A L W A Y S E V O L V I N G . . . U P H O L D I N G P R O U D T R A D I T I O N S Comerica Incorporated Comerica Tower at Detroit Center 500 Woodward Avenue, MC 3391 Detroit, Michigan 48226 www.comerica.com 2 0 0 1 A N N U A L R E P O R T C O R P O R A T E P R O F I L E Comerica Incorporated (NYSE: CMA) is a financial services company focused on business banking and asset gathering.Through its more than 500 customer-service locations, including branch, lending and investment offices, Comerica helps businesses and people be successful. Comerica is ideally positioned to deliver high quality financial services in Michigan, California and Texas, as well as in Florida, 19 other states, Canada and Mexico. Comerica has an investment services affiliate, Munder Capital Management, ranked among the top 5 percent of money managers worldwide. F A S T F A C T S O N C O M E R I C A ❚ More than 11,000 employees focused on relationship management. ❚ Among the 20 largest banking companies in the U.S., with $51 billion in total assets at December 31, 2001. ❚ 3rd largest SBA 7(a) lender in the nation. ❚ Among the top 10 U.S. bank holding companies in commercial loans and top 20 in small business loans. ❚ #1 among the top 50 U.S. bank holding companies in commercial loans as a percent of total assets. ❚ Among the “Best Big Companies in America,” according to Forbes magazine. Comerica is organized into three focused operating units: B U S I N E S S B A N K Corporate Banking (National Business Finance, which includes Commercial Real Estate, National Dealer Services, Comerica Business Credit and Comerica Leasing Services; U.S. Banking; Middle Market Banking;W.Y. Campbell), International Finance,Treasury Management Services. I N D I V I D U A L B A N K Private Banking, Small Business Banking and Personal Financial Services. I N V E S T M E N T B A N K Investment Services (Comerica Securities; Munder Capital Management; Wilson, Kemp & Associates), Comerica Insurance Services, Institutional Trust, Retirement Services. O U R V I S I O N Comerica is in business to help people be successful.We are committed to delivering the highest quality financial services by: ❚ Providing outstanding value and building enduring customer relationships. ❚ Creating a positive environment for our colleagues, built on trust, teamwork and respect. ❚ Demonstrating leadership in our communities. ❚ Ensuring a consistent, superior return for our owners. C O N T E N T S 1 Financial Highlights 2 At a Glance 4 Letter to Shareholders 8 Always evolving... Upholding proud traditions 16 Directors and Officers 22 Financial Review and Reports Congratulations to G E R A L D B U R L E Y, Treasury Management Support, for being named Comerica’s 2001 National Quality Excellence Award overall winner. In addition to Burley, nine finalists were recognized in 2001 for their dedication to quality: N A N C Y B A R O N Corporate Learning J A S O N F E D E R O F F Deposit Services T U L A K Y P R I A N I D E S Global Trust S U S A N L A R U S H Middle Market Banking J A N E M U R R A Y East Jackson Office K E N S T A L L M A N Lockwood Office B R U C E T A C K E T T Treasury Management-Product Management C H A R Y L T A Y L O R Josey-Trinity Mills Office T E R A N C E W I L K Technical Services F I N A N C I A L H I G H L I G H T S (dollar amounts in millions, except per share data) I N C O M E S T A T E M E N T Net interest income Net income — excluding merger-related and restructuring charges Basic net income per share Diluted net income per common share — excluding merger-related and restructuring charges Cash dividends per common share Book value per common share Market value per share R A T I O S Return on average common shareholders’ equity — excluding merger-related and restructuring charges Return on average assets — excluding merger-related and restructuring charges Average common shareholders’ equity as a percentage of average assets B A L A N C E S H E E T ( A T D E C E M B E R 3 1 ) Total assets Total earning assets Loans Business loans Deposits Common shareholders’ equity 2001 2000 Amount Percent 1 Change $ 2,102 710 842 3.93 3.88 4.61 1.76 27.17 57.30 15.16% 18.03 1.43 1.69 9.27 $50,732 46,566 41,196 38,933 37,570 4,807 $ 2,004 791 791 4.38 4.31 4.31 1.60 23.98 59.38 19.52% 1.69 8.45 $49,534 45,791 40,170 37,885 33,854 4,250 $ 98 (81) 51 (0.45) (0.43) 0.30 0.16 3.19 (2.08) $1,198 775 1,026 1,048 3,716 557 5% (10) 6 (10) (10) 7 10 13 (4) 2% 2 3 3 11 13 N E T I N C O M E ( I N M I L L I O N S ) D I L U T E D N E T I N C O M E P E R C O M M O N S H A R E ( I N D O L L A R S ) 01 00 99 98 97 $710 $842 $791 $759 $651 $586 01 00 99 98 97 $3.88 $4.61 $4.31 $4.13 $3.51 $3.11 Excludes 2001 merger-related and restructuring charges Excludes 2001 merger-related and restructuring charges A T A G L A N C E 2 B U S I N E S S B A N K I N D I V I D U A L B A N K I N V E S T M E N T B A N K O V E R V I E W E V O L V I N G T R A D I T I O N Comerica’s Business Bank provides companies with an array of credit and non-credit financial products and services. It builds long-lasting relationships with business customers, with an emphasis on middle market companies.The Business Bank offers highly professional business lending, credit underwriting, international banking and cash management services. ❚ Internet-enabling our business products and services, such as with Comerica eFXSM, Comerica GlobalTRADE Web, TradeCard® and Comerica NetVisionSM ❚ Producing positive results, underscored by our #1 ranking in commercial loans as a percent of total assets ❚ Leveraging our expertise in specialized industries — Technology and Life Sciences, Automotive Dealer, Title and Escrow, Healthcare, and Entertainment, among others ❚ Cross-selling products and services, such as our innovative Comerica CompCardSM, or plastic paycheck, to an increasingly sophisticated and technologically adept business client base 3 ❚ Relationship building ❚ Local decision making ❚ Strong credit underwriting skills ❚ Excellent service ❚ Solid reputation Comerica’s Individual Bank focuses on deepening relationships with consumers, and owners and managers of small businesses. It also delivers highly responsive and personalized private banking services to affluent individuals. Individual Bank distribution channels include branch and supermarket offices, online and telephone banking, and automated teller machines. Comerica’s Investment Bank offers a full range of investment products and services to individuals, companies and other entities. Major areas of focus include institutional trust, retirement services, full-service brokerage services and insurance.The Investment Bank plays an important role in keeping clients’ assets within Comerica. ❚ Growing our share of the small business market, as evidenced by our #3 ranking in SBA 7(a) lending, and top 20 ranking in small business lending ❚ Enhancing the electronic delivery of banking services with Comerica Web Banking® for Small Business, and our new platform for delivering real-time access for online banking ❚ Developing new products and services ❚ Deepening client relationships ❚ Personalized service ❚ Responsive ❚ Expert personal trust services ❚ Trusted resource to meet customer needs and gather assets, such as with Access Checking, our fee-less checking product ❚ Forging alliances, such as with RBC Dain Rauscher and the renewal in 2001 of our strategic trust alliance with UBS PaineWebber, and bringing forth innovative wealth management strategies to preserve, protect and grow the wealth of individuals and families ❚ Providing online access for Institutional ❚ Strong focus on relationships Trust clients through Comerica TRACNetSM ❚ Helping investors stay connected with wireless investing from Comerica Securities ❚ Offering an even broader range of investment products through our investment services affiliate, Munder Capital Management ❚ Using advanced planning techniques in Comerica Insurance Services for clients’ enhanced financial well being ❚ Superior investment alternatives ❚ Expert institutional trust services ❚ Ability to meet client investment needs ❚ Proven experience L E T T E R T O S H A R E H O L D E R S 4 President & Chief Executive Officer Ralph W. Babb Jr. (left), with Chairman Eugene A. Miller 5 Dear Fellow Shareholders, In 2001, our lives as Americans changed forever. We endured a tragedy of immense proportion which will forever affect individuals and businesses throughout our country. As we come to terms with the full meaning and impact of the September 11 tragedy, one truth stands out: Americans are In this trying time for our country and its economy, it is important to remember that our company is functioning very well and our fundamental strategy remains unchanged as we continue to look for opportunities to further strengthen and grow. stronger and more courageous, and stand united as never before to face the challenges the future holds for us. Here at Comerica, 2001 was a particularly significant year because of our leadership transition. We started a new chapter in our history with the announcement of Ralph Babb’s appointment as president and chief executive officer, only the 15th person to serve in that position since our company’s founding 153 years ago. In addition, we completed the integration of Imperial Bank with Comerica Bank-California, greatly expanding our business in one of the nation’s fastest growing states. The merger also enabled us to grow several of our national businesses, most notably small business lending and lending to companies in the technology and life sciences industry. The year was not without its challenges, however. A faltering economy was compounded by the tragedy of September 11. The decrease in the stock market, primarily technology-related stocks, led to a decline in investment advisory revenues and resulted in special charges at Munder Capital Management. 6 $300 $200 $100 $0 Comparison of Five Year Cumulative Total Return Among Comerica Incorporated, Keefe 50-Bank Index and S&P 500 Index (Assumes $100 Invested on 12/31/96 and Reinvestment of Dividends) 1996 1997 1998 1999 2000 2001 Comerica Incorporated Keefe 50-Bank Index S & P 500 Index I N M E M O R I A M Heinz Prechter, who passed away in July 2001, served with dedication and distinction as a director of Manufacturers National Corporation from 1987 to 1992, as a director of Comerica Bank since 1992, and as a director of Comerica Incorporated since 2000. We remember and honor his service to our company and the Downriver communities of Southeast Michigan. Toward the end of the year, as the economy continued to weaken, we revised our credit guidance as nonperforming loans and net charge-offs were higher than originally expected, particularly in the manufacturing sector. Overall, our operating performance was very good. Excluding the Imperial merger-related and restructuring charges, return on assets was 1.69 percent and return on equity was 18.03 percent. Our efficiency ratio is one of the lowest of all bank holding companies at 49 cents on the dollar. Forbes magazine identified Comerica as one of the 400 “Best Big Companies in America” in 2001, recognizing the 400 companies for “the strategy, stamina and growth to be standouts among their peers ... The companies ... share some personality traits that serve them well — an innate ability to adapt to change; a hunger to innovate and go against the grain; resiliency in a down industry and amid doubts on Wall Street; and a relentless will to be miserly even in boom times.” Even through the recent market turbulence, Comerica’s share price has continued to perform well relative to other measures of market performance. In fact, including reinvestment of dividends, $100 invested in Comerica common stock at the end of 1996 would have returned $188 at the end of 2001, which compares favorably to a similar investment in the Keefe 50-Bank Index, which would have returned $176, and the S&P 500 Index, which would have returned $166. As we have in each of the past 33 consecutive years, Comerica increased its annual dividend. In January 2002, we raised the quarterly dividend for common stock by nine percent to $0.48 a share. In this trying time for our country and its economy, it is important to remember that our company is functioning very well and our fundamental strategy remains unchanged as we continue to look for opportunities to further strengthen and grow. As always, we will seek out opportunities to grow in large, metropolitan areas where we can best execute our strategy. And, the geographic diversification should protect us in economic downturns like the current one. For example, we recently increased our presence in Houston, the fourth largest city in the United States, making significant investments in people and resources to serve both the large number of entrepreneurial businesses and the retail consumers in that fast-growing city. While we set our strategy to grow internally, we always keep an eye out for potential acquisitions, as we did most recently in California. Now that the integration of Imperial Bank is complete, we have an excellent footprint in that state. Our goal for 2002 is to give the integration time to mature and to leverage the considerable business opportunities created by the union of these two California banks. R E T U R N O N A V E R A G E C O M M O N E Q U I T Y ( I N P E R C E N T A G E S ) 7 15.16% 18.03% 19.52% 21.78% 21.16% 20.88% Excludes 2001 merger-related and restructuring charges D I V I D E N D S P E R C O M M O N S H A R E ( I N D O L L A R S ) $1.76 $1.60 $1.44 $1.28 $1.15 In our headquarters state of Michigan, where we are the largest bank, our retail operations are very important. In 2001 we opened three new branch offices and this year, we intend to open seven more, in the growing counties in and around the southeast portion of our state. The challenges of this current economic environment are not new to those of us with a concentration of business in the Midwest. At Comerica, we built our reputation for maintaining long-term relationships “through thick and thin” in similar economic times when we continued to service our customers and look for a greater share of their business, as opposed to pulling back. That reputation serves us well today and enables us to continue to grow our business. And we can do this because of our well-developed credit culture. Extensive credit training, solidly integrated lending and credit functions, and a proactive credit administration process are the foundation of our business lending. Given this culture and our years of experience, we are there for our customers through the peaks and valleys of fluctuations in the economy. The year 2002 will be a challenging one. The war on terrorism continues, and our armed forces remain overseas. Within the financial services industry, consolidation among banks is commonplace, but deregulation moves at a much slower pace. The good news is that the U.S. economy is accelerating. Consumer confidence is on the rebound and rising from the depths following the economic stumble and terrorist attacks during the second half of 2001. The stock market also has been rising, foretelling better business activity and profits for 2002 and 2003. During this time of change and uncertainty in the world around us, our goal at Comerica is to ensure our business operates and grows as usual. Because the two of us, the executive team and the board have worked closely together, the leadership transition will be seamless. Most importantly, we work with colleagues who are committed to our core values and continually provide outstanding service to all our customers. They are the true success of this company. We are confident in Comerica’s ability to meet the challenges before us and continue to grow our business because of our highly disciplined strategy, our expertise in relationship management and our dedicated team of colleagues. 01 00 99 98 97 01 00 99 98 97 Eugene A. Miller Chairman Ralph W. Babb Jr. President and Chief Executive Officer A L W A Y S E V O L V I N G . . . 8 Some things change. Some things stay the same. At Comerica, both are true. We continue to evolve to meet the changing needs of customers, employees, shareholders and the communities we serve. While doing so, we are able to uphold the many proud traditions that have defined our company for 153 years. Not every company can transform itself in this way, as we do, and still be successful. That’s why we’re not like every company. TRANSFO 9 To compete effectively in today’s challenging economy, companies have to be quick, skillful and confident. These are key attributes of Comerica, a financial services company that takes great pride in its continuing ability to reinvent itself. From our Service Company, where “making it work” is a way of life, to our business development officers, who treat new business as a stepping stone to a successful relationship, the drive for results is constant. The transformation of our Service Company is a case in point. Not simply content with providing high-quality production services, the Service Company, under the leadership of Chief Information Officer John Beran, set out to effectively and proactively support new product and service requests. It did not stop there. The Service Company is evolving to the point where it is also becoming known for initiating new ideas to help business units succeed. The focus on effective and efficient service delivery, client partnerships and now business enablement is transforming how the Service Company operates. Its superior work helps Comerica bring innovative new products and services to the marketplace. Within these next several pages, you will find other examples of Comerica’s evolution. As we evolve, you will see we never lose sight of that which makes us strong: Integrity and trust, teamwork, customer service, flexibility and adapting to change, learning and personal growth, and ownership. These are our core values, the ever-present traditions inherent in our culture. RMATION 10 11 Comerica’s evolution is perhaps most striking in the world of high technology. We are Internet-enabling our Business Bank, Individual Bank and Investment Bank products and services with speed, accuracy and efficiency. It is important for businesses and individuals to be successful in their online experiences with us, so we continue to invest in the latest Web-site technology. State-of-the-art security and point-and-click convenience are hallmarks of our Internet services. The latest enhancements to comerica.com include express login, so our online banking customers can quickly access their favorite transactional pages: ❚ For our individual and small business customers, Comerica Web Banking® and Comerica Web Banking for Small Business provide easy ways to stay in touch with their accounts, with the ability to check balances, transfer funds or pay bills, all online; ❚ For our private banking customers, Private Banking Online provides a convenient way to view trust account balances and holdings, and more; ❚ For our brokerage service customers, Online Trading with Comerica Securities provides unlimited access to real-time quotes, capabilities to enter trade orders, check balances, and more; ❚ For our retirement services customers, R.E.T.I.R.E. Online provides fast access to workplace savings plans; ❚ For our business banking customers, Comerica NetVisionSM provides managed, secure and reliable online access to account information, with transaction initiation capabilities, and more; ❚ For our international trade services customers, Comerica GlobalTRADE Web provides quick, real-time international trade management; ❚ For our institutional trust customers, Comerica TRACNetSM provides account balances, history and more, all online; and, ❚ For our foreign exchange customers, Comerica eFXSM provides a full array of Internet-based foreign exchange services. 12 Our integration of Imperial Bank is further evidence of our company’s evolution. During the year, Imperial Bank joined forces with Comerica Bank-California, a combination that created one of the largest banking companies in the Golden State. The integration brought together colleagues from around the corporation focused on the single goal of a smooth transition. A tradition of service excellence and confidence borne from years of experience helped ensure the goal would be met. And it was, thanks to colleagues such as Peg Rulien, our Service Company manager for California and Texas, and countless others. From the union of Imperial and Comerica comes strength. Comerica today offers a full range of financial products and services to businesses of any size. We are best known for our leadership in middle market and small business banking, and though our reach is global, our touch is local. Responsive and experienced relationship managers understand their markets and their customers, and are empowered to make decisions. This tradition of local authority helps set us apart from the competition. Comerica today ranks third in the nation and first in California in Small Business Administration (SBA) 7(a) guaranteed lending. Comerica’s SBA groups are located in 14 states with 31 offices nationwide. Comerica today has one of the leading technology banking practices, offering a wide range of financial services tailored to corporate customers, entrepreneurs and professionals. Imperial’s emphasis on early stage companies, combined with Comerica’s concentration on late stage companies, means we now effectively service customers through all stages of their growth. From 19 offices located across the United States, Comerica’s Technology and Life Sciences Division serves all major technology centers. Comerica today also is adept at servicing the specialized needs of entertainment-based companies. The Comerica Entertainment Group finances a diverse portfolio of motion picture and television projects. 13 . . . U P H O L D I N G P R O U D T R A D I T I O N S 14 Our focus on relationships is a tradition at Comerica and is at the heart of our continuing ability to succeed in the dynamic financial services marketplace. We build enduring relationships with customers, employees, shareholders and communities. We forge long-standing relationships with customers as we concentrate on our core competencies of business banking and asset gathering. Our heritage is based on our ability to understand and meet their financial needs through all economic cycles. We have stable, long-term financial relationships with owner-managed and middle market companies, large corporations, individuals and others. Our relationships with employees are built on honesty, integrity and open communication. We treat our colleagues as owners because they are — more than 90 percent of them own company stock. Our relationships with shareholders are built on trust. We continue to take good care of their investments in us. We provide them consistently superior returns, and have a long tradition of sharing excess capital with them after supporting prudent growth in our businesses. Our relationships with the communities we serve is a continuing source of great pride. Comerica is a leader in helping meet the credit and deposit needs of the communities where we operate. We foster close relationships with residents, groups and organizations, such as with our diversity initiatives. Comerica’s commitment and compassion were evident in 2001. Employee pledges for the annual United Way and Black United Fund campaign totaled more than $2 million. And our employees, together with our customers in the communities where we operate, helped raise nearly $3 million for the American Red Cross Disaster Relief Fund, demonstrating our proud tradition of helping when help is needed most. Always evolving... Upholding proud traditions. That’s Comerica. 