years. Loans Held for Sale Loans held for sale, normally mortgages, are carried at the lower of cost or market. Market value is determined in the aggregate. Securities Investment securities held to maturity are those securities which management has the ability and positive intent to hold to maturity. Investment securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities that fail to meet the ability and positive intent criteria are accounted for as securities available for sale, The allowance is maintained at a level adequate to absorb losses inherent in the loan portfolio. Management determines the adequacy of the allowance by applying projected loss ratios to the risk ratings of loans both individually and by cat- egory. The projected loss ratios incorporate such factors as recent loss experience, current economic conditions, the risk characteristics of the various categories and concentrations of loans, transfer risk and other pertinent factors. However, there can be no assurance that the actual loss ratios will not vary from those projected. Loans which are deemed uncollectible are charged off and deducted from the allowance. The provi- sion for loan losses and recoveries on loans previously charged off are added to the allowance. Nonperforming Assets Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market rates due to a serious weakening of the borrower’s financial condition and other real estate which has been acquired primarily through foreclosure and is awaiting disposition. Consumer loans are generally not placed on nonaccrual status and are directly charged off no later than 180 days past due, or earlier if deemed uncollectible. Loans other than consumer are generally placed on nonaccrual status when principal or interest is past due 90 days or more and/or when, in the opin- ion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable. Comerica Incorporated 41 1 Accounting Policies (continued) Other real estate acquired is carried at the lower of cost or fair value, minus estimated costs to sell. When the property is acquired through foreclosure, any excess of the related loan bal- ance over fair value is charged to the allowance for loan losses. Subsequent write-downs, operating expenses and losses upon sale, if any, are charged to noninterest expenses. Stock-Based Compensation In 1996, the Corporation adopted SFAS No. 123, “Accounting for Stock-Based Compensation.” Under the provisions of this statement, the Corporation elected to continue to apply Account- ing Principles Board (APB) opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in mea- suring and recognizing compensation expense for its stock-based compensation plans, and to disclose the pro forma effect of applying the fair value method contained in SFAS No. 123. Information on the Corporation’s stock-based compensation plans is included in Note 12. Pension Costs Pension costs are charged to salaries and employee benefits expense and funded consistent with the requirements of federal law and regulations. Postretirement Benefits Postretirement benefits are recognized in the financial statements during the employee’s active service period. Derivative Financial Instruments and Foreign Exchange Contracts Interest rate and foreign exchange swaps, interest rate caps and floors, and futures and forward contracts may be used to manage the Corporation’s exposure to interest rate and foreign currency risks. These instruments, with the exception of futures and for- wards, are accounted for on an accrual basis since there is a high correlation with the on-balance sheet instrument being hedged. If this correlation ceases to exist, the existing unrealized gain or loss is amortized over the remaining term of the instrument, and future changes in fair value are accounted for in other income or expense. Net interest income or expense, including premiums paid or received, is recognized over the life of the contract and reported as an adjustment to interest expense. Realized gains and losses on futures and forwards are generally deferred and amor- tized over the life of the contract as an adjustment to net interest income. Gains or losses on early termination of risk manage- 2 Acquisitions During the years ended December 31, 1996 and 1995, Comer- ica made the following acquisitions, which were accounted for as purchases: ment derivative financial instruments are deferred and amortized as an adjustment to the yields of the related assets or liabilities over their remaining contractual life. If the designated asset or liability matures, or is disposed of or extinguished, any unreal- ized gains or losses on the related derivative instrument are rec- ognized currently and reported as an adjustment to interest expense. Foreign exchange futures and forward contracts, foreign currency options, interest rate caps and interest rate swap agree- ments executed as a service to customers are accounted for on a fair value basis. As a result, the fair values of these instruments are recorded in the consolidated balance sheet with both realized and unrealized gains and losses recognized currently in noninter- est income. Income Taxes Provisions for income taxes are based on amounts reported in the statements of income (after exclusion of nontaxable income such as interest on state and municipal securities) and include deferred income taxes on temporary differences between the tax basis and financial reporting basis of assets and liabilities. Statements of Cash Flows For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption, “Cash and due from banks.” Loan Origination Fees and Costs Loan origination and commitment fees are deferred and recog- nized over the life of the related loan or over the commitment period as a yield adjustment. Loan fees on unused commitments and fees related to loans sold are recognized currently as other noninterest income. Nonowner Changes in Equity In 1997, the Corporation adopted SFAS No. 130, “Reporting Comprehensive Income.” This statement establishes standards for the reporting and display of net income and nonowner changes in equity and its components in a full set of general- purpose financial statements. The Corporation has elected to present information regarding this statement in the Consolidated Statements of Changes in Shareholders’ Equity on page 39. The caption “Net income and nonowner changes in equity,” represents total comprehensive income as defined in the statement. (in millions) During 1996 Metrobank During 1995 University Bank & Trust QuestStar Bank, N.A. FMV of Assets Acquired FMV of Liabilities Assumed Purchase Price Intangibles Recorded $1,083 $1,020 $125 $62 456 205 422 193 69 25 35 13 42 Comerica Incorporated Sales and calls of investment securities available for sale resulted in realized gains and losses as follows: Year Ended December 31 (in thousands) Available for Sale 1997 1996 Securities gains Securities losses Total $18,890 (3,195) $14,945 (1,357) $15,695 $13,588 Assets, principally securities, carried at approximately $2.7 billion at December 31, 1997, were pledged to secure public deposits (including State of Michigan deposits of $40 million at December 31, 1997) and for other purposes as required by law. All held to maturity securities were redesignated to the avail- able for sale category in December 1995 in accordance with the one-time provisions issued in conjunction with the FASB’s Special Report, “A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities.” At the date of transfer the amortized cost of the held to maturity securities was $4.6 billion. The net unrealized loss related to the redesignated securities totaled $9 million. 