COMERICA INC /NEW/ - Quarter Report: 2017 March (Form 10-Q)

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 March 31, 2017



o	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 incorporation or organization)	(I.R.S. Employer 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 ý No o

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 ý No o

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



Large accelerated filer ý		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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 April 24, 2017: 176,936,261 shares

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COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at March 31, 2017 (unaudited) and December 31, 2016	1

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)	2

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (unaudited)	3

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)	4

Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	54

ITEM 4. Controls and Procedures	54

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings	54

ITEM 1A. Risk Factors	54

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

ITEM 6. Exhibits	55

Signature	56

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries



(in millions, except share data)	March 31, 2017			December 31, 2016
	(unaudited)
ASSETS
Cash and due from banks	$	1,176		$	1,249

Interest-bearing deposits with banks	7,143			5,969
Other short-term investments	92			92

Investment securities available-for-sale	10,830			10,787
Investment securities held-to-maturity	1,508			1,582

Commercial loans	30,215			30,994
Real estate construction loans	2,930			2,869
Commercial mortgage loans	9,021			8,931
Lease financing	550			572
International loans	1,106			1,258
Residential mortgage loans	1,944			1,942
Consumer loans	2,537			2,522
Total loans	48,303			49,088
Less allowance for loan losses	(708		)	(730		)
Net loans	47,595			48,358
Premises and equipment	488			501
Accrued income and other assets	4,144			4,440
Total assets	$	72,976		$	72,978

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	31,892		$	31,540

Money market and interest-bearing checking deposits	22,177			22,556
Savings deposits	2,138			2,064
Customer certificates of deposit	2,597			2,806
Foreign office time deposits	59			19
Total interest-bearing deposits	26,971			27,445
Total deposits	58,863			58,985
Short-term borrowings	41			25
Accrued expenses and other liabilities	989			1,012
Medium- and long-term debt	5,153			5,160
Total liabilities	65,046			65,182

Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 228,164,824 shares	1,141			1,141
Capital surplus	2,106			2,135
Accumulated other comprehensive loss	(379		)	(383		)
Retained earnings	7,431			7,331
Less cost of common stock in treasury - 50,732,795 shares at 3/31/17 and 52,851,156 shares at 12/31/16	(2,369		)	(2,428		)
Total shareholders’ equity	7,930			7,796
Total liabilities and shareholders’ equity	$	72,976		$	72,978

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Comerica Incorporated and Subsidiaries



	Three Months Ended March 31,
(in millions, except per share data)	2017			2016
INTEREST INCOME
Interest and fees on loans	$	421		$	406
Interest on investment securities	62			62
Interest on short-term investments	13			4
Total interest income	496			472
INTEREST EXPENSE
Interest on deposits	9			10
Interest on medium- and long-term debt	17			15
Total interest expense	26			25
Net interest income	470			447
Provision for credit losses	16			148
Net interest income after provision for credit losses	454			299
NONINTEREST INCOME
Card fees	77			72
Service charges on deposit accounts	58			55
Fiduciary income	49			46
Commercial lending fees	20			20
Letter of credit fees	12			13
Bank-owned life insurance	10			9
Foreign exchange income	11			10
Brokerage fees	5			4
Net securities losses	—			(2		)
Other noninterest income	29			17
Total noninterest income	271			244
NONINTEREST EXPENSES
Salaries and benefits expense	233			248
Outside processing fee expense	87			78
Net occupancy expense	38			38
Equipment expense	11			13
Restructuring charges	11			—
Software expense	29			29
FDIC insurance expense	13			11
Advertising expense	4			4
Litigation-related expense	(2		)	—
Other noninterest expenses	33			37
Total noninterest expenses	457			458
Income before income taxes	268			85
Provision for income taxes	66			25
NET INCOME	202			60
Less income allocated to participating securities	2			1
Net income attributable to common shares	$	200		$	59
Earnings per common share:
Basic	$	1.15		$	0.34
Diluted	1.11			0.34

Comprehensive income	206			161

Cash dividends declared on common stock	42			37
Cash dividends declared per common share	0.23			0.21

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Comerica Incorporated and Subsidiaries