15 O U R L E A D E R S H I P T E A M C O M E R I C A I N C O R P O R A T E D B O A R D O F D I R E C T O R S 16 R A L P H W. B A B B J R . President and Chief Executive Officer Comerica Incorporated and Comerica Bank (Appointed to board September 25, 2001) (e, f, g) L I L L I A N B A U D E R , P H . D . Vice President Corporate Affairs Masco Corporation (a, c) J O S E P H J . B U T T I G I E G I I I Vice Chairman Comerica Incorporated and Comerica Bank (Appointed to board January 22, 2002) (g) J A M E S F. C O R D E S Retired Executive Vice President The Coastal Corporation (g) P E T E R D . C U M M I N G S Chairman Peter D. Cummings & Associates (f) J . P H I L I P D I N A P O L I President J.P. DiNapoli Companies, Inc. (a, c) A N T H O N Y F. E A R L E Y J R . Chairman and Chief Executive Officer DTE Energy Company (g) M A X M . F I S H E R Investor (b) R O G E R F R I D H O L M President St. Clair Group (e) T O D D W. H E R R I C K President and Chief Executive Officer Tecumseh Products Company (g) D A V I D B A K E R L E W I S Chairman Lewis and Munday, P.C. (f) J O H N D . L E W I S Vice Chairman Comerica Incorporated and Comerica Bank W A Y N E B . LY O N Chairman Lifestyle Furnishings International, Inc. (b) E U G E N E A . M I L L E R Chairman Comerica Incorporated and Comerica Bank (d, e, f, g) A L F R E D A . P I E R G A L L I N I Investor (b) J O H N W. P O R T E R , P H . D . Chief Executive Officer Urban Education Alliance, Inc. (e) H O W A R D F. S I M S Chairman SDG Associates, P.L.L.C. Sims Design Group, Inc. (c) R O B E R T S . T A U B M A N President and Chief Executive Officer The Taubman Company, Inc. (g) 17 W I L L I A M P. V I T I T O E Consultant Retired Chairman and Chief Executive Officer Washington Energy Company (a) M A R T I N D . W A L K E R Principal MORWAL Investments (a, b) P A T R I C I A M . W A L L I N G T O N President CIO Associates (f) G A I L L . W A R D E N President and Chief Executive Officer Henry Ford Health System (e) K E N N E T H L . W A Y Chairman Lear Corporation (b) B O A R D C O M M I T T E E S (a) Audit & Legal (b) Compensation (c) Directors (d) Executive (e) Public Responsibility (f ) Trust & Investment (g) Risk Asset C O M E R I C A B A N K - C A L I F O R N I A D I R E C T O R S C O M E R I C A B A N K - T E X A S D I R E C T O R S 18 T H E O D O R E J . B I A G I N I Counsel Biagini Properties G E O R G E L . G R A Z I A D I O J R . Chairman Comerica Bank-California J A M E S F. C O R D E S Retired Executive Vice President The Coastal Corporation J A K E K A M I N Chairman South Texas Advisory Board Comerica Bank-Texas J A C K C . C A R S T E N Managing Director Horizon Ventures W A LT E R T. K A C Z M A R E K Executive Vice President Comerica Bank-California L E O E . C H A V E Z , P H . D . Chancellor Foothill-DeAnza Community College District E L I N O R W E I S S M A N S F I E L D Attorney C H A R L E S T. O W E N President and Publisher San Diego Business Journal T H O M A S M . D U N N I N G Chairman and Chief Executive Officer Lockton Dunning Benefit Company W. T H O M A S M C Q U A I D Chairman and Chief Executive Officer Performance Properties Corporation R U B E N E . E S Q U I V E L Vice President Community and Corporate Relations University of Texas Southwestern Medical Center R A Y M O N D D . N A S H E R Chairman Comerica Bank-Texas Chairman The Nasher Company E D W A R D P. R O S K I J R . President Majestic Realty Company C H A R L E S L . G U M M E R President and Chief Executive Officer Comerica Bank-Texas C A LV I N E . P E R S O N Owner Calvin E. Person and Associates B O O N E P O W E L L J R . Retired Chairman Baylor Health Care System R E V. Z A N H O L M E S J R . Senior Pastor St. Luke Community United Methodist Church D A V I D C . W H I T E Executive Vice President Comerica Bank-California L E W I S N . W O L F F Chairman and Chief Executive Officer Wolff DiNapoli J A C K W. C O N N E R Former Chairman Comerica Bank-California N O R M A N P. C R E I G H T O N Vice Chairman Comerica Bank-California J . P H I L I P D I N A P O L I President J.P. DiNapoli Companies, Inc. N . J O H N D O U G L A S Chairman and Chief Executive Officer Information Network Radio J . M I C H A E L F U LT O N President and Chief Executive Officer Comerica Bank-California M A N A G E M E N T C O U N C I L 19 E U G E N E A . M I L L E R Chairman R A L P H W. B A B B J R . President and Chief Executive Officer J O S E P H J . B U T T I G I E G I I I Vice Chairman Business Bank J O H N D . L E W I S Vice Chairman Individual and Investment Banks J O H N R . B E R A N Executive Vice President and Chief Information Officer Service Company D A L E E . G R E E N E Executive Vice President Corporate Banking R I C H A R D A . C O L L I S T E R Executive Vice President Corporate Staff G E O R G E C . E S H E L M A N Executive Vice President Investment Bank C H A R L E S L . G U M M E R President and Chief Executive Officer Comerica Bank-Texas J O H N R . H A G G E R T Y Executive Vice President Small Business Banking and Personal Financial Services G E O R G E W. M A D I S O N Executive Vice President, Corporate Secretary and General Counsel R O N A L D P. M A R C I N E L L I Executive Vice President National Business Finance D A V I D B . S T E P H E N S Executive Vice President Private Banking J . M I C H A E L F U LT O N President and Chief Executive Officer Comerica Bank-California T H O M A S R . J O H N S O N Executive Vice President Credit Policy J A M E S R . T I E T J E N Senior Vice President Human Resources C O M M E R C I A L B A N K S O T H E R U N I T S 20 C O M E R I C A B A N K Comerica Tower at Detroit Center, 500 Woodward Avenue, MC 3391 Detroit, Michigan 48226 C O M E R I C A B A N K - T E X A S 1601 Elm Street, MC 6507 Dallas,Texas 75201 (214) 589-1400 Charles L. Gummer President and Chief Executive Officer Full-service bank headquartered in Dallas with offices in the Dallas/ Fort Worth Metroplex, Austin and the greater Houston area. C O M E R I C A B A N K M E X I C O, S . A . Edificio Forum Andres Bello No. 10 Piso 17 Col. Chapultepec Polanco Mexico, D.F. 11560 (011) 525-279-3700 Claude H. Miller Managing Director Headquartered in Mexico City, with additional offices in Monterrey, Querétaro and Guadalajara. Comerica Bank Mexico, S.A. provides a wide range of corporate banking and trade finance services to middle market and large corporate companies. (313) 222-4000 (248) 371-5000 Ralph W. Babb Jr. President and Chief Executive Officer Full-service bank headquartered in Detroit with offices in metropolitan Detroit and Ann Arbor, Battle Creek, Grand Rapids, Jackson, Kalamazoo, Lansing, Midland and Muskegon. Florida region specializes in private banking services, with offices in Boca Raton, Fort Lauderdale, Palm Beach Gardens, Naples, Sarasota and Tampa. National businesses of Comerica operating in Florida include Comerica Business Credit, National Dealer Services, Commercial Real Estate, Comerica Securities, International Trade Services and SBA Lending. Canadian region, with an office in Toronto (Suite 2210 South Tower, Royal Bank Plaza, 200 Bay Street, P.O. Box 61,Toronto Ontario M5J2J2.) (416) 367-3113, specializes in providing a wide range of corporate banking, treasury, cash management and trade services in Canada. C O M E R I C A B A N K - C A L I F O R N I A 333 W. Santa Clara Street MC 4805 San Jose, California 95113 (408) 556-5000 J. Michael Fulton President and Chief Executive Officer Full-service bank headquartered in San Jose with offices in Sacramento, Fresno, the greater San Francisco Bay/San Jose area, Santa Cruz Coastal, greater Los Angeles/Orange County, and San Diego. Additional regional banking offices in Phoenix, Denver, and Kirkland, Wash. SBA lending offices are located around the country, and Technology and Life Sciences Division offices serve technology centers nationwide. C O M E R I C A S E C U R I T I E S , I N C . A full service broker-dealer that offers stocks, bonds, mutual funds and annu- ities to individual investors, along with investment banking services. C O M E R I C A I N S U R A N C E S E RV I C E S , I N C . Offers life, disability, long-term care, group benefits, and property and casualty insurance to businesses and individuals. P R O F E S S I O N A L L I F E U N D E RW R I T E R S S E RV I C E S , I N C . ( P L U S ) Provides life insurance, annuities and disability insurance products to independent insurance agents. M U N D E R C A P I TA L M A N AG E M E N T Provides investment advisory services to institutions, municipalities, unions, charitable organizations and individuals across North America. Also serves as investment manager for The Munder Funds. Framlington Holdings Limited, a London-based international investment advisor, is a subsidiary of Munder. W I L S O N , K E M P & A S S O C I AT E S , I N C . Provides account management services to private investors, corporations, municipalities and charitable institutions throughout the United States. W. Y. C A M P B E L L & C O M PA N Y Provides investment banking and corporate finance services to Fortune 500 companies and middle-market firms. C O M E R I C A W E S T I N C O R P O R AT E D U.S. Banking-West Group originates mid-sized loans to business customers with specific emphasis on the Western United States. C O M E R I C A L E A S I N G C O R P O R AT I O N Provides equipment leasing and financing services for businesses throughout the United States. (Select businesses also having locations outside of Comerica’s primary markets) C O M E R I C A B U S I N E S S C R E D I T Atlanta Chicago Cincinnati Cleveland Darien, Conn. Dayton, Ohio Denver Indianapolis I N S T I T U T I O N A L T R U S T Chicago Red Bank, N.J. I N T E R N AT I O N A L F I N A N C E Chicago Hong Kong Sao Paulo, Brazil N AT I O N A L D E A L E R S E RV I C E S Chicago Denver P R I VAT E B A N K I N G C E N T E R S Chicago Cleveland Denver Memphis Minneapolis New York City Phoenix S B A L E N D I N G Bellevue, Wash. Charlotte, N.C. Chicago Cleveland Denver New Orleans Olympia, Wash. Phoenix Raleigh-Durham, N.C. T E C H N O L O G Y & L I F E S C I E N C E S Atlanta Boston Denver Kirkland, Wash. New York City Philadelphia Phoenix Portland Raleigh-Durham, N.C. Reston,Va. U . S . B A N K I N G Chicago Las Vegas 21 22 F I N A N C I A L R E V I E W A N D R E P O R T S 24 2001 Financial Highlights 24 Earnings Performance 31 Strategic Lines of Business 32 Balance Sheet and Capital Funds Analysis 35 Risk Management 42 Consolidated Financial Statements 46 Notes to Consolidated Financial Statements 68 Report of Management 68 Report of Independent Auditors 69 Historical Review T A B L E 1 : S E L E C T E D F I N A N C I A L D A T A (dollar amounts in millions, except per share data) Year Ended December 31 2001 2000 1999 1998 1997 E A R N I N G S S U M M A R Y Total interest income Net interest income Provision for credit losses Securities gains Noninterest income (excluding securities gains) Noninterest expenses Net income — excluding 2001 merger-related and restructuring charges P E R S H A R E O F C O M M O N S T O C K Basic net income Diluted net income — excluding 2001 merger-related and restructuring charges Cash dividends declared Common shareholders’ equity Market value Y E A R - E N D B A L A N C E S Total assets Total earning assets Total loans Total deposits Total borrowings Medium- and long-term debt Common shareholders’ equity D A I LY A V E R A G E B A L A N C E S Total assets Total earning assets Total loans Total deposits Total borrowings Medium- and long-term debt Common shareholders’ equity R A T I O S Return on average assets — excluding 2001 merger-related and restructuring charges Return on average common shareholders’ equity — excluding 2001 merger-related and restructuring charges Efficiency ratio — excluding 2001 merger-related and restructuring charges Dividend payout ratio — excluding 2001 merger-related and restructuring charges Average common shareholders’ equity as a percentage $ 3,393 2,102 236 20 784 1,559 710 842 $ 3.93 3.88 4.61 1.76 27.17 57.30 $50,732 46,566 41,196 37,570 7,489 5,503 4,807 $49,688 45,722 41,371 35,312 8,782 6,198 4,605 1.43% 1.69 15.16 18.03 53.95 48.70 45 38 $ 3,716 2,004 255 16 941 1,484 791 $ 3,097 1,817 146 9 858 1,359 759 $ 3,004 1,720 146 7 660 1,237 651 $ 2,959 1,645 169 6 603 1,177 586 23 $ 4.38 4.31 $ 4.20 4.13 $ 3.58 3.51 $ 3.17 3.11 1.60 23.98 59.38 1.44 20.87 46.69 1.28 17.99 68.19 1.15 16.10 60.17 $ 49,534 45,791 40,170 33,854 10,353 8,259 4,250 $ 46,877 43,364 38,698 30,340 11,621 8,298 3,963 $ 45,510 42,426 36,305 29,196 11,682 8,757 3,698 $ 42,662 39,247 35,490 27,478 11,003 7,441 3,409 $ 42,785 39,090 34,053 29,883 8,999 5,358 3,178 $ 39,969 36,599 31,916 26,604 9,626 6,109 2,995 $ 41,018 37,370 31,681 26,761 10,612 7,363 2,864 $ 38,521 35,275 29,609 25,082 9,929 6,034 2,723 1.69% 1.78% 1.63% 1.52% 19.52 50.35 37 21.78 50.70 35 21.16 51.84 36 20.88 52.15 37 of average assets 9.27 8.45 7.99 7.49 7.07 2 0 0 1 F I N A N C I A L H I G H L I G H T S R E T U R N O N A V E R A G E A S S E T S CENTERED ON PERFORMANCE • Earned 15.16 percent on average common shareholders’ equity (18.03 percent excluding merger-related and restructuring charges), compared to 19.52 percent in 2000. • Returned 1.43 percent on average assets (1.69 percent excluding merger-related and restructuring charges), compared to 1.69 percent in 2000. 24 • Generated an efficiency ratio of 53.95 percent (48.70 percent excluding merger-related and restructuring charges), compared to 50.35 percent in 2000, evidence of Comerica’s ongoing cost discipline. REPORTED EARNINGS • Reported net income of $710 million, or $3.88 per common share, compared to $791 million, or $4.31 per common share for 2000. • Excluding merger-related and restructuring charges, net income increased $51 million to $842 million, or $4.61 per common share, an increase of seven percent per common share compared to 2000. SUSTAINED GROWTH • Generated a seven percent increase in average business loans. • Averaged $50 billion in total assets, a six percent increase from 2000. • Increased average shareholders’ equity to $4.8 billion. ENHANCED SHAREHOLDERS’ RETURN • Raised the quarterly cash dividend 10 percent to $0.44 per share, ( I N P E R C E N T A G E S ) 01 00 99 98 97 1.43% 1.69% 1.69% 1.78% 1.63% 1.52% Excluding 2001 merger-related and restructuring charges E A R N I N G S P E R F O R M A N C E NET INTEREST INCOME Net interest income 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. Gains and losses related to the effective portion of risk management interest rate swaps that qualify as hedges are included with the interest income or expense of the hedged asset when classified in earnings. Net interest income on a fully taxable equivalent basis (FTE) comprised 72 percent when classified in earnings of net revenues in 2001, compared to 68 percent in 2000 and 1999. an annual rate of $1.76 per share. N E T I N T E R E S T I N C O M E • Strengthened core capital, as evidenced by Tier 1 common capital ratio increasing from 6.80 percent to 7.30 percent, after repurchasing 2.2 million shares in 2001. IMPLEMENTED KEY STRATEGIES • Completed the acquisition of Imperial Bancorp, a $7.4 billion banking company acquired in 2001, creating one of the largest banking companies in California, with assets of $14.8 billion. • Integrated the operations and converted all systems of Imperial Bancorp into Comerica within nine months of closing. 01 00 99 98 97 $2,106 $2,008 $1,822 $1,727 $1,654 4.61% 4.63% 4.64% 4.72% 4.68% Net Interest Income (FTE) Net Interest Margin (FTE) 25 T A B L E 2 : A N A L Y S I S O F N E T I N T E R E S T I N C O M E — F U L L Y T A X A B L E E Q U I V A L E N T (dollar amounts in millions) 2001 2000 1999 Average Balance Interest Average Rate Average Balance Interest Average Average Rate Balance Interest Average Rate $1,807 207 246 435 60 124 69 175 3,123 247 27 3,397 6.85% 7.38 7.95 7.65 7.59 8.39 6.25 — 7.55 6.37 6.02 7.44 249 19 583 37 888 105 298 1,291 2.51 1.36 4.44 5.97 3.54 4.08 4.80 3.82 Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Business loan swap income (expense) Total loans (1) Investment securities (2) Short-term investments Total earning assets Cash and due from banks Allowance for credit losses Accrued income and other assets Total assets Money market and NOW deposits Savings deposits Certificates of deposit (3) Foreign office time deposits (4) Total interest-bearing deposits Short-term borrowings Medium- and long-term debt (3) Total interest-bearing sources Noninterest-bearing deposits Accrued expenses and other liabilities Preferred stock Common shareholders’ equity Total liabilities and $26,401 2,800 3,090 5,695 795 1,479 1,111 — 41,371 3,909 442 45,722 1,835 (654) 2,785 $49,688 $ 9,902 1,380 13,149 628 25,059 2,584 6,198 33,841 10,253 823 166 4,605 shareholders’ equity $49,688 $1,778 206 159 379 70 184 49 36 2,861 201 40 3,102 7.71% 7.86 9.21 8.27 7.47 9.95 6.91 — 8.06 6.42 6.06 7.90 241 25 379 48 693 183 404 1,280 2.73 1.59 4.88 7.05 3.68 5.14 5.44 4.29 $2,244 235 257 453 64 131 54 (57) 3,381 261 78 3,720 295 23 570 63 951 215 546 1,712 $25,313 2,552 2,554 5,142 833 1,434 870 — 38,698 3,688 978 43,364 1,842 (595) 2,266 $46,877 $ 9,188 1,403 9,867 814 21,272 3,323 8,298 32,893 9,068 703 250 3,963 $46,877 8.87% $23,069 2,627 9.21 1,729 10.09 4,583 8.80 930 7.64 1,853 9.09 699 6.24 — — 8.74 6.99 7.97 8.57 3.21 1.65 5.78 7.75 4.47 6.48 6.57 5.20 35,490 3,107 650 39,247 1,896 (531) 2,050 $42,662 $ 8,815 1,541 7,773 688 18,817 3,562 7,441 29,820 8,661 522 250 3,409 $42,662 Net interest income/rate spread (FTE) $2,106 3.62 FTE adjustment (5) $ 4 $2,008 $ 4 3.37 $1,822 3.61 $ 5 Impact of net noninterest-bearing sources of funds Net interest margin (as a percentage of average earning assets)(FTE) 0.99 4.61% 1.26 4.63% 1.03 4.64% (1) Nonaccrual loans are included in average balances reported and are used to calculate rates. (2) Average rate based on average historical cost. (3) Certificates of deposit and medium- and long-term debt averages have been adjusted to reflect the gain or loss attributable to the risk hedged by risk management swaps that qualify as a fair value hedge. (4) Includes substantially all deposits by foreign depositors; deposits are primarily in excess of $100,000. (5) The FTE adjustment is computed using a federal income tax rate of 35%. T A B L E 3 : R A T E - V O L U M E A N A L Y S I S — F U L L Y T A X A B L E E Q U I V A L E N T (in millions) 26 Interest income (FTE): Loans: 2001 / 2000 2000 / 1999 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) Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Business loan swap income (expense) Total loans Investment securities Short-term investments Total interest income (FTE) Interest expense: Money market and NOW deposits Savings deposits Certificates of deposit Foreign office time deposits Total interest-bearing deposits Short -term borrowings Medium- and long-term debt Total interest expense $(511) (47) (54) (60) (1) (10) — 232 (451) (27) (19) (497) (64) (4) (132) (15) (215) (80) (147) (442) Net interest income (FTE) $ (55) *Rate/volume variances are allocated to variances due to volume. $ 74 19 43 42 (3) 3 15 — 193 13 (32) 174 18 — 145 (11) 152 (30) (101) 21 $153 $(437) (28) (11) (18) (4) (7) 15 232 (258) (14) (51) (323) (46) (4) 13 (26) (63) (110) (248) (421) $ 98 $267 36 15 25 2 (15) (5) (93) 232 19 8 259 42 1 70 5 118 48 85 251 $ 8 $199 (7) 83 49 (8) (38) 10 — 288 41 30 359 12 (3) 121 10 140 (16) 57 181 $178 $466 29 98 74 (6) (53) 5 (93) 520 60 38 618 54 (2) 191 15 258 32 142 432 $186 27 Net interest income (FTE) increased five percent to $2,106 million in 2001. Contributing to this increase was a five percent increase in average earning assets and a 13 percent increase in average interest- free sources of funds. Comerica (the “Corporation”) continued to generate growth in business loans in 2001. Business loans averaged $39.1 billion in 2001, an increase of seven percent from 2000. The increase in interest-free sources of funds was primarily due to a $1.2 billion increase in average noninterest-bearing deposits and a $558 million increase in average shareholders’ equity. Net interest income (FTE) expressed as a percentage of average earning assets is referred to as the net interest margin. For 2001, the net interest margin was 4.61 percent, remaining relatively stable when compared to 4.63 percent in 2000, despite the rapidly changing interest rate environment in 2000 and 2001. The net interest margin was negatively impacted by slower growth in lower cost core deposit balances than that of earning assets, resulting in a greater reliance on higher cost certificates of deposits in the mix of interest-bearing liabilities. Core deposits are defined as total deposits excluding brokered and institutional certificates of deposit and foreign office time deposits. Also contributing to the decline was a decrease in the benefit to the net interest margin provided by interest-free sources of funds. This rate-related decrease was partially offset by the increase in the average balances of interest-free sources of funds mentioned in the paragraph above. Comerica implements various asset and liability management tactics to minimize exposure to net interest income risk. This risk represents the potential reduction in net interest income that may result from a fluctuating economic environment including changes to interest rates and portfolio growth rates. Such actions include the manage- ment of earning assets, funding and capital. In addition, interest rate swap contracts are employed, effectively fixing the yields on certain variable rate loans and altering the interest rate characteristics of deposits and debt issued throughout the year. Refer to the “Interest Rate Risk” section on page 37 of this financial review for additional information regarding the Corporation’s asset and liability manage- ment policies. In 2000, net interest income (FTE) increased 10 percent to $2,008 million. Contributing to the increase over 1999 was a 10 percent increase in average earning assets and an increase in interest-free sources of funds. The Corporation generated strong growth in business loans in 2000. Business loans averaged $36.4 billion in 2000, a significant increase of 11 percent from 1999. The increase in interest-free sources of funds was primarily due to a $554 million increase in average shareholders’ equity and a $407 million increase in average noninterest-bearing deposits. The net interest margin decreased one basis point to 4.63 percent from 4.64 percent in 1999. The net interest margin in 2000 was negatively impacted by slower growth in lower cost core deposit balances than that of earning assets, resulting in a greater reliance on higher cost certificates of deposits and medium- and long-term debt in the mix of interest- bearing liabilities. This was primarily offset by an increase in the benefit to the net interest margin provided by interest-free sources of funds. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses reflects management’s evaluation of the adequacy of the allowance for credit losses. The allowance for credit losses represents management’s assessment of probable losses inherent in the Corporation’s loan portfolio, including all binding commitments to lend. The allowance provides for probable losses Internal risk ratings are assigned to each that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology which has been in use, without material change, for several years. business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. The Corporation defines business loans as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. The Corporation performs a detailed credit quality review quarterly on large business loans which have deteriorated below certain levels of credit risk and allocates a specific portion of the allowance to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent charge-off experience, current economic conditions and trends, and trends with respect to past due and nonaccrual amounts. The allocated allowance was $546 million at December 31, 2001, an increase of $103 million from year-end 2000. Allocations to business loans, as shown in Table 7 on page 33, increased due to an increase in the specific portion of the allowance required as a result of the quarterly credit quality review of certain large business loans with deteriorated credit risk at December 31, 2001. Actual loss ratios experienced in the future could vary from those projected. The uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. An unallocated allowance is maintained to capture these probable losses. The unallocated portion of the allowance reflects management’s view that the allowance should recognize the imprecision underlying the process of estimating expected credit losses. Determination of the probable losses inherent in the portfolio, which are not necessarily captured by the allocation methodology discussed above, involves the exercise of judgment. Factors which were considered in the evaluation of the adequacy of the Corporation’s unallocated allowance include portfolio exposures to the healthcare, high technology and energy industries, as well as Latin American transfer risks and the risk associated with new customer relationships. The unallocated N E T L O A N S C H A R G E D O F F T O A V E R A G E L O A N S ( I N P E R C E N T A G E S ) 01 00 99 98 97 0.46% 0.50% 0.31% 0.34% 0.33% T A B L E 4 : A N A L Y S I S O F T H E A L L O W A N C E F O R C R E D I T L O S S E S (dollar amounts in millions) Year Ended December 31 Balance at beginning of period Transfer to loans held for sale 28 Loans charged off: Domestic Commercial Real estate construction Commercial mortgage Consumer Lease financing International Total loans charged off Recoveries: Domestic Commercial Real estate construction Commercial mortgage Residential mortgage Consumer Lease financing Total recoveries Net loans charged off Provision for credit losses Balance at end of period 2001 $608 — 200 2 3 5 7 15 232 35 — 1 1 5 1 43 189 236 $655 2000 $548 — 200 — 1 11 1 11 224 21 — 1 — 7 — 29 195 255 $608 1999 $515 (4) 101 — 2 31 — 10 144 21 — 3 — 10 1 35 109 146 $548 1998 $475 — 70 2 1 65 4 7 1997 $403 — 42 2 4 92 — 1 149 141 21 — 9 — 13 — 43 106 146 $515 20 2 10 — 12 — 44 97 169 $475 Ratio of allowance for credit losses to total loans at end of period 1.59% 1.51% 1.51% 1.51% 1.50% Ratio of net loans charged off during the period to average loans outstanding during the period 0.46% 0.50% 0.31% 0.34% 0.33% allowance was $109 million at December 31, 2001, a decrease of $56 million from 2000. The unallocated allowance declined as some of the uncertainties in the portfolios noted above became clearer and resulted in allocations to specific credits. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment within the portfolio. Unanticipated economic events could cause changes in the credit characteristics of the portfolio and result in Inclusion of an unanticipated increase in the allocated allowance. other portfolio exposures in the unallocated allowance, as well as significant increases in the current portfolio exposures could increase the amount of the unallocated allowance. Either of these events, or some combination, may result in the need for additional provision for credit losses in order to maintain an allowance that complies with credit risk and accounting policies. The provision for credit losses was $236 million in 2001, compared to $255 million and $146 million in 2000 and 1999, respectively. Included in the provision for credit losses in 2001 is a $25 million merger-related charge to conform the credit policies of Imperial with Comerica. Net charge-offs in 2001 were $189 million, or 0.46 percent of average total loans, compared to $195 million, or 0.50 percent, in 2000 and $109 million, or 0.31 percent, in 1999. Comparisons were affected by additional charge-offs taken in 2000 to align charge-off policies of Imperial with the Corporation. An analysis of the changes in the allowance for credit losses, including charge-offs and recoveries by loan category, is presented in Table 4. Charge-offs on business loans increased in part as a result of the slowing economy and its impact on the manufacturing sector. Consumer charge-offs declined as a result of the sale of $457 million of loans in the first quarter of 2000. At December 31, 2001, the allowance for credit losses was $655 million, an increase of $47 million from year-end 2000. The allowance as a percentage of total loans was 1.59 percent at December 31, 2001 compared to 1.51 percent at December 31, 2000. As a percentage of nonperforming assets, the allowance was 105 percent at December 31, 2001, compared to 179 percent at year-end 2000. The allowance was 3.5 times and 3.1 times annual net charge-offs at December 31, 2001 and 2000, respectively. NONINTEREST INCOME (in millions) Year Ended December 31 2001 2000 1999 Service charges on deposit accounts Fiduciary income Commercial lending fees Letter of credit fees Brokerage fees Investment advisory revenue, net Equity in earnings of unconsolidated subsidiaries Other noninterest income Subtotal Warrant income Securities gains Net gain on sales of businesses Significant unusual items $211 180 67 58 44 12 14 203 789 5 20 31 (41) $189 181 61 52 44 119 21 201 868 30 16 50 (7) $177 183 55 46 36 61 15 176 749 33 9 76 — Total noninterest income $804 $957 $867 Noninterest income decreased $153 million, or 16 percent, to $804 million in 2001, compared to $957 million in 2000 and $867 million in 1999. Comparisons to 1999 for certain noninterest income and expense line items were impacted by the sale of $457 million of consumer loans in the first quarter 2000. Excluding the effects of gains and losses on securities, warrant income, divestitures and the net gains on the sales of businesses, deferred distribution cost impairment charges and other unusual items mentioned below, noninterest income decreased four percent in 2001. Service charges on deposit accounts increased $22 million, or 12 percent, in 2001 compared to an increase of $12 million, or seven percent, in 2000. This increase was attributable to continued strong growth in the sale of new and existing cash management services to business customers and the positive impact of lower earnings credit allowances provided to business customers in 2001. The increase in 2000 was net of the negative impact of higher earnings credit allowances provided to business customers. Fiduciary income was relatively flat from 1999 to 2001. Personal and institutional trust fees are the two major components of this category. Comparisons to 1999 for fiduciary income were impacted by the sale of Imperial’s trust business in the second quarter of 1999. Fiduciary income is based on services provided and assets managed. Fluctuations in the market values of the underlying assets, particularly equity securities, impact fiduciary income. N O N I N T E R E S T I N C O M E ( I N M I L L I O N S ) 01 00 99 98 97 $804 $957 $867 $667 $609 Commercial lending fees increased $6 million, or 10 percent, in 2001 compared to an increase of $6 million, or 11 percent, in 2000. Continued commercial loan growth contributed to increases in loan commitment fees and loan syndication and participation agent fees, the two major components of this category. Letter of credit fees increased $6 million, or 11 percent, in 2001 compared to an increase of $6 million, or 13 percent, in 2000. These increases were primarily related to growth in middle-market commercial lending relationships and strong demand for international trade services from new and existing customers. 