3 Investment Securities Information concerning investment securities as shown in the consolidated balance sheets of the Corporation was as follows: Gross Gross Unrealized Unrealized Estimated Losses Fair Value Gains Cost $3,239,423 $24,223 $24,994 $3,238,652 164,394 603,176 5,902 7,584 244 13,502 170,052 597,258 (in thousands) December 31, 1997 U.S. government and agency securities State and municipal securities Other securities Total securities available for sale $4,006,993 $37,709 $38,740 $4,005,962 December 31, 1996 U.S. government and agency securities State and municipal securities Other securities Total securities $4,011,022 $22,702 $65,375 $3,968,349 220,173 603,873 7,866 654 196 685 227,843 603,842 available for sale $4,835,068 $31,222 $66,256 $4,800,034 The cost and estimated fair values of debt securities by con- tractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obliga- tions with or without call or prepayment penalties. December 31, 1997 (in thousands) Contractual maturity Within one year Over one year to five years Over five years to ten years Over ten years Subtotal securities Mortgage-backed securities Equity and other nondebt securities Total securities available for sale Estimated Fair Value Cost $ 205,857 $ 206,165 284,387 283,331 162,991 61,554 159,140 66,350 714,789 714,986 3,190,530 3,189,879 101,674 101,097 $4,006,993 $4,005,962 Comerica Incorporated 43 A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contrac- tual 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. December 31 (in thousands) Average impaired loans for the year Total period-end impaired loans Period-end impaired loans requiring an allowance Impairment allowance 1997 1996 1995 $73,502 70,470 $114,253 98,050 $148,087 135,034 60,376 20,358 59,960 19,528 89,209 26,578 Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded invest- ment in the loan. Sixty-four percent of the total impaired loans at December 31, 1997, are evaluated based on fair value of related collateral. Remaining loan impairment is based on the present value of expected future cash flows discounted at the loan’s effective interest rate. 4 Nonperforming Assets The following table summarizes nonperforming assets and loans which are contractually past due 90 days or more as to interest or principal payments. Nonperforming assets consist of nonaccrual loans, reduced-rate loans and other real estate. Nonaccrual loans are those on which interest is not being rec- ognized. Reduced-rate loans are those on which interest has been renegotiated to lower than market rates because of the weakened financial condition of the borrower. Nonaccrual and reduced-rate loans are included in loans on the consolidated balance sheet. December 31 (in thousands) Nonaccrual loans Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Total Reduced-rate loans Total nonperforming loans Other real estate 1997 1996 $058,914 1,000 3,438 11,088 3,719 $071,991 — 3,576 22,567 5,160 78,159 103,294 7,583 8,009 85,742 111,303 17,046 28,398 Total nonperforming assets $102,788 $139,701 Loans past due 90 days $052,805 $051,748 Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms Interest income recognized 5 $010,088 $011,119 $002,399 $002,681 Allowance for Loan Losses An analysis of changes in the allowance for loan losses follows: (in thousands) 1997 1996 1995 Balance at January 1 Allowance of institutions and loans purchased/sold Loans charged off Recoveries on loans previously charged off $367,165 $341,344 $326,195 — (131,140) (3,630) (125,912) 4,668 (119,028) 42,122 41,363 43,009 Net loans charged off Provision for loan losses (89,018) 146,000 (84,549) 114,000 (76,019) 86,500 Balance at December 31 $424,147 $367,165 $341,344 As a percent of total loans 1.47% 1.40% 1.40% 44 Comerica Incorporated 6 Significant Group Concentrations of Credit Risk Concentrations of both on-balance sheet and off-balance sheet credit risk are controlled and monitored as part of credit poli- cies. The Corporation is a regional bank holding company with a geographic concentration of its on-balance sheet and off-balance sheet activities centered in Michigan. In addition, the Corporation has an industry concentration with the auto- motive industry, which includes manufacturers and their finance subsidiaries, suppliers, dealers and company executives. 7 Premises and Equipment A summary of premises and equipment at December 31 by major category follows: (in thousands) Land Buildings and improvements Furniture and equipment Total cost 1997 1996 $ 52,934 353,308 344,681 $ 54,635 366,618 436,133 750,923 857,386 Less accumulated depreciation and amortization (370,766) (449,723) Net book value $380,157 $407,663 8 Short-term Borrowings Federal funds purchased and securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Other borrowed funds, consisting of com- mercial paper, borrowed securities, term federal funds pur- chased, short-term notes and treasury tax and loan deposits, generally mature within one to 120 days from the transaction date. The following is a summary of short-term borrowings at December 31, 1997 and 1996: Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Other Borrowed Funds (in thousands) December 31, 1997 Amount outstanding at year-end Weighted average interest rate at year-end $1,592,860 $2,600,041 5.26% 5.30% December 31, 1996 Amount outstanding at year-end Weighted average interest rate at year-end $1,395,540 $3,093,651 5.80% 5.14% At December 31, 1997 and 1996, exposure from loan commitments and guarantees to companies related to the auto- motive industry totaled $8.3 billion and $8.2 billion, respec- tively. Additionally, commercial real estate loans, including commercial mortgages and construction loans, totaled $4.6 billion in 1997 and $4.2 billion in 1996. Approximately $2.0 billion of commercial real estate loans at December 31, 1997, involved mortgages on owner-occupied properties. Those bor- rowers are involved in business activities other than real estate, and the sources of repayment are not dependent on the performance of the real estate market. Rental expense for leased properties and equipment amounted to $41 million in 1997 and $44 million in 1996 and 1995. Future minimum lease rentals under noncancelable operating lease obligations are as follows: (in thousands) 1998 1999 2000 2001 2002 2003 and later $041,189 38,379 35,429 31,649 26,333 117,813 The 1996 amounts outstanding include $700 million of short- term notes. The Corporation entered into interest rate swap contracts that converted the rates paid on notes from the bank prime rate minus 2.96% and the one-month London Interbank Offered Rate (LIBOR) (5.29% and 5.53% at December 31, 1996, respectively) to a three-month LIBOR (5.56% at December 31, 1996) based rate. At December 31, 1997, the parent company had available additional credit totaling $100 million under a line of credit agreement, all of which was unused. Under the current agree- ment the line will expire in April of 2000. Comerica Incorporated 45 9 Medium- and Long-term Debt Medium- and long-term debt consisted of the following at December 31: All subordinated notes and debentures with maturities greater than one year qualify as Tier 2 capital. (in thousands) 1997 1996 Parent Company 7.25% subordinated notes due 2007 9.75% subordinated notes due 1999 10.125% subordinated debentures due 1998 $ 148,509 74,877 74,965 $ 148,548 74,782 74,880 Total parent company 298,351 298,210 Subsidiaries Subordinated notes: 7.25% subordinated notes due 2007 8.375% subordinated notes due 2024 7.25% subordinated notes due 2002 6.875% subordinated notes due 2008 7.125% subordinated notes due 2013 7.875% subordinated notes due 2026 198,100 147,938 149,246 99,220 148,224 146,914 — 147,860 149,089 99,143 148,112 146,814 Total subordinated notes 889,642 691,018 Medium-term notes: Floating rate based on LIBOR indices Floating rate based on Treasury bill indices Floating rate based on Prime indices Floating rate based on Federal Funds indices Fixed rate notes with interest rates ranging 2,811,793 487,000 1,100,007 349,998 1,448,947 399,955 — — from 5.75% to 6.875% 1,349,596 1,399,040 Total medium-term notes 6,098,394 3,247,942 Notes payable — 4,599 The Corporation currently has two medium-term note pro- grams: a senior note program and a European note program. Under these programs, certain of the bank subsidiaries may offer an aggregate principal amount of up to $9.5 billion. The notes can be issued as fixed or floating rate notes and with terms from one month to 15 years. The interest rates on the floating rate medium-term notes based on LIBOR ranged from three-month LIBOR minus 0.14% to three-month LIBOR plus 0.10%. The notes are due from 1998 to 2002. The interest rates on the floating