	Common Stock							Accumulated Other Comprehensive Loss									Total Shareholders’ Equity
(in millions, except per share data)	Shares Outstanding		Amount		Capital Surplus			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Shareholders’ Equity

BALANCE AT DECEMBER 31, 2015	175.7		$	1,141	$	2,173		$	(429	)	$	7,084		$	(2,409	)	$	7,560
Net income	—		—		—			—			60			—			60
Other comprehensive income, net of tax	—		—		—			101			—			—			101
Cash dividends declared on common stock ($0.21 per share)	—		—		—			—			(37		)	—			(37		)
Purchase of common stock	(1.4	)	—		—			—			—			(49		)	(49		)
Net issuance of common stock under employee stock plans	0.8		—		(35		)	—			(10		)	34			(11		)
Share-based compensation	—		—		20			—			—			—			20
BALANCE AT MARCH 31, 2016	175.1		$	1,141	$	2,158		$	(328	)	$	7,097		$	(2,424	)	$	7,644

BALANCE AT DECEMBER 31, 2016	175.3		$	1,141	$	2,135		$	(383	)	$	7,331		$	(2,428	)	$	7,796
Cumulative effect of change in accounting principle	—		—		3			—			(2		)	—			1
Net income	—		—		—			—			202			—			202
Other comprehensive income, net of tax	—		—		—			4			—			—			4
Cash dividends declared on common stock ($0.23 per share)	—		—		—			—			(42		)	—			(42		)
Purchase of common stock	(1.7	)	—		—			—			—			(118		)	(118		)
Net issuance of common stock under employee stock plans	2.3		—		(25		)	—			(14		)	108			69
Net issuance of common stock for warrants	1.5		—		(24		)	—			(44		)	68			—
Share-based compensation	—		—		18			—			—			—			18
Other	—		—		(1		)	—			—			1			—
BALANCE AT MARCH 31, 2017	177.4		$	1,141	$	2,106		$	(379	)	$	7,431		$	(2,369	)	$	7,930

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries



	Three Months Ended March 31,
(in millions)	2017			2016
OPERATING ACTIVITIES
Net income	$	202		$	60
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	16			148
Benefit for deferred income taxes	(1		)	(39		)
Depreciation and amortization	31			30
Net periodic defined benefit (credit) cost	(4		)	3
Share-based compensation expense	18			20
Net amortization of securities	2			2
Accretion of loan purchase discount	(1		)	(2		)
Net securities losses	—			2
Net gains on sales of foreclosed property	(1		)	(1		)
Net change in:
Accrued income receivable	3			(4		)
Accrued expenses payable	5			10
Other, net	137			19
Net cash provided by operating activities	407			248
INVESTING ACTIVITIES
Investment securities available-for-sale:
Maturities and redemptions	393			350
Sales	1,259			—
Purchases	(1,699		)	(291		)
Investment securities held-to-maturity:
Maturities and redemptions	76			75
Net change in loans	752			(352		)
Proceeds from sales of foreclosed property	3			5
Net increase in premises and equipment	(12		)	(27		)
Purchases of Federal Home Loan Bank stock	—			(21		)
Other, net	1			3
Net cash provided by (used in) investing activities	773			(258		)
FINANCING ACTIVITIES
Net change in:
Deposits	(5		)	(3,537		)
Short-term borrowings	16			491
Common stock:
Repurchases	(125		)	(52		)
Cash dividends paid	(40		)	(37		)
Issuances under employee stock plans	76			1
Other, net	(1		)	(1		)
Net cash used in financing activities	(79		)	(3,135		)
Net increase (decrease) in cash and cash equivalents	1,101			(3,145		)
Cash and cash equivalents at beginning of period	7,218			6,147
Cash and cash equivalents at end of period	$	8,319		$	3,002
Interest paid	$	27		$	19
Income tax (refunds received) paid	(1		)	2
Noncash investing and financing activities:
Loans transferred to other real estate	1			17

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Organization

The accompanying unaudited consolidated financial statements were prepared in accordance with United States (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 three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