29 Brokerage fees remained flat at $44 million in 2001, compared to an increase of $8 million, or 23 percent in 2000. Brokerage fees include commissions from retail broker transactions and mutual fund sales. Investment advisory income, which includes revenue generated by the Corporation’s Munder Capital Management subsidiary (“Munder”), decreased $107 million, or 90 percent, in 2001, compared to an increase of $58 million, or 94 percent, in 2000. The 2001 decline reflects deferred distribution cost impairment charges totaling $40 million discussed more fully below and a $74 million decrease in investment advisory revenue, as the market values of technology-related stocks continued declining from record highs during the first quarter of 2000. The 2000 increase, excluding the $7 million deferred distribution cost impairment charge discussed below, was primarily due to higher investment advisory fees, which increased $65 million, or 105 percent, over 1999. Stock market performance, including the significant decline in the technology sector, resulted in a continued decrease in assets under management at Munder to $35 billion at December 31, 2001, from $40 billion at December 31, 2000, and $49 billion at year-end 1999. The Corporation recorded deferred distribution cost impairment charges of $40 million in 2001 and $7 million in 2000. These charges resulted from a reassessment of the recoverability of unamortized commission costs paid to brokers for selling certain mutual fund shares, principally shares in the Corporation’s Munder subsidiary’s NetNet, International NetNet and Future Technology funds. Net asset values in these technology funds suffered significantly as market conditions weakened, declining 26 percent in the first quarter 2001 and over 45 percent during the third quarter 2001; the quarters in 2001 when impairment was recorded. These declines prompted a revaluation of expected future cash flows from the funds, which are based on a percentage of assets under management and early redemption fees over a prescribed number of years. Net remaining deferred distribution costs at December 31, 2001 were $33 million. The changes in deferred distribution costs are reflected in the table below. Given net asset values at December 31, 2001, it would take a decline in total assets under DEFERRED DISTRIBUTION COSTS (in millions) Year Ended December 31 2001 2000 1999 Balances at beginning of period Commissions paid to brokers Redemption fees received Amortization of costs Impairment charge Balances at end of period $ 86 11 (10) (14) (40) $ 33 $ 21 118 (12) (34) (7) $ 86 $ —* 21 — — — $ 21 * Deferred distribution costs prior to December 1999 were sold to a third party. 30 management at Munder of approximately 30 percent to trigger further impairment, which at that level would be approximately $4 million. Each additional five percent decline results in a further impairment of $2 million. Equity in earnings of unconsolidated subsidiaries decreased $57 million in 2001, after remaining relatively flat in 2000. Excluding the impact of divestitures and significant unusual items from 2001 and 2000, equity in earnings of unconsolidated subsidiaries decreased $7 million, or 32 percent. Significant unusual items in equity in earnings of unconsolidated subsidiaries in 2001 included a $57 million charge related to long-term incentive plans at a United Kingdom subsidiary, Framlington (a London, England based investment manager), of which Munder is a minority owner. In May 2000, the announcement that the majority owner of Framlington was being acquired triggered a change-in-control provision, which fully vested all options and restricted shares held by employees of Framlington. all outstanding options held by employees were exercised and their shares mandatorily purchased by Framlington, requiring U.S. accounting recognition of the expense. In 2000, significant unusual items in equity in earnings of unconsolidated subsidiaries included a $7 million write-down of low-income housing investments which are being accounted for under the equity method. In March 2001, Other noninterest income increased $18 million, or nine percent, in 2001 compared to an increase of $25 million, or 14 percent, in 2000. Significant unusual items in other noninterest income in 2001 included $11 million in net gains resulting from the purchase and subsequent sale, all within the first quarter, of interest rate derivative contracts which failed to meet the Corporation’s risk-reduction criteria and a $5 million gain from the demutualization of an insurance carrier. In 2000, significant unusual items in other noninterest income included a $6 million gain from the demutualization of an insurance carrier, offset by a $6 million write-down of low-income housing investments which are being accounted for under the cost method. Comparisons of other noninterest income with prior years were impacted by the divestiture of Imperial’s merchant bankcard business in the second quarter of 2001. The gain that resulted from the sale of Imperial’s merchant bankcard business was included in merger- related and restructuring charges as the sale was required by an existing Comerica alliance agreement. Excluding the significant unusual items from 2001 and 2000 noted above, and the impact of divestitures, which resulted in a year over year decrease in other noninterest income of $14 million, noninterest income increased nine percent in 2001. The adoption of Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001, resulted in a transition adjustment that was insignificant. Hedge ineffectiveness on cash flow hedges of variable rate loans was not material. Refer to Note 1 and 20 of the financial statements for a further discussion of hedge ineffectiveness. Warrant income was $5 million in 2001, $30 million in 2000, and $33 million in 1999. At December 31, 2001 the Corporation owned over 900 warrant positions compared to over 800 warrant positions at December 31, 2000. Unrealized gains for both periods were insignificant. The decrease in warrant income resulted from a reduction in the number of warrants that became marketable in 2001 as a result of a decrease in public offerings. The Corporation recognized a net gain related to its investment securities portfolio of $20 million, $16 million, and $9 million in 2001, 2000 and 1999, respectively. In 2001, net gain on the sales of businesses included a $21 million gain on the sale of Comerica’s ownership in an automated teller machine (ATM) network provider and an $8 million gain from the sale of substantially all of the assets of a deposit-servicing subsidiary. In 2000, the sale of consumer loans resulted in a gain of $48 million. The net gain on sales of businesses in 1999 is principally comprised of a gain of $44 million from an initial public offering of the Corporation’s majority-owned subsidiary, Official Payments Corporation (“OPAY”) (Nasdaq: OPAY), a gain of $21 million on the sale of ownership in an ATM network provider and a $9 million gain on the sale of certain trust businesses. NONINTEREST EXPENSES (in millions) Year Ended December 31 2001 2000 1999 Salaries Employee benefits $ 707 102 $ 748 103 $ 679 99 Total salaries and employee benefits Net occupancy expense Equipment expense Outside processing fee expense Customer services Other Subtotal Merger-related and restructuring charges Other significant unusual items 809 115 70 61 41 316 1,412 152 (5) 851 110 76 59 37 327 1,460 — 24 778 104 73 60 40 299 1,354 — 5 Total noninterest expenses $1,559 $1,484 $1,359 Noninterest expenses increased five percent to $1,559 million in 2001, compared to $1,484 million in 2000 and $1,359 million in 1999. Excluding the effect of divestitures and the significant unusual items discussed below, noninterest expenses decreased two percent in 2001. Total salaries expense decreased $41 million, or five percent, in 2001 versus an increase of $69 million, or 10 percent, in 2000. The decrease in 2001 was primarily due to lower levels of business unit incentives, which are tied to revenue growth. The increase in 2000 was primarily due to higher levels of incentives, which are tied to revenue growth and investments in staff in growth businesses. Employee benefits expense decreased $1 million, or one percent in 2001 compared to a benefit level increase of $4 million, or four percent, in 2000. The decrease in 2001 was primarily due to increased earnings on company owned life insurance, partially offset by an increase in employee healthcare costs. The increase between 2000 and 1999 was primarily attributable to higher payroll taxes offset by lower levels of pension expense due to favorable changes in defined benefit plan assumptions as well as a reduction in long- term disability expense. Net occupancy and equipment expenses, on a combined basis, decreased $1 million, or less than one percent, to $185 million in 2001, compared to the increase of $9 million, or five percent, in 2000. Outside processing fees increased to $61 million in 2001, from $59 million in 2000 and $60 million in 1999. The impact of the divestiture of Imperial’s merchant bankcard business in the second quarter of 2001 and the integration of Imperial’s systems partially offset growth in this expense in 2001. Customer service fees increased 11 percent to $41 million in 2001, from $37 million in 2000 and $40 million in 1999. Customer service fees represent expenses paid on behalf of customers to attract and retain certain noninterest-bearing deposit balances. The increase in 2001 resulted from larger balances in these noninterest- bearing deposits. N O N I N T E R E S T E X P E N S E S INCOME TAXES ( I N M I L L I O N S ) 01 00 99 98 97 $1,407 $1,559 $1,484 $1,359 $1,237 $1,177 Excluding 2001 merger-related and restructuring charges In addition to The Corporation recorded merger-related and restructuring charges of $152 million in 2001. The restructuring charges included $148 million related to the first quarter 2001 acquisition of Imperial and $4 million at the Corporation’s OPAY subsidiary. The OPAY restructuring charge is shown net of the portion of the charge attributable to the minority shareholders in OPAY. the above, the Corporation recorded a $25 million merger-related charge in 2001 that is included in the provision for credit losses to conform the credit policies of Imperial with Comerica. The integration with Imperial was completed in fourth quarter of 2001 and all merger-related and restructuring charges have been expensed. The Corporation expects to realize annual noninterest expense savings totaling $60 million from the integration, the full effect of which will begin to be realized in the first quarter of 2002. The OPAY restructuring is expected to significantly reduce the company’s operating expenses and use of cash by incorporating newly developed technology; reduce marketing, administrative and communications costs; and reduce workforce. The restructuring is expected to result in a decrease in OPAY’s operating expenses of $9 million dollars annually, beginning in 2002. For additional information on both restructuring charges, including their components, see Note 17 to the financial statements on page 56. Other noninterest expenses decreased $40 million, or 11 percent, in 2001 compared to a $47 million increase, or 16 percent in 2000. Significant unusual items in other noninterest expenses in 2001 included $5 million in minority interest income in 2001 due to recording Munder’s minority interest holders’ share of the Framlington long-term incentive plans charge discussed in noninterest income. Minority interest income represented the portion of losses on consolidated subsidiaries that was allocated to minority shareholders. Significant unusual items in other noninterest expenses in 2000 included $12 million of interest associated with a preliminary settle- ment of Federal tax years prior to 1993, a $6 million contribution to Comerica’s charitable foundation and $6 million of marketing costs to launch a new closed-end fund. Excluding divestitures and significant unusual items described above, other noninterest expenses decreased two percent in 2001. The Corporation’s efficiency ratio is defined as total noninterest expenses divided by the sum of net interest revenue (FTE) and noninterest income, excluding securities gains. The ratio decreased to 48.70 percent (excluding merger-related and restructuring charges) in 2001, compared to 50.35 percent in 2000 and 50.70 percent in 1999. The provision for income taxes was $401 million in 2001, compared to $431 million in 2000 and $420 million in 1999. The effective tax rate, computed by dividing the provision for income taxes by income before taxes, was 36.1 percent in 2001 and 35.3 percent in 2000 and 35.6 percent in 1999. Excluding the merger-related and restructuring charges, which included an adjustment of Imperial’s tax liabilities and was not fully deductible, the effective tax rate was 34.6 percent. The rate in 2001 was affected by a $7 million tax benefit related to the Imperial Bancorp acquisition that was immedi- ately recognizable, but only after Imperial became part of Comerica. 31 S T R A T E G I C L I N E S O F B U S I N E S S The Corporation’s operations are strategically aligned into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business were differentiated based upon the products and services provided. In addition to the three major lines of business, the Finance Division is also reported as a segment. The Other category included items not directly associated with these lines of business or the Finance Division. Note 24 on page 63 describes how these segments were identified and presents financial results of these businesses for the years ended December 31, 2001, 2000 and 1999. The Business Bank’s net income increased $71 million, or 16 percent, in 2001. Net interest income increased $58 million, the provision for credit losses decreased $44 million and noninterest expenses decreased $30 million; offset by a $24 million decrease in noninterest income. The increase in net interest income was primarily due to loan growth, offset by a decrease in the spread between earning assets and the related funding costs. Loan growth of 6.5 percent was primarily driven by significant increases in middle-market lending and commercial real estate loans. Smaller increases in national dealer services, international, and asset based/specialty lending were offset by a decline in loans to large business customers. The decline in the provision for credit losses was affected by additional charge-offs in 2000 to align Imperial’s charge-off policy with the Corporation’s. The decrease in noninterest income was primarily due to lower warrant income, partially offset by an $8 million gain from the sale of substantially all of the assets of a deposit-servicing subsidiary. The decrease in noninterest expenses was primarily due to efficiencies realized from the Imperial merger. Individual Bank net income decreased $38 million, or 12 percent, in 2001, a substantial decrease from 2000. Comparisons were affected by the sale of $457 million of consumer loans in early 2000. Net interest income decreased $13 million, or two percent, principally from a narrowing of spreads in certain deposit categories. The provision for credit losses increased $19 million, primarily from increases in the small business, indirect lending, revolving credit and private banking sectors, as the economy weakened loan quality. Noninterest income decreased $28 million, or eight percent, primarily due to the $48 million gain in 2000 from the sale of consumer loans. Partially offsetting this was a $9 million increase in service charges on deposit accounts. Noninterest expenses remained relatively flat. Excluding the $48 million gain and the impact of the sale of loans in 2000, total revenues (FTE) in 2001 would have increased $7 million, or one percent over 2000, while net income in 2001 would have decreased $7 million, or two percent. Return on average assets and return on average common equity in 2001 would have been 1.56 percent and 35.90 percent, respectively. T A B L E 5 : A N A L Y S I S O F I N V E S T M E N T S E C U R I T I E S A N D L O A N S (in millions) December 31 Investment securities available for sale U.S. government and agency securities State and municipal securities Other securities 32 Total investment securities available for sale Commercial loans International loans Government and official institutions Banks and other financial institutions Commercial and industrial Total international loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans 2001 2000 1999 1998 1997 $ 3,920 32 339 $ 4,291 $ 3,135 46 710 $ 3,891 $ 2,950 73 760 $ 3,783 $ 2,882 115 410 $ 3,407 $ 3,892 170 613 $ 4,675 $25,176 $26,009 $23,629 $22,097 $18,152 9 427 2,579 3,015 3,258 6,267 779 1,484 1,217 2 402 2,167 2,571 2,915 5,361 808 1,477 1,029 10 391 2,172 2,573 2,167 4,873 871 1,389 803 12 433 2,268 2,713 1,339 4,322 1,038 1,897 647 6 339 1,740 2,085 1,116 3,867 1,565 4,379 517 $41,196 $40,170 $36,305 $34,053 $31,681 The net loss for the Investment Bank was $70 million in 2001, a decrease of $82 million from net income of $12 million in 2000. Noninterest income declined $171 million, or 64 percent, from last year. The 2001 decline reflected deferred distribution cost impairment charges totaling $40 million; a $74 million decrease in investment advisory revenue, as the market values of technology- related stocks continued declining from their record highs during the first quarter of 2000; and a $57 million charge related to long- term incentive plans at Framlington. Noninterest expenses decreased $36 million from lower revenue-related incentives for investment advisory fees and lower advertising costs. The Finance Division’s net income increased $58 million in 2001, primarily due to a $55 million increase in net interest income and a $48 million increase in noninterest income. Net interest income in the Finance Division increased due to improved spreads on securities from lower average funding costs in 2001, as well as centralization of interest risk management for Imperial into Finance in 2001. The increase in noninterest income was primarily due to $19 million in gains recorded in 2001, the majority of which resulted from the purchase and subsequent sale of interest rate derivatives contracts which failed to meet the Corporation’s risk-reduction criteria, and a $9 million increase in gains from the sale of securities. Net income for the Other category decreased $90 million in 2001. The 2001 decrease was primarily a result of the $148 million merger-related and restructuring charges related to the first quarter 2001 acquisition of Imperial included in noninterest expenses and the $25 million merger-related charge to conform the credit policies of Imperial with Comerica recorded in the provision for credit losses. Offsetting these charges was a $21 million gain from the sale of Comerica’s ownership in an ATM network provider recorded in noninterest income in 2001. B A L A N C E S H E E T A N D C A P I T A L F U N D S A N A L Y S I S Total assets were $50.7 billion at year-end 2001, an increase of $1.2 billion from $49.5 billion at December 31, 2000. On an average basis, total assets increased to $49.7 billion in 2001 from $46.9 billion in 2000. This increase was funded primarily by deposits, which rose on average $5.0 billion, partially offset by a reduction of medium- and long-term debt, which declined on average $2.1billion. EARNING ASSETS Total earning assets were $46.6 billion at December 31, 2001, representing a $0.8 billion increase from $45.8 billion at year-end 2000. On an average basis, total earning assets were $45.7 billion in 2001, compared to $43.4 billion in 2000. As a result of the weakening economy, business loan growth slowed in 2001, increasing on an average basis by $2.7 billion, or seven percent, from 2000. Certain business loan categories continued to show significant growth in 2001. Average commercial loans increased $1.1 billion, or four percent, average commercial mortgage loans increased $553 million, or 11 percent and real estate construction increased $536 million, or 21 percent. These increases are attributable to successful execution of the Corporation’s core lending strategy and strong customer relationships. International loans averaged $2.8 billion in 2001, an increase of $248 million, or 10 percent, from 2000. International loan growth in 2001 was primarily in North America. Active risk management practices minimize risk inherent in international lending arrangements. These practices include structuring bilateral agreements or participating in bank facilities, which secure repayment from sources external to the borrower’s country. Accordingly, such international outstandings are excluded from cross-border risk of that country. Mexican cross- border risk of $858 million, or 1.69 percent of total assets, was the only country with exposure exceeding 1.00 percent of total assets at December 31, 2001. Additional information on the Corporation’s Mexican cross-border risk is provided in Table 8 on page 33. T A B L E 6 : L O A N M A T U R I T I E S A N D I N T E R E S T R A T E S E N S I T I V I T Y (in millions) December 31, 2001 Commercial loans Commercial mortgage loans International loans Real estate construction loans Total Loans maturing after one year Predetermined interest rates Floating interest rates Total Within One Year* $19,411 2,132 2,666 2,507 $26,716 After One But Within Five Years After Five Years $4,444 2,887 326 623 $8,280 $3,852 4,428 $8,280 $1,321 1,248 23 128 $2,720 $2,442 278 $2,720 Total $25,176 6,267 3,015 3,258 $37,716 33 *Includes demand loans, loans having no stated repayment schedule or maturity and overdrafts. T A B L E 7 : A L L O C A T I O N O F T H E A L L O W A N C E F O R C R E D I T L O S S E S (dollar amounts in millions) December 31 2001 2000 1999 1998 1997 Amount % Amount % Amount % Amount % Amount % Commercial Real estate construction Commercial mortgage Residential mortgage Consumer Lease financing International Unallocated Total 61% $384 8 17 61 15 — 2 4 11 3 9 64 7 109 $655 100% Amount – allocated allowance % – loans outstanding as a percent of total loans $290 11 59 — 8 5 70 165 $608 65% 7 13 2 4 3 6 100% $226 12 35 — 18 8 35 214 $548 65% 6 14 2 4 2 7 65% 4 13 3 5 2 8 $182 9 21 — 48 6 17 232 57% 4 12 5 14 2 6 $117 20 18 1 116 1 5 197 100% $515 100% $475 100% T A B L E 8 : M E X I C A N C R O S S - B O R D E R R I S K (in millions) December 31 2001 2000 1999 Governments and Official Institutions Banks and Other Financial Institutions Commercial and Industrial $ 6 9 15 $ 54 114 150 $798 503 426 Total $858 626 591 T A B L E 9 : A N A L Y S I S O F I N V E S T M E N T S E C U R I T I E S P O R T F O L I O — F U L L Y T A X A B L E E Q U I V A L E N T (dollar amounts in millions) December 31, 2001 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. Maturity† 34 Available for sale U.S.Treasury U.S. government and agency State and municipal securities Other bonds, notes and debentures Other investments* Total investment securities $ 69 4.86% $ — —% $ — —% $ — —% $ 69 4.86% 0/5 92 6.72 385 6.21 693 6.16 2,681 6.26 3,851 6.25 18/7 5 6.15 20 6.35 6 6.17 1 6.39 32 6.28 25 — 5.34 — 169 6.58 — — 28 — 8.20 — 27 4.89 90 — 249 6.45 90 — 3/2 3/9 — available for sale $191 5.86% $574 6.32% $727 6.24% $2,799 6.25% $4,291 6.24% 17/3 *Balances are excluded in the calculation of total yield. †Based on final contractual maturity. Average residential mortgage loans decreased $38 million, or five percent, from 2000, reflecting management’s decision to sell the majority of mortgage originations. Growth in home equity lending generated a $45 million, or three percent, increase in consumer loans. Average investment securities rose to $3.9 billion in 2001, compared to $3.7 billion in 2000. Average U.S. government and agency securities increased $399 million, while average state and municipal securities decreased $21 million. government and agency securities resulted from interest risk and balance sheet management decisions while the tax-exempt portfolio of state and municipal securities continued to decrease as reduced tax advantages for these type of securities discouraged additional investment. Average other securities decreased $157 million in 2001. Other securities at December 31, 2001, consist primarily of collater- alized mortgage obligations (CMOs), Brady bonds and Eurobonds. Increases in U.S. OTHER EARNING ASSETS Short-term investments include interest-bearing deposits with banks, federal funds sold and securities purchased under agreements to resell, trading securities and loans held for sale. These investments provide a range of maturities under one year to manage short-term investment requirements of the Corporation. 