rate medium-term notes based on U.S. Treasury indices ranged from the three-month U.S. Treasury bill bond equivalent rate plus 0.54% to the two-year Constant Treasury Maturity Rate plus 0.01%. The notes are due from 1998 to 2000. The interest rates on the floating rate medium- term notes based on prime ranged from prime minus 2.87% to prime minus 2.82% and are due in 1998. The interest rates on the floating rate medium-term notes based on the federal funds rate ranged from the federal funds rate plus 0.055% to the federal funds rate plus 0.0625% and are also due in 1998. The maturities of the fixed rate notes range from 1998 to 2000. The medium-term notes do not qualify as Tier 2 capital and are not insured by the FDIC. The principal maturities of medium- and long-term debt are as follows: Total subsidiaries 6,988,036 3,943,559 (in thousands) Total medium- and long-term debt $7,286,387 $4,241,769 Concurrent with the issuance of certain of the medium- and long- term debt presented above, the Corporation entered into interest rate swap agreements to convert the stated rate of the debt to a rate based on the indices identified in the following table: 1998 1999 2000 2001 2002 2003 and later $5,273,441 73,636 265,744 298,958 482,135 892,473 Principal Amount of Debt Converted Base Rate at 12/31/97 Base Rate $0150,000 50,000 6-month LIBOR 3-month LIBOR 5.91% 5.91 (in thousands) Parent Company 7.25% subordinated notes 9.75% subordinated notes Subsidiaries Subordinated notes: 7.25% subordinated notes 8.375% subordinated notes 7.25% subordinated notes 6.875% subordinated notes 7.125% subordinated notes 7.875% subordinated notes 200,000 150,000 150,000 100,000 150,000 150,000 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR Medium-term notes: Floating rate based on LIBOR indices Fixed rate notes with interest rates ranging from 5.80% to 6.65% 600,000 1,895,000 1-month LIBOR 3-month LIBOR 100,000 1,050,000 1-month LIBOR 3-month LIBOR 5.91 5.91 5.91 5.91 5.91 5.91 5.94 5.91 5.94 5.91 46 Comerica Incorporated 10 Shareholders’ Equity The board of directors has authorized the repurchase of up to 27 million shares (or 40.5 million shares on a post-split basis) of Comerica Incorporated common stock for general corporate purposes, acquisitions and employee benefit plans. At Decem- ber 31, 1997, 12.2 million shares (or 18.3 million shares on a post-split basis) had been repurchased under this program. At December 31, 1997, the Corporation had reserved 7.7 million shares of common stock for issuance to employees and directors under the long-term incentive plans. In January 1998, the Corporation declared a three-for-two stock split, effected in the form of a 50 percent stock dividend to be paid April 1, 1998. All per share data included in the consolidated financial statements and in the related notes thereto have been retroactively adjusted to reflect the split. 11 Net Income per Common Share SFAS No. 128, “Earnings per Share,” was adopted in 1997. The statement simplifies the standards for computing earnings per share. Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock out- standing during the period. Diluted net income per common share is computed by dividing net income applicable to com- mon stock by the weighted average number of shares, non- vested stock and dilutive common stock equivalents outstand- ing during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation’s stock plans, using the treasury stock method. A computation of earnings per share follows: During 1996, the Corporation issued 5 million shares of Fixed/Adjustable Rate Noncumulative Preferred Stock, Series E, with a stated value of $50 per share. Dividends are payable quarterly, at a rate of 6.84% per annum through July 1, 2001. Thereafter, the rate will be equal to 0.625% plus an effective rate, but not less than 7.34% nor greater than 13.34%. The effective rate will be equal to the highest of the Treasury Bill Rate, the Ten Year Constant Treasury Maturity Rate and the Thirty Year Constant Treasury Maturity Rate (as defined in the prospectus). The Corporation, at its option, may redeem all or part of the outstanding shares on or after July 1, 2001. Year Ended December 31 (in thousands, except per share data) 1997 1996 1995 Basic Average shares outstanding 158,333 169,076 173,532 Net income Less preferred stock dividends $530,476 17,100 $417,161 9,025 $413,366 — Net income applicable to common stock Basic net income per share Diluted Average shares outstanding Nonvested stock Common stock equivalents Net effect of the assumed exercise of stock options $513,376 $408,136 $413,366 $3.24 $2.41 $2.38 158,333 204 169,076 195 173,532 163 2,503 1,956 1,070 Diluted average shares 161,040 171,227 174,765 Net income Less preferred stock dividends $530,476 17,100 $417,161 9,025 $413,366 — Net income applicable to common stock $513,376 $408,136 $413,366 Diluted net income per share $3.19 $2.38 $2.37 Comerica Incorporated 47 The following table summarizes information about stock options outstanding at December 31, 1997: Outstanding Exercisable Exercise Price Range $ 7.66 - $10.29 18.00 10.37 - 18.75 18.59 - 25.17 19.00 - 40.09 25.42 - 52.67 40.25 - Total Shares 772,229 953,303 1,161,279 1,205,404 1,688,751 1,856,377 7,637,343 Average Life (a) Average Exercise Price $09.57 16.65 18.59 20.79 26.29 40.33 2.4 5.3 7.2 4.9 8.2 9.2 6.8 Average Exercise Price $09.57 16.22 18.59 20.75 26.05 40.25 Shares 772,229 722,615 521,637 1,173,154 409,278 600 $24.77 3,599,513 $17.73 (a) Average contractual life remaining in years. 12 Long-term Incentive Plans The Corporation has long-term incentive plans under which it has awarded both shares of restricted stock to key executive officers and stock options to executive officers, directors and key personnel of the Corporation and its subsidiaries. The exercise price of the stock options is equal to the fair market value at the time the options are granted and the options may have restrictions regarding exercisability. The maturity of each option is determined at the date of grant; however, no options may be exercised later than ten years from the date of grant. The Corporation adopted the disclosure-only option under SFAS No. 123, “Accounting for Stock-Based Compensation,” as of December 31, 1996. If the recognition provisions of the new statement had been adopted as of the beginning of 1997, the effect on 1997 net income would have been immaterial. Average per Share Exercise Market Price Price $15.42 18.64 19.43 10.74 $16.25 18.64 21.25 21.04 Number 5,982,030 1,659,270 (331,112) (771,370) — Outstanding—December 31, 1994 Granted Cancelled Exercised Expired Acquisition of University Bank & Trust 229,679 10.70 18.33 Outstanding—December 31, 1995 Granted Cancelled Exercised Expired Acquisition of Metrobank Outstanding—December 31, 1996 Granted Cancelled Exercised Expired 6,768,497 1,894,143 (321,119) (1,775,613) — 595,718 7,161,626 1,994,182 (266,295) (1,252,170) — $16.39 25.61 18.95 12.78 $26.67 25.61 28.95 29.34 8.49 26.42 $18.95 40.28 26.00 15.93 $34.92 40.28 43.07 44.81 Outstanding—December 31, 1997 7,637,343 $24.77 $60.17 Exercisable—December 31, 1997 Available for grant— December 31, 1997 3,599,513 98,393 48 Comerica Incorporated 13 Employee Benefit Plans The Corporation has a defined benefit pension plan in effect for substantially all full-time employees. Staff expense includes income of $0.3 million in 1997, $1.4 million in 1996 and $1.0 million in 1995 for the plan. Benefits under the plan are based primarily on years of service and the levels of com- pensation during the five highest paid consecutive calendar years occurring during the last ten years before retirement. The plan's assets primarily consist of units of certain collec- tive investment funds administered by Munder Capital Man- agement, equity securities, U.S. government and agency securities and corporate bonds and notes. Net periodic pension cost/(income) consisted of the following: (in thousands) 1997 1996 1995 based matching contribution based on the Corporation’s financial performance. Staff expense includes expense of $9.7 million in 1997, $10.4 million in 1996 and $7.1 million in 1995 for the plan. The Corporation’s postretirement