Share-Based Compensation

Effective January 1, 2016, the Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting” (ASU 2016-09). ASU 2016-09 provides for the election of an accounting policy as to the timing of when stock award forfeitures are recognized in compensation expense. The Corporation elected to account for forfeitures as they occur, rather than account for compensation cost based on an estimate of the number of awards that are expected to vest. The prior period effect of this policy election as of the beginning of the year was reported as "cumulative effect of change in accounting principle" in the accompanying Consolidated Statements of Changes in Shareholders’ Equity (unaudited). In addition, ASU 2016-09 requires excess tax benefits and deficiencies resulting from employee stock awards to be prospectively recognized as a component of income taxes. Previously, excess tax benefits and deficiencies were recognized in "capital surplus" in the Consolidated Statements of Changes in Shareholders' Equity. Net excess tax benefits for awards that vested, were exercised or expired included in the "provision for income taxes" totaled $24 million for the three months ended March 31, 2017. The equivalent amount included in capital surplus for the three months ended March 31, 2016 was insignificant.

The Corporation also retrospectively adopted certain changes to the statement of cash flows in accordance with ASU 2016-09. Excess tax benefits must be classified as an operating activity and cash paid to a tax authority by the Corporation when withholding shares from an employee’s award for tax-withholding purposes must be classified as a financing activity. Accordingly, the Corporation reclassified $3 million from operating activities to financing activities in the Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2016 pertaining to shares withheld from employee awards for tax withholding purposes. Excess tax benefits were insignificant for the three months ended March 31, 2016.

Recently Issued Accounting Pronouncements

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07), which requires employers to report service cost as part of compensation expense and the other components of net benefit cost separately from service cost on the statement of income. ASU 2017-07 is effective for the Corporation on January 1, 2018. Early adoption is permitted. The Corporation does not expect the new guidance to have a material impact on its financial condition or results of operation.

NOTE 2 – 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.

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.

Refer to note 1 to the consolidated financial statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016 for further information about the fair value hierarchy, descriptions 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

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis.

ASSETS AND LIABLILITIES 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 March 31, 2017 and December 31, 2016.



(in millions)	Total		Level 1		Level 2		Level 3
March 31, 2017
Trading securities:
Deferred compensation plan assets	$	89	$	89	$	—	$	—
Equity and other non-debt securities	1		1		—		—
Total trading securities	90		90		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,780		2,780		—		—
Residential mortgage-backed securities (a)	7,938		—		7,938		—
State and municipal securities	5		—		—		5		(b)
Equity and other non-debt securities	107		61		—		46		(b)
Total investment securities available-for-sale	10,830		2,841		7,938		51
Derivative assets:
Interest rate contracts	85		—		74		11
Energy derivative contracts	99		—		99		—
Foreign exchange contracts	31		—		31		—
Warrants	2		—		—		2
Total derivative assets	217		—		204		13
Total assets at fair value	$	11,137	$	2,931	$	8,142	$	64
Derivative liabilities:
Interest rate contracts	$	52	$	—	$	52	$	—
Energy derivative contracts	98		—		98		—
Foreign exchange contracts	25		—		25		—
Total derivative liabilities	175		—		175		—
Deferred compensation plan liabilities	89		89		—		—
Total liabilities at fair value	$	264	$	89	$	175	$	—


(a)	Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(b)	Auction-rate securities.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries



(in millions)	Total		Level 1		Level 2		Level 3
December 31, 2016
Trading securities:
Deferred compensation plan assets	$	87	$	87	$	—	$	—
Equity and other non-debt securities	1		1		—		—
Total trading securities	88		88		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,779		2,779		—		—
Residential mortgage-backed securities (a)	7,872		—		7,872		—
State and municipal securities	7		—		—		7		(b)
Equity and other non-debt securities	129		82		—		47		(b)
Total investment securities available-for-sale	10,787		2,861		7,872		54
Derivative assets:
Interest rate contracts	223		—		212		11
Energy derivative contracts	146		—		146		—
Foreign exchange contracts	38		—		38		—
Warrants	3		—		—		3
Total derivative assets	410		—		396		14
Total assets at fair value	$	11,285	$	2,949	$	8,268	$	68
Derivative liabilities:
Interest rate contracts	$	81	$	—	$	81	$	—
Energy derivative contracts	144		—		144		—
Foreign exchange contracts	29		—		29		—
Total derivative liabilities	254		—		254		—
Deferred compensation plan liabilities	87		87		—		—
Total liabilities at fair value	$	341	$	87	$	254	$	—


(a)	Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(b)	Auction-rate securities.

