Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-10706

 

 

Comerica Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-1998421
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

Comerica Bank Tower

1717 Main Street, MC 6404

Dallas, Texas 75201

(Address of principal executive offices)

(Zip Code)

(214) 462-6831

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨     No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

$5 par value common stock:

Outstanding as of July 25, 2011: 176,777,667 shares

 

 

 


Table of Contents

COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements   
Consolidated Balance Sheets at June 30, 2011 (unaudited), December 31, 2010 and June 30, 2010 (unaudited)      3   
Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2011 and 2010 (unaudited)      4   
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (unaudited)      5   
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)      6   
Notes to Consolidated Financial Statements (unaudited)      7   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      45   
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk      74   
ITEM 4. Controls and Procedures      74   
PART II. OTHER INFORMATION   
ITEM 1. Legal Proceedings      74   
ITEM 1A. Risk Factors      74   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds      74   
ITEM 6. Exhibits      75   
Signature      77   


Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries

 

(in millions, except share data)

   June 30,
2011
    December 31,
2010
    June 30,
2010
 
     (unaudited)           (unaudited)  

ASSETS

      

Cash and due from banks

   $ 987      $ 668      $ 816   

Interest-bearing deposits with banks

     2,479        1,415        3,409   

Other short-term investments

     124        141        134   

Investment securities available-for-sale

     7,537        7,560        7,188   

Commercial loans

     22,052        22,145        21,151   

Real estate construction loans

     1,728        2,253        2,774   

Commercial mortgage loans

     9,579        9,767        10,318   

Residential mortgage loans

     1,491        1,619        1,606   

Consumer loans

     2,232        2,311        2,443   

Lease financing

     949        1,009        1,084   

International loans

     1,162        1,132        1,226   
  

 

 

   

 

 

   

 

 

 

Total loans

     39,193        40,236        40,602   

Less allowance for loan losses

     (806     (901     (967
  

 

 

   

 

 

   

 

 

 

Net loans

     38,387        39,335        39,635   

Premises and equipment

     641        630        634   

Customers’ liability on acceptances outstanding

     10        9        24   

Accrued income and other assets

     3,976        3,909        4,045   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 54,141      $ 53,667      $ 55,885   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Noninterest-bearing deposits

   $ 16,344      $ 15,538      $ 15,769   

Money market and NOW deposits

     18,033        17,622        16,062   

Savings deposits

     1,462        1,397        1,407   

Customer certificates of deposit

     5,551        5,482        5,893   

Other time deposits

     —          —          165   

Foreign office time deposits

     368        432        484   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     25,414        24,933        24,011   
  

 

 

   

 

 

   

 

 

 

Total deposits

     41,758        40,471        39,780   

Short-term borrowings

     67        130        200   

Acceptances outstanding

     10        9        24   

Accrued expenses and other liabilities

     1,062        1,126        1,048   

Medium- and long-term debt

     5,206        6,138        9,041   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     48,103        47,874        50,093   

Common stock - $5 par value:

      

Authorized - 325,000,000 shares

      

Issued - 203,878,110 shares

     1,019        1,019        1,019   

Capital surplus

     1,472        1,481        1,467   

Accumulated other comprehensive loss

     (308     (389     (240

Retained earnings

     5,395        5,247        5,124   

Less cost of common stock in treasury - 27,092,427 shares at 6/30/11, 27,342,518 shares at 12/31/10, and 27,561,412 shares at 6/30/10

     (1,540     (1,565     (1,578
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     6,038        5,793        5,792   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 54,141      $ 53,667      $ 55,885   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Comerica Incorporated and Subsidiaries

 

      Three Months Ended
June  30,
     Six Months Ended
June 30,
 

(in millions, except per share data)

   2011     2010      2011     2010  

INTEREST INCOME

         

Interest and fees on loans

   $ 369      $ 412       $ 744      $ 824   

Interest on investment securities

     59        61         116        122   

Interest on short-term investments

     3        3         5        6   
                                 

Total interest income

     431        476         865        952   

INTEREST EXPENSE

         

Interest on deposits

     23        29         45        64   

Interest on medium- and long-term debt

     17        25         34        51   
                                 

Total interest expense

     40        54         79        115   
                                 

Net interest income

     391        422         786        837   

Provision for loan losses

     47        126         96        301   
                                 

Net interest income after provision for loan losses

     344        296         690        536   

NONINTEREST INCOME

         

Service charges on deposit accounts

     51        52         103        108   

Fiduciary income

     39        38         78        77   

Commercial lending fees

     21        22         42        44   

Letter of credit fees

     18        19         36        37   

Card fees

     15        15         30        28   

Foreign exchange income

     10        10         19        20   

Bank-owned life insurance

     9        9         17        17   

Brokerage fees

     6        6         12        12   

Net securities gains

     4        1         6        3   

Other noninterest income

     29        22         66        42   
                                 

Total noninterest income

     202        194         409        388   

NONINTEREST EXPENSES

         

Salaries

     185        179         373        348   

Employee benefits

     50        45         100        89   
                                 

Total salaries and employee benefits

     235        224         473        437   

Net occupancy expense

     38        39         78        80   

Equipment expense

     17        15         32        32   

Outside processing fee expense

     25        23         49        46   

Software expense

     20        22         43        44   

FDIC insurance expense

     12        16         27        33   

Legal fees

     8        9         17        17   

Advertising expense

     7        7         14        15   

Other real estate expense

     6        5         14        17   

Litigation and operational losses

     5        2         8        3   

Merger and restructuring charges

     5        —           5        —     

Provision for credit losses on lending-related commitments

     (2     —           (5     7   

Other noninterest expenses

     33        35         69        70   
                                 

Total noninterest expenses

     409        397         824        801   
                                 

Income from continuing operations before income taxes

     137        93         275        123   

Provision for income taxes

     41        23         76        18   
                                 

Income from continuing operations

     96        70         199        105   

Income from discontinued operations, net of tax

     —          —           —          17   
                                 

NET INCOME

     96        70         199        122   

Less:

         

Preferred stock dividends

     —          —           —          123   

Income allocated to participating securities

     1        1         2        —     
                                 

Net income (loss) attributable to common shares

   $ 95      $ 69       $ 197      $ (1
                                 

Basic earnings per common share:

         

Income (loss) from continuing operations

   $ 0.54      $ 0.40       $ 1.12      $ (0.11

Net income (loss)