benefits plan continues postretirement health care and life insurance benefits for retirees as of December 31, 1992, provides a phase-out for employees over 50 as of that date and substantially reduces all benefits for remaining employees. The Corporation has funded the plan with a company-owned life insurance contract purchased in 1995. Net periodic postretirement benefit cost included the following components: Service cost—benefits earned during the period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and (deferral) $ 12,400 $ 11,675 $ (8,857 33,823 (89,528) 43,006 31,572 (62,710) 18,072 29,231 (93,650) 54,585 Net pension income $ 0(299) $0(1,391) $ 0 (977) The following table sets forth the funded status of the defined benefit pension plans and amounts recognized on the Corpora- tion’s balance sheet: (in thousands) Service cost Interest cost on accumulated postretirement benefit obligation Return on plan assets Amortization of transition obligation Net amortization and (deferral) Net periodic postretirement benefit cost 1997 1996 1995 $0,273 $0,402 $0,383 5,710 (7,941) 4,628 2,472 5,597 (3,094) 4,628 (2,488) 6,652 (2,453) 4,628 (1,511) $5,142 $5,045 $7,699 The following table sets forth the status of the postretirement plan at December 31: December 31 (in thousands) Accumulated benefit obligation Vested Nonvested Accumulated benefit obligation Effect of projected future compensation levels Projected benefit obligation Plan assets at fair value Plan assets in excess of projected benefit obligation Unrecognized net gain due to past experience different from that assumed and effects of changes in assumptions Unrecognized net assets being amortized over 15 years Prepaid pension Actuarial assumptions were as follows: 1997 1996 (in thousands) $411,688 17,797 $367,376 16,483 429,485 95,844 525,329 585,215 383,859 78,917 462,776 515,164 Retirees Other fully eligible plan participants Other active plan participants Total accumulated postretirement benefit obligation Plan assets at fair value 59,886 52,388 Funded status Unrecognized net gain Unrecognized transition obligation (25,790) (17,672) (15,358) (20,191) 1997 1996 $72,175 5,543 3,866 $65,711 4,910 5,799 81,584 76,420 86,727 80,547 5,143 4,127 (8,294) 69,105 (11,800) 73,733 Prepaid postretirement benefit $65,954 $66,060 $018,738 $014,525 Actuarial assumptions were as follows: Discount rate used in determining projected benefit obligation Rate of increase in compensation levels Long-term rate of return on assets 1997 1996 1995 7% 7.5% 7.5% 5% 5% 5% 8% 9% 9% The Corporation has a savings (“401(k)”) plan which is a defined contribution plan. All of the Corporation’s salaried and regular part-time employees are eligible to participate in the plan. The Corporation makes matching contributions based on a declining percentage of employee contributions (currently, maximum per employee is $1,000) as well as a performance- Discount rate used in determining accumulated postretirement benefit obligation Long-term rate of return on assets 1997 1996 1995 7% 7.5% 7.5% 6.7% 6.7% 6.7% A 7 percent health care cost trend rate was projected for 1997 and is assumed to decrease gradually to 5 percent by 1999, remaining constant thereafter. Increasing each health care rate by one percentage point would increase the accumulated postretirement benefit obligation by $6 million at December 31, 1997, and the aggregate of the service and interest cost components by $384 thousand for the year ended December 31, 1997. Comerica Incorporated 49 14 Income Taxes The current and deferred components of income taxes were as follows: The principal components of deferred tax (assets) liabilities at December 31 were as follows: 1997 1996 1995 (in thousands) (in thousands) Currently payable Federal Foreign State and local Deferred federal, state and local $239,680 30,723 15,584 $225,863 5,912 11,039 $192,899 1,015 7,595 285,987 279 242,814 (13,769) 201,509 10,819 Total $286,266 $229,045 $212,328 There were $2.0 million, $4.8 million and $4.1 million of income taxes provided on securities transactions in 1997, 1996 and 1995, respectively. Allowance for loan losses Lease financing transactions Allowance for depreciation Deferred loan origination fees and costs Investment securities available for sale Employee benefits Restructuring charge Other temporary differences, net Total 1997 1996 $(132,990) 122,127 15,567 (20,088) (149) (7,625) (10,150) (34,440) $(116,816) 105,805 18,972 (11,408) (11,562) (3,132) (15,178) (35,825) $ (67,748) $ (69,144) The provision for income taxes differs from that computed by applying the federal statutory rate of 35 percent for the reasons in the following analysis: (in thousands) 1997 1996 1995 Tax based on federal statutory rate Effect of tax-exempt interest income Other $285,860 (5,687) 6,093 $226,172 (8,842) 11,715 $218,993 (12,538) 5,873 Provision for income taxes $286,266 $229,045 $212,328 15 Restructuring The Corporation recorded a restructuring charge of $90 mil- lion in 1996 in connection with a program to improve efficien- cy, revenue and customer service. The charge only includes direct and incremental costs associated with the program. The following table provides details on the restructuring-related reserve as of December 31: Termination benefits primarily include severance payments. The occupancy and equipment portion consists of lease termi- nation costs, space consolidation and estimated losses on the disposal of vacated properties. Other charges consist primarily of the project costs incurred during the assessment phase of the program. (in thousands) Employee Termination Occupancy and Equipment Other Total Balances at 12/31/96 Activity $48,000 (38,000) $21,000 (10,000) $21,000 (13,000) $90,000 (61,000) Balances at 12/31/97 $10,000 $11,000 $08,000 $29,000 16 Transactions With Related Parties The bank subsidiaries have had, and expect to have in the future, transactions with the Corporation’s directors and their affiliates. Such transactions were made in the ordinary course of business and included extensions of credit, all of which were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not, in management’s opinion, involve more than normal risk of col- lectibility or present other unfavorable features. The aggregate amount of loans attributable to persons who were related par- ties at December 31, 1997, approximated $138 million at the beginning and $226 million at the end of 1997. During 1997, new loans to related parties aggregated $124 million and repayments totaled $36 million. 50 Comerica Incorporated 17 Regulatory Capital and Banking Subsidiaries Banking regulations limit the transfer of assets in the form of dividends, loans or advances from the bank subsidiaries to the Corporation. Under the most restrictive of these regula- tions, the aggregate amount of dividends which can be paid to the Corporation without obtaining prior approval from bank regulatory agencies approximated $361 million at January 1, 1998, plus current year’s earnings. Substantially all the assets of the Corporation’s subsidiaries are restricted from transfer to the Corporation in the form of loans or advances. Dividends paid to the Corporation by its banking subsidiaries amounted to $354 million in 1997, $322 million in 1996 and $184 million in 1995. (in thousands) December 31, 1997 Tier 1 capital Total capital Tier 1 capital to average assets (minimum–3.0%) Tier 1 capital to risk–weighted assets (minimum–4.0%) Total capital to risk–weighted assets (minimum–8.0%) December 31, 1996 Tier 1 capital Total capital Tier 1 capital to average assets (minimum–3.0%) Tier 1 capital to risk–weighted assets (minimum–4.0%) Total capital to risk–weighted assets (minimum–8.0%) 18 The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of Tier 1 and total capital (as defined in the regulations) to average and risk-weighted assets. At December 31, 1997, the Corporation and all of its banking subsidiaries exceeded the ratios required for an institution to be considered “well capitalized” (total capital ratio greater than 10 percent). The following is a summary of the capital position of the Corporation and its significant banking sub- sidiaries: Comerica