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 offer supplemental earning opportunities and serve correspondent banks. Loans held for sale typically represent residential mortgage loans and Small Business Administration loans that have been originated and which manage- ment has decided to sell. Loans held for sale in 2000 also included consumer loans which were sold during the year. Average short- term investments decreased to $442 million during 2001, from $978 million in 2000, due to the sale of consumer loans and a reduction in federal funds sold. DEPOSITS AND BORROWED FUNDS Average deposits were $35.3 billion during 2001, an increase of $5.0 billion, or 16 percent, from 2000. Average noninterest-bearing deposits grew $1.2 billion, or 13 percent, from 2000, from increased title and escrow company deposits, which benefit from high home mortgage financing and refinancing activity. Average interest-bearing transaction, savings and money market deposits increased seven percent during 2001, to $11.3 billion. Average certificates of deposit increased $3.3 billion, or 33 percent, from 2000. This increase was primarily from certificates of deposits issued in denominations in excess of $100,000 through brokers or to institutional investors. Average foreign office time deposits decreased $186 million from the 2000 level, due to the use of other more attractive sources of funding. Average short-term borrowings decreased $739 million, as deposit growth reduced the need for these funding sources. Short-term borrowings include federal funds purchased, securities sold under agreement to repurchase, commercial paper and treasury tax and loan notes. The Corporation uses medium-term debt (both domestic and European) and long-term debt to provide funding to support expanding earning assets while providing liquidity which mirrors the estimated duration of deposits. Long-term subordinated notes further help maintain the Corporation’s and subsidiary banks’ total capital ratio at a level that qualifies for the lowest FDIC risk-based insurance premium. Medium- and long-term debt decreased on an average basis by $2.1 billion as deposit growth and slowing loan growth reduced the need for these funding sources. In July 2001, Comerica issued $350 million of 7.60% Trust Preferred Securities which are classified in medium- and long-term debt. The securities pay cumulative dividends each quarter beginning October 1, 2001, and are callable any time after July 30, 2006. These trust preferred securities qualify as tier one capital for regulatory purposes. The Corporation used the proceeds from the issuance to redeem and retire in total the $250 million of preferred stock that was outstanding, and for other general corporate purposes. Additionally, in December 2001, the Corporation, issued approximately $1 billion of medium-term debt as part of a privately placed secured financing transaction. As part of the transaction, the Corporation used a portfolio of approximately $1.2 billion of auto dealer floor plan loans as collateral. The overcollateralization of the issuance provided for a preferred credit rating status. The debt issuance provided an additional source of funding for the Corporation, and the proceeds were used to replace other sources of funding and for general corporate purposes. Further information on medium- and long-term debt is included in Note 10 on page 51 to the consolidated financial statements. CAPITAL Shareholders’ equity was $4.8 billion at December 31, 2001, up $307 million, or seven percent from December 31, 2000. This increase was primarily due to $385 million of retained earnings, $80 million of common stock issued for employee stock plans and $214 million in other comprehensive income, offset by a reduction in equity of $121 million from repurchasing 2,198,700 shares of common stock. The Corporation has approximately 8.8 million additional shares authorized for repurchase by the Board of Directors’ current resolutions. Shareholders’ equity was also reduced in 2001 by the retirement of $250 million of preferred stock discussed above. Further information on the change in other comprehensive income is provided in Note 12 to the consolidated financial statements on page 44. The Corporation declared common dividends totaling $313 million, or $1.76 per share, on net income applicable to common stock of $698 million. The dividend payout ratio, excluding merger-related and restructuring charges and calculated on a per share basis, was 38 percent in 2001 versus 37 percent in 2000 and 35 percent in 1999. At December 31, 2001, the Corporation and all of its banking subsidiaries exceeded the capital ratios required for an institution to be considered “well capitalized” by the standards developed under the Federal Deposit Insurance Corporation Improvement Act of 1991. See Note 19 to the consolidated financial statements on page 57 for the capital ratios. R I S K M A N A G E M E N T The Corporation assumes various types of risk in the normal course of business. The most significant risk exposures are from credit, interest rate, liquidity, market and operations. Comerica employs risk management processes to identify, measure, monitor and control these risks. 35 C R E D I T R I S K Credit represents the risk that a customer or counterparty may not perform in accordance to contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities and entering into financial derivative instruments. Policies and procedures for measuring and managing this risk are formulated, approved and communicated throughout the Corporation. Credit executives, independent from lending officers, are involved in the origination and underwriting process to ensure adherence to risk policies and underwriting standards. The Corporation also manages credit risk through diversification, limiting exposure to any single industry or customer, selling participations to third parties, syndicating loans and requiring collateral. NONPERFORMING ASSETS Nonperforming assets include loans on nonaccrual status, loans which 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. The Corporation’s policies regarding nonaccrual loans reflect the importance of identifying troubled loans early. N O N P E R F O R M I N G A S S E T S T O L O A N S A N D O T H E R R E A L E S T A T E ( I N P E R C E N T A G E S ) 1.52% 0.84% 01 00 99 98 97 0.59% 0.48% 0.44% Consumer loans are 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 management determines that principal or interest may not be fully collectible, but no later than 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 to an amount that management ultimately expects to collect. Interest previously accrued but not collected on nonaccrual loans is charged against current income at the time the loan is placed on nonaccrual. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Loans which have been restructured to yield a rate that was equal to or greater than the rate charged for new loans with comparable risk and have met the requirements for a return to accrual status are generally not included in nonperforming assets. However, such loans may be required to be evaluated for impairment. Refer to Note 4 of the financial statements on page 49 for a further discussion of impaired loans. Nonperforming assets as a percent of total loans and other real estate were 1.52 percent and 0.84 percent at year-end 2001 and 2000, respectively. T A B L E 1 0 : S U M M A R Y O F N O N P E R F O R M I N G A S S E T S A N D P A S T D U E L O A N S 36 (dollar amounts in millions) December 31 Nonperforming assets Nonaccrual loans Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing 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 2001 2000 1999 1998 1997 $467 109 10 18 — 5 8 617 — 617 10 $ 233 69 5 17 — 3 4 331 2 333 6 $116 55 — 10 1 5 6 193 9 202 11 $ 97 20 2 7 3 3 7 139 18 157 7 $ 62 1 5 11 4 5 1 89 32 121 20 $627 1.50% $ 339 0.83% $213 0.56% $164 0.46% $141 0.38% and other real estate 1.52% 0.84% 0.59% 0.48% 0.44% Allowance for credit losses as a percentage of total nonperforming assets Loans past due 90 days or more and still accruing 105% $ 44 179% $ 36 257% $ 48 314% $ 44 337% $ 56 Nonaccrual loans at December 31, 2001, increased 86 percent to $617 million from $331 million at year-end 2000. Other real estate owned (ORE) increased $4 million. Loans past due 90 days or more and still on accrual status increased $8 million from year-end 2000. Table 10 provides additional detail on nonperforming assets. The nonaccrual loan table below indicates the percentage of nonaccrual loan value to original contract value, which exhibits the degree to which loans reported as nonaccrual have been charged off. NONACCRUAL LOANS (dollar amounts in millions) December 31 Carrying value Contractual value Carrying value as a percentage of contractual value 2001 $617 826 75% 2000 $331 499 66% CONCENTRATION OF CREDIT Loans to companies and individuals involved with the automotive industry represented the largest significant industry concentration at December 31, 2001. These loans totaled $6.1 billion, or 15 percent, of total loans at December 31, 2001, compared to $5.7 billion, or 14 percent, at December 31, 2000. floor plan loans to automotive dealers of $1.9 billion and $2.1 billion at December 31, 2001 and 2000, respectively. All other industry concentrations individually represented less than 10 percent of total loans at year-end 2001. Included in these totals are Nonperforming assets to companies and individuals involved with the automotive industry comprised approximately seven percent of total nonperforming assets at December 31, 2001. The largest automotive industry loan on nonaccrual status at December 31, 2001, was $11 million. The largest automotive industry-related charge-off during the year was $6 million. The Corporation has successfully operated in the Michigan economy despite a loan concentration and several downturns in the auto industry. COMMERCIAL REAL ESTATE LENDING The real estate construction loan portfolio contains loans primarily made to long-time customers with satisfactory completion experi- ence. The portfolio has approximately 1,680 loans, of which 42 percent had balances less than $1 million at December 31, 2001. The largest real estate construction loan had a balance of approxi- mately $29 million. Total commercial mortgage loans totaled $6.3 billion at December 31, 2001. This portfolio had 7,715 loans, of which 81 percent had balances of less than $1 million at December 31, 2001. The largest loan in this portfolio had a balance of approximately $30 million. Of the $9.5 billion in total commercial mortgage and real estate construction loans at December 31, 2001, 45 percent involved owner-occupied properties. Additionally, the Corporation’s policy requires a 75 percent or less loan-to-value ratio for all commercial mortgage and real estate construction loans. The geographic distribution of real estate construction and commercial mortgage loan borrowers is an important factor in evaluating credit risk. The following table indicates, by address of borrower, the diversification of the Corporation’s real estate construction and commercial mortgage loan portfolio. 37 GEOGRAPHIC DISTRIBUTION OF BORROWERS (in millions) December 31, 2001 Michigan California Texas Florida Other Total Real Estate Construction Commercial Mortgage $1,364 1,139 445 166 144 $3,258 $3,787 1,107 591 243 539 $6,267 I N T E R E S T R A T E R I S K Interest rate risk arises primarily through the Corporation’s core business activities of extending loans and accepting deposits. The Corporation actively manages its material exposure to interest rate risk. The principal 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 types of financial instruments to manage the extent to which net interest income may be affected by fluctuations in interest rates. The Board of Directors, upon recommendations of the Risk Asset Quality Review Committee, establishes policies and risk limits pertaining to asset and liability management activities. The Board, with the assistance of the Risk Asset Quality Review Committee and the Asset and Liability Policy Committee (ALPC), monitors compliance with these policies. The ALPC meets regularly to discuss and review asset and liability management strategies and is comprised of executive and senior management from various areas of the Corporation, including finance, lending, investments and deposit gathering. 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 satisfies all management objectives, a combination of techniques is used to manage interest rate risk, including simulation analysis, asset and liability repricing schedules and economic value of equity. The ALPC regularly reviews the results of these interest rate risk measurements. The Corporation frequently evaluates net interest income under various balance sheet and interest rate scenarios, using simulation analysis as its principal risk management technique. The results of these analyses provide the information needed to assess the proper balance sheet structure. An unexpected change in economic activity, whether domestically or internationally, could translate into a materially different interest rate environment than currently expected. 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 increase and decrease 200 basis points from the most likely rate environment. to asset prepayment levels, yield curves and overall balance sheet mix and growth 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, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Derivative In addition, adjustments If short-term interest rates rise financial instruments entered into for risk management purposes are included in these analyses. The measurement of risk exposure, at year-end 2001, for a 200 basis-point decline in short-term interest rates identified approximately $80 million, or four percent, of net interest income at risk during 2002. 200 basis points, net interest income would be enhanced during 2002 by approximately $39 million, or two percent. Corresponding measures of risk exposure for year end 2000 were $51 million of net interest income at risk for a 200 basis-point decline in rates and a $6 million enhancement of net interest income for a 200 basis-point rise in rates. Corporate policy limits adverse change to no more than five percent of management’s most likely net interest income forecast and the Corporation is operating within this policy guideline. Most assets and liabilities reprice either at maturity or in accordance with their contractual terms. However, several balance sheet components demonstrate characteristics that require adjustments to more accurately reflect repricing and cash flow behavior. Assumptions based on historical pricing relationships 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 interest rates. 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 portray 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 rudimentary directional outlook on the impact of changes in interest rates. In addition, estimates Interest rate sensitivity is measured as a percentage of earning assets. The operating range for interest rate sensitivity, on an elasticity-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. Table 11 on page 38 shows the interest sensitivity gap as of year-end 2001 and 2000. 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 $800 million of rate sensitivity to the 2001 year-end gap. In addition, the schedule includes an adjustment for the price elasticity on certain core deposits. Using this methodology, the Corporation was in a liability sensitive position throughout most of 2001. The Corporation had a one- year liability sensitive gap of $1,502 million, or three percent of earning assets, as of December 31, 2001. This compares to a $1,370 million asset sensitive gap, or three percent of earning assets, at December 31, 2000. Management anticipates growth in asset sensitivity throughout 2002, which will reduce and/or eliminate the current liability sensitive position. The Corporation utilizes investment securities and derivative instruments, predominantly interest rate swaps, as asset and liability management tools with the overall objective of mitigating the adverse impact to net interest income from changes in interest rates. These swaps primarily modify the interest rate characteristics of certain assets and liabilities (e.g., from a floating rate to a fixed rate, from a fixed rate to a floating rate, or from one floating rate index to another). This strategy assists management in achieving interest rate objectives. T A B L E 1 1 : S C H E D U L E O F R A T E S E N S I T I V E A S S E T S A N D L I A B I L I T I E S (dollar amounts in millions) Commercial loans (including lease financing) 24,104 2,289 26,393 December 31, 2001 Interest Sensitivity Period Within Over One Year One Year Total December 31, 2000 Interest Sensitivity Period Within Over One Year One Year Total $ — $ 1,925 $ 1,925 $ — $ 1,931 $ 1,931 1,072 1,343 7 2,948 1,079 4,291 2,889 7,044 1,018 126 3,015 3,260 10,304 466 1,484 35,055 6,141 41,196 1,727 1,863 24,947 2,440 6,217 989 34,593 3 2,028 2,091 131 2,867 488 5,577 1,730 3,891 27,038 2,571 9,084 1,477 40,170 1,275 966 2,241 888 924 1,812 $38,745 $11,987 $50,732 $ 39,071 $ 10,463 $49,534 38 A S S E T S Cash and due from banks Short-term investments Investment securities International loans Real estate related loans Consumer loans Total loans Other assets Total assets L I A B I L I T I E S Deposits Noninterest-bearing deposits $ 5,596 $ 7,000 $12,596 $ 3,772 $ 6,417 $10,189 Savings deposits Money market and NOW deposits Certificates of deposit Foreign office time deposits Total deposits Short-term borrowings Medium- and long-term debt Other liabilities Total liabilities Shareholders’ equity 414 8,214 11,430 528 1,298 2,208 882 — 1,712 10,422 12,312 528 26,182 11,388 37,570 1,986 3,598 450 — 1,905 416 1,986 5,503 866 — 7,618 10,698 424 22,512 2,093 6,546 329 1,340 2,303 1,282 — 1,340 9,921 11,980 424 11,342 33,854 — 1,713 499 2,093 8,259 828 32,216 13,709 45,925 31,480 13,554 45,034 226 4,581 4,807 10 4,490 4,500 Total liabilities and shareholders’ equity $32,442 $18,290 $50,732 $ 31,490 $ 18,044 $49,534 Sensitivity impact of interest rate swaps $ (9,654) $ 9,654 Interest sensitivity gap Gap as a percentage of earning assets $ (3,351) $ 3,351 (7)% 7% Sensitivity impact from elasticity adjustments (1) 1,849 (1,849) Interest sensitivity gap with elasticity adjustments(1) $ (1,502) $ 1,502 Gap as a percentage of earning assets (3)% 3% — — — — — — $ (7,946) $ 7,946 $ (365) $ 365 (1)% 1% 1,735 (1,735) $ 1,370 $ (1,370) 3% (3)% — — — — — — (1) Elasticity adjustments for NOW, savings and money market deposit accounts are based on expected future pricing relationships as well as historical pricing relationships dating back to 1985. T A B L E 1 2 : R E M A I N I N G E X P E C T E D M A T U R I T Y O F R I S K M A N A G E M E N T I N T E R E S T R A T E S W A P S (dollar amounts in millions) VARIABLE RATE ASSET DESIGNATION: Generic receive fixed swaps Weighted average: (1) Receive rate Pay rate FIXED RATE ASSET DESIGNATION: Pay fixed swaps Generic Amortizing Weighted average: (2) Receive rate Pay rate FIXED RATE DEPOSIT DESIGNATION: Generic receive fixed swaps Weighted average: (1) Receive rate Pay rate MEDIUM- AND LONG-TERM DEBT DESIGNATION: 2002 2003 2004 2005 2006 2007- 2026 Total Dec. 31, 2000 $2,919 $4,750 $2,000 $ 900 $500 $ — $11,069 $ 9,277 39 7.03% 3.65% 8.31% 4.09% 7.57% 4.76% 7.76% 4.77% 5.83% 2.38% —% —% 7.68% 4.07% 7.55% 8.14% $ 34 1 $ — $ — $ — — — — $ — $ — $ — — $ 34 1 98 1 2.22% 2.56% —% —% —% —% —% —% —% —% —% —% 2.22% 2.56% 6.70% 6.79% $1,743 $ — $ — $ — $ — $ — $ 1,743 $ 1,378 4.87% 2.00% —% —% —% —% —% —% —% —% —% —% 4.87% 2.00% 7.19% 6.66% Generic receive fixed swaps $ 150 $ — $ — $ 250 $ — $1,250 $ 1,650 $ 1,715 Weighted average: (1) Receive rate Pay rate Floating/floating swaps Weighted average: Receive rate Pay rate 7.22% 2.37% —% —% —% —% 7.04% 2.01% —% —% 6.73% 2.82% 6.82% 2.66% 6.83% 6.76% $ — $ — $ — $ — $ — $ — $ — $ 125 —% —% —% —% —% —% —% —% —% —% —% —% —% —% 6.72% 6.59% Total notional amount $4,847 $4,750 $2,000 $1,150 $500 $1,250 $14,497 $12,594 (1) Variable rates paid on receive fixed swaps are based on one-month and three-month LIBOR or one-month Canadian Deposit Offer Rate (CDOR) effective December 31, 2001. Variable rates received on pay fixed swaps are based on prime. (2) Variable rate received is based on one-month CDOR at December 31, 2001. RISK MANAGEMENT DERIVATIVE FINANCIAL CUSTOMER-INITIATED AND OTHER DERIVATIVE INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS FINANCIAL INSTRUMENTS AND FOREIGN RISK MANAGEMENT NOTIONAL ACTIVITY (in millions) 40 Balances at December 31, 1999 Additions Maturities/amortizations Balances at December 31, 2000 Additions Maturities/amortizations Terminations Interest Rate Foreign Exchange Contracts Contracts Totals $ 16,996 10,886 (9,230) $ 1,213 8,850 (9,455) $ 18,209 19,736 (18,685) 18,652 8,255 (6,330) (6,080) 608 13,797 (13,585) — 19,260 22,052 (19,915) (6,080) Balances at December 31, 2001 $ 14,497 $ 820 $ 15,317 The notional amount of risk management interest rate swaps totaled $14.5 billion at December 31, 2001, and $12.6 billion at December 31, 2000. The fair value of risk management interest rate swaps was an asset of $571 million at December 31, 2001, compared to an asset of $173 million at December 31, 2000. For the year ended December 31, 2001, risk management interest rate swaps generated $238 million of net interest income, compared to $48 million of net interest expense for the year ended December 31, 2000. Table 12 on page 39 summarizes the expected maturity distribution of the notional amount of risk management interest rate swaps and provides the weighted average interest rates associated with amounts to be received or paid as of December 31, 2001. Swaps have been grouped by the asset and liability designation. In addition to interest rate swaps, the Corporation employs various other types of derivatives and foreign exchange contracts to mitigate exposures to interest rate and foreign currency risks associated with specific assets and liabilities (e.g., loans or deposits denominated in foreign currencies). Such instruments include interest rate caps and floors, purchased put options, foreign exchange forward contracts and foreign exchange swap agreements. The aggregate notional amounts of these risk management derivatives and foreign exchange contracts at December 31, 2001 and 2000, were $820 million and Interest rate floor contracts with a weighted $6.7 billion, respectively. average strike price of 5.73% represent $5.0 billion of the $6.7 billion of notional amounts at December 31, 2000. These interest rate floor contracts were terminated in the first quarter of 2001 because these Imperial contracts did not meet the Corporation’s policies for risk management hedges. Further information regarding risk management financial instruments and foreign currency exchange contracts is provided in Notes 1, 10, and 20. EXCHANGE CONTRACTS CUSTOMER-INITIATED AND OTHER NOTIONAL ACTIVITY (in millions) Balances at December 31, 1999 Additions Maturities/amortizations Balances at December 31, 2000 Additions Maturities/amortizations Terminations Interest Rate Foreign Exchange Contracts Contracts Totals $ 563 488 (181) $ 707 50,643 (49,473) $ 1,270 51,131 (49,654) 870 1,485 (471) (186) 1,877 48,426 (47,614) — 2,747 49,911 (48,085) (186) Balances at December 31, 2001 $1,698 $ 2,689 $ 4,387 The Corporation writes interest rate caps and enters into foreign exchange contracts and interest rate swaps to accommodate the needs of customers requesting such services. Customer-initiated activity represented 22 percent at December 31, 2001 and 12 percent at December 31, 2000, of total derivative and foreign exchange contracts, including commitments to purchase and sell securities. Refer to Note 20 of the financial statements on page 58 for further information regarding customer-initiated and other derivative financial instruments and foreign exchange contracts. L I Q U I D I T Y R I S K Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or acquisition of additional funds. The Corporation has various financial obligations, including contractual obligations and commercial commitments. The Corporation has contractual obligations that require future cash payments. The amount of payments required under medium- and long-term debt obligations, noncancellable property and equipment leases and other significant noncancellable contractual obligations in 2002 is $1.6 billion. Refer to Notes 7 and 10 of the financial statements on pages 50 and 51 for a further discussion of these contractual obligations. The Corporation also has other commercial commitments that may impact liquidity. These commitments include commitments to purchase earning assets, commitments to fund venture capital investments, unused commitments to extend credit, standby letters of credit and financial guarantees, commercial letters of credit and credit default swaps. The total amount of these commercial commitments at December 31, 2001 was $34 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Corporation. Refer to Note 20 and the Market Risk section of the Financial Review on page 41 for a further discussion of these commercial commitments. Liquidity requirements are satisfied with various funding sources. First, the Corporation accesses the purchased funds market each day to meet funding needs. Purchased funds at December 31, 2001, comprised of certificates of deposits $100,000 and over that mature in less than one year, foreign office time deposits and short-term borrowings, approximated $10.4 billion. Second, a $15 billion medium- term note program allows the Michigan, California and Texas banks to issue debt with maturities between one month and 15 years. The Michigan bank has an additional $2 billion European note program. At year-end 2001, unissued debt relating to the two programs totaled $14.6 billion. A third source was liquid assets, which totaled $7.3 billion at December 31, 2001. Additionally, the Corporation also had available $16 billion from a collaterized borrowing account with the Federal Reserve Bank at year-end 2001. The parent company had available a $250 million commercial paper facility at December 31, 2001, $110 million of which was unused. Another source of liquidity for the parent company is dividends from its subsidiaries. As discussed in Note 19 to the financial statements on page 57, subsidiary banks are subject to regulation and may be limited in their ability to pay dividends or transfer funds to the holding company. During 2002, the subsidiary banks can pay dividends up to $641 million plus current year net profits without prior regulatory approval. One measure of current parent company liquidity is investment in subsidiaries as a percent of shareholders’ equity. An amount over 100 percent represents the reliance on subsidiary dividends to repay liabilities. As of December 31, 2001, the ratio was 112 percent. M A R K E T R I S K The Corporation’s market risk related to trading instruments is not significant as trading activities are limited. Certain of the Corporation’s noninterest income, including fiduciary income, investment advisory revenue and brokerage fees are at risk to changes in equity markets and to fluctuations in the market value of assets managed. The Corporation also has a portfolio of direct and indirect (through funds) private equity and venture capital investments, and has made commitments to fund additional investments in future periods. These investments are at risk to changes in equity markets, general economic conditions and many other factors. The majority of these investments are not marketable, and are included in other assets. The investments are reviewed for impairment on a quarterly basis, by comparing the carrying value to the estimated fair value. Fair value is generally estimated by reviewing information provided by the investee, and obtained through other public sources where available. The lack of an independent source to validate fair value estimates is an inherent limitation in the valuation process. The amount by which the carrying value exceeds the fair value, that is determined to be other than temporary impairment, is charged to current earnings and the carrying value of the investment is written down accordingly. At December 31, the Corporation had approxi- mately $114 million of direct and indirect private equity and venture capital investments and had made commitments to fund an additional $140 million of such investments in future periods. O P E R A T I O N A L R I S K Operational risk is the risk of unexpected losses attributable to human error, system failures, fraud, unauthorized transactions and inadequate controls and procedures. The Corporation mitigates this risk through a system of internal controls that are designed to keep operating risks at appropriate levels. The Corporation’s internal audit and financial staff monitors and assesses the overall effectiveness of the system of internal controls on an ongoing basis and internal audit provides an opinion on the environment to management and the Audit Committee. Operational losses are experienced by all companies and are routinely incurred in business operations. The internal audit staff independently supports an active Audit Committee oversight process. The Audit Committee serves as an independent extension of the Board of Directors. Routine and special meetings are scheduled periodically to provide more detail on relevant operations risks. 