     0.54        0.40         1.12        (0.01

Diluted earnings per common share:

         

Income (loss) from continuing operations

     0.53        0.39         1.10        (0.11

Net income (loss)

     0.53        0.39         1.10        (0.01

Cash dividends declared on common stock

     18        8         35        18   

Cash dividends declared per common share

     0.10        0.05         0.20        0.10   

See notes to consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Comerica Incorporated and Subsidiaries

 

                             

Accumulated

Other

                   
           Common Stock                          Total  

(in millions, except per share data)

   Preferred
Stock
    Shares
Outstanding
    Amount      Capital
Surplus
    Comprehensive
Loss
    Retained
Earnings
    Treasury
Stock
    Shareholders’
Equity
 

BALANCE AT DECEMBER 31, 2009

   $ 2,151        151.2      $ 894       $ 740      $ (336   $ 5,161      $ (1,581   $ 7,029   

Net income

     —          —          —           —          —          122        —          122   

Other comprehensive income, net of tax

     —          —          —           —          96        —          —          96   
                       

Total comprehensive income

                    218   

Cash dividends declared on preferred stock

     —          —          —           —          —          (38     —          (38

Cash dividends declared on common stock ($0.10 per share)

     —          —          —           —          —          (18     —          (18

Purchase of common stock

     —          —          —           —          —          —          (4     (4

Issuance of common stock

     —          25.1        125         724        —          —          —          849   

Redemption of preferred stock

     (2,250     —          —           —          —          —          —          (2,250

Redemption discount accretion on preferred stock

     94        —          —           —          —          (94     —          —     

Accretion of discount on preferred stock

     5        —          —           —          —          (5     —          —     

Net issuance of common stock under employee stock plans

     —          —          —           (5     —          (4     6        (3

Share-based compensation

     —          —          —           11        —          —          —          11   

Other

     —          —          —           (3     —          —          1        (2
                                                                 

BALANCE AT JUNE 30, 2010

   $ —          176.3      $ 1,019       $ 1,467      $ (240   $ 5,124      $ (1,578   $ 5,792   
                                                                 

BALANCE AT DECEMBER 31, 2010

   $ —          176.5      $ 1,019       $ 1,481      $ (389   $ 5,247      $ (1,565   $ 5,793   

Net income

     —          —          —           —          —          199        —          199   

Other comprehensive income, net of tax

     —          —          —           —          81        —          —          81   
                       

Total comprehensive income

                    280   

Cash dividends declared on common stock ($0.20 per share)

     —          —          —           —          —          (35     —          (35

Purchase of common stock

     —          (0.5     —           —          —          —          (21     (21

Net issuance of common stock under employee stock plans

     —          0.8        —           (30     —          (16     46        —     

Share-based compensation

     —          —          —           21        —          —          —          21   
                                                                 

BALANCE AT JUNE 30, 2011

   $ —          176.8      $ 1,019       $ 1,472      $ (308   $ 5,395      $ (1,540   $ 6,038   
                                                                 

See notes to consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries

 

     Six Months Ended June 30,  

(in millions)

   2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 199      $ 122   

Income from discontinued operations, net of tax

     —          17   
  

 

 

   

 

 

 

Income from continuing operations, net of tax

     199        105   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     96        301   

Provision for credit losses on lending-related commitments

     (5     7   

Provision for deferred income taxes

     23        1   

Depreciation and software amortization

     59        62   

Share-based compensation expense

     21        11   

Net amortization of securities

     12        8   

Net securities gains

     (6     (3

Excess tax benefits from share-based compensation arrangements

     (1     (1

Net decrease in trading securities

     14        5   

Net decrease (increase) in loans held-for-sale

     3        (1

Net decrease in accrued income receivable

     5        9   

Net decrease in accrued expenses

     (40     (9

Other, net

     82        228   

Discontinued operations, net

     —          17   
  

 

 

   

 

 

 

Net cash provided by operating activities

     462        740   

INVESTING ACTIVITIES

    

Proceeds from maturities and redemptions of investment securities available-for-sale

     1,031        681   

Proceeds from sales of investment securities available-for-sale

     5        209   

Purchases of investment securities available-for-sale

     (1,028     (521

Proceeds from sales of indirect private equity and venture capital funds

     33        —     

Net decrease in loans

     822        1,200   

Net increase in fixed assets

     (57     (36

Net increase in customers’ liability on acceptances outstanding

     (1     (13

Sales of Federal Home Loan Bank stock

     36        41   
  

 

 

   

 

 

 

Net cash provided by investing activities

     841        1,561   

FINANCING ACTIVITIES

    

Net increase in deposits

     1,134        126   

Net decrease in short-term borrowings

     (63     (262

Net increase in acceptances outstanding

     1        13   

Repayments of medium- and long-term debt

     (940     (2,116

Proceeds from issuance of common stock

     —          849   

Redemption of preferred stock

     —          (2,250

Proceeds from issuance of common stock under employee stock plans

     3        4   

Excess tax benefits from share-based compensation arrangements

     1        1   

Purchase of common stock for treasury

     (21     (4

Dividends paid on common stock

     (35     (16

Dividends paid on preferred stock

     —          (38
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     80        (3,693
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,383        (1,392

Cash and cash equivalents at beginning of period

     2,083        5,617   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,466      $ 4,225   
  

 

 

   

 

 

 

Interest paid

   $ 76      $ 125   
  

 

 

   

 

 

 

Income taxes, tax deposits and tax-related interest paid

   $ 47      $ 19   
  

 

 

   

 

 

 

Noncash investing and financing activities:

    

Loans transferred to other real estate

   $ 30      $ 41   

Pending settlement of matured investment securities available-for-sale

     110        —     

See notes to consolidated financial statements.

 

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Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 1 – BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation were included. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Certain items in prior periods were reclassified to conform to the current presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report of Comerica Incorporated and Subsidiaries (the Corporation) on Form 10-K for the year ended December 31, 2010.