Inc. (Consolidated) Comerica Bank Comerica Bank- Texas Comerica Bank- California $2,513,820 3,961,243 $2,037,217 3,243,206 $325,394 359,674 $329,963 370,531 7.09% 7.15% 8.92% 9.07% 7.07 11.14 6.85 10.90 9.59 10.60 9.20 10.33 $2,366,342 3,617,961 $1,930,830 2,914,832 $275,895 309,627 $282,108 319,109 7.07% 7.23% 8.42% 7.40% 7.18 7.12 10.99 10.75 9.49 10.65 8.95 10.12 Financial Instruments With Off-Balance Sheet Risk In the normal course of business, the Corporation enters into various off-balance sheet transactions involving derivative financial instruments, foreign exchange contracts and credit- related financial instruments to manage exposure to fluctua- tions in interest rate, foreign currency and other market risks and to meet the financing needs of customers. These financial instruments involve, to varying degrees, elements of credit and market risk in excess of the amount reflected in the consoli- dated balance sheets. Credit risk is the possible loss that may occur in the event of nonperformance by the counterparty to a financial instrument. The Corporation attempts to minimize credit risk arising from off-balance sheet financial instruments by evaluating the cred- itworthiness of each counterparty adhering to the same credit approval process used for traditional lending activities. Coun- terparty risk limits and monitoring procedures have also been established to facilitate the management of credit risk. Collat- eral is obtained, if deemed necessary, based on the results of management’s credit evaluation. Collateral varies, but may include cash, investment securities, accounts receivable, inven- tory, property, plant and equipment or real estate. Derivative financial instruments and foreign exchange con- tracts are traded over an organized exchange or negotiated over-the-counter. Credit risk associated with exchange-traded contracts is typically assumed by the organized exchange. Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange-traded contracts which have standardized terms and readily available Comerica Incorporated 51 18 Financial Instruments With Off-Balance Sheet Risk (continued) price information. The Corporation reduces exposure to credit and liquidity risks from over-the-counter derivative and for- eign exchange contracts by conducting such transactions with investment-grade domestic and foreign investment banks or commercial banks. Market risk is the potential loss that may result from move- ments in interest or foreign currency rates which cause an unfavorable change in the value of a financial instrument. The Corporation manages this risk by establishing counterparty and monetary exposure limits and monitoring compliance with those limits. Market risk arising from derivative and foreign exchange positions entered into on behalf of customers is reflected in the consolidated financial statements and may be mitigated by entering into offsetting transactions. Market risk inherent in off-balance sheet derivative and foreign exchange contracts held or issued for risk management purposes is gen- erally offset by changes in the value of rate sensitive on-bal- ance sheet assets or liabilities. Termination of derivative contracts, other than by a counterparty, is unlikely as a partic- ular instrument can be offset by entering into an opposite- effect derivative product to facilitate risk management strategies. Derivative Financial Instruments and Foreign Exchange Contracts The Corporation, as an end-user, employs a variety of off-bal- ance sheet financial instruments for risk management purposes. Activity related to these instruments is centered predominantly in the interest rate markets and mainly involves interest rate swaps. Various other types of instruments are also used to man- age exposures to market risks, including interest rate caps and floors, total return swaps, foreign exchange forward contracts and foreign exchange swap agreements. Refer to the section entitled “Risk Management Derivative Financial Instruments and Foreign Exchange Contracts” in the financial review on page 33 for further information about the Corporation’s objec- tives for using such instruments. The following table presents the composition of off-balance sheet derivative financial instruments and foreign exchange contracts, excluding commitments, held or issued for risk management purposes at December 31, 1997 and 1996. Notional 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. Notional/ Contract Amount Unrealized Gains Unrealized Fair Losses Value $8,515 $137 $ (14) $123 52 — — — — — — — (in millions) December 31, 1997 Risk management Interest rate contracts: Swaps Options, caps and floors purchased Caps written Total interest rate contracts 8,567 137 (14) 123 Foreign exchange contracts: Spot and forwards Swaps 445 154 Total foreign exchange contracts 599 12 5 17 (9) — (9) 3 5 8 Total risk management $9,166 $154 $ (23) $131 December 31, 1996 Risk management Interest rate contracts: Swaps Options, caps and floors purchased Caps written 53 152 Total interest rate contracts 8,220 Foreign exchange contracts: Spot and forwards Swaps 444 38 Total foreign exchange contracts 482 $8,015 $. 42 $ (97). $(55) — — 42 26 — 26 — — — — (97). (55) (4). (1). 22 (1) (5). 21 Total risk management $8,702 $ 68 $(102). $(34) Credit risk, which excludes the effects of any collateral or netting arrangements, is measured as the cost to replace, at current market rates, contracts in a profitable position. The amount of this exposure is represented by the gross unrealized gains on derivative and foreign exchange contracts. Bilateral collateral agreements with counterparties covered 93 percent of the notional amount of interest rate derivative contracts at December 31, 1997 and 1996. These agreements reduce credit risk by providing for the exchange of marketable investment securities to secure amounts due on contracts in an unrealized gain position. In addition, at December 31, 1997, master net- ting arrangements had been established with all interest rate swap counterparties and certain foreign exchange counterpar- ties. These arrangements effectively reduce credit risk by per- mitting settlement, on a net basis, of contracts entered into with the same counterparty. The Corporation has not experi- enced any credit losses associated with derivative or foreign exchange contracts. 52 Comerica Incorporated 18 Financial Instruments With Off-Balance Sheet Risk (continued) On a limited scale, fee income is earned from entering into various transactions, principally foreign exchange contracts and interest rate caps, at the request of customers. The Corpo- ration does not speculate in derivative financial instruments for the purpose of profiting in the short-term from favorable movements in market rates. Fair values for customer-initiated and other derivative and foreign exchange contracts represent the net unrealized gains or losses on such contracts and are recorded in the con- solidated balance sheets. Changes in fair value are recognized in the consolidated income statements. For the year ended December 31, 1997, unrealized gains and unrealized losses on customer-initiated and other foreign exchange contracts aver- aged $23 million and $18 million, respectively. For the year ended December 31, 1996, unrealized gains and unrealized losses averaged $10 million and $9 million, respectively. These contracts also generated $7 million of noninterest income for both years ended December 31, 1997 and 1996. Average positive and negative fair values and income related to customer-initiated and other interest rate contracts were not material for 1997 and 1996. The following table presents the composition of off-balance sheet derivative financial instruments and foreign exchange contracts held or issued in connection with customer-initiated and other activities at December 31, 1997 and 1996. Notional/ Contract Unrealized Unrealized Amount Gains Fair Losses Value (in millions) December 31, 1997 Customer-initiated and other Interest rate contracts: Caps written Floors purchased Swaps $.0314 32 150 $ — — 6 $ — $ — — — — (6) Detailed discussions of each class of derivative financial instrument and foreign exchange contract held or