41 O T H E R M A T T E R S This annual report and other documents filed by Comerica with the Securities and Exchange Commission (SEC) include forward-looking statements as that term is used in the securities laws. All statements regarding Comerica’s expected financial position, strategies and growth prospects and general economic conditions expected to exist in the future are forward-looking statements. The words, “anticipates”, “believes”, “estimates”, “seeks”, “plans”, “intends” and similar expressions, as they relate to Comerica or its management, are intended to identify forward-looking statements. Although Comerica believes that the expectations reflected in these forward- looking statements are reasonable and has based these expectations on Comerica’s beliefs and assumptions it has made, such expectations may prove incorrect. Numerous factors, including unknown risks and uncertainties, could cause variances in these projections and their underlying assumptions. Such factors are changes in interest rates, changes in industries where Comerica has a significant con- centration of loans, changes in the level of fee income, changes in accounting treatment affecting the value of assets, Comerica’s ability to implement its strategic initiatives, the impact of the September 11, 2001, terrorist attacks or of any subsequent terrorist activities or of any actions taken in response to or as a result of those attacks or activities, changes in general economic conditions and related credit conditions and continuing consolidations in the banking industry. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events which may have changed after the date the forward-looking state- ments are made. C O N S O L I D A T E D B A L A N C E S H E E T S C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S (in thousands, except share data) December 31 A S S E T S 42 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 credit losses Net loans Premises and equipment Customers’ liability on acceptances outstanding Accrued income and other assets Total assets L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y Noninterest-bearing deposits Interest-bearing deposits Total deposits Short-term borrowings 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 at 12/31/00 Common stock – $5 par value Authorized – 325,000,000 shares Issued – 178,749,198 shares at 12/31/01 and 177,703,678 shares at 12/31/00 Capital surplus Unearned employee stock ownership plan stock – 131,954 shares at 12/31/01 and 176,462 shares at 12/31/00 Accumulated other comprehensive income Retained earnings Deferred compensation Less cost of common stock in treasury – 1,674,659 shares at 12/31/01 and 289,397 shares at 12/31/00 Total shareholders’ equity 2001 2000 $ 1,925,262 1,078,799 4,290,724 25,176,000 3,015,463 3,257,549 6,266,939 779,116 1,483,961 1,217,314 41,196,342 (655,094) 40,541,248 352,814 28,589 2,514,537 $ 1,930,682 1,730,158 3,890,725 26,009,336 2,571,156 2,915,168 5,360,601 807,064 1,477,135 1,029,164 40,169,624 (608,110) 39,561,514 347,962 26,668 2,046,347 $50,731,973 $49,534,056 $12,596,255 24,974,124 37,570,379 1,986,263 28,589 836,767 5,502,511 45,924,509 $10,188,475 23,665,808 33,854,283 2,093,381 26,668 800,386 8,259,179 45,033,897 — 250,000 893,746 345,156 (5,037) 225,617 3,447,974 (9,205) (90,787) 4,807,464 888,519 301,414 (6,750) 12,097 3,085,784 (14,494) (16,411) 4,500,159 Total liabilities and shareholders’ equity $50,731,973 $49,534,056 See notes to consolidated financial statements. C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S (in thousands, except per share data) Year Ended December 31 I N T E R E S T I N C O M E Interest and fees on loans Interest on investment securities Interest on short-term investments Total interest income I N T E R E S T E X P E N S E Interest on deposits Interest on short-term borrowings Interest on medium- and long-term debt Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses N O N I N T E R E S T I N C O M E Service charges on deposit accounts Fiduciary income Commercial lending fees Letter of credit fees Brokerage fees Investment advisory revenue, net Equity in earnings of unconsolidated subsidiaries Warrant income Securities gains Net gain on sales of businesses Other noninterest income Total noninterest income N O N I N T E R E S T E X P E N S E S Salaries and employee benefits Net occupancy expense Equipment expense Outside processing fee expense Customer services Merger-related and restructuring charges Other noninterest expenses Total noninterest expenses Income before income taxes Provision for income taxes N E T I N C O M E 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. 2001 2000 1999 $3,120,806 246,288 26,453 3,393,547 888,262 105,336 297,611 1,291,209 2,102,338 236,000 1,866,338 210,780 180,123 67,022 57,424 44,422 11,848 (43,057) 4,552 19,763 31,233 219,222 803,332 809,483 114,548 70,278 61,034 40,985 151,715 310,990 1,559,033 1,110,637 401,059 $ 709,578 $ 697,970 $ 3.93 3.88 $ 313,202 1.76 $ $3,379,271 259,333 77,749 3,716,353 951,281 215,372 545,531 1,712,184 2,004,169 254,800 1,749,369 188,828 180,860 60,682 51,960 44,055 118,511 14,021 29,861 16,295 50,299 201,309 956,681 851,456 110,126 76,532 58,541 36,882 — 350,986 1,484,523 1,221,527 430,792 $ 790,735 $ 773,635 $ 4.38 4.31 $ 250,277 1.60 $ 43 $2,859,053 198,901 39,317 3,097,271 692,808 183,124 404,463 1,280,395 1,816,876 146,220 1,670,656 176,639 182,754 54,659 46,116 35,942 61,202 14,716 33,033 8,675 76,387 176,891 867,014 777,539 104,308 73,217 60,207 40,263 — 303,374 1,358,908 1,178,762 419,347 $ 759,415 $ 742,315 $ 4.20 4.13 $ 224,837 1.44 $ C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y — C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S (in thousands, except share data) Non- redeemable Preferred Stock Common Stock Unearned Accumulated Employee Other Stock Capital Ownership Comprehensive Income Surplus Plan Shares Deferred Retained Earnings Compensation Total Treasury Shareholders’ Equity Stock 44 B A L A N C E S AT J A N UA RY 1 , 1 9 9 9 Net income for 1999 Other comprehensive income, net of tax Total comprehensive income Cash dividends declared: Preferred stock Common stock Purchase and retirement of 254,213 shares of common stock Purchase of 44,082 shares of common stock Common stock dividend Issuance of common stock under employee stock plans Amortization of deferred compensation, net of minority interest B A L A N C E S AT D E C E M B E R 3 1 , 1 9 9 9 Net income for 2000 Other comprehensive income, net of tax Total comprehensive income Cash dividends declared: Preferred stock Common stock Purchase and retirement of 930,212 shares of common stock Purchase of 353,547 shares of common stock Common stock dividend Issuance of common stock under employee stock plans Amortization of deferred compensation, net of minority interest B A L A N C E S AT D E C E M B E R 3 1 , 2 0 0 0 Net income for 2001 Other comprehensive income, net of tax — Total comprehensive income — Redemption of preferred stock (250,000) Cash dividends declared: Preferred stock Common stock Purchase of 2,198,700 shares of common stock Issuance of common stock under employee stock plans Amortization of deferred compensation, net of minority interest B A L A N C E S AT D E C E M B E R 3 1 , 2 0 0 1 ( ) Indicates deduction. See notes to consolidated financial statements. — — — — — — — — — — $ 250,000 — $ 882,452 $ 152,795 — — $ — — $ (6,970) $ 2,244,493 759,415 — $ (5,202) $ (89,133) $ 3,428,435 759,415 — — — — — — — — — — — — — — — — — — — (1,284) (8,069) — 7,712 — 44,993 — — — — — — — 573 12,067 (3,750) — 24,215 — (14,734) — — — — (17,100) — (224,837) — — (52,724) (32,037) — — — — — — — 4 — — — — — (2,885) — (14,734) 744,681 (17,100) (224,837) (9,353) (2,885) (19) 44,857 21,714 — (16,800) — 7,415 250,000 — 889,453 — 226,001 — (3,750) — (21,704) — 2,677,210 790,735 (21,998) — (47,161) — 3,948,051 790,735 — — — — — — — — — — — — — — — — — (4,651) (31,645) — — — 84,906 — — — — — — — 3,717 22,152 (3,000) — — — 33,801 — — — — (17,100) — (250,277) — — (84,927) — — — — — — — — — — — — (14,108) — 33,801 824,536 (17,100) (250,277) (36,296) (14,108) (21) (29,857) (3,278) 44,858 34,592 — 10,782 — 10,782 250,000 888,519 301,414 (6,750) 12,097 3,085,784 (14,494) (16,411) 4,500,159 — — — — — — — — — — — — — — — — — — — — — — — — — — — 5,227 43,742 1,713 — — — — 709,578 213,520 — — — — — (11,608) — — (313,202) — — — — — — — — — — — — 709,578 213,520 923,098 (250,000) (11,608) (313,202) — — — — — (120,630) (120,630) (22,578) (9,072) 46,254 65,286 — 14,361 — 14,361 $ — $893,746 $345,156 $(5,037) $225,617 $3,447,974 $ (9,205) $ (90,787) $4,807,464 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S (in thousands) Year Ended December 31 O P E R A T I N G A C T I V I T I E S Net income Adjustments to reconcile net income to net cash provided by operating activities 2001 2000 1999 $ 709,578 $ 790,735 $ 759,415 45 Provision for credit losses Depreciation Merger-related and restructuring charges Net (increase) decrease in trading account securities Net (increase) decrease in assets held for sale Net (increase) decrease in accrued income receivable Net increase in accrued expenses Gain on the sale of businesses Net amortization of intangibles Other, net Total adjustments Net cash provided by operating activities 236,000 63,354 54,634 3,436 (130,352) 134,233 34,734 (31,233) 34,491 (107,845) 291,452 1,001,030 254,800 70,988 — (12,410) (33,385) (80,923) 110,273 (50,299) 36,643 (146,594) 149,093 939,828 146,220 74,768 — (46,854) 53,568 (42,321) 138,459 (76,387) 33,921 112,196 393,570 1,152,985 (27,222) (2,846) (9,418) I N V E S T I N G A C T I V I T I E S Net increase 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 Net increase in loans Fixed assets, net Net increase in company owned life insurance Net (increase) decrease in customers’ liability on acceptances outstanding Net cash provided by acquisition/sale of businesses 805,497 2,386,202 1,303,982 (4,188,934) (1,221,673) (68,206) (167,677) (1,921) 45,463 176,527 6,298,862 827,426 (7,200,262) (4,032,060) (45,903) (29,018) 17,142 442,426 Net cash used in investing activities (1,134,489) (3,547,706) F I N A N C I N G A C T I V I T I E S Net increase (decrease) in deposits Net 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 Redemption of preferred stock Proceeds from issuance of common stock and other capital transactions Purchase of common stock for treasury and retirement Dividends paid Net cash provided by 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 Transfer from loans to loans held for sale See notes to consolidated financial statements. 3,703,865 (107,118) 1,921 2,081,233 (4,932,466) (250,000) 65,286 (120,630) (314,052) 128,039 (5,420) 1,930,682 $ 1,925,262 $ 1,419,884 $ 344,249 $ 12,505 — 4,658,280 (831,313) (17,142) 6,103,664 (6,604,430) — 37,240 (56,403) (261,096) 3,028,800 420,922 1,509,760 $ 1,930,682 $ 1,718,365 $ 379,250 $ 6,870 — (134,094) 1,921,554 3,965,212 (6,328,161) (2,918,339) (55,825) (46,521) (31,475) 69,512 (3,567,555) (686,777) (716,060) 31,475 6,373,364 (2,981,672) — 29,347 (18,118) (235,646) 1,795,913 (618,657) 2,128,417 $ 1,509,760 $ 1,210,598 $ 347,933 $ 11,430 620,280 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S 1 A C C O U N T I N G P O L I C I E S ORGANIZATION 46 Comerica Incorporated is a registered financial holding company headquartered in Detroit, Michigan. The Corporation’s principal 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 Incorporated and its subsidiaries conform to accounting principles generally accepted in the United States and prevailing practices within the banking 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 accounting and reporting policies. CONSOLIDATION 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 combinations, the historical consolidated financial statements are restated to include the accounts and results of operations. Statement of Financial Accounting Standards (SFAS) No. 141 “Business Combinations” (issued June 2001), eliminated the pooling-of-interests method for acquisitions initiated after June 30, 2001. 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 25 years (weighted average of 19 years). Beginning in 2002, as required by SFAS No. 142 “Goodwill and Other Intangible Assets” (issued June 2001), goodwill will no longer be amortized, but will be subject to annual impairment tests. Other intangible assets that do not have an indefinite life will continue to be amortized over its useful lives. Core deposit intangi- ble assets are amortized on an accelerated method over 10 years. IMPAIRMENT The Corporation periodically evaluates long-lived assets, certain identifiable intangibles, deferred costs and goodwill for indication of impairment in value. When required, asset impairment is recorded. LOANS HELD FOR SALE Loans held for sale, normally mortgages and Small Business Administration loans, are carried at the lower of cost or market. Market value is determined in the aggregate. SECURITIES Investment securities that fail to meet the ability and positive intent criteria are accounted for as securities available for sale, 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. Realized and unrealized gains or losses on trading securities are included in non- interest 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 estimated useful lives of the assets. The estimated useful lives are generally 10-33 years for premises that the company owns and 3-8 years for furniture and equipment. Leasehold improvements are amortized over the terms of their respective leases or 10 years, whichever is shorter. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses represents management’s assessment of probable losses inherent in the Corporation’s credit portfolio. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified. The Corporation allocates the allowance for credit losses to each loan category based on a defined methodology, which has Internal risk been in use, without material change, for several years. ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the senior management of the Credit Policy Group. Business loans are defined as those belonging to the commercial, international, real estate construction, commercial mortgage and lease financing categories. A detailed credit quality review is performed quarterly on large business loans which have deteriorated below certain levels of credit risk. A specific portion of the allowance is allocated to such loans based upon this review. The portion of the allowance allocated to the remaining business loans is determined by applying projected loss ratios to each risk rating based on numerous factors identified below. The portion of the allowance allocated to consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio. Projected loss ratios incorporate factors such as recent loan loss experience, current economic conditions and trends, and trends with respect to past due and nonaccrual amounts. Management maintains an unallocated allowance to recognize the uncertainty and imprecision underlying the process of estimating expected credit losses. This uncertainty occurs because other factors affecting the determination of probable losses inherent in the loan portfolio may exist which are not necessarily captured by the application of historical loss ratios. Loans which are deemed uncollectible are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans previously charged off are added to the allowance. 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. Management also considers industry norms and the expectations from rating agencies and banking regulators in determining the adequacy of the allowance. The total allowance, including the unallocated amount, is available to absorb losses from any segment within the portfolio. 1 A C C O U N T I N G P O L I C I E S ( C O N T I N U E D ) NONPERFORMING ASSETS POSTRETIREMENT BENEFITS 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. Loans which were restructured, but yield a rate equal to or greater than the rate charged for new loans with comparable risk and have met the requirements for accrual status, are generally not reported as nonperforming assets. Such loans continue to be evaluated for impairment for the remainder of the calendar year of the modifica- tions. These loans may be excluded from the impairment assessment in the calendar years subsequent to the restructuring if not impaired based on the modified terms. See Note 4 on page 49 for additional information on loan impairment. Income on such loans Consumer loans are generally not placed on nonaccrual status and are 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 opinion 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. is then recognized only to the extent that cash is received and where future collection of principal is probable. Generally, a loan may be returned to accrual status when all delinquent principal and interest have been received and the Corporation expects repay- ment of the remaining contractual principal and interest or when the loan is both well secured and in the process of collection. A nonaccrual loan that is restructured will generally remain on nonac- crual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, sustained payment performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the restructured terms. These factors may result in the loan being returned to an accrual basis at the time of restructuring or upon satisfaction of a shorter performance period. If management is uncertain whether the borrower has the ability to meet the revised payment schedule, the loan remains classified as nonaccrual. 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 balance over fair value is charged to the allowance for credit losses. Subsequent write-downs, operating expenses and losses upon sale, if any, are charged to noninterest expenses. STOCK-BASED COMPENSATION The Corporation elected to continue to apply the intrinsic value method in accounting for its stock-based compensation plans. Information on the Corporation’s stock-based compensation plans is included in Note 14 on page 53. PENSION COSTS Pension costs are charged to salaries and employee benefits expense and funded consistent with the requirements of federal law and regulations. 47 Postretirement benefits are recognized in the financial statements during the employee’s active service period. DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS Beginning January 1, 2001, derivative instruments are carried at fair value as either other assets or liabilities on the balance sheet. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Corporation designates the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments designated and qualifying as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item (i.e. the ineffective portion), if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. In 2000, the fair value of interest rate and foreign exchange swaps, interest rate caps and floors and futures and forward contracts used to hedge the Corporation’s interest rate and foreign currency risk was not reflected on the balance sheet. These instruments, with the exception of futures and forward contracts, were accounted for on an accrual basis since there was a high correlation with the on- balance sheet instrument being hedged. Foreign exchange futures and forward contracts, foreign currency options, interest rate caps and interest rate swap agreements executed as a service to customers are not designated as hedging instruments and both the realized and unrealized gains and losses on these instruments are recognized currently in noninterest 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. Deferred taxes are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence. 1 A C C O U N T I N G P O L I C I E S ( C O N T I N U E D ) STATEMENTS OF CASH FLOWS LOAN ORIGINATION FEES AND COSTS 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.” DEFERRED DISTRIBUTION COSTS Loan origination and commitment fees are deferred and recognized 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 noninterest income. 48 Certain mutual fund distribution costs are capitalized when paid and amortized over six years. Fees that contractually recoup the deferred costs are received over a 6 – 8 year period. The net of fees and amortization is recorded in noninterest income. OTHER COMPREHENSIVE INCOME The Corporation has elected to present information on compre- hensive income in the Consolidated Statements of Changes in Shareholders’ Equity on page 44 and in Note 12 on page 52. 2 A C Q U I S I T I O N S In January 2001, the Corporation merged with Imperial Bancorp (Imperial), a $7 billion (assets) bank holding company, through an exchange of 0.46 shares of Comerica common stock for each share of Imperial common stock. The Corporation issued 21 million shares of common stock as part of the transaction. The financial information presented in this annual report is restated to include the accounts and results of operations of Imperial, which was accounted for as a pooling-of-interests combination. The Corporation incurred a pre-tax, merger-related and restructuring charge of $173 million ($128 million after-tax) in 2001 in connection with the acquisition. As of December 31, 2001, all merger-related expenses have been incurred. At December 31, 2001, the Corporation owned 12 million shares, or approximately 55%, of the outstanding common stock of Official Payment Corporation (“OPAY”)(Nasdaq: OPAY). OPAY completed an initial public offering (“IPO”) on November 23, 1999, of 5 million shares of common stock priced at $15 per share. As a result of the offering, the Corporation's ownership percentage of OPAY's common stock decreased from 80% to approximately 56% of total outstanding shares. The Corporation recognized a $44 million pre-tax gain in 1999 representing the increase in its basis in OPAY stock due to the IPO. The gain is reflected in “Net gain on sale of businesses” in the Consolidated Statements of Income. 3 I N V E S T M E N T S E C U R I T I E S Information concerning investment securities as shown in the consolidated balance sheets of the Corporation was as follows: (in thousands) December 31, 2001 Cost Gross Gross Unrealized Unrealized Estimated Fair Value Losses Gains U.S. government and agency securities State and municipal securities Other securities Total securities $3,879,206 $47,535 $ 6,903 $3,919,838 30,935 355,344 1,200 1,141 4 17,730 32,131 338,755 available for sale $4,265,485 $49,876 $24,637 $4,290,724 December 31, 2000 U.S. government and agency securities State and municipal securities Other securities Total securities $ 3,120,561 $ 22,476 $ 8,417 $ 3,134,620 (in thousands) 44,920 713,101 1,417 6,599 40 9,892 46,297 709,808 available for sale $ 3,878,582 $ 30,492 $ 18,349 $ 3,890,725 The cost and estimated fair values of debt securities by contractual 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 obligations with or without call or prepayment penalties. (in thousands) December 31, 2001 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 Cost Estimated Fair Value $ 188,685 $ 191,044 189,032 33,502 27,366 193,067 36,527 35,824 454,103 3,721,019 90,363 440,944 3,759,379 90,401 Total securities available for sale $4,265,485 $4,290,724 Sales, calls and write-downs of investment securities available for sale resulted in realized gains and losses as follows: Year Ended December 31 2001 2000 Securities gains Securities losses Total $29,453 (9,690) $20,152 (3,857) $19,763 $16,295 Assets, principally securities, carried at approximately $1.9 billion at December 31, 2001, were pledged to secure public deposits (including State of Michigan deposits of $122 million at December 31, 2001) and for other purposes as required by law. 4 N O N P E R F O R M I N G A S S E T S 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 recognized. 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. (in thousands) December 31 Nonaccrual loans Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total Reduced-rate loans Total nonperforming loans Other real estate 2001 2000 $467,078 109,349 9,751 17,891 323 4,727 7,349 616,468 219 616,687 10,104 $233,408 68,911 4,542 17,398 185 3,080 3,837 331,361 2,306 333,667 5,577 Total nonperforming assets $626,791 $339,244 Loans past due 90 days and still accruing $ 44,089 $ 36,176 Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms Interest income recognized $ 60,867 $ 41,733 $ 16,958 $ 7,934 49 A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all nonaccrual and reduced-rate loans (with the exception of residential mortgage and consumer loans) are impaired. Impaired loans at December 31, 2001, were $674 million, $62 million of which were formerly on nonaccrual status, but were restructured and met the requirements to be restored to an accrual basis. These restructured loans are performing in accordance with their modified terms, but, in accordance with impaired loan disclosures must continue to be disclosed as impaired for the remainder of the calendar year of the restructuring. Excluding these restructured loans, impaired loans related to business loans remaining on nonaccrual status totaled $611 million at December 31, 2001. (in thousands) December 31 2001 2000 1999 Average impaired loans for the year $548,662 $292,665 $209,480 Total period-end impaired loans Less: Loans returned to accrual status $673,812 $364,895 $199,922 during the year (62,394) (36,799) (13,168) Total period-end nonaccrual business loans $611,418 $328,096 $186,754 Period-end impaired loans requiring an allowance $561,681 $277,159 $184,607 Impairment allowance $228,417 $104,107 $ 61,913 Those impaired loans not requiring an allowance represent loans for which the fair value exceeded the recorded investment in the loan. Thirty-one percent of the total impaired loans at December 31, 2001, 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. 