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1, Level 2 and Level 3 fair value measurements during each of the three-month periods ended March 31, 2017 and 2016.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three-month period ended March 31, 2017 and 2016.



			Net Realized/Unrealized Gains (Losses) (Pretax)

	Balance at Beginning of Period		Recorded in Earnings							Recorded in Other Comprehensive Income									Balance at End of Period

(in millions)			Realized			Unrealized							Redemptions			Sales
Three Months Ended March 31, 2017
Investment securities available-for-sale:
State and municipal securities (a)	$	7	$	—		$	—			$	—		$	(2	)	$	—		$	5
Equity and other non-debt securities (a)	47		—			—				—			(1		)	—			46
Total investment securities available-for-sale	54		—			—				—			(3		)	—			51
Derivative assets:
Interest rate contracts	11		—			—				—			—			—			11
Warrants	3		1		(b)	(1		)	(b)	—			—			(1		)	2
Three Months Ended March 31, 2016
Investment securities available-for-sale:
State and municipal securities (a)	$	9	$	—		$	—			$	—		$	—		$	—		$	9
Corporate debt securities (a)	1		—			—				—			—			—			1
Equity and other non-debt securities (a)	67		—			—				(1		)	(15		)	—			51
Total investment securities available-for-sale	77		—			—				(1		)	(15		)	—			61
Derivative assets:
Interest rate contracts	9		—			11			(b)	—			—			—			20
Warrants	2		—			—				—			—			—			2


(a)	Auction-rate securities.


(b)	Realized and unrealized gains and losses due to changes in fair value recorded in "other noninterest income" on the consolidated statements of comprehensive income.

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. The following table presents assets recorded at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016. No liabilities were recorded at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016.



(in millions)	Level 3
March 31, 2017
Loans:
Commercial	$	276
Commercial mortgage	14
International	7
Total assets at fair value	$	297
December 31, 2016
Loans:
Commercial	$	256
Commercial mortgage	15
International	11
Total loans	282
Other real estate	1
Total assets at fair value	$	283

Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016 included loans for which a specific allowance was established based on the fair value of collateral and other real estate for which fair value of the properties was less than the cost basis. For both asset classes, the unobservable inputs were the additional adjustments applied by management to the appraised values to reflect such factors as non-current appraisals and revisions to estimated time to sell. These adjustments are determined based on qualitative judgments made by management on a case-by-case basis and are not quantifiable inputs, although they are used in the determination of fair value.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table presents quantitative information related to the significant unobservable inputs utilized in the Corporation's Level 3 recurring fair value measurement as of March 31, 2017 and December 31, 2016.The Corporation's Level 3 recurring fair value measurements primarily include auction-rate securities where fair value is determined using an income approach based on a discounted cash flow model and certain interest rate derivative contracts where credit valuation adjustments are significant to the overall fair value of the derivative. The inputs in the table below reflect management's expectation of continued illiquidity in the secondary auction-rate securities market due to a lack of market activity for the issuers remaining in the portfolio, a lack of market incentives for issuer redemptions, and the expectation for a continuing low interest rate environment. The workout periods reflect management's expectation of the pace at which short-term interest rates could rise at each respective period.



			Discounted Cash Flow Model
			Unobservable Input
	Fair Value (in millions)		Discount Rate	Workout Period (in years)
March 31, 2017
State and municipal securities (a)	$	5	5% - 7%	1 - 2
Equity and other non-debt securities (a)	46		7% - 9%	1 - 2
December 31, 2016
State and municipal securities (a)	$	7	4% - 6%	1 - 2
Equity and other non-debt securities (a)	47		7% - 9%	1 - 2


(a)	Auction-rate securities.

ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS NOT RECORDED AT FAIR VALUE 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.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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:



	Carrying Amount			Estimated Fair Value
(in millions)				Total			Level 1		Level 2		Level 3
March 31, 2017
Assets
Cash and due from banks	$	1,176		$	1,176		$	1,176	$	—	$	—
Interest-bearing deposits with banks	7,143			7,143			7,143		—		—
Investment securities held-to-maturity	1,508			1,499			—		1,499		—
Loans held-for-sale	2			2			—		2		—
Total loans, net of allowance for loan losses (a)	47,595			47,341			—		—		47,341
Customers’ liability on acceptances outstanding	4			4			4		—		—
Restricted equity investments	207			207			207		—		—
Nonmarketable equity securities (b)	11			18
Liabilities
Demand deposits (noninterest-bearing)	31,892			31,892			—		31,892		—
Interest-bearing deposits	24,374			24,374			—		24,374		—
Customer certificates of deposit	2,597			2,523			—		2,523		—
Total deposits	58,863			58,789			—		58,789		—
Short-term borrowings	41			41			41		—		—
Acceptances outstanding	4			4			4		—		—
Medium- and long-term debt	5,153			5,149			—		5,149		—
Credit-related financial instruments	(74		)	(74		)	—		—		(74		)
December 31, 2016
Assets
Cash and due from banks	$	1,249		$	1,249		$	1,249	$	—	$	—
Interest-bearing deposits with banks	5,969			5,969			5,969		—		—
Investment securities held-to-maturity	1,582			1,576			—		1,576		—
Loans held-for-sale	4			4			—		4		—
Total loans, net of allowance for loan losses (a)	48,358			48,250			—		—		48,250
Customers’ liability on acceptances outstanding	5			5			5		—		—
Restricted equity investments	207			207			207		—		—
Nonmarketable equity securities (b)	11			16
Liabilities
Demand deposits (noninterest-bearing)	31,540			31,540			—		31,540		—
Interest-bearing deposits	24,639			24,639			—		24,639		—
Customer certificates of deposit	2,806			2,731			—		2,731		—
Total deposits	58,985			58,910			—		58,910		—
Short-term borrowings	25			25			25		—		—
Acceptances outstanding	5			5			5		—		—
Medium- and long-term debt	5,160			5,132			—		5,132		—
Credit-related financial instruments	(73		)	(73		)	—		—		(73		)


(a)	Included $297 million and $282 million of impaired loans recorded at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016, respectively.


(b)	Certain investments that are measured at fair value using the net asset value have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 - INVESTMENT SECURITIES

A summary of the Corporation’s investment securities follows:



(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2017
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,772	$	9	$	1	$	2,780
Residential mortgage-backed securities (a)	7,990		46		98		7,938
State and municipal securities	5		—		—		5
Equity and other non-debt securities	107		1		1		107
Total investment securities available-for-sale (b)	$	10,874	$	56	$	100	$	10,830
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,508	$	—	$	9	$	1,499

December 31, 2016
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,772	$	8	$	1	$	2,779
Residential mortgage-backed securities (a)	7,921		48		97		7,872
State and municipal securities	7		—		—		7
Equity and other non-debt securities	129		1		1		129
Total investment securities available-for-sale (b)	$	10,829	$	57	$	99	$	10,787
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,582	$	1	$	7	$	1,576


(a)	Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(b)	Included auction-rate securities at amortized cost and fair value of $52 million and $51 million, respectively as of March 31, 2017 and $55 million and $54 million, respectively, as of December 31, 2016.


(c)	The amortized cost of investment securities held-to-maturity included net unrealized losses of $11 million at March 31, 2017 and $12 million at December 31, 2016 related to securities transferred from available-for-sale, which are included in accumulated other comprehensive loss.