issued by the Corporation for both risk management and customer- initiated and other activities are provided below. Interest Rate Swaps Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for variable pay- ments based on a designated market rate or index (or variable payments based on two different rates or indices for basis swaps), applied to a specified notional amount until a stated maturity. In some cases, the payments may be based on the change in the value of an underlying security. The Corpora- tion’s swap agreements are structured such that variable pay- ments are primarily based on one-month and three-month LIBOR. These instruments are principally negotiated over-the- counter and are subject to credit risk, market risk and liquidity risk. Interest Rate Options, Including Caps and Floors Option contracts grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate caps and floors are option-based contracts which entitle the buyer to receive cash payments based on the difference between a designated reference rate and the strike price, applied to a notional amount. Written options, primarily caps, expose the Corporation to market risk but not credit risk. A fee is received at inception for assuming the risk of unfavorable changes in interest rates. Purchased options contain both cred- it and market risk; however, market risk is limited to the fee paid. Options are either exchange-traded or negotiated over- the-counter. All interest rate caps and floors are over-the- counter agreements. 496 6 (6) — Foreign Exchange Contracts Total interest rate contracts Foreign exchange contracts: Spot, forwards, futures and options 1,837 37 (33) 4 Total customer- initiated and other $2,333 $ 43 $(39) $0 4 December 31, 1996 Customer-initiated and other Interest rate contracts: Caps written Floors purchased Swaps $1,358 2 30 $ — — 5 $ — $ — — — —. (5) Total interest rate contracts Foreign exchange contracts: Spot, forwards, futures 390 5 (5) — and options 644 19 (18) 1 Total customer- initiated and other $1,034 $ 24 $(23) $ 01 The Corporation uses foreign exchange rate swaps, including generic receive variable swaps and cross-currency swaps, for risk management purposes. Generic receive variable swaps involve payment, in a foreign currency, of the difference between a contractually fixed exchange rate and an average exchange rate determined at settlement, applied to a notional amount. Cross-currency swaps involve the exchange of both interest and principal amounts in two different currencies. Other foreign exchange contracts such as futures, forwards and options are primarily entered into as a service to cus- tomers and to offset market risk arising from such positions. Futures and forward contracts require the delivery or receipt of foreign currency at a specified date and exchange rate. For- eign currency options allow the holder to purchase or sell a foreign currency at a specified date and price. Foreign exchange futures are exchange-traded, while forwards, swaps and most options are negotiated over-the-counter. Foreign exchange contracts expose the Corporation to both market risk and credit risk. Comerica Incorporated 53 18 Financial Instruments With Off-Balance Sheet Risk (continued) Commitments The Corporation also enters into commitments to purchase or sell earning assets for risk management purposes. These trans- actions, which are similar in nature to forward contracts, did not have a material impact on the consolidated financial state- ments for the years ended December 31, 1997 and 1996. Commitments to purchase investment securities are executed to secure certain rates on primarily U.S. government and agency securities. No such commitments were outstanding at year-end 1997, while $50 million were outstanding at year- end 1996. Commitments to purchase and sell U.S. Treasury and municipal bond securities related to the Corporation’s trading account totaled $2 million and $18 million at Decem- ber 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, $30 million and $23 million, respectively, of com- mitments with settlement terms of up to 120 days had been initiated to reduce interest rate risk on fixed rate residential mortgage loans originated or held for sale. Outstanding com- mitments expose the Corporation to both credit risk and mar- ket risk. Available credit lines on fixed rate credit card and check prod- uct accounts, which have characteristics similar to option con- tracts, totaled $1.8 billion and $2.0 billion at December 31, 1997 and 1996, respectively. These commitments expose the Corporation to the risk of a reduction in net interest income as interest rates increase. Market risk exposure arising from fixed rate revolving credit commitments is very limited, however, since it is unlikely that a significant number of customers with these accounts will simultaneously borrow up to their maxi- mum available credit lines. Additional information concerning unused commitments to extend credit is provided in the “Credit-Related Financial Instruments” section below. Credit-Related Financial Instruments The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. 19 Contingent Liabilities The Corporation and its subsidiaries are parties to litigation and claims arising in the normal course of their activities. Although the amount of ultimate liability, if any, with respect to such matters cannot be determined with reasonable certain- ty, management, after consultation with legal counsel, believes that the litigation and claims, some of which are substantial, will not have a materially adverse effect on the Corporation’s consolidated financial position or results of operations. Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table: (in millions) Unused commitments to extend credit Standby letters of credit and financial guarantees Commercial letters of credit 1997 1996 $27,528 3,088 449 $22,118 2,684 335 Unused Commitments to Extend Credit Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments gen- erally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation. Total unused commitments to extend credit at December 31, 1997 and 1996, included $4 billion of variable and fixed rate revolving credit commit- ments. Other unused loan commitments, primarily variable rate, totaled $24 billion at December 31, 1997, and $18 billion at December 31, 1996. Standby and Commercial Letters of Credit and Financial Guarantees Standby and commercial letters of credit and financial guaran- tees represent conditional obligations of the Corporation which guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Long-term standby letters of credit and financial guarantees, defined as those maturing beyond one year, expire in decreasing amounts through the year 2012, and were $1,309 million and $1,192 million at December 31, 1997 and 1996, respectively. The remaining standby letters of credit and financial guarantees, which mature within one year, totaled $1,779 million and $1,492 million at December 31, 1997 and 1996, respectively. Commercial letters of credit are issued to finance foreign or domestic trade transactions. 54 Comerica Incorporated 20 Usage Restrictions Included in cash and due from banks are amounts required to be deposited with the Federal Reserve Bank. These reserve balances vary, depending on the level of customer deposits in the Corporation’s subsidiary banks. At December 31, 1997 and 1996, the Federal Reserve balances were $587 million and $534 million, respectively. 