5 A L L O W A N C E F O R C R E D I T L O S S E S An analysis of changes in the allowance for credit losses follows: (dollar amounts in thousands) 2001 2000 1999 The provision for credit losses in 2001 included a $25 million merger-related charge to conform the credit policies of Imperial with Comerica. Balance at January 1 $ 608,110 $ 548,147 $ 515,058 Loans charged off Recoveries on loans previously charged off Net loans charged off Provision for credit losses Transfer to loans held for sale Foreign currency translation adjustment (231,600) (223,527) (143,727) 42,764 28,745 34,563 (188,836) 236,000 — (194,782) 254,800 — (109,164) 146,220 (4,000) (180) (55) 33 Balance at December 31 $ 655,094 $ 608,110 $ 548,147 As a percent of total loans 1.59% 1.51% 1.51% 6 S I G N I F I C A N T G R O U P C O N C E N T R A T I O N S O F C R E D I T R I S K Concentrations of both on-balance sheet and off-balance sheet credit risk are controlled and monitored as part of credit policies. The Corporation is a regional financial holding company with a geographic concentration of its on-balance sheet and off-balance sheet activities in Michigan. In addition, the Corporation has an industry concentration with the automotive industry. 50 At December 31, 2001 and 2000, exposure from loan commitments and guarantees to companies related to the automotive industry totaled $11.2 billion and $10.6 billion, respectively. Additionally, commercial real estate loans, including commercial mortgages and construction loans, totaled $9.5 billion at December 31, 2001 and $8.3 billion at year-end 2000. Approximately $4.3 billion of commer- cial real estate and real estate construction loans at December 31, 2001, involved owner-occupied properties. Those borrowers 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. 7 P R E M I S E S & E Q U I P M E N T & O T H E R N O N C A N C E L L A B L E O B L I G AT I O N S A summary of premises and equipment at December 31 by major category follows: Rental expense for leased properties and equipment amounted to $55 million in 2001, $51 million in 2000 and $50 million in 1999. Future minimum payments under noncancellable obligations are as follows: (in thousands) Land Buildings and improvements Furniture and equipment Total cost Less accumulated depreciation and amortization Net book value 2001 2000 (in thousands) $ 55,565 391,059 383,299 $ 54,878 379,019 384,452 829,923 (477,109) 818,349 (470,387) $352,814 $ 347,962 2002 2003 2004 2005 2006 2007 and later $ 69,453 67,848 58,210 50,467 38,384 255,401 8 D E P O S I T S A maturity distribution of domestic certificates of deposits of $100,000 and over at December 31 follows: (in millions) Three months or less Over three months to six months Over six months to twelve months Over twelve months Total 2001 2000 $4,387 1,513 1,946 501 $8,347 $3,206 2,028 2,061 349 $7,644 9 S H O R T - T E R M B O R R O W I N G S 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 commercial (in thousands) December 31, 2001 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Other Borrowed Funds Amount outstanding at year-end Weighted average interest rate at year-end $1,693,447 $ 292,816 1.64% 1.81% December 31, 2000 Amount outstanding at year-end Weighted average interest rate at year-end $ 1,640,006 $ 453,375 6.37% 5.51% December 31, 1999 Amount outstanding at year-end Weighted average interest rate at year-end $ 1,387,536 $1,537,158 4.43% 4.45% paper, borrowed securities, term federal funds purchased, short-term notes and treasury tax and loan deposits, generally mature within one to 120 days from the transaction date. The table at left provides a summary of short-term borrowings at December 31, 2001 and 2000. At December 31, 2001, the parent company had available a $250 million commercial paper facility of which $140 million was outstanding. This facility is supported by a $200 million line of credit agreement. Under the current agreement, the line will expire in May 2002. At December 31, 2001, the Corporation’s subsidiary banks had pledged loans totaling $21.8 billion to secure a $16 billion collater- alized borrowing account with the Federal Reserve Bank. 10 M E D I U M - & L O N G - T E R M D E B T Medium- and long-term debt consisted of the following at December 31: All subordinated notes with maturities greater than one year qualify as Tier 2 capital. (in thousands) Parent Company 2001 2000 7.25% subordinated notes due 2007 $ 156,288 $ 157,414 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 6.00% subordinated notes due 2008 7.65% subordinated notes due 2010 8.50% subordinated notes due 2009 215,747 179,152 186,774 107,642 155,490 168,029 256,031 267,661 102,234 198,703 155,071 149,719 103,272 154,486 172,346 248,238 248,385 99,474 Total subordinated notes 1,638,760 1,529,694 Medium-term notes: Floating rate based on LIBOR indices Floating rate based on Treasury indices Floating rate based on Prime indices Total medium-term notes Variable rate secured debt financings due 2007 Notes payable 9.98% trust preferred securities due 2026 7.60% trust preferred securities due 2050 Total subsidiaries 5,048,972 2,355,618 — 125,000 — 1,320,964 2,355,618 956,260 — 56,234 339,351 6,494,936 — 13,445 63,690 — 5,346,223 8,101,765 Total medium- and long-term debt $5,502,511 $8,259,179 The carrying value of medium- and long-term debt in 2001 has been adjusted to reflect the gain or loss attributable to the risk hedged by risk management interest rate swaps that qualify as fair value hedges. 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. (dollar amounts in thousands) Principal Amount of Debt Converted Base Rate at 12/31/01 Base Rate 51 The Corporation currently has two medium-term note programs: a senior note program and a European note program. Under these programs, certain bank subsidiaries may offer an aggregate principal amount of up to $17 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 plus 0.07% to one-month LIBOR plus 0.20%. The notes are due from 2002 to 2005. There are no floating rate notes outstanding based on Treasury or Prime indices at December 31, 2001. The medium-term notes do not qualify as Tier 2 capital and are not insured by the FDIC. Comerica issued $350 million of 7.60% Trust Preferred Securities which are classified in medium- and long-term debt. The securities pay interest each quarter beginning October 1, 2001, and are callable any time after July 30, 2006. The Corporation used the proceeds from the issuance to redeem and retire in total the $250 million of preferred stock that was outstanding and for other general corporate purposes. The Corporation also has $55 million of 9.98% trust preferred securities classified in medium- and long- term debt at December 31, 2001. The securities pay interest semi- annually in June and December, and are callable anytime after June 30, 2007. The Corporation purchased and retired $10 million of these securities in 2001. In July 2001, In December 2001, the Corporation privately placed approximately $1 billion of variable rate notes as part of a secured financing trans- action. The Corporation utilized approximately $1.2 billion of dealer floor plan loans as collateral in conjunction with this transaction. The over-collateralization of the issuance provided for a preferred credit rating status. The secured financing includes $904 million of deferred payment notes bearing interest at the rate of 30 basis points plus a commercial paper reference rate, and $60 million of deferred payment notes based on one-month LIBOR. The interest rate on each of these note issuances is reset monthly. The $904 deferred payment notes, which may be redeemed upon the occurence of certain conditions, mature in December 2007. $60 million deferred payment notes until January 2007, at which time the notes become redeemable by the holder. These 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: Interest will accrue on the Parent company (in thousands) 7.25% subordinated notes $150,000 6-month LIBOR 2.01% Subsidiaries Subordinated notes: 7.25% subordinated notes 8.375% subordinated notes 7.25% subordinated notes 6.875% subordinated notes 6.00% subordinated notes 7.125% subordinated notes 7.875% subordinated notes 7.65% subordinated notes 8.50% subordinated notes $200,000 150,000 150,000 100,000 250,000 150,000 150,000 250,000 100,000 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 6-month LIBOR 3-month LIBOR 3-month LIBOR 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 2.01% 1.91% 1.91% 2002 2003 2004 2005 2006 2007 and later $1,558,000 680,000 100,000 185,000 — 2,879,000 11 S H A R E H O L D E R S ’ E Q U I T Y In October 2000, in connection with the Imperial acquisition, the Board of Directors of the Corporation rescinded the then existing share repurchase program. In March 2001, the Board approved a one million (1,000,000) share repurchase program, which was completed in the third quarter 2001. authorized the repurchase of up to an additional ten million (10,000,000) shares of Comerica Incorporated outstanding common stock. At December 31, 2001, 1.2 million shares had been repurchased under this program. In August 2001, the Board 52 At December 31, 2001, the Corporation had reserved 29.0 million shares of common stock for issuance to employees and directors under the long-term incentive plans. In August 2001, the Corporation retired 5 million shares of Fixed/Adjustable Rate Noncumulative Preferred Stock, Series E, with a stated value of $50 per share. 12 O T H E R C O M P R E H E N S I V E I N C O M E Other comprehensive income includes the change in unrealized gains and losses on investment securities available for sale, the change in accumulated net gains and losses on cash flow hedges and the change in the accumulated foreign currency translation adjustment. The Consolidated Statements of Changes in Shareholders’ Equity includes only combined, net of tax, other comprehensive income. The following presents reconciliations of the components of accumulated other comprehensive income for the years ended December 31, 2001, 2000 and 1999. (in thousands) Year Ended December 31 Net unrealized gains (losses) on investment securities available for sale: Balance at beginning of year Net unrealized holding gains (losses) arising during the period Less: Reclassification adjustment for gains (losses) included in net income Change in net unrealized gains (losses) before income taxes Provision for income taxes Change in net unrealized gains (losses) on investment securities available for sale, net of tax Balance at December 31 Accumulated net gains (losses) on cash flow hedges: Balance at beginning of year Transition adjustment upon adoption of accounting standard Net cash flow hedge gains (losses) arising during the period Less: Reclassification adjustment for gains (losses) included in net income Change in cash flow hedges before income taxes Provision for income taxes Change in cash flow hedges, net of tax Balance at December 31 Accumulated foreign currency translation adjustment: Balance at beginning of year Net translation gains (losses) arising during the period Less: Reclassification adjustment for gains (losses) included in net income Change in translation adjustment before income taxes Provision for income taxes Change in foreign currency translation adjustment, net of tax The adoption of Statement No. 133 on January 1, 2001 resulted in a cumulative effect of an accounting change of $65 million, $42 million net of tax, included in other comprehensive income. For a further discussion of the effect of derivative instruments on other comprehensive income see Notes l and 20 to the consolidated financial statements. 2001 2000 1999 $ 8,016 31,901 19,763 12,138 4,248 7,890 $ 15,906 $ — 64,705 432,744 174,618 322,831 112,991 209,840 $209,840 $ 4,081 (4,853) (643) (4,210) — (4,210) $(22,719) 61,996 16,295 45,701 14,966 30,735 $ 8,016 $ — — — — — — — $ — $ 1,015 3,066 — 3,066 — 3,066 $ (8,203) (12,452) 8,675 (21,127) (6,611) (14,516) $(22,719) $ $ — — — — — — — — $ 1,233 (218) — (218) — (218) Balance at December 31 $ (129) $ 4,081 $ 1,015 Total accumulated other comprehensive income, net of taxes, at December 31 $225,617 $ 12,097 $(21,704) 13 N E T I N C O M E P E R C O M M O N S H A R E 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 outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares, nonvested stock and dilutive common stock equivalents outstanding 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. Unallocated employee stock ownership plan shares are not included in average shares outstanding. A computation of earnings per share is presented at right. (in thousands, except per share data) Year Ended December 31 2001 2000 1999 Basic Average shares outstanding 177,665 176,826 176,771 Net income Less preferred stock dividends $709,578 11,608 $790,735 17,100 $759,415 17,100 Net income applicable to common stock $697,970 $773,635 $742,315 53 Basic net income per common share $ 3.93 $ 4.38 $ 4.20 Diluted Average shares outstanding Nonvested stock Common stock equivalents Net effect of the assumed exercise of stock options 177,665 238 176,826 159 176,771 167 2,121 2,395 2,863 Diluted average shares 180,024 179,380 179,801 Net income Less preferred stock dividends $709,578 11,608 $790,735 17,100 $759,415 17,100 Net income applicable to common stock $697,970 $773,635 $742,315 Diluted net income per common share $ 3.88 $ 4.31 $ 4.13 14 L O N G - T E R M I N C E N T I V E P L A N S 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 Corporation has elected to follow the intrinsic value method in accounting for its employee and director stock options when the exercise price equals the market price of the underlying stock on the date of grant. 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 options may have restrictions regarding exercisability. A majority of the Corporation’s options vest over a four-year period. Pro forma information regarding net income and earnings per share was determined as if the Corporation had accounted for its employee and director stock options under the fair value method. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The model may not necessarily provide a reliable single measure of the fair value of employee and director stock options. The Corporation’s employee and director stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. In addition, The fair value of the options was estimated using an option valuation model with the following weighted-average assumptions: Outstanding – December 31, 1998 Granted Cancelled Exercised Expired Outstanding – December 31, 1999 Granted Cancelled Exercised Expired Outstanding – December 31, 2000 Granted Cancelled Exercised Expired Outstanding – December 31, 2001 Average per Share Market Exercise Price Price $ 33.26 64.86 56.27 18.44 $ 40.32 42.53 50.92 17.16 $ 43.38 52.00 54.32 28.71 $68.19 66.63 58.69 62.76 $46.69 41.95 49.58 17.31 $59.38 52.00 64.74 59.70 $46.81 $57.30 Number 10,234,956 2,388,392 (259,697) (801,136) — 11,562,515 2,781,847 (261,986) (1,522,564) — 12,559,812 2,566,441 (269,735) (1,757,074) — 13,099,444 Exercisable – December 31, 2000 8,026,508 Exercisable – December 31, 2001 8,159,135 Available for grant – December 31, 2001 15,893,000 $ 39.09 43.13 Had compensation cost for the Corporation’s stock-based compensation plans been determined in accordance with the fair value provisions, net income and earnings per share would have been as follows: (in thousands, except per share data) 2001 2000 1999 2001 2000 1999 Risk-free interest rate Expected dividend yield Expected volatility factors of the market price of Comerica common stock Expected option life (in years) 4.88% 2.66% 31% 4.8 6.46% 2.84% 28% 4.8 5.15% 3.24% 24% 4.8 Pro forma net income applicable to common stock $653,266 $747,700 $719,598 Pro forma earnings per share: Basic Diluted $ 3.68 3.63 $ 4.23 4.17 $ 4.07 4.00 14 L O N G - T E R M I N C E N T I V E P L A N S ( C O N T I N U E D ) The pro forma net income and earnings per share presented on the previous page includes the compensation cost associated with options to acquire OPAY stock granted to employees of the Corporation’s OPAY subsidiary. Other disclosures provided in this note do not include information related to the OPAY stock option plan. Pro forma net income applicable to common and earnings per share in 2001 was affected by the accelerated vesting of former Imperial and OPAY stock options as a result of the Imperial acquisition. 54 The table to the right summarizes information about stock options outstanding at December 31, 2001: Exercise Price Range $ 5.87 -$18.75 19.83 - 37.74 40.09 - 49.81 50.17 - 59.24 60.31 - 66.81 68.44 - 71.58 Shares 1,272,196 1,893,037 3,520,206 2,606,273 2,076,506 1,731,226 Total 13,099,444 Outstanding Exercisable Average Life (a) Average Exercise Price Average Exercise Price $17.75 24.84 41.36 53.16 66.52 71.58 Shares 1,272,196 1,893,037 2,213,548 88,863 1,300,885 1,390,606 $17.75 24.84 41.42 54.58 66.59 71.58 46.81 8,159,135 43.13 2.9 3.7 7.2 9.3 7.2 6.2 6.6 (a) Average contractual life remaining in years. In 2001, the Corporation awarded 162 thousand shares of restricted stock. The fair value of these shares at grant date was $9 million. The following table sets forth the funded status of the defined benefit pension and postretirement plan and amounts recognized on the Corporation’s balance sheet: (in thousands) Defined Benefit Pension Plan 2000 2001 Postretirement Benefit Plan 2000 2001 Funded status at December 31 Unrecognized net (gain) loss Unrecognized net transition (asset) obligation Unrecognized prior service cost $(84,547) 139,142 $ 40,393 (24,927) $ 5,836 10,606 $ 9,758 3,282 19,576 (856) 47,083 51,388 — 21,597 — — Prepaid benefit cost $ 74,171 $ 36,207 $63,525 $64,428 The change in funding status of the defined benefit pension plan from 2000 to 2001 is a result of lower than expected investment performance in 2001. Future contributions to the plan and improved earnings performance of the plan is expected to return the plan to a fully funded status. The Corporation has met or exceeded all minimum funding standards for the defined benefit pension plan. Components of net periodic benefit cost (income): Defined Benefit Pension Plan (in thousands) Service cost Interest cost Expected return on plan assets Amortization of unrecognized transition asset Amortization of unrecognized prior 2001 2000 1999 $ 15,548 46,999 (67,145) $ 13,531 42,839 (60,920) $ 15,387 38,118 (51,241) 2,069 (4,834) (4,834) 15 E M P L O Y E E B E N E F I T P L A N S The Corporation has a defined benefit pension plan in effect for substantially all full-time employees. Staff expense includes income of $1.4 million in 2001, $7.9 million in 2000 and $0.8 million in 1999 for the plan. Benefits under the plan are based primarily on years of service, age and compensation 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 collective investment funds administered by Munder Capital Management, equity securities, U.S. government and agency securities and corporate bonds and notes. The Corporation’s postretirement benefits plan continues postre- tirement health care and life insurance benefits for retirees as of December 31, 1992, and life insurance only for retirees after that date. The Corporation has funded the plan with a company-owned life insurance contract. The tables below set forth reconciliations of the Corporation’s pension and postretirement plan obligations and plan assets: (in thousands) Defined Benefit Pension Plan 2000 2001 Postretirement Benefit Plan 2000 2001 Change in benefit obligation: Benefit obligation at January 1 $590,627 Service cost 15,548 Interest cost 46,998 Amendments — Actuarial (gain) loss 65,164 (25,042) Benefits paid $509,686 13,531 42,839 25,696 22,294 (23,419) $75,952 88 5,708 — 1,853 (6,112) $74,562 79 5,541 — 2,892 (7,122) $693,295 $590,627 $77,489 $75,952 Benefit obligation at December 31 Change in plan assets: Fair value of plan assets at January 1 Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at December 31 $608,748 $631,019 $83,325 $85,711 $631,019 (33,829) 36,600 (25,042) $651,782 2,656 — (23,419) $85,711 637 3,089 (6,112) $84,391 5,136 3,306 (7,122) service cost 2,021 2,026 (322) Amortization of unrecognized net (gain) loss (856) (584) 2,132 Net periodic benefit income $ (1,364) $ (7,942) $ (760) 15 E M P L O Y E E B E N E F I T P L A N S ( C O N T I N U E D ) Postretirement Benefit Plan (in thousands) Service cost Interest cost Expected return on plan assets Amortization of unrecognized transition obligation 2001 2000 1999 $ 88 5,708 (6,109) $ 79 5,541 (6,069) $ 256 5,308 (5,935) 4,306 4,305 4,628 Net periodic benefit cost $ 3,993 $ 3,856 $ 4,257 The Corporation also maintains defined contribution plans (including 401(k) plans) for various groups of its employees. All of the Corporation’s employees are eligible to participate in one or more of the plans. The Corporation makes matching contributions, most of which are based on a declining percentage of employee contributions (currently, maximum per employee is $1,000) as well as a performance-based matching contribution based on the Corporation’s financial performance. Staff expense includes expense of $16.6 million in 2001, $18.7 million in 2000 and $16.7 million in 1999 for the plans. 55 Actuarial assumptions were as follows: Defined Benefit Pension Plan Discount rate used in determining benefit obligation Long-term rate of return on assets Rate of compensation increase Postretirement Benefit Plan Discount rate used in determining benefit obligation Long-term rate of return on assets 2001 2000 1999 7.4% 10.0% 5.0% 7.9% 10.0% 5.0% 8.0% 9.3% 5.0% 2001 2000 1999 7.4% 6.7% 7.9% 6.7% 8.0% 6.7% The health care and prescription drug cost trend rates projected for 2001 were eight percent and 10 percent, respectively. Each health care cost trend rate is assumed to gradually decrease to Increasing each health care rate five percent by the year 2007. by one percentage point would increase the accumulated postre- tirement benefit obligation by $6 million at December 31, 2001, and the aggregate of the service and interest cost components by $418 thousand for the year ended December 31, 2001. Decreasing each health care rate by one percentage point would decrease the accumulated postretirement benefit obligation by $5 million at December 31, 2001, and the aggregate of the service and interest cost components by $367 thousand for the year ended December 31, 2001. Imperial In 2001 the plan was converted to an internally leveraged Prior to the merger, Imperial maintained an employee stock ownership plan (“ESOP”) for certain employees. Imperial recorded compensation expense equal to the fair value of the shares allocated under the plan. The contributions to the plan are discretionary. At December 31, 2000 the plan was externally leveraged. borrowed $6 million from a correspondent bank in 1999 and an additional $6 million in 2000 to fund the purchase of 133,723 and 165,227 shares of common stock, respectively, for contribution to the ESOP. plan and merged into the Corporation's 401(k) plan. Shares are released to the ESOP as principal and interest payments are made In 2001, a total of 44,508 shares of common stock, on the loans. with a cost basis of $1.7 million, were released to the ESOP. For 2000, a total of 70,183 shares, with a cost basis of $3.0 million, were released to the ESOP. At December 31, 2001 and 2000, unearned compensation related to the ESOP of $5.0 million and $6.8 million, respectively, was reflected as a reduction of shareholders’ equity. The fair value of unallocated ESOP shares totaled $7.6 million and $10.5 million at December 31, 2001 and 2000, respectively. Prior to the merger, Imperial also maintained a Deferred Compensation Plan (“DC Plan”) to provide specified benefits to certain employees and directors. The DC Plan allowed participants to defer all or a portion of their salary and bonus. from 0% to 50% of certain participants’ deferrals under the plan. The match percentage was 25% for 2001 and 50% for 2000 and 1999. The expense related to funding the deferred compensation match totaled $0.6 million, $5.1 million and $3.