A summary of the Corporation’s investment securities in an unrealized loss position as of March 31, 2017 and December 31, 2016 follows:



	Temporarily Impaired
	Less than 12 Months					12 Months or more					Total
(in millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2017
U.S. Treasury and other U.S. government agency securities	$	709	$	1		$	—	$	—		$	709	$	1
Residential mortgage-backed securities (a)	5,116		90			1,123		29			6,239		119
State and municipal securities (b)	—		—			5		—		(c)	5		—		(c)
Equity and other non-debt securities (b)	—		—			46		1			46		1
Total temporarily impaired securities	$	5,825	$	91		$	1,174	$	30		$	6,999	$	121
December 31, 2016
U.S. Treasury and other U.S. government agency securities	$	527	$	1		$	—	$	—		$	527	$	1
Residential mortgage-backed securities (a)	4,992		87			1,177		32			6,169		119
State and municipal securities (b)	—		—			7		—		(c)	7		—		(c)
Equity and other non-debt securities (b)	36		—		(c)	11		—		(c)	47		—		(c)
Total temporarily impaired securities	$	5,555	$	88		$	1,195	$	32		$	6,750	$	120


(a)	Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(b)	Primarily auction-rate securities.


(c)	Unrealized losses less than $0.5 million.

At March 31, 2017, the Corporation had 238 securities in an unrealized loss position with no credit impairment, including 8 U.S. Treasury securities, 189 residential mortgage-backed securities, 28 auction-rate preferred securities and 13 state and

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

municipal auction-rate securities. As of March 31, 2017, approximately 96 percent of the aggregate par value of auction-rate securities have been redeemed or sold since acquisition, of which approximately 90 percent were redeemed at or above cost. 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 March 31, 2017.

Sales, calls and write-downs of investment securities available-for-sale resulted in no securities gains or losses for the three-month period ended March 31, 2017 and no gains and $2 million of losses for the three-month period ended March 31, 2016, recorded in “net securities losses” on the consolidated statements of comprehensive income. Securities losses resulted primarily from charges related to a derivative contract tied to the conversion rate of Visa Class B shares.

The following table 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)	Available-for-sale				Held-to-maturity
March 31, 2017	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Contractual maturity
Within one year	$	30	$	30	$	—	$	—
After one year through five years	2,971		2,979		—		—
After five years through ten years	1,847		1,879		22		22
After ten years	5,919		5,835		1,486		1,477
Subtotal	10,767		10,723		1,508		1,499
Equity and other non-debt securities	107		107
Total investment securities	$	10,874	$	10,830	$	1,508	$	1,499

Included in the contractual maturity distribution in the table above were residential mortgage-backed securities available-for-sale with total amortized cost and fair value of $8.0 billion and $7.9 billion, respectively, and residential mortgage-backed securities held-to-maturity with a total amortized cost and fair value of $1.5 billion. 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 March 31, 2017, investment securities with a carrying value of $1.3 billion were pledged where permitted or required by law to secure $829 million of liabilities, primarily public and other deposits of state and local government agencies and derivative instruments.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

The following table presents an aging analysis of the recorded balance of loans.



	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
March 31, 2017
Business loans:
Commercial	$	35	$	30	$	3	$	68	$	400	$	29,747	$	30,215
Real estate construction:
Commercial Real Estate business line (a)	3		—		—		3		—		2,564		2,567
Other business lines (b)	—		—		—		—		—		363		363
Total real estate construction	3		—		—		3		—		2,927		2,930
Commercial mortgage:
Commercial Real Estate business line (a)	19		—		11		30		8		1,978		2,016
Other business lines (b)	14		1		8		23		33		6,949		7,005
Total commercial mortgage	33		1		19		53		41		8,927		9,021
Lease financing	—		—		3		3		6		541		550
International	2		—		—		2		8		1,096		1,106
Total business loans	73		31		25		129		455		43,238		43,822
Retail loans:
Residential mortgage	13		1		—		14		39		1,891		1,944
Consumer:
Home equity	8		3		—		11		26		1,753		1,790
Other consumer	1		—		1		2		1		744		747
Total consumer	9		3		1		13		27		2,497		2,537
Total retail loans	22		4		1		27		66		4,388		4,481
Total loans	$	95	$	35	$	26	$	156	$	521	$	47,626	$	48,303
December 31, 2016
Business loans:
Commercial	$	30	$	12	$	14	$	56	$	445	$	30,493	$	30,994
Real estate construction:
Commercial Real Estate business line (a)	—		—		—		—		—		2,485		2,485
Other business lines (b)	—		—		—		—		