21 Estimated Fair Values of Financial Instruments Disclosure of the estimated fair values of financial instru- ments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its finan- cial instruments. These valuation methods require consider- able judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not neces- sarily indicate amounts which could be realized in a current exchange. Furthermore, as the Corporation normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of trust operations and other fee generating businesses. The Corporation does not believe that it would be practicable to estimate a representational fair value for these types of items. The Corporation used the following methods and assumptions: Cash and short-term investments: The carrying amount approximates the estimated fair value of these instruments, which consist of cash and due from banks, interest-bearing deposits with banks and federal funds sold. Trading account securities: These securities are carried at quoted market value or the market value for comparable secu- rities, which represents estimated fair value. Loans held for sale: The market value of these loans repre- sents estimated fair value. The market value is determined on the basis of existing forward commitments or the market val- ues of similar loans. Investment securities: The market value of investment secu- rities, which is based on quoted market values or the market values for comparable securities, represents estimated fair value. Domestic commercial loans: These consist of commercial, real estate construction, commercial mortgage and equipment lease financing loans. The estimated fair value of the Corpora- tion’s variable rate commercial loans is represented by their carrying value, adjusted by an amount which estimates the change in fair value caused by changes in the credit quality of borrowers since the loans were originated. The estimated fair value of fixed rate commercial loans is calculated by dis- counting the contractual cash flows of the loans using year- end origination rates derived from the Treasury yield curve or other representative bases. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of bor- rowers since the loans were originated. International loans: The estimated fair value of the Corpora- tion’s short-term international loans which consist of trade- related loans, or loans which have no cross-border risk due to the existence of domestic guarantors or liquid collateral, is represented by their carrying value, adjusted by an amount which estimates the effect on fair value of changes in the credit quality of borrowers or guarantors. The estimated fair value of long-term international loans is based on the quoted market values of these loans or on the market values of inter- national loans with similar characteristics. Retail loans: This category consists of residential mortgage, consumer and auto lease financing loans. The estimated fair value of residential mortgage loans is based on discounted contractual cash flows or market values of similar loans sold in conjunction with securitized transactions. For consumer loans, the estimated fair values are calculated by discounting the contractual cash flows of the loans using rates representa- tive of year-end origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Customers’ liability on acceptances outstanding: The carrying amount approximates the estimated fair value. Loan servicing rights: The estimated fair value represents those servicing rights recorded under SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Fair value is computed using discounted cash flow analyses, using interest rates and prepayment speed assumptions currently quoted for comparable instruments. Comerica Incorporated 55 21 Estimated Fair Values of Financial Instruments (continued) Deposit liabilities: The estimated fair value of demand deposits, consisting of checking, savings and certain money market deposit accounts, is represented by the amounts payable on demand. The carrying amount of deposits in for- eign offices approximates their estimated fair value, while the estimated fair value of term deposits is calculated by dis- counting the scheduled cash flows using the year-end rates offered on these instruments. Short-term borrowings: The carrying amount of federal funds purchased, securities sold under agreements to repur- chase and other borrowings approximates estimated fair value. Acceptances outstanding: The carrying amount approximates the estimated fair value. Medium- and long-term debt: The estimated fair value of the Corporation’s variable rate medium- and long-term debt is represented by its carrying value. The estimated fair value of the fixed rate medium- and long-term debt is based on quot- ed market values. If quoted market values are not available, the estimated fair value is based on the market values of debt with similar characteristics. Derivative financial instruments and foreign exchange con- tracts: The estimated fair value of interest rate swaps repre- sents the amount the Corporation would receive or pay to terminate or otherwise settle the contracts at the balance sheet date, taking into consideration current unrealized gains and losses on open contracts. The estimated fair value of for- eign exchange futures and forward contracts and commit- ments to purchase or sell financial instruments are based on quoted market prices. The estimated fair value of interest rate and foreign currency options (including interest rate caps and floors) are determined using option pricing models. Credit-related financial instruments: The estimated fair value of unused commitments to extend credit and standby and commercial letters of credit is represented by the estimated cost to terminate or otherwise settle the obligations with the counterparties. This amount is approximated by the fees cur- rently charged to enter into similar arrangements, consider- ing the remaining terms of the agreements and any changes in the credit quality of counterparties since the agreements were entered into. This estimate of fair value does not take into account the significant value of the customer relation- ships and the future earnings potential involved in such arrangements as the Corporation does not believe that it would be practicable to estimate a representational fair value for these items. The estimated fair values of the Corporation’s financial instru- ments at December 31, 1997 and 1996 are as follows: (in millions) Assets Cash and short-term investments Trading account securities Loans held for sale Investment securities available for sale Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans Less allowance for loan losses 1997 1996 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $12,080 9 41 4,006 15,805 2,085 $12,080 9 41 $11,961 6 38 4,006 15,743 2,080 4,800 13,520 1,706 $11,961 6 38 4,800 13,445 1,704 941 933 751 744 3,634 3,617 3,446 3,413 1,565 4,348 517 1,608 4,231 518 1,744 4,634 406 1,771 4,498 406 28,895 28,730 26,207 25,981 (424) — (367) — Net loans 28,471 28,730 25,840 25,981 Customers’ liability on acceptances outstanding Loan servicing rights Liabilities Demand deposits (noninterest-bearing) Interest-bearing deposits Total deposits Short-term borrowings Acceptances outstanding Medium- and 18 28 18 31 33 23 33 25 6,761 15,825 22,586 3,193 18 6,761 15,840 6,713 15,654 22,601 22,367 3,193 18 4,489 33 6,713 15,664 22,377 4,489 33 long-term debt 7,286 7,395 4,242 4,268 Off-balance Sheet Financial Instruments Derivative financial instruments and foreign exchange contracts Risk management: Unrealized gains Unrealized losses Customer-initiated and other: Unrealized gains Unrealized losses — — 43 (39) 154 (23) 43 (39) — — 24 (23) Credit-related financial instruments — (13) — 68 (102) 24 (23) (10) 56 Comerica Incorporated 22 Parent Company Financial Statements BALANCE SHEETS—Comerica Incorporated December 31 (in thousands, except share data) Assets Cash and due from banks Time deposits with subsidiary bank Investment securities available for sale Investment in subsidiaries, principally banks Receivables from subsidiaries Premises and equipment Other assets Total assets Liabilities and Shareholders’ Equity Long-term debt Other borrowed funds Advances from nonbanking subsidiaries Other liabilities Total liabilities Nonredeemable preferred stock—$50 stated value Authorized—5,000,000 shares Issued—5,000,000 shares in 1997 and 1996 Common stock—$5 par value Authorized—250,000,000 shares Issued—156,815,367 shares in 1997 and 107,297,345 shares in 1996 Capital surplus Unrealized gains and losses on investment securities available for sale Retained earnings Deferred compensation Total shareholders’ equity Total liabilities and shareholders’ equity STATEMENTS OF INCOME—Comerica Incorporated Year Ended December 31 (in thousands) Income Income from subsidiaries Dividends from subsidiaries Other interest