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. The plan was merged into the Corporation’s deferred compensation plan at June 30, 2001. No additional matching contributions are paid to participants under the terms of the merged plan. Imperial matched 16 I N C O M E T A X E S The current and deferred components of income taxes were as follows: (in thousands) (in thousands) Currently payable Federal Foreign State and local Deferred federal, state and local Total 2001 2000 1999 $305,153 17,570 33,723 356,446 44,613 $360,514 16,120 20,809 397,443 33,349 $337,127 22,797 31,019 390,943 28,404 $401,059 $430,792 $419,347 There were $6.9 million, $4.4 million and $3.8 million of income tax provision on securities transactions in 2001, 2000 and 1999, respectively. The principal components of deferred tax assets and liabilities at December 31 is presented at right: Deferred tax assets: Allowance for credit losses Allowance for depreciation Deferred loan origination fees and costs Employee benefits Other temporary differences, net Total deferred tax assets Deferred tax liabilities: Lease financing transactions OPAY Other comprehensive income Total deferred tax liabilities Net deferred tax liability 2001 2000 $ 214,307 9,642 33,413 37,712 85,217 $ 195,425 3,302 31,617 30,627 52,109 $ 380,291 $ 313,080 $ 423,456 11,919 122,324 $ 310,624 13,029 4,251 557,699 327,904 $ 177,408 $ 14,824 16 I N C O M E T A X E S ( C O N T I N U E D ) 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) 56 Tax based on federal statutory rate Effect of tax-exempt interest income State income taxes Company owned life insurance Goodwill Merger-related tax liability adjustment Other Provision for income taxes 2001 2000 1999 Amount Rate Amount Rate Amount Rate $388,723 35.0% (0.2) 2.2 (1.2) 0.6 (0.6) 0.3 (1,807) 24,275 (13,475) 7,189 (6,853) 3,007 $427,535 (1,917) 18,419 (11,553) 7,557 35.0% (0.2) 1.5 (0.9) 0.6 — — (0.7) (9,249) $412,567 (2,856) 15,561 (11,054) 7,584 35.0% (0.2) 1.3 (0.9) 0.6 — — (0.2) (2,455) $401,059 36.1% $430,792 35.3% $419,347 35.6% 17 M E R G E R - R E L A T E D A N D R E S T R U C T U R I N G C H A R G E S IMPERIAL BANCORP RESTRUCTURING The Corporation recorded a restructuring charge of $173 million in 2001 related to the acquisition of Imperial Bancorp. The components of this charge, which included $25 million recorded in the provision for credit losses and $148 million recorded in noninterest expenses, are shown in the table below. The integration with Imperial was completed in the fourth quarter of 2001. No additional Imperial- related restructuring charges are expected. Employee termination costs included the cost of severance, outplacement and other benefits associated with the involuntary termination of employees, primarily senior management and employees in corporate support and data processing functions. A total of 352 employees were terminated in 2001 as part of the restructuring plan. Other employee-related costs include cash payments related to change in control provisions in employment contracts and retention bonuses. The charge related to conforming policies represents costs associated with conforming the credit and accounting policies of Imperial with those of the Corporation. Of the $36 million charge associated with conforming policies, $25 million was included in the provision for credit losses on the statement of income in the first quarter of 2001. The remaining amount related primarily to a gain on the sale of Imperial’s merchant bankcard business, required under an existing RESTRUCTURING RESERVE ANALYSIS (in thousands) Other Comerica alliance agreement, and conforming commercial equipment lease residual values policies. The Corporation incurred facilities and operations charges associated with closing excess facilities and replacing signage. Other merger-related restructuring costs were primarily comprised of investment banking, accounting, consulting and legal fees. OFFICIAL PAYMENTS CORPORATION (OPAY) RESTRUCTURING The Corporation recorded a restructuring charge of $4 million in the fourth quarter of 2001 related to its subsidiary, Official Payments Corporation (OPAY), designed to significantly reduce operating expenses and its use of cash. The OPAY restructuring charge is shown net of the portion of the charge attributable to the minority shareholders in OPAY. As part of the restructuring program, OPAY will incorporate newly developed technology into its operations resulting in reductions in salaries and benefits, marketing, administrative and telecommunications costs. No additional restructuring charges are expected as part of this plan. The restructuring charge included employee termination costs of $1 million which covered the cost of severance, outplacement and other benefits associated with the involuntary termination of Employee Termination Employee- Conforming Related Facilities and Policies Operations Other Imperial Total OPAY Combined Total Total Balance at January 1, 2001 Provision expense charged to operating expense Cash outlays Noncash write-downs and other $ — $ — $ — $ — $ — $ — $ — $ — 35,200 (29,900) — 49,200 (36,000) (11,100) 35,900 — (35,900) 23,500 (2,500) (21,000) 28,900 (28,400) — 172,700 (96,800) (68,000) 4,000 (300) (1,500) 176,700 (97,100) (69,500) Balance at December 31, 2001 $ 5,300 $ 2,100 $ — $ — $ 500 $ 7,900 $ 2,200 $ 10,100 17 M E R G E R - R E L A T E D A N D R E S T R U C T U R I N G C H A R G E S ( C O N T I N U E D ) employees, primarily in corporate support and product development areas. A total of 44 employees are expected to be severed as part of the restructuring plan, 33 of which occurred during the fourth quarter. The remaining employee severances will occur during 2002. The remainder of the charge was for facilities and operations charges of $3 million associated with asset write-downs and lease terminations for excess facilities and equipment disposed of as part of the restructuring effort. 18 T R A N S A C T I O N S W I T H R E L A T E D P A R T I E S 57 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 collectibility or present other unfavorable features. The aggregate amount of loans attributable to persons who were related parties at December 31, 2001, totaled $401 million at the beginning and $406 million at the end of 2001. During 2001, new loans to related parties aggregated $448 million and repayments totaled $443 million. 19 R E G U L A T O R Y C A P I T A L & B A N K I N G S U B S I D I A R I E S 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 regulations, the aggregate amount of dividends which can be paid to the Corporation without obtaining prior approval from bank regulatory agencies approximated $641 million at January 1, 2002, 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 $580 million in 2001, $339 million in 2000 and $261 million in 1999. 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. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. At December 31, 2001 and 2000, 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 subsidiaries. (in thousands) December 31, 2001 Tier 1 common capital Tier 1 capital Total capital Tier 1 common capital to risk-weighted assets Tier 1 capital to risk-weighted assets (minimum-4.0%) Total capital to risk-weighted assets (minimum-8.0%) Tier 1 capital to average assets (minimum-3.0%) December 31, 2000 Tier 1 common capital Tier 1 capital Total capital Tier 1 common capital to risk-weighted assets Tier 1 capital to risk-weighted assets (minimum-4.0%) Total capital to risk-weighted assets (minimum-8.0%) Tier 1 capital to average assets (minimum-3.0%) Comerica Inc. (Consolidated) $4,282,890 4,678,475 6,860,542 Comerica Comerica Bank- Comerica Bank- California Texas Bank $2,946,887 3,166,887 4,880,733 $401,797 401,797 548,680 $1,174,524 1,174,524 1,570,924 7.30% 7.98 11.70 9.36 6.99% 7.52 11.58 8.90 9.02% 9.02 12.31 10.42 8.94% 8.94 11.96 8.66 $ 3,914,196 4,230,159 6,398,904 $ 2,923,331 2,923,331 4,600,732 $ 370,520 370,520 519,976 $ 980,768 996,768 1,378,907 6.80% 7.35 11.11 8.74 7.09% 7.09 11.16 8.91 9.43% 9.43 13.23 9.95 7.65% 7.78 10.76 8.17 20 D E R I V AT I V E A N D C R E D I T- R E L AT E D F I N A N C I A L I N S T R U M E N T S A N D F O R E I G N E X C H A N G E C O N T R A C T S In the normal course of business, the Corporation enters into various transactions involving derivative financial instruments, foreign exchange contracts and credit-related financial instruments to manage exposure to fluctuations in interest rate, foreign currency and other market risks and to meet the financing needs of customers. These financial instru- ments involve, to varying degrees, elements of credit and market risk. 58 Credit risk is the possible loss that may occur in the event of non- performance by the counterparty to a financial instrument. The Corporation attempts to minimize credit risk arising from financial instruments by evaluating the creditworthiness of each counterparty, adhering to the same credit approval process used for traditional lending activities. Counterparty risk limits and monitoring procedures have also been established to facilitate the management of credit risk. Collateral is obtained, if deemed necessary, based on the results of management's credit evaluation. Collateral varies, but may include cash, investment securities, accounts receivable, inventory, property, plant and equipment or real estate. Derivative financial instruments and foreign exchange contracts 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 price information. The Corporation reduces exposure to credit and liquidity risks from over-the-counter derivative and foreign 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 movements 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 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 derivative and foreign exchange contracts held or issued for risk management purposes is generally offset by changes in the value of rate sensitive assets or liabilities. DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE CONTRACTS The Corporation, as an end-user, employs a variety of 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 manage exposures to market risks, including interest rate caps and floors, total return swaps, foreign exchange forward contracts and foreign exchange swap agreements. As part of a fair value hedging strategy, the Corporation has entered into interest rate swap agreements for interest rate risk management purposes. The interest rate swap agreements utilized, effectively modify the Corporation’s exposure to interest rate risk by converting fixed-rate deposits and debt to a floating rate. These agreements involve the receipt of fixed rate of interest amounts in exchange for floating rate interest payments over the life of the agreement, without an exchange of the underlying principal amount. No ineffectiveness was required to be recorded on these hedging instruments in the statement of income for the year ended December 31, 2001. As part of a cash flow hedging strategy, the Corporation entered into predominantly 3-year interest rate swap agreements that effectively convert a portion of its existing and forecasted floating-rate loans to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest income over the next three years. Approximately 27% ($11 billion) of the Corporation’s outstanding loans were designated as the hedged items to interest rate swap agreements at December 31, 2001. For the year ended December 31, 2001, interest rate swap agreements designated as cash flow hedges increased interest and fees on loans by $175 million. Hedge ineffectiveness that resulted from cash flow hedges of variable rate loans was not material. If interest rates and interest curves remain at their current levels, the Corporation expects to reclassify $198 million of net gains on derivative instruments, that are designated as cash flow hedges, from accumulated other comprehensive income to earnings during the next twelve months due to receipt of variable interest associated with the existing and forecasted floating-rate loans. In addition, the Corporation uses forward foreign exchange contracts to protect the value of its foreign subsidiaries. Realized and unrealized gains and losses from these hedges are not included in the statement of income, but are shown in the accumulated foreign currency translation adjustment account included in other comprehensive income, with the related amounts due to or from counterparties included in other liabilities or other assets. During the year ended December 31, 2001 and 2000, the Corporation recognized immaterial amounts of net gains in accumulated foreign currency translation adjustment, related to the forward foreign exchange contracts. The Corporation also uses various other types of financial instruments to mitigate interest rate and foreign currency risks associated with specific assets or liabilities. Such instruments include interest rate caps and floors, foreign exchange forward contracts, and foreign exchange cross-currency swaps. The following table presents the composition of derivative financial instruments and foreign exchange contracts, excluding commitments, held or issued for risk management purposes at December 31, 2001 In 2001, the fair values of all derivatives and foreign and 2000. exchange contracts are reflected in the consolidated balance sheets, as required by SFAS No. 133. In 2000, only the fair values of customer-initiated and other derivatives and foreign exchange contracts are reflected in the consolidated balance sheets. 20 D E R I V AT I V E A N D C R E D I T- R E L AT E D F I N A N C I A L I N S T R U M E N T S A N D F O R E I G N E X C H A N G E C O N T R A C T S ( C O N T I N U E D ) (1) 9 (in millions) (in millions) December 31, 2001 Risk management Interest rate contracts: Notional/ Contract Unrealized Unrealized Losses Amount Gains Fair Value Swaps $14,497 $573 $ (2) $571 Foreign exchange contracts: Spot and forwards Swaps 535 285 Total foreign exchange contracts 820 10 2 12 (4) (17) 6 (15) (21) (9) Total risk management $15,317 $585 $(23) $562 December 31, 2000 Risk management Interest rate contracts: Swaps Options, caps and floors purchased Total interest rate contracts Foreign exchange contracts: Spot and forwards Swaps Total foreign exchange contracts $ 12,594 $ 206 $ (33) $ 173 6,058 18,652 493 115 608 10 216 18 1 19 (34) (6) (13) 182 12 (12) (19) — Total risk management $ 19,260 $ 235 $ (53) $ 182 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. 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 92 percent and 95 percent of the notional amount of interest rate derivative contracts at December 31, 2001 and 2000, respectively. 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, 2001, master netting arrangements had been established with all interest rate swap counterparties and certain foreign exchange counterparties. These arrangements effectively reduce credit risk by permitting settlement, on a net basis, of contracts entered into with the same counterparty. The Corporation has not experienced any material credit losses associated with derivative or foreign exchange contracts. On a limited scale, fee income is earned from entering into various transactions, principally foreign exchange contracts and interest rate contracts at the request of customers. Market risk inherent in customer contracts is often mitigated by taking offsetting positions. The Corporation generally does not speculate in derivative financial instruments for the purpose of profiting in the short-term from favorable movements in market rates. 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 consolidated balance sheets. Changes in fair value are recognized in the consolidated income statements. For the year ended December 31, 2001, unrealized gains and unrealized losses on customer-initiated and other foreign exchange contracts averaged $43 million and $39 million, respectively. For the year ended December 31, 2000, unrealized gains and unrealized losses averaged $26 million and $19 million, respectively. These contracts also generated noninterest income of $21 million in 2001 and $9 million in 2000. Average positive and negative fair values and income related to customer-initiated and other interest rate contracts were not material for 2001 and 2000. The following table presents the composition of derivative financial instruments and foreign exchange contracts held or issued in connection with customer-initiated and other activities at December 31, 2001 and 2000. 59 Notional/ Contract Unrealized Unrealized Losses Amount Gains Fair Value $ 365 $— $ (4) $(4) December 31, 2001 Customer-initiated and other Interest rate contracts: Caps and floors written Caps and floors purchased Swaps Total interest rate contracts Foreign exchange contracts: Spot, forwards, futures and options Swaps Total foreign December 31, 2000 Customer-initiated and other Interest rate contracts: Caps and floors written Caps and floors purchased Swaps Total interest rate contracts Foreign exchange contracts: Spot, forwards, futures and options Swaps Total foreign 352 981 1,698 2,323 366 179 493 870 1,827 50 4 14 18 35 2 37 — (13) (17) (29) (1) (30) 4 1 1 6 1 7 1 5 6 26 — 26 — (4) (5) (19) — (19) 1 1 1 7 — 7 exchange contracts 2,689 Total customer-initiated and other $4,387 $55 $(47) $ 8 $ 198 $ — $ (1) $ (1) exchange contracts 1,877 Total customer-initiated and other $ 2,747 $ 32 $ (24) $ 8 20 D E R I V AT I V E A N D C R E D I T- R E L AT E D F I N A N C I A L I N S T R U M E N T S A N D F O R E I G N E X C H A N G E C O N T R A C T S ( C O N T I N U E D ) CREDIT-RELATED FINANCIAL INSTRUMENTS The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. 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 Credit default swaps 2001 2000 $28,695 5,118 258 7 $28,625 4,692 305 44 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 generally 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 included bankcard, revolving check credit and equity access loan commitments of $1 billion at December 31, 2001 and 2000. Other unused commitments, primarily variable rate, totaled $28 billion at December 31, 2001 and 2000. STANDBY AND COMMERCIAL LETTERS OF CREDIT AND FINANCIAL GUARANTEES Standby and commercial letters of credit and financial guarantees 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 $1,562 million and $1,338 million at December 31, 2001 and 2000, respectively. The remaining standby letters of credit and financial guarantees, which mature within one year, totaled $3,556 million and $2,997 million at December 31, 2001 and 2000, respectively. Commercial letters of credit are issued to finance foreign or domestic trade transactions. CREDIT DEFAULT SWAPS Credit default swaps allow the Corporation to diversify its loan portfolio by assuming credit exposure from different borrowers or industries without actually extending credit in the form of a loan. Credit risk associated with credit default swaps was $7 million and $44 million at December 31, 2001 and 2000, respectively. Detailed discussions of each class of derivative financial instruments and foreign exchange contracts held or issued by the Corporation for both risk management and customer-initiated and other activities are as follows. 60 INTEREST RATE SWAPS Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for variable payments 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. The Corporation's swap agreements are structured such that variable payments are primarily based on prime, one-month LIBOR or 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 credit 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. FOREIGN EXCHANGE CONTRACTS 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 customers 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. Foreign 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. COMMITMENTS The Corporation also enters into commitments to purchase or sell earning assets for risk management purposes. These transactions, which are similar in nature to forward contracts, did not have a material impact on the consolidated financial statements for the years ended December 31, 2001 and 2000. Commitments to purchase and sell investment securities for the Corporation's trading account totaled $11 million and $10 million, respectively, at December 31, 2001 and $1 million and $2 million, respectively, at December 31, 2000. Outstanding commitments expose the Corporation to both credit and market risk. 21 C O N T I N G E N T L I A B I L I T I E S The Corporation and its subsidiaries are parties to litigation and claims arising in the normal course of their activities. The amount of ultimate liability, if any, with respect to such matters, or the likelihood or impact of future claims that may be brought against the Corporation, cannot be determined with reasonable certainty. 22 U S A G E R E S T R I C T I O N S Management, after consultation with legal counsel, believes that the litigation and claims, some of which are substantial, will not have a material adverse effect on the Corporation’s consolidated financial position. 61 Cash and due from banks may include 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. The average amount of these reserves was $212 million and $201 million for the years ended December 31, 2001 and 2000, respectively. 23 E S T I M A T E D F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S In Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. 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 financial instruments. These valuation methods require considerable 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 necessarily 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 believes the imprecision of an estimate could be significant. 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 securities, which represents estimated fair value. Loans held for sale: The market value of these loans represents estimated fair value or estimated net selling price. The market value is determined on the basis of existing forward commitments or the market values of similar loans. Investment securities: The market value of investment securities, which is based on quoted market values or the market values for comparable securities, represents estimated fair value. Domestic business loans: These consist of commercial, real estate construction, commercial mortgage and equipment lease financing loans. The estimated fair value of the Corporation’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 discounting 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 borrowers since the loans were originated. International loans: The estimated fair value of the Corporation’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 international loans with similar characteristics. Retail loans: This category consists of residential mortgage and consumer 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 transac- tions. For consumer loans, the estimated fair values are calculated by discounting the contractual cash flows of the loans using rates representative 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 and acceptances outstanding: The carrying amount approximates the estimated fair value. Loan servicing rights: The estimated fair value is a discounted cash flow analyses, using interest rates and prepayment speed assumptions currently quoted for comparable instruments. 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 foreign offices approximates their estimated fair value, while the estimated fair value of term deposits is calculated by discounting the scheduled cash flows using the year-end rates offered on these instruments. 23 E S T I M A T E D F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S ( C O N T I N U E D ) Short-term borrowings: The carrying amount of federal funds purchased, securities sold under agreements to repurchase and other borrowings approximates estimated fair value. The estimated fair values of the Corporation’s financial instruments at December 31, 2001 and 2000 are as follows: (in millions) 62 Medium- and long-term debt: The estimated fair value of the Corporation’s variable rate medium- and long-term debt is repre- sented by its carrying value. The estimated fair value of the fixed rate medium- and long-term debt is based on quoted 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 contracts: The estimated fair value of interest rate swaps represents 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 foreign exchange futures and forward contracts and commitments to purchase or sell financial instruments is based on quoted market prices. The estimated fair value of interest rate and foreign currency options (including interest rate caps and floors) is determined using option pricing models. Beginning January 1, 2001, all derivative financial instruments and foreign exchange contracts are carried at fair value on the balance sheet. 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 currently charged to enter into similar arrangements, considering 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 relationships 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. 2001 2000 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value $ 2,620 101 283 $ 2,620 101 284 $ 3,404 104 153 $ 3,404 104 158 4,291 25,176 3,015 3,258 6,267 779 1,484 1,217 41,196 (655) 4,291 24,897 2,952 3,262 6,285 785 1,468 1,208 40,857 — 40,541 40,857 29 9 29 9 12,596 24,974 37,570 1,986 29 5,503 12,596 25,070 37,666 1,986 29 5,490 3,891 26,009 2,571 2,915 5,361 808 1,477 1,029 40,170 (608) 39,562 27 7 10,188 23,666 33,854 2,093 27 8,259 3,891 25,673 2,501 2,926 5,323 818 1,500 1,086 39,827 — 39,827 27 7 10,188 23,760 33,948 2,093 27 8,209 585 (23) 55 (47) 585 (23) 55 (47) 7 — 35 (27) 235 (53) 32 (24) — (28) — (89) A S S E T S 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 credit losses Net loans Customers’ liability on acceptances outstanding Loan servicing rights L I A B I L I T I E S Demand deposits (noninterest-bearing) Interest-bearing deposits Total deposits Short-term borrowings Acceptances outstanding Medium- and long-term debt D E R I VAT I V E F I N A N C I A L I N S T RU M E N T S A N D F O R E I G N E XC H A N G E CON T R AC T S Risk management: Unrealized gains Unrealized losses Customer-initiated and other: Unrealized gains Unrealized losses C R E D I T- R E L AT E D F I N A N C I A L I N S T RU M E N T S 24 B U S I N E S S S E G M E N T I N F O R M A T I O N The Corporation has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. These lines of business are differentiated based on the products and services provided. Lines of business results are produced by the Corporation’s internal management accounting system. This system measures financial results based on the internal organizational structure of the Corporation. Information presented is not necessarily comparable with similar information for any other financial institution. The management accounting system assigns balance sheet and income statement items to each line of business using certain methodologies which are constantly being refined. For comparability purposes, amounts in all periods are based on methodologies in effect at December 31, 2001. These methodologies, which are briefly summarized in the following paragraph, may be modified as management accounting systems are enhanced and changes occur in the organizational structure or product lines. In addition to the three major lines of business, the Finance Division is also reported as a segment. 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 remaining assets and liabilities. The credit loss provision is assigned based on the amount necessary to maintain an allowance for credit 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 allocated 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 overhead is assigned based on the ratio of a line of business’ noninterest expenses to total noninterest expenses incurred by all business lines. Equity, (common equity plus Tier 1 qualifying trust preferred securities) is allocated based on credit, operational and business risks. The following discussion provides information about the activities of each line of business. A discussion of the financial results and the factors impacting 2001 performance can be found in the section entitled “Strategic Lines of Business” in the financial review on page 31. The Business Bank is comprised of middle market lending, asset-based lending, large corporate banking, international financial services and specialty deposit gathering. 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 market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services. 