Pending Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (ASU 2011-05). The Corporation will adopt ASU 2011-05, which revises the way in which comprehensive income is presented in the financial statements, in its consolidated financial statements in the first quarter 2012. The provisions of ASU 2011-05 give companies the option to present total comprehensive income, components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. While the provisions of ASU 2011-05 will amend the presentation of comprehensive income, the adoption of ASU 2011-05 will not have any effect on the Corporation’s financial condition and results of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The Corporation will adopt ASU 2011-04, which generally aligns the principles of fair value measurements with International Financial Reporting Standards (IFRSs), in its consolidated financial statements in the first quarter 2012. The provisions of ASU 2011-04 clarify the application of existing fair value measurement requirements, and expand the disclosure requirements for fair value measurements. While the provisions of ASU 2011-04 will increase the Corporation’s fair value disclosures the Corporation does not expect the adoption of ASU 2011-04 to have any effect on the Corporation’s financial condition and results of operations.

In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” (ASU 2011-02). The Corporation will adopt ASU 2011-02, which clarifies existing guidance used by creditors to determine when a modification represents a concession, in its consolidated financial statements in the third quarter 2011. While the provisions of ASU 2011-02 may increase the amount of the Corporation’s receivables that are considered troubled debt restructurings and will expand the Corporation’s disclosures on troubled debt restructurings, the Corporation expects minimal impact to the allowance for loan losses and does not expect the adoption of ASU 2011-02 to have a material effect on the Corporation’s financial condition and results of operations.

NOTE 2 –ACQUISITION

On July 28, 2011 (the “acquisition date”), the Corporation acquired all the outstanding common stock of Sterling Bancshares, Inc. (“Sterling”), a bank holding company headquartered in Houston, Texas, in a stock-for-stock transaction. Sterling common shareholders and holders of outstanding Sterling phantom stock units received 0.2365 shares of the Corporation’s common stock in exchange for each share of Sterling common stock or phantom stock unit. As a result, the Corporation issued approximately 24 million common shares, subject to payment of cash in lieu of fractional shares, with an acquisition date fair value of $793 million, based on the Corporation’s closing stock price of $32.67 on July 27, 2011. Based on the merger agreement, outstanding and unexercised options to purchase Sterling common stock were converted into fully vested options to purchase common stock of the Corporation. In addition, outstanding warrants to purchase Sterling common stock were converted into warrants to purchase common stock of the Corporation. The fair value of total consideration paid to acquire Sterling was approximately $803 million. The Corporation incurred $5 million of pre-integration and transaction costs prior to the acquisition closing date that are included in “merger and restructuring charges” in the consolidated statements of income. However, the assets acquired and liabilities assumed from Sterling, the consideration paid to acquire Sterling, and the results of Sterling’s operations are not reflected in consolidated financial statements as of and for the three- and six-month periods ended June 30, 2011. The acquisition of Sterling significantly expands the Corporation’s presence in Texas, particularly in the Houston and San Antonio areas, and gives the Corporation the ability to leverage additional marketing capacity to offer a wide array of products through a larger distribution network, particularly to middle market and small business companies.

 

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 2 –ACQUISITION (continued)

 

The assets and liabilities of Sterling were recorded on the consolidated balance sheets at estimated fair value as of the acquisition date. The initial accounting for the acquisition was incomplete at the time these financial statements were issued. The following purchase price allocation is preliminary and may change as additional information becomes available and additional analyses are completed. Preliminary initial goodwill of $469 million was recorded after adjusting for the preliminary fair value of net identifiable assets acquired.

 

(in millions)

   Initial Allocation  

Fair value of consideration paid:

  

Common stock issued (a)

   $ 793   

Warrants issued

     7   

Stock options issued

     3   

Cash in lieu of fractional shares (a)

  
  

 

 

 

Total consideration paid

     803   
  

 

 

 

Fair value of identifiable assets acquired:

  

Cash and cash equivalents

     730   

Investment securities available-for-sale

     1,527   

Total loans

     2,109   

Premises and equipment

     35   

Core deposit intangible

     41   

Accrued income and other assets

     288   
  

 

 

 

Total identifiable assets acquired

     4,730   

Fair value of liabilities assumed:

  

Deposits

     4,076   

Short-term borrowings

     20   

Medium- and long-term debt

     262   

Accrued expenses and other liabilities

     38   
  

 

 

 

Total liabilities assumed

     4,396   
  

 

 

 

Fair value of net identifiable assets acquired

     334   
  

 

 

 

Goodwill resulting from acquistion

   $ 469   
  

 

 

 

 

(a) Due to the limited time since the acquisition date, the number of shares of common stock issued and the amount of cash paid in lieu of fractional shares has yet to be determined. The fair value of common stock issued includes the fair value of any potential fractional shares.

The goodwill resulting from the acquisition represents the inherent long-term value expected from the business opportunities created from combining Sterling with the Corporation. None of the goodwill recognized will be deductible for income tax purposes. Due to the limited time since the acquisition date, the allocation of the preliminary goodwill attributable to the acquisition of Sterling to the Corporation’s business segments was incomplete at the time these financial statements were issued. Additionally, the pro forma revenues and net income of the combined entity are yet to be determined. This information will be included in the Corporation’s Form 10-Q for the period ending September 30, 2011.

The core deposit intangible will be amortized on an accelerated basis over the estimated life, currently expected to be approximately 10 years.

 

8


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 2 –ACQUISITION (continued)

 

In conjunction with the Sterling acquisition, the acquired impaired loan portfolio was accounted for at preliminary fair value as follows.

 

(In millions)

   Impaired
Loans
 

Contractually required principal and interest

   $ 322   

Contractual cash flows not expected to be collected (nonaccretable difference)

     165   
        

Expected cash flows

     157   

Interest component of expected cash flows (accretable yield)

     26   
        

Estimated fair value at acquisition

   $ 131   
        

Information regarding acquired loans not deemed impaired at acquisition was as follows.

(In millions)

   Nonimpaired
Loans
 

Contractually required principal and interest

   $ 2,468   

Contractual cash flows not expected to be collected

     206   

Estimated fair value at acquisition

     1,978   

Loans acquired in the Sterling acquisition were initially recorded at fair value with no separate allowance for loan losses. The Corporation reviewed the loans at acquisition to determine which loans should be considered purchased impaired loans and aggregated the impaired loans into pools of loans based on common risk characteristics. The Corporation defined impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date.

The Corporation estimated the total cash flows expected to be collected from the pools of loans, which includes undiscounted expected principal and interest. The excess of the total cash flows expected to be collected over the fair value of the related loans represents the accretable yield, which is recognized as interest income on a level-yield basis over the life of the related loans. The difference between the undiscounted contractual principal and interest and the total cash flows expected to be collected is the nonaccretable difference, which reflects the impact of estimated credit losses and other factors. Subsequent decreases in the expected cash flows will require the Corporation to evaluate the need for additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in the recognition of additional interest income over the then remaining lives of the loan pools.