income Intercompany management fees Other interest income Other noninterest income Total income Expenses Interest on long-term debt and other borrowed funds Net interest rate swap income Interest on advances from subsidiaries Salaries and employee benefits Occupancy expense Equipment expense Restructuring charge Other noninterest expenses Total expenses Income before income taxes and equity in undistributed net income of subsidiaries Income tax expense (credit) Equity in undistributed net income of subsidiaries, principally banks Net Income Comerica Incorporated 1997 1996 $ 372 80,400 20,822 3,017,058 375 6,566 39,634 $ 263 105,700 17,074 2,829,906 — 53,347 31,345 $3,165,227 $3,037,635 $ 298,351 — 4,054 101,046 $ 298,210 842 236 122,778 403,451 422,066 250,000 250,000 784,077 — (1,937) 1,731,419 (1,783) 536,487 — (22,789) 1,854,116 (2,245) 2,761,776 2,615,569 $3,165,227 $3,037,635 1997 1996 1995 $353,500 3,626 166,952 559 2,070 $322,000 3,372 264,368 1,773 5,278 $183,700 7,113 293,292 — 2,680 526,707 596,791 486,785 26,129 (2,818) 18 65,766 9,373 2,053 — 54,244 26,328 (2,794) 86 123,271 22,483 24,806 27,000 63,224 19,948 (785) 243 127,261 22,778 25,600 — 76,319 154,765 284,404 271,364 371,942 6,111 312,387 (1,931) 215,421 10,705 365,831 314,318 204,716 164,645 102,843 208,650 $530,476 $417,161 $413,366 57 22 Parent Company Financial Statements (continued) STATEMENTS OF CASH FLOWS—Comerica Incorporated Year Ended December 31 (in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings of subsidiaries, principally banks Depreciation Restructuring charge Other, net Total adjustments Net cash provided by operating activities Investing Activities Purchase of investment securities available for sale Proceeds from sale of investment securities available for sale Proceeds from sales of fixed assets and other real estate Purchases of fixed assets Net (increase) decrease in bank time deposits Net (increase) in receivables from subsidiaries Capital transactions with subsidiaries Net cash provided by (used in) investing activities Financing Activities Net increase (decrease) in advances from subsidiaries Proceeds from issuance of long-term debt Repayments and purchases of long-term debt Net decrease in short-term borrowings Proceeds from issuance of preferred stock Proceeds from issuance of common stock Purchase of common stock for treasury and retirement Dividends paid Net cash used in financing activities Net increase (decrease) in cash on deposit at bank subsidiary Cash on deposit at bank subsidiary at beginning of year Cash on deposit at bank subsidiary at end of year Interest paid Income taxes recovered (paid) Noncash investing and financing activities Stock issued for acquisitions The preceding parent company financial statements reflect the sale of the Corporation’s information services, transaction processing and operations services departments to a subsidiary, Comerica Bank, on January 1, 1997. 1997 1996 1995 $530,476 $417,161 $413,366 (164,645) 1,800 (20,992) 20,928 (102,843) 20,595 27,000 23,091 (208,650) 20,447 (6,078) 16,694 (162,909) (32,157) (177,587) 367,567 385,004 235,779 (4,092) 427 28,958 (1,424) 25,300 (375) (3,283) (4,820) — 603 (20,345) 25,100 — 131,871 (6,097) — 3,439 (16,413) (41,200) — (1,400) 45,511 132,409 (61,671) 3,818 — 141 (842) (3,523) (4,064) — 210,000 (59,147) — — 11,736 (178,656) (155,726) (259) — — 246,744 35,206 (622,196) (173,414) 22,584 (243,258) (195,412) (412,969) (517,442) (175,857) 109 263 (29) 292 (1,749) 2,041 $000.372 $111,263 $111,292 $ 25,799 $125,942 $115,623 $ (1,145) $111,150 $003,275 $ — $128,938 $177,100 58 Comerica Incorporated 23 Summary of Quarterly Financial Information The following quarterly information is unaudited. However, in the opinion of management, the information reflects all adjustments which are necessary for the fair presentation of the results of operations for the periods presented. (in thousands, except per share data) Interest income Interest expense Net interest income Provision for loan losses Securities gains/(losses) Noninterest income (excluding securities gains) Noninterest expenses Net income Basic net income per share Diluted net income per share (in thousands, except per share data) Interest income Interest expense Net interest income Provision for loan losses Securities gains/(losses) Noninterest income (excluding securities gains) Restructuring charge Noninterest expenses (excluding restructuring charge) Net income Basic net income per share Diluted net income per share 1997 Fourth Quarter Third Quarter Second Quarter First Quarter $682,163 316,281 365,882 37,000 5,836 $674,671 313,090 361,581 34,000 1,096 $663,326 299,798 363,528 34,000 (1,359) $627,243 275,458 351,785 41,000 122 134,928 257,368 139,927 135,251 252,622 137,067 122,806 249,259 129,710 129,272 248,737 123,772 $0.86 0.85 $0.84 0.83 $0.79 0.78 $0.75 0.74 1996 Fourth Quarter Third Quarter Second Quarter First Quarter $632,737 279,476 353,261 32,000 10,194 $633,421 280,154 353,267 28,500 (276) $642,192 285,703 356,489 25,000 3,310 $654,430 305,169 349,261 28,500 360 122,214 90,000 116,604 — 117,480 — 137,068 — 266,220 60,816 253,635 121,518 270,196 118,221 278,975 116,606 $0.35 0.35 $0.71 0.70 $0.68 0.67 $0.66 0.66 Comerica Incorporated 59 Report of Management Report of Independent Auditors Board of Directors, Comerica Incorporated We have audited the accompanying consolidated balance sheets of Comerica Incorporated and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the respon- sibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accept- ed auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate- ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state- ments. An audit also includes assessing the accounting princi- ples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above pre- sent fairly, in all material respects, the consolidated financial position of Comerica Incorporated and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Detroit, Michigan January 20, 1998 Management is responsible for the accompanying financial statements and all other financial information in this Annual Report. The financial statements have been prepared in con- formity with generally accepted accounting principles and include amounts which of necessity are based on manage- ment’s best estimates and judgments and give due considera- tion to materiality. The other financial information herein is consistent with that in the financial statements. In meeting its responsibility for the reliability of the financial statements, management develops and maintains systems of internal accounting controls. These controls are designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management’s authorization. The concept of reasonable assur- ance is based on the recognition that the cost of internal accounting control systems should not exceed the related benefits. The systems of control are continually monitored by the internal auditors whose work is closely coordinated with and supplements in many instances the work of independent auditors. The financial statements have been audited by independent au- ditors Ernst & Young LLP. Their role is to render an indepen- dent professional opinion on management’s financial statements based upon performance of procedures they deem appropriate under generally accepted auditing standards. The Corporation’s Board of Directors oversees management’s internal control and financial reporting responsibilities through its Audit Committee as well as various other committees. The Audit Committee, which consists of directors who are not officers or employees of the Corporation, meets periodically with management and internal and independent auditors to assure that they and the Committee are carrying out their responsibilities, and to review auditing, internal control and financial reporting matters. Eugene A. Miller Chairman and Chief Executive Officer Ralph W. Babb Jr. Executive Vice President and Chief Financial Officer W2@@ ?W&@@@ W&0Y@5 ?W.Me@H O)X?eW.Y??J@? W2@@)??W&He?75? ?W&@@@H?W&5?eJ@H? W&0Y@@?W&(Y?e75 ?W.M?J@@T&(Ye?J@H W2@6X?W.Y??7@V@(Y?e?75? ?W&0Y@)T.Ye?@@W(YfJ@H? W&

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