63 The Individual Bank includes consumer lending, consumer deposit gathering, mortgage loan origination, small business banking (annual sales under $10 million) and private banking. This line of business offers a variety of consumer products, including deposit accounts, installment loans, credit cards, student loans, 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 and personal trust services are also provided to meet the personal financial needs of affluent individuals (as defined by individual net income or wealth). The Investment Bank is responsible for institutional trust products, retirement services and provides investment management and advisory services (including Munder), investment banking and discount securities brokerage services. This line of business also offers the sale of mutual fund and annuity products, as well as life, disability and long-term care insurance products. The Finance segment includes the Corporation’s securities portfolio and asset and liability management activities. This segment is responsible for managing the Corporation’s funding, liquidity and capital needs, performing interest sensitivity gap and earnings simulation analysis and executing various strategies to manage the Corporation’s exposure to interest rate risk. The Other category includes divested business lines, the income and expense impact of cash and credit loss reserves not assigned to specific business lines and miscellaneous other items of a corpo- rate nature. 24 B U S I N E S S S E G M E N T I N F O R M A T I O N ( C O N T I N U E D ) Lines of business/segment financial results were as follows: (dollar amounts in millions) 64 E A R N I N G S S U M M A R Y Net interest income (FTE) Provision for credit losses Noninterest income Noninterest expenses Provision for income taxes (FTE) Net income (loss) S E L E C T E D A V E R A G E B A L A N C E S Assets Loans Deposits Allocated equity S T A T I S T I C A L D A T A Return on average assets Return on average allocated equity Efficiency ratio (dollar amounts in millions) E A R N I N G S S U M M A R Y Net interest income (FTE) Provision for credit losses Noninterest income Noninterest expenses Provision for income taxes (FTE) Net income (loss) S E L E C T E D A V E R A G E B A L A N C E S Assets Loans Deposits Allocated equity S T A T I S T I C A L D A T A Return on average assets Return on average allocated equity Efficiency ratio Business Bank Individual Bank Investment Bank* 2001 2000 1999 2001 2000 1999 2001 2000 1999 $ 1,333 245 293 572 294 515 $ 1,275 289 317 602 257 444 $ 1,120 180 330 559 265 446 $ 738 22 324 616 141 283 $ 751 3 352 612 167 321 $ 707 $ (6) — 96 197 (37) (70) (5) 300 604 141 267 $ (10) — 267 233 12 12 $ (4) — 202 176 9 13 $35,648 34,080 11,171 2,798 $33,458 31,987 9,629 2,428 $30,424 28,800 8,631 1,958 $ 7,881 7,269 18,405 894 $ 7,202 6,658 17,959 809 $ 7,163 $ 6,690 17,418 745 398 22 72 267 $408 53 37 282 $247 — 24 197 1.44% 18.40 35.06 1.33% 18.29 37.86 1.47% 22.80 38.64 1.46% 31.63 57.94 1.71% 39.72 55.46 1.46% (17.28)% 35.78 59.97 (26.27) 220.28 2.70% 4.26 90.95 5.43% 6.80 89.37 Finance Other Total 2001 2000 1999 2001 2000 1999 2001 2000 1999 $ 42 — 66 8 42 58 $ (13) — 18 4 1 — $ 2 — 11 4 2 7 $ (1) (31) 25 166 (35) (76) $ 5 (37) 3 33 (2) 14 $ (3) $ 2,106 236 (29) 804 24 1,559 16 405 8 710 26 $ 2,008 $ 1,822 146 867 1,359 425 759 255 957 1,484 435 791 $4,230 — 5,564 752 $ 4,312 — 2,596 399 $3,615 — 1,296 335 $1,531 — 100 (106) $1,497 — 119 45 $1,213 $49,688 — 41,371 35,312 4,605 109 174 $46,877 $42,662 35,490 27,478 3,409 38,698 30,340 3,963 0.33% 7.70 9.10 (0.01)% (0.21) (35.72) 0.05% 1.95 49.18 n/m% n/m n/m n/m% n/m n/m n/m% n/m n/m 1.43% 15.16 53.95 1.69% 1.78% 19.52 50.35 21.78 50.70 * 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 $(63) million in 2001, $26 million in 2000 and $22 million in 1999. Return on average allocated equity would have been (23.39)% in 2001, 9.31% in 2000 and 11.38% in 1999. n/m - not meaningful 25 P A R E N T C O M P A N Y F I N A N C I A L S T A T E M E N T S BALANCE SHEETS – COMERICA INCORPORATED (in thousands, except share data) December 31 A S S E T S Cash and due from subsidiary bank Time deposits with banks Short-term investments with subsidiary bank Investment securities available for sale Investment in subsidiaries, principally banks Premises and equipment Other assets Total assets L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y Commercial paper Long-term debt Subordinated debt issued to and advances from subsidiaries Other liabilities Total liabilities Nonredeemable preferred stock – $50 stated value Authorized – 5,000,000 shares Issued – 5,000,000 shares at 12/31/00 Common stock – $5 par value Authorized – 325,000,000 shares Issued – 178,749,198 shares at 12/31/01 and 177,703,678 shares at 12/31/00 Capital surplus Unearned employee stock ownership plan shares – 131,954 shares at 12/31/01 and 176,462 shares at 12/31/00 Accumulated other comprehensive income Retained earnings Deferred compensation Less cost of common stock in treasury – 1,674,659 shares at 12/31/01 and 289,397 shares at 12/31/00 Total shareholders’ equity Total liabilities and shareholders’ equity STATEMENTS OF INCOME – COMERICA INCORPORATED (in thousands) 65 2001 2000 $ 101,117 100 12,000 — 5,371,101 3,052 187,974 $5,675,344 $ 139,909 156,288 359,670 212,013 867,880 $ 9,918 100 112,000 47,262 4,634,579 3,391 66,009 $4,873,259 $ 79,985 157,414 4,453 131,248 373,100 — 250,000 893,746 345,156 (5,037) 225,617 3,447,974 (9,205) (90,787) 4,807,464 $5,675,344 888,519 301,414 (6,750) 12,097 3,085,784 (14,494) (16,411) 4,500,159 $4,873,259 Year ended December 31 I N C O M E Income from subsidiaries Dividends from subsidiaries Other interest income Intercompany management fees Other interest income Other noninterest income Total income E X P E N S E S Interest on commercial paper Interest on long-term debt Interest on subordinated debt issued to subsidiaries Salaries and employee benefits Occupancy expense Equipment expense Other noninterest expenses Total expenses Income before income taxes and equity in undistributed net income of subsidiaries Provision for income taxes Equity in undistributed net income of subsidiaries, principally banks N E T I N C O M E 2001 2000 1999 $579,719 2,121 131,901 — 23,520 737,261 3,940 7,590 12,671 69,442 4,132 1,175 22,003 120,953 616,308 12,219 604,089 105,489 $709,578 $339,060 6,464 97,865 123 1,572 445,084 5,432 10,140 — 63,258 4,238 1,721 35,131 119,920 325,164 (4,528) 329,692 461,043 $790,735 $260,603 808 93,414 347 24,354 379,526 4,976 11,535 — 64,580 5,840 1,572 29,730 118,233 261,293 349 260,944 498,471 $759,415 25 P A R E N T C O M P A N Y F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) STATEMENTS OF CASH FLOWS – COMERICA INCORPORATED (in thousands) Year ended December 31 O P E R A T I N G A C T I V I T I E S 2001 2000 1999 66 Net income Adjustments to reconcile net income to net cash provided $ 709,578 $ 790,735 $ 759,415 by operating activities Undistributed earnings of subsidiaries, principally banks Gain on the sale of business Depreciation Other, net Total adjustments Net cash provided by operating activities I N V E S T I N G A C T I V I T I E S 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 short-term investment with subsidiary bank Net increase in private equity and venture capital investments Net cash provided by sale of business Capital transactions with subsidiaries Net cash used in investing activities F I N A N C I N G A C T I V I T I E S Net increase in subordinated debt issued to and advances from subsidiaries Repayments and purchases of long-term debt Net increase in commercial paper Proceeds from issuance of common stocks Purchase of common stock for treasury and retirement Redemption of preferred stock 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 paid (recovered) (105,489) (21,420) 1,264 18,348 (107,297) 602,281 — — 35 (909) 100,000 (23,345) 33,463 (421,190) (311,946) 360,260 — 60,000 65,286 (120,630) (250,000) (314,052) (199,136) 91,199 9,918 $ 101,117 $ 19,428 $ 16,815 (461,043) — 1,458 4,513 (455,072) 335,663 (24,432) 2,176 30 (614) (42,200) — — (10,750) (75,790) 571 (1,129) 5,109 20,618 (14,108) — (261,096) (250,035) 9,838 80 9,918 16,251 (5,990) $ $ $ (498,471) (21,339) 1,404 12,729 (505,677) 253,738 (7,687) 2,580 115 (316) (47,300) — 14,432 (5,610) (43,786) 3,882 (76,096) 74,877 23,268 (2,885) — (235,646) (212,600) (2,648) 2,728 80 $ $ 19,184 $ (9,807) 26 S U M M A R Y O F Q U A R T E R L Y F I N A N C I A L S T A T E M E N T S 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 credit losses (1) Securities gains (losses) Noninterest income (excluding securities gains (losses)) Merger-related and restructuring charges Noninterest expenses, excluding merger-related and restructuring charges Net income — excluding merger-related and restructuring charges Basic net income per common share Diluted net income per common share — excluding merger-related and restructuring charges Interest income Interest expense Net interest income Provision for credit losses Securities gains (losses) Noninterest income (excluding securities gains (losses)) Noninterest expenses Net income Basic net income per common share Diluted net income per common share 67 Fourth Quarter $755,012 218,886 536,126 69,000 (2,766) 218,058 25,043 346,387 198,979 217,222 $ 1.12 1.11 1.21 Fourth Quarter $ 985,231 466,032 519,199 88,006 2,285 213,725 376,082 172,596 $ 0.95 0.94 2001 Third Quarter $823,421 296,882 526,539 58,000 (468) 215,610 18,246 2000 346,568 208,535 219,118 $ 1.16 1.14 1.20 Third Quarter $ 948,974 445,292 503,682 43,300 1,316 242,685 375,404 215,058 $ 1.19 1.17 Second Quarter $874,654 347,273 527,381 37,000 (747) 203,663 14,122 358,690 208,472 216,663 $ 1.15 1.13 1.18 Second Quarter $ 910,729 413,036 497,693 56,600 7,257 234,593 366,242 206,050 $ 1.14 1.12 First Quarter $940,460 428,168 512,292 72,000 23,744 146,238 94,304 355,673 93,592 188,703 $ 0.50 0.50 1.02 First Quarter $ 871,419 387,824 483,595 66,894 5,437 249,383 366,795 197,031 $ 1.09 1.08 (1) First quarter 2001 includes a $25 million merger-related charge to conform the credit policies of Imperial with Comerica. 27 P E N D I N G A C C O U N T I N G P R O N O U N C E M E N T S In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”. The Corporation adopted SFAS 141 in 2001 and will adopt SFAS 142 in 2002. Under the new rules, the pooling- of-interest method of accounting was eliminated for all business combinations initiated after June 30, 2001. In addition, beginning in 2002, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets that do not have an indefinite life will continue to be amortized over their useful lives. The Corporation’s application of the nonamortization provisions of the Statement is expected to result in an annual increase in net income of $28 million, or approximately $0.16 per share. The Corporation performed the first required impairment test of goodwill and indefinite lived intangible assets, as of January 1, 2002. Based on this test, the Corporation will not be required to record a transition adjustment upon adoption. In addition, in July 2001 the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations” The Statement covers legal obligations that are identifiable by the entity upon acquisition and construction, and during the operating life of a long-lived asset. Identified retirement obligations would be recorded as a liability with a corresponding amount capitalized as part of the asset’s carrying amount. The capitalized retirement cost asset would be amortized to expense over the asset’s useful life. The Statement is effective January 1, 2003 for calendar year companies. The Corporation does not believe that the impact of adoption of SFAS No. 143 will have a material impact on the Corporation’s financial position or results of operations. R E P O R T O F M A N A G E M E N T R E P O R T O F I N D E P E N D E N T A U D I T O R S Management is responsible for the accompanying financial statements and all other financial information in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts which of necessity are based on management’s best estimates and judgments and give due consideration to materiality. The other financial information herein is consistent with that in the financial statements. 68 In meeting its responsibility for the reliability of the financial state- ments, 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 assurance 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 auditors Ernst & Young LLP. Their role is to render an independent profes- sional opinion on management’s financial statements based upon performance of procedures they deem appropriate under auditing standards generally accepted in the United States. The Corporation’s Board of Directors oversees management’s internal control and financial reporting responsibilities through its Audit & Legal Committee as well as various other committees. The Audit & Legal 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 Ralph W. Babb Jr. President and Chief Executive Officer Chief Financial Officer Marvin J. Elenbaas Senior Vice President and Controller Board of Directors Comerica Incorporated We have audited the accompanying consolidated balance sheets of Comerica Incorporated and subsidiaries as of December 31, 2001 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comerica Incorporated and subsidiaries at December 31, 2001 and the consolidated results of their operations and their cash flows for the year then ended in conformity accounting principles generally accepted in the United States. We previously audited and reported on the consolidated balance sheet of Comerica Incorporated and subsidiaries as of December 31, 2000 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2000 and 1999, prior to their restatement for the 2001 pooling of interests as described in Note 2 to the consolidated financial state- ments. The contribution of Comerica Incorporated to total assets, revenues, and net income represented 85%, 86%, and 95% of the respective 2000 restated totals and the contribution to revenue and net income represented 86% and 89% of the respective 1999 restated totals. Financial statements of the other pooled company included in the 2000 and 1999 restated consolidated statements were audited and reported on separately by other auditors. We also have audited, as to combination only, the accompanying consolidated balance sheet as of December 31, 2000 and the related consolidated statements of income, shareholders’ equity, and cash flows for the years ended December 31, 2000 and 1999, after restatement for the 2001 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 2 to the consolidated financial statements. Detroit, Michigan January 16, 2002 H I S T O R I C A L R E V I E W — A V E R A G E B A L A N C E S H E E T S C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S CONSOLIDATED FINANCIAL INFORMATION (in millions) A S S E T S Cash and due from banks Short-term investments Investment securities Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans Less allowance for credit losses Net loans Accrued income and other assets Total assets L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y Noninterest-bearing deposits Interest-bearing deposits Total deposits Short-term borrowings Accrued expenses and other liabilities Medium- and long-term debt Total liabilities Shareholders’ equity 2001 2000 1999 1998 1997 $ 1,835 $ 1,842 $ 1,896 $ 1,963 $ 1,956 69 442 3,909 26,401 2,800 3,090 5,695 795 1,479 1,111 41,371 (654) 40,717 2,785 978 3,688 25,313 2,552 2,554 5,142 833 1,434 870 38,698 (595) 38,103 2,266 650 3,107 23,069 2,627 1,729 4,583 930 1,853 699 35,490 (531) 34,959 2,050 642 4,041 19,850 2,342 1,200 4,011 1,331 2,606 576 31,916 (498) 31,418 1,905 410 5,256 16,143 1,952 997 3,883 1,676 4,510 448 29,609 (447) 29,162 1,737 $49,688 $46,877 $42,662 $39,969 $38,521 $10,253 25,059 35,312 2,584 823 6,198 44,917 4,771 $ 9,068 21,272 30,340 3,323 703 8,298 42,664 4,213 $ 8,661 18,817 27,478 3,562 522 7,441 39,003 3,659 $ 8,445 18,159 26,604 3,517 494 6,109 36,724 3,245 $ 7,306 17,776 25,082 3,895 537 6,034 35,548 2,973 Total liabilities and shareholders’ equity $49,688 $46,877 $42,662 $39,969 $38,521 H I S T O R I C A L R E V I E W — S T A T E M E N T S O F I N C O M E C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S CONSOLIDATED FINANCIAL INFORMATION (in millions, except per share data) 2001 2000 1999 1998 1997 70 I N T E R E S T I N C O M E Interest and fees on loans Interest on investment securities Interest on short-term investments Total interest income I N T E R E S T E X P E N S E Interest on deposits Interest on short-term borrowings Interest on medium- and long-term debt Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses N O N I N T E R E S T I N C O M E Service charges on deposit accounts Fiduciary income Commercial lending fees Letter of credit fees Brokerage fees Investment advisory revenue, net Equity in earnings of unconsolidated subsidiaries Warrant income Securities gains Net gain on sales of businesses Other noninterest income Total noninterest income N O N I N T E R E S T E X P E N S E S Salaries and employee benefits Net occupancy expense Equipment expense Outside processing fee expense Customer services Merger-related and restructuring charges Other noninterest expenses Total noninterest expenses Income before income taxes Provision for income taxes N E T I N C O M E 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 $3,121 246 26 3,393 888 105 298 1,291 2,102 236 1,866 211 180 67 58 44 12 (43) 5 20 31 219 804 809 115 70 61 41 152 311 1,559 1,111 401 $ 710 $ 698 $ 3.93 $ 3.88 $ 313 $ 1.76 $3,379 259 78 3,716 951 215 546 1,712 2,004 255 1,749 189 181 61 52 44 119 14 30 16 50 201 957 851 110 76 59 37 — 351 1,484 1,222 431 $ 791 $ 774 $ 4.38 $ 4.31 $ 250 $ 1.60 $2,859 199 39 3,097 693 183 404 1,280 1,817 146 1,671 177 183 55 46 36 61 15 33 9 76 176 867 778 104 73 60 40 — 304 1,359 1,179 420 $ 759 $ 742 $ 4.20 $ 4.13 $ 225 $ 1.44 $2,706 263 35 3,004 739 191 354 1,284 1,720 146 1,574 164 175 58 31 46 18 (6) 22 7 11 141 667 680 100 70 53 50 (7) 291 1,237 1,004 353 $ 651 $ 634 $ 3.58 $ 3.51 $ 199 $ 1.28 $2,579 355 25 2,959 746 213 355 1,314 1,645 169 1,476 147 155 34 34 20 — 30 4 6 25 154 609 624 98 71 48 38 — 298 1,177 908 322 $ 586 $ 568 $ 3.17 $ 3.11 $ 181 $ 1.15 H I S T O R I C A L R E V I E W — S T A T I S T I C A L D A T A C O M E R I C A I N C O R P O R A T E D A N D S U B S I D I A R I E S CONSOLIDATED FINANCIAL INFORMATION A V E R A G E R A T E S ( F U L LY T A X A B L E E Q U I V A L E N T B A S I S ) Short-term investments 6.02% 7.97% 6.06% 5.61% 6.05% 71 2001 2000 1999 1998 1997 Investment securities Commercial loans International loans Real estate construction loans Commercial mortgage loans Residential mortgage loans Consumer loans Lease financing Total loans Interest income as a percent of earning assets Domestic deposits Deposits in foreign offices Total interest-bearing deposits Short-term borrowings Medium- and long-term debt Interest expense as a percent of interest-bearing sources Interest rate spread Impact of net noninterest-bearing sources of funds Net interest margin as a percent of earning assets R E T U R N O N A V E R A G E C O M M O N S H A R E H O L D E R S ’ E Q U I T Y R E T U R N O N A V E R A G E A S S E T S E F F I C I E N C Y R A T I O P E R S H A R E D A T A Book value at year-end Market value at year-end Market value – high and low for year O T H E R D A T A Number of banking offices Number of employees (full-time equivalent) 6.37 6.85 7.38 7.95 7.65 7.59 8.39 6.25 7.55 7.44 3.48 5.97 3.54 4.08 4.80 3.82 3.62 0.99 4.61 15.16 1.43 53.95 $ 27.17 57.30 65-44 342 11,406 6.99 8.87 9.21 10.09 8.80 7.64 9.09 6.24 8.74 8.57 4.34 7.75 4.47 6.48 6.57 5.20 3.37 1.26 4.63 19.52 1.69 50.35 $ 23.98 59.38 61-33 354 11,444 6.42 7.71 7.86 9.21 8.27 7.47 9.95 6.91 8.06 7.90 3.55 7.05 3.68 5.14 5.44 4.29 3.61 1.03 4.64 21.78 1.78 50.70 $ 20.87 46.69 70-44 348 11,484 6.61 8.12 7.97 9.94 8.76 7.70 10.19 7.65 8.48 8.23 3.97 6.71 4.07 5.43 5.80 4.62 3.61 1.11 4.72 21.16 1.63 51.84 6.83 8.41 7.07 10.00 9.05 7.90 9.81 7.49 8.72 8.40 4.13 5.68 4.20 5.47 5.88 4.74 3.66 1.02 4.68 20.88 1.52 52.15 $ 17.99 68.19 73-47 348 11,363 $ 16.10 60.17 62-34 362 10,972 S H A R E H O L D E R I N F O R M A T I O N STOCK STOCK PRICES, DIVIDENDS AND YIELDS Comerica’s stock trades on the New York Stock Exchange (NYSE) under the symbol CMA. SHAREHOLDER ASSISTANCE Inquiries related to shareholder records, change of name, address or ownership of stock, and lost or stolen stock certificates should be directed to the transfer agent and registrar: 72 Wells Fargo Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164-0854 (800) 468-9716 stocktransfer@wellsfargo.com ELIMINATION OF DUPLICATE MATERIALS If you receive duplicate mailings at one address, you may have multiple shareholder accounts. You can consolidate your multiple accounts into a single, more convenient account by contacting the transfer agent shown above. In addition, if more than one member of your household is receiving shareholder materials, you can eliminate the duplicate mailings by contacting the transfer agent. DIVIDEND REINVESTMENT PLAN Comerica offers a dividend reinvestment plan which permits participating shareholders of record to reinvest dividends in Comerica common stock without paying brokerage commissions or service charges. Participating shareholders also may invest up to $3,000 in additional funds each quarter for the purchase of additional shares. A brochure describing the plan in detail and an authorization form can be requested from the transfer agent shown above. DIVIDEND DIRECT DEPOSIT Common shareholders of Comerica may have their dividends deposited into their savings or checking account at any bank that is a member of the National Automated Clearing House (ACH) Information describing this service and an authorization system. form can be requested from the transfer agent shown above. DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends customarily are paid on Comerica’s common stock on or about January 1, April 1, July 1 and October 1. ANNUAL MEETING The Annual Meeting of Shareholders of Comerica Incorporated will be held at 9:30 a.m. on Tuesday, May 21, 2002, at the Detroit Public Library, 5201 Woodward Avenue, Detroit, Michigan 48202. FORM 10-K A copy of the Corporation’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge upon written request to the Secretary of the Corporation at the address listed at the bottom of this page. Quarter 2001 Fourth Third Second First 2000 Fourth Third Second First High $58.40 63.88 62.75 65.15 $61.13 59.44 54.38 46.25 Dividend Dividend* Yield Low Per Share $44.02 50.27 50.73 53.00 $47.19 45.00 39.88 32.94 $0.44 0.44 0.44 0.44 $0.40 0.40 0.40 0.40 3.4% 3.1 3.1 3.0 3.0% 3.1 3.4 4.1 *Dividend yield is calculated by annualizing the quarterly dividend per share and dividing by an average of the high and low price in the quarter. At January 31, 2002, there were 17,068 holders of record of the Corporation’s common stock. INVESTOR RELATIONS ON THE INTERNET Go to www.comerica.com to find the latest investor relations information about Comerica, including stock quotes, news releases and customized financial data. COMMUNITY REINVESTMENT ACT (CRA) PERFORMANCE Comerica is committed to meeting the credit needs of the communities it serves. Following are the most recent CRA ratings for Comerica subsidiaries: Comerica Bank (Michigan) Comerica Bank – Texas Comerica Bank – California Outstanding Satisfactory Satisfactory EQUAL EMPLOYMENT OPPORTUNITY Comerica is committed to its affirmative action program and practices which ensure uniform treatment of employees without regard to race, creed, color, age, national origin, religion, handicap, marital status, veteran status, weight, height or sex. PRODUCT INFORMATION CENTER If you have any questions about Comerica’s products and services, please contact our Product Information Center at (800) 292-1300. CAREER OPPORTUNITIES Go to www.comericajobs.com to find the latest information about career opportunities at Comerica. Comerica Incorporated, Comerica Tower at Detroit Center, 500 Woodward Avenue, MC 3391, Detroit, Michigan 48226 (248) 371-5000 (metro Detroit) • (800) 521-1190 (outside Detroit area) • www.comerica.com MEDIA CONTACT: Sharon R. McMurray, (313) 222-4881 INVESTOR CONTACT: Judith S. Love, (313) 222-2840 C O R P O R A T E P R O F I L E Comerica Incorporated (NYSE: CMA) is a financial services company focused on business banking and asset gathering.Through its more than 500 customer-service locations, including branch, lending and investment offices, Comerica helps businesses and people be successful. Comerica is ideally positioned to deliver high quality financial services in Michigan, California and Texas, as well as in Florida, 19 other states, Canada and Mexico. Comerica has an investment services affiliate, Munder Capital Management, ranked among the top 5 percent of money managers worldwide. F A S T F A C T S O N C O M E R I C A ❚ More than 11,000 employees focused on relationship management. ❚ Among the 20 largest banking companies in the U.S., with $51 billion in total assets at December 31, 2001. ❚ 3rd largest SBA 7(a) lender in the nation. ❚ Among the top 10 U.S. bank holding companies in commercial loans and top 20 in small business loans. ❚ #1 among the top 50 U.S. bank holding companies in commercial loans as a percent of total assets. ❚ Among the “Best Big Companies in America,” according to Forbes magazine. Comerica is organized into three focused operating units: B U S I N E S S B A N K Corporate Banking (National Business Finance, which includes Commercial Real Estate, National Dealer Services, Comerica Business Credit and Comerica Leasing Services; U.S. Banking; Middle Market Banking;W.Y. Campbell), International Finance,Treasury Management Services. I N D I V I D U A L B A N K Private Banking, Small Business Banking and Personal Financial Services. I N V E S T M E N T B A N K Investment Services (Comerica Securities; Munder Capital Management; Wilson, Kemp & Associates), Comerica Insurance Services, Institutional Trust, Retirement Services. O U R V I S I O N Comerica is in business to help people be successful.We are committed to delivering the highest quality financial services by: ❚ Providing outstanding value and building enduring customer relationships. ❚ Creating a positive environment for our colleagues, built on trust, teamwork and respect. ❚ Demonstrating leadership in our communities. ❚ Ensuring a consistent, superior return for our owners. C O N T E N T S 1 Financial Highlights 2 At a Glance 4 Letter to Shareholders 8 Always evolving... Upholding proud traditions 16 Directors and Officers 22 Financial Review and Reports Congratulations to G E R A L D B U R L E Y, Treasury Management Support, for being named Comerica’s 2001 National Quality Excellence Award overall winner. In addition to Burley, nine finalists were recognized in 2001 for their dedication to quality: N A N C Y B A R O N Corporate Learning J A S O N F E D E R O F F Deposit Services T U L A K Y P R I A N I D E S Global Trust S U S A N L A R U S H Middle Market Banking J A N E M U R R A Y East Jackson Office K E N S T A L L M A N Lockwood Office B R U C E T A C K E T T Treasury Management-Product Management C H A R Y L T A Y L O R Josey-Trinity Mills Office T E R A N C E W I L K Technical Services A L W A Y S E V O L V I N G . . . U P H O L D I N G P R O U D T R A D I T I O N S Comerica Incorporated Comerica Tower at Detroit Center 500 Woodward Avenue, MC 3391 Detroit, Michigan 48226 www.comerica.com 2 0 0 1 A N N U A L R E P O R T