For acquired loans not deemed impaired at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. Subsequent to the acquisition date, methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans; however, a provision for loan losses will be recorded only to the extent the required allowance exceeds any remaining credit discounts.

NOTE 3 – FAIR VALUE MEASUREMENTS

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market 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.

Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date. However, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the financial instrument.

Trading securities, investment securities available-for-sale, derivatives and deferred compensation plan liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as impaired loans, other real estate (primarily foreclosed property), nonmarketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting.

 

9


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

The Corporation categorizes assets and liabilities recorded at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1    Valuation is based upon quoted prices for identical instruments traded in active markets.
  Level 2    Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
  Level 3    Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes the level of the fair value hierarchy in which the assets or liabilities are classified. Transfers of assets or liabilities between levels of the fair value hierarchy are recognized at the beginning of the reporting period, when applicable.

Cash and due from banks, federal funds sold and securities purchased under agreements to resell, and interest-bearing deposits with banks

Due to the short-term nature, the carrying amount of these instruments approximates the estimated fair value.

Trading securities and associated deferred compensation plan liabilities

Securities held for trading purposes and associated deferred compensation plan liabilities are recorded at fair value and included in “other short-term investments” and “accrued expenses and other liabilities,” respectively, on the consolidated balance sheets. Level 1 securities held for trading purposes include assets related to employee deferred compensation plans, which are invested in mutual funds, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and other securities traded on an active exchange, such as the New York Stock Exchange. Deferred compensation plan liabilities represent the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets. Level 2 trading securities include municipal bonds and mortgage-backed securities issued by U.S. government-sponsored entities and corporate debt securities. Securities classified as Level 3 include securities in less liquid markets and securities not rated by a credit agency. The methods used to value trading securities are the same as the methods used to value investment securities available-for-sale, discussed below.

Loans held-for-sale

Loans held-for-sale, included in “other short-term investments” on the consolidated balance sheets, are recorded at the lower of cost or fair value. The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifies loans held-for-sale subjected to nonrecurring fair value adjustments as Level 2.

Investment securities available-for-sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, an adjustment to the quoted prices may be necessary. In some circumstances, the Corporation may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate to estimate an instrument’s fair value. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include residential mortgage-backed securities issued by U.S. government-sponsored enterprises, corporate debt securities and state and municipal securities. The fair value of Level 2 securities was determined using quoted prices of securities with similar characteristics or pricing models based on observable market data inputs, primarily interest rates, spreads and prepayment information. Securities classified as Level 3, of which the substantial majority are auction-rate securities (ARS), represent securities in less liquid markets requiring significant

 

10


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

management assumptions when determining fair value. Due to the lack of a robust secondary auction-rate securities market with active fair value indicators, fair value at June 30, 2011, December 31, 2010 and June 30, 2010 was determined using an income approach based on a discounted cash flow model utilizing two significant assumptions: discount rate (including a liquidity risk premium) and workout period. The discount rate was calculated using credit spreads of the underlying collateral or similar securities plus a liquidity risk premium. The liquidity risk premium was based on observed industry auction-rate securities valuations by third parties and incorporated the rate at which the various types of similar ARS had been redeemed or sold since acquisition in 2008. The workout period was based on an assessment of publicly available information on efforts to re-establish functioning markets for these securities and the Corporation’s redemption experience. As of June 30, 2011, approximately 61 percent of the aggregate ARS par value had been redeemed or sold since acquisition at or above carrying value.

Loans

The Corporation does not record loans at fair value on a recurring basis. However, periodically, the Corporation records nonrecurring adjustments to the carrying value of loans based on fair value measurements. Loans for which it is probable that payment of interest or principal will not be made in accordance with the contractual terms of the original loan agreement are considered impaired. Impaired loans are reported as nonrecurring fair value measurements when an allowance is established based on the fair value of collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation classifies the impaired loan as nonrecurring Level 2. When management determines that the fair value of the collateral requires additional adjustments, either as a result of non-current appraisal value or when there is no observable market price, the Corporation classifies the impaired loan as nonrecurring Level 3.

Business loans consist of commercial, real estate construction, commercial mortgage, lease financing and international loans. The estimated fair value for variable rate business loans that reprice frequently is based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant in an active market. The fair value for other business loans and retail loans are estimated using a discounted cash flow model that employs interest rates currently offered on the loans, adjusted by an amount for estimated credit losses and other adjustments that would be expected to be made by a market participant in an active market. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable.

Customers’ liability on acceptances outstanding and acceptances outstanding

The carrying amount of these instruments approximates the estimated fair value, due to their short-term nature.

Derivative assets and derivative liabilities

Derivative instruments held or issued for risk management or customer-initiated activities are traded in over-the-counter markets where quoted market prices are not readily available. Fair value for over-the-counter derivative instruments is measured using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities. Included in the fair value of over-the-counter derivative instruments are credit valuation adjustments reflecting counterparty credit risk and credit risk of the Corporation. These adjustments are determined by applying a credit spread for the counterparty or the Corporation, as appropriate, to the total expected exposure of the derivative after considering collateral and other master netting arrangements. These adjustments, which are considered Level 3 inputs, are based on estimates of current credit spreads to evaluate the likelihood of default. The Corporation assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Corporation classified its over-the-counter derivative valuations in Level 2 of the fair value hierarchy. Examples of Level 2 derivative instruments are interest rate swaps and energy derivative and foreign exchange contracts.

The Corporation also holds a portfolio of warrants for generally nonmarketable equity securities. These warrants are primarily from high technology, non-public companies obtained as part of the loan origination process. Warrants which contain a net exercise provision or a non-contingent put right embedded in the warrant agreement are accounted for as derivatives and recorded at fair value using a Black-Scholes valuation model with five inputs: risk-free rate, expected life, volatility, exercise price, and the per share market value of the underlying company. The Corporation classifies warrants accounted for as derivatives as recurring Level 3.

 

11


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

The Corporation holds a derivative contract associated with the 2008 sale of its remaining ownership of Visa Inc. (Visa) Class B shares. Under the terms of the derivative contract, the Corporation will compensate the counterparty primarily for dilutive adjustments made to the conversion factor of the Visa Class B to Class A shares based on the ultimate outcome of litigation involving Visa. Conversely, the Corporation will be compensated by the counterparty for any increase in the conversion factor from anti-dilutive adjustments. The fair value of the derivative contract was based on unobservable inputs consisting of management’s estimate of the litigation outcome, timing of litigation settlements and payments related to the derivative. The Corporation classifies the derivative liability as recurring Level 3.

Nonmarketable equity securities

The Corporation has a portfolio of indirect private equity and venture capital investments. These funds generally cannot be redeemed and the majority are not readily marketable. Distributions from these funds are received by the Corporation as a result of the liquidation of underlying investments of the funds and/or as income distributions. It is estimated that the underlying assets of the funds will be liquidated over a period of up to 15 years. The value of these investments is at risk to changes in equity markets, general economic conditions and a variety of other factors. The investments are accounted for on the cost or equity method and are individually reviewed for impairment on a quarterly basis by comparing the carrying value to the estimated fair value. These investments may be carried at fair value on a nonrecurring basis when they are deemed to be impaired and written down to fair value. For such investments, fair value measurement guidance permits the use of net asset value, provided the net asset value is calculated by the fund in compliance with fair value measurement guidance applicable to investment companies. Where there is not a readily determinable fair value, the Corporation estimates fair value for indirect private equity and venture capital investments based on the Corporation’s percentage ownership in the net asset value of the entire fund, as reported by the fund, after indication that the fund adheres to applicable fair value measurement guidance. For those funds where the net asset value is not reported by the fund, the Corporation derives the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund, the Corporation gives consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy and other qualitative information, as available. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process.

The Corporation also holds restricted equity investments, primarily Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock. Restricted equity securities are not readily marketable and are recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. No significant observable market data for these instruments is available. The Corporation considers the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. The Corporation’s investment in FHLB stock totaled $92 million and $128 million at June 30, 2011 and December 31, 2010, respectively, and its investment in FRB stock totaled $59 million at both June 30, 2011 and December 31, 2010. The Corporation believes its investments in FHLB and FRB stock are recoverable at par.

The Corporation classifies nonmarketable equity securities subjected to nonrecurring fair value adjustments as Level 3.

Other real estate

Other real estate is included in “accrued income and other assets” on the consolidated balance sheets and includes primarily foreclosed property. Foreclosed property is initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequently, foreclosed property is carried at the lower of cost or fair value, less costs to sell. Other real estate may be carried at fair value on a nonrecurring basis when fair value is less than cost. Fair value is based upon independent market prices, appraised value or management’s estimate of the value. Foreclosed property carried at fair value based on an observable market price or a current appraised value is classified by the Corporation as nonrecurring Level 2. When management determines that the fair value of the foreclosed property requires additional adjustments, either as a result of a non-current appraisal or when there is no observable market price, the Corporation classifies the foreclosed property as nonrecurring Level 3.

Loan servicing rights

Loan servicing rights, included in “accrued income and other assets” on the consolidated balance sheets, are subject to impairment testing. A valuation model is used for impairment testing, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a

 

12


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

discount rate determined by management. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.

Deposit liabilities

The estimated fair value of checking, savings and certain money market deposit accounts is represented by the amounts payable on demand. The estimated fair value of term deposits is calculated by discounting the scheduled cash flows using the period-end rates offered on these instruments.

Short-term borrowings

The carrying amount of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings approximates the estimated fair value.

Medium- and long-term debt

The carrying value of variable-rate FHLB advances approximates the estimated fair value. The estimated fair value of the Corporation’s remaining variable- and 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.

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 executed. 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.

 

13


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010.

 

(in millions)

   Total      Level 1      Level 2      Level 3  

June 30, 2011

           

Trading securities:

           

Deferred compensation plan assets

   $ 90       $ 90       $ —         $ —     

Residential mortgage-backed securities (a)

     5         —           5         —     

State and municipal securities

     8         —           6         2   

Corporate debt securities

     1         —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     104         90         12         2   

Investment securities available-for-sale:

           

U.S. Treasury and other U.S. government agency securities

     20         20         —           —     

Residential mortgage-backed securities (a)

     6,899         —           6,899         —     

State and municipal securities (b)

     26         —           —           26   

Corporate debt securities:

           

Auction-rate debt securities

     1         —           —           1   

Other corporate debt securities

     49         —           48         1   

Equity and other non-debt securities:

           

Auction-rate preferred securities

     437         —           —           437   

Money market and other mutual funds

     105         105         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     7,537         125         6,947         465   

Derivative assets:

           

Interest rate contracts

     513         —           513         —     

Energy derivative contracts

     100         —           100         —     

Foreign exchange contracts

     47         —           47         —     

Warrants

     8         —           —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     668         —           660         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 8,309       $ 215       $ 7,619       $ 475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate contracts

   $ 223       $ —         $ 223       $ —     

Energy derivative contracts

     100         —           100         —     

Foreign exchange contracts

     40         —           40         —     

Other

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     364         —           363         1   

Deferred compensation plan liabilities

     90         90         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 454       $ 90       $ 363       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b) Primarily auction-rate securities.

 

14


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

(in millions)

   Total      Level 1      Level 2      Level 3  

December 31, 2010

           

Trading securities:

           

Deferred compensation plan assets

   $ 86       $ 86       $ —         $ —     

Residential mortgage-backed securities (a)

     7         —           7         —     

Other government-sponsored enterprise securities

     1         —           1         —     

State and municipal securities

     19         —           19         —     

Corporate debt securities

     4         —           4         —     

Other securities

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

     118         86         31         1   

Investment securities available-for-sale:

           

U.S. Treasury and other U.S. government agency securities

     131         131         —           —     

Residential mortgage-backed securities (a)

     6,709         —           6,709         —     

State and municipal securities (b)

     39         —           —           39   

Corporate debt securities:

           

Auction-rate debt securities

     1         —           —           1   

Other corporate debt securities

     26         —           25         1   

Equity and other non-debt securities:

           

Auction-rate preferred securities

     570         —           —           570   

Money market and other mutual funds

     84         84         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     7,560         215         6,734         611   

Derivative assets:

           

Interest rate contracts

     542         —           542         —     

Energy derivative contracts

     103         —           103         —     

Foreign exchange contracts

     51         —           51         —     

Warrants

     7         —           —           7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     703         —           696         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 8,381       $ 301       $ 7,461       $ 619   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate contracts

   $ 249       $ —         $ 249       $ —     

Energy derivative contracts

     103         —           103         —     

Foreign exchange contracts

     48         —           48         —     

Other

     1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     401         —           400         1   

Deferred compensation plan liabilities

     86         86         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 487       $ 86       $ 400       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b) Primarily auction-rate securities.

There were no significant transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1 and Level 2 fair value measurements during the three- and six-month periods ended June 30, 2011 and 2010.

 

15


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three- and six-month periods ended June 30, 2011 and 2010.

          Net Realized/Unrealized Gains (Losses)                          
    Balance at
Beginning  of
Period
    Recorded in Earnings     Recorded in  Other
Comprehensive
Income (Pre- tax)
                      Balance at
End of  Period
 

(in millions)

    Realized     Unrealized       Purchases     Sales     Settlements    

Three months ended June 30, 2011

               

Trading securities:

               

State and municipal securities

  $ —        $ —        $ —        $ —        $ 2      $ —        $ —        $ 2   

Investment securities available-for-sale:

               

State and municipal securities (a)

    26        —          —          —          —          —          —          26   

Auction-rate debt securities

    1        —          —          —          —          —          —          1   

Other corporate debt securities

    1        —          —          —          —          —          —          1   

Auction-rate preferred securities

    504        4        —          8        —          (79     —          437   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities
available-for-sale

    532        4        —          8        —          (79     —          465   

Derivative assets:

               

Warrants

    8        5        —          —          —          (5     —          8   

Derivative liabilities:

               

Other

    2        —          —          —          —          —          (1     1   

Three months ended June 30, 2010

               

Trading securities:

               

State and municipal securities

  $ —        $ —        $ —        $ —        $ 3      $ —        $ —        $ 3   

Investment securities available-for-sale:

               

State and municipal securities (a)

    45        —          —          (3     —          —          —          42   

Auction-rate debt securities

    144        2        —          9        —          (103     —          52   

Other corporate debt securities

    1        —          —          —          —          —          —          1   

Auction-rate preferred securities

    663        3        —          (9     —          (48     —          609   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities
available-for-sale

    853        5        —          (3     —          (151     —          704   

Derivative assets:

               

Warrants

    7        —          1        —          —          (1     —          7   

Derivative liabilities:

               

Other

    —          (1     (2     —          —          —          (1     2   

 

(a) Primarily auction-rate securities

 

          Net Realized/Unrealized Gains (Losses)                          
   

Balance at

Beginning of

Period

    Recorded in Earnings    

Recorded in Other

Comprehensive

Income (Pre-tax)

                     

Balance at

End of Period

 
(in millions)     Realized     Unrealized       Purchases     Sales     Settlements    

Six months ended June 30, 2011

               

Trading securities:

               

State and municipal securities

  $ —        $ —        $ —        $ —        $ 2      $ —        $ —        $ 2   

Other securities

    1        —          —          —          —          (1     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading securities

    1        —          —          —          2        (1     —          2   

Investment securities available-for-sale:

               

State and municipal securities (a)

    39        —          —          —          —          (13     —          26   

Auction-rate debt securities

    1        —          —          —          —          —          —          1   

Other corporate debt securities

    1        —          —          —          —          —          —          1   

Auction-rate preferred securities

    570        7        —          (3     —          (137     —          437   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities
available-for-sale

    611        7        —          (3     —          (150     (0     465   

Derivative assets:

               

Warrants

    7        7        1        —          —          (7     —          8   

Derivative liabilities:

               

Other

    1        —          (1     —          —          —          (1     1   

Six months ended June 30, 2010

               

Trading securities:

               

State and municipal securities

  $ —        $ —        $ —        $ —        $ 3      $ —        $ —        $ 3   

Investment securities available-for-sale:

               

State and municipal securities (a)

    46        —          —          (4     —          —          —          42   

Auction-rate debt securities

    150        2        —          4        —          (104     —          52   

Other corporate debt securities

    7        27        —          —          —          —          (33     1   

Auction-rate preferred securities

    706        5        —          (8     —          (94     —          609   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities
available-for-sale

    909        34        —          (8     —          (198     (33     704   

Derivative assets:

               

Warrants

    7        2        1        —          —          (3     —          7   

Derivative liabilities:

               

Other

    —          (1     (2     —          —          —          (1     2   

 

(a) Primarily auction-rate securities

 

16


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

 

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the three- and six-month periods ended June 30, 2011 and 2010.

The following table presents the income statement classification of realized and unrealized gains and losses due to changes in fair value recorded in earnings for the three- and six-month periods ended June 30, 2011 and 2010 for recurring Level 3 assets and liabilities, as shown in the previous table.

 

     Net Securities
Gains (Losses)
    Other Noninterest
Income
     Discontinued
Operations
     Total  

(in millions)

   Realized     Unrealized     Realized      Unrealized      Realized      Realized     Unrealized  

Three months ended June 30, 2011

                 

Investment securities available-for-sale:

                 

Auction-rate preferred securities

   $ 4      $ —        $ —         $ —         $ —         $ 4      $ —     

Derivative assets:

                 

Warrants

     —          —          5         —           —           5        —     

Three months ended June 30, 2010

                 

Investment securities available-for-sale:

                 

Auction-rate debt securities

   $ 2      $ —        $ —         $ —         $ —         $ 2      $ —     

Auction-rate preferred securities

     3        —          —           —           —           3        —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available-for-sale

     5        —          —           —           —           5        —     

Derivative assets:

                 

Warrants

     —          —          —           1         —           —          1   

Derivative liabilities:

                 

Other

     (1     (2     —           —           —           (1     (2

Six months ended June 30, 2011

                 

Investment securities available-for-sale:

                 

Auction-rate preferred securities

   $ 7      $ —        $ —         $ —         $ —         $ 7      $ —     

Derivative assets:

                 

Warrants

     —          —          7         1         —           7        1   

Derivative liabilities:

                 

Other

     —          (1     —           —           —           —          (1

Six months ended June 30, 2010

                 

Investment securities available-for-sale:

                 

Auction-rate debt securities

   $ 2      $ —        $ —         $ —         $ —         $ 2      $ —     

Other corporate debt securities

     —          —          —           —           27         27        —     

Auction-rate preferred securities

     5        —          —           —           —           5        —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available-for-sale

     7        —          —           —           27         34        —     

Derivative assets:

                 

Warrants

     —          —          2         1         —           2        1   

Derivative liabilities:

                 

Other

     (1     (2     —           —           —           (1     (2

 

(a) Primarily auction-rate securities

 

17


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Corporation may be required, from time to time, to record certain assets and liabilities at fair value on a nonrecurring basis. These include assets that are recorded at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. Assets and liabilities recorded at fair value on a nonrecurring basis are presented in the following table.

 

(in millions)

   Total      Level 2      Level 3  

June 30, 2011

        

Loans held-for-sale:

        

Residential mortgage

   $ 7       $ 7       $ —     

Loans:

        

Commercial

     221         —           221   

Real estate construction

     129         —           129   

Commercial mortgage

     363         —           363   

Residential mortgage

     10         —           10   

Lease financing

     6         —           6   

International

     7         —           7   
  

 

 

    

 

 

    

 

 

 

Total loans

     736         —           736   

Nonmarketable equity securities

     2         —           2   

Other real estate

     26         —           26   

Loan servicing rights

     4         —           4   
  

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 775       $ 7       $ 768   
  

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

December 31, 2010

        

Loans held-for-sale:

        

Residential mortgage

   $ 6       $ 6       $ —     

Loans:

        

Commercial

     200         —           200   

Real estate construction

     247         —           247   

Commercial mortgage

     398         —           398   

Lease financing

     7         —           7   

International

     2         —           2   
  

 

 

    

 

 

    

 

 

 

Total loans

     854         —           854   

Nonmarketable equity securities

     9         —           9   

Other real estate

     33         —           33   

Loan servicing rights

     5         —           5   
  

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 907       $ 6       $ 901   
  

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $  —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

 

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

The Corporation typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed. The disclosures also do not include estimated fair value amounts for items that 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 carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Corporation’s consolidated balance sheets are as follows:

 

     June 30, 2011     December 31, 2010  

(in millions)

   Carrying
Amount
    Estimated
Fair Value
    Carrying
Amount
    Estimated
Fair Value
 

Assets

        

Cash and due from banks

   $ 987      $ 987      $ 668      $ 668   

Interest-bearing deposits with banks

     2,479        2,479        1,415        1,415   

Loans held-for-sale

     20        20        23        23   

Total loans, net of allowance for loan losses (a)

     38,387        38,456        39,335        39,212   

Customers’ liability on acceptances outstanding

     10        10        9        9   

Nonmarketable equity securities (b)

     16        28        47        77   

Loan servicing rights

     4        4        5        5   

Liabilities

        

Demand deposits (noninterest-bearing)

     16,344        16,344        15,538        15,538   

Interest-bearing deposits

     25,414        25,423        24,933        24,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     41,758        41,767        40,471        40,483   

Short-term borrowings

     67        67        130        130   

Acceptances outstanding

     10        10        9        9   

Medium- and long-term debt

     5,206        5,129        6,138        6,008   

Credit-related financial instruments

     (93     (93     (99     (99

 

(a) Included $736 million and $854 million of impaired loans recorded at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010, respectively.
(b) Included $2 million and $9 million of nonmarketable equity securities recorded at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010, respectively.

 

19


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

 

NOTE 4 – INVESTMENT SECURITIES

A summary of the Corporation’s investment securities available-for-sale follows:

 

(in millions)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

June 30, 2011

           

U.S. Treasury and other U.S. government agency securities

   $ 20       $ —         $ —         $ 20   

Residential mortgage-backed securities (a)

     6,741         169         11         6,899   

State and municipal securities (b)

     32         —           6         26   

Corporate debt securities:

           

Auction-rate debt securities

     1         —           —           1   

Other corporate debt securities

     49         —           —           49   

Equity and other non-debt securities:

           

Auction-rate preferred securities

     467         2         32         437   

Money market and other mutual funds

     105         —           —           105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 7,415       $ 171       $ 49       $ 7,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

U.S. Treasury and other U.S. government agency securities

   $ 131       $ —         $ —         $ 131   

Residential mortgage-backed securities (a)

     6,653         95         39         6,709   

State and municipal securities (b)

     46         —           7         39   

Corporate debt securities:

           

Auction-rate debt securities

     1         —           —           1   

Other corporate debt securities

     26         —           —           26   

Equity and other non-debt securities:

           

Auction-rate preferred securities

     597         3         30         570   

Money market and other mutual funds

     84         —           —           84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 7,538       $ 98       $ 76       $ 7,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b) Primarily auction-rate securities.

 

20


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – INVESTMENT SECURITIES (continued)

 

A summary of the Corporation’s investment securities available-for-sale in an unrealized loss position as of June 30, 2011 and December 31, 2010 follows:

 

     Impaired  
     Less than 12 months      12 months or more      Total  

(in millions)

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

June 30, 2011

                 

Residential mortgage-backed securities (a)

   $ 1,263       $ 11       $ —         $ —         $ 1,263       $ 11   

State and municipal securities (b)

     —           —           25         6         25         6   

Equity and other non-debt securities:

                 

Auction-rate preferred securities

     —           —           345         32         345         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired securities

   $ 1,263       $ 11       $ 370       $ 38       $ 1,633       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                 

Residential mortgage-backed securities (a)

   $ 1,702       $ 39       $ —         $ —         $ 1,702       $ 39   

State and municipal securities (b)

     —           —           38         7         38         7   

Equity and other non-debt securities:

                 

Auction-rate preferred securities

     —           —           436         30         436         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired securities

   $ 1,702       $ 39       $ 474       $ 37       $ 2,176       $ 76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b) Primarily auction-rate securities.

As of June 30, 2011, 94 percent of the Corporation’s auction-rate portfolio was rated Aaa/AAA by the credit rating agencies.

At June 30, 2011, the Corporation had 208 securities in an unrealized loss position with no credit impairment, including 152 auction-rate preferred securities, 30 residential mortgage-backed securities and 26 state and municipal auction-rate securities. The unrealized losses for these securities resulted from changes in market interest rates and liquidity. The Corporation ultimately expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Corporation will be required to sell the securities in an unrealized loss position prior to recovery of amortized cost. The Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2011.

Sales, calls and write-downs of investment securities available-for-sale resulted in the following gains and losses, recorded in “net securities gains” on the consolidated statements of income, computed based on the adjusted cost of the specific security.

 

     Six Months Ended June 30,  

(in millions)

   2011     2010  

Securities gains

   $ 7      $ 9   

Securities losses

     (1     (6
  

 

 

   

 

 

 

Total net securities gains

   $ 6      $ 3   
  

 

 

   

 

 

 

 

21


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – INVESTMENT SECURITIES (continued)

 

The table below summarizes the amortized cost and fair values of debt securities by contractual maturity. 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 millions)    Amortized      Fair  

June 30, 2011

   Cost      Value  

Contractual maturity

     

Within one year

   $ 69       $ 69   

After one year through five years

     466         473   

After five years through ten years

     55         56   

After ten years

     6,253         6,397   
  

 

 

    

 

 

 

Subtotal

     6,843         6,995   

Equity and other nondebt securities:

     

Auction-rate preferred securities

     467         437   

Money market and other mutual funds

     105         105   
  

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 7,415       $ 7,537   
  

 

 

    

 

 

 

Included in the contractual maturity distribution in the table above were auction-rate securities with a total amortized cost and fair value of $32 million and $26 million, respectively. Auction-rate securities are long-term, floating rate instruments for which interest rates are reset at periodic auctions. At each successful auction, the Corporation has the option to sell the security at par value. Additionally, the issuers of auction-rate securities generally have the right to redeem or refinance the debt. As a result, the expected life of auction-rate securities may differ significantly from the contractual life. Also included in the table above were residential mortgage-backed securities with a total amortized cost and fair value of $6,741 million and $6,899 million, respectively. The actual cash flows of mortgage-backed securities may differ from contractual maturity as the borrowers of the underlying loans may exercise prepayment options.

At June 30, 2011, investment securities with a carrying value of $2.3 billion were pledged where permitted or required by law to secure $1.7 billion of liabilities, primarily public and other deposits of state and local government agencies and derivative instruments.

NOTE 5 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

The following table summarizes nonperforming assets as of June 30, 2011 and December 31, 2010.

 

(in millions)

   June 30, 2011      December 31, 2010  

Nonaccrual loans

   $ 941       $ 1,080   

Reduced-rate loans (a)

     33         43   
  

 

 

    

 

 

 

Total nonperforming loans

     974         1,123   

Foreclosed property

     70         112   
  

 

 

    

 

 

 

Total nonperforming assets

   $ 1,044       $ 1,235   
  

 

 

    

 

 

 

 

  (a) Reduced-rate business loans totaled $13 million and $26 million, respectively, and reduced-rate
retail loans totaled $20 million and $17 million, respectively, at June 30, 2011 and
December 31, 2010.

 

22


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 5 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES (continued)

 

The following presents an aging analysis of loans as of June 30, 2011 and December 31, 2010.

 

     Loans Past Due and Still Accruing                       

(in millions)

   30-59 Days      60-89 Days      90 Days
or More
     Total      Nonaccrual
Loans
     Current
Loans
     Total Loans  

June 30, 2011

                    

Business loans:

                    

Commercial

   $ 131       $ 20       $ 11       $ 162       $ 261       $ 21,629       $ 22,052   

Real estate construction:

                    

Commercial Real Estate business line (a)

     15         1         2         18         137         1,188         1,343   

Other business lines (b)

     10         —           —           10         2         373         385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction

     25         1         2         28         139         1,561         1,728   

Commercial mortgage:

                    

Commercial Real Estate business line (a)

     31         13         7         51         186         1,693         1,930   

Other business lines (b)

     71         10         18         99         269         7,281         7,649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial mortgage

     102         23         25         150         455         8,974         9,579   

Lease financing

     —           —           —           —           6         943         949   

International

     —           —           —           —           7         1,155         1,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total business loans

     258         44         38         340         868         34,262         35,470   

Retail loans:

                    

Residential mortgage

     16         4         15         35         60         1,396         1,491   

Consumer:

                    

Home equity

     10         5         6         21         4         1,597         1,622   

Other consumer

     5         1         5         11         9         590         610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     15         6         11         32         13         2,187         2,232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail loans

     31         10         26         67         73         3,583         3,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 289       $ 54       $ 64       $ 407       $ 941       $ 37,845       $ 39,193   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                    

Business loans:

                    

Commercial

   $ 84       $ 28       $ 3       $ 115       $ 252       $ 21,778       $ 22,145   

Real estate construction:

                    

Commercial Real Estate business line (a)

     27         —           17         44         259         1,523         1,826   

Other business lines (b)

     2         —           5         7         4         416         427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate construction

     29         —           22         51         263         1,939         2,253   

Commercial mortgage:

                    

Commercial Real Estate business line (a)

     8         1         —           9         181         1,747         1,937   

Other business lines (b)

     28         25         16         69         302         7,459         7,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial mortgage

     36         26         16         78         483         9,206         9,767   

Lease financing

     —           —           —           —           7         1,002         1,009   

International

     1         —           —           1         2         1,129         1,132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total business loans

     150         54         41         245         1,007         35,054         36,306   

Retail loans:

                    

Residential mortgage

     33         23         7         63         55         1,501         1,619   

Consumer:

                    

Home equity

     11         4         10         25         5         1,674         1,704   

Other consumer

     4         2         4         10         13         584         607   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     15         6         14         35         18         2,258         2,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail loans

     48         29         21         98         73         3,759         3,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 198       $ 83       $ 62       $ 343       $ 1,080       $ 38,813       $ 40,236   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Primarily loans to real estate investors and developers.
(b) Primarily loans secured by owner-occupied real estate.

 

23


Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 5 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES (continued)

 

The following table details the changes in the allowance for loan losses for the three- and six-month periods ended June 30, 2011 and 2010 and related loan amounts as of June 30, 2011 and 2010.

 

     June 30, 2011        

(in millions)

   Business
Loans
    Retail Loans     Total     June 30, 2010  

Three Months Ended

        

Allowance for loan losses:

        

Balance at beginning of period

   $ 786      $ 63      $ 849      $ 987   

Loan charge-offs

     (109     (16     (125     (158

Recoveries on loans previously charged-off

     33        2        35        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs

     (76     (14     (90     (146

Provision for loan losses

     28        19        47        126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 738      $ 68      $ 806      $ 967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended

        

Allowance for loan losses:

        

Balance at beginning of period

   $ 839      $ 62      $ 901      $ 985   

Loan charge-offs

     (222     (26     (248     (342

Recoveries on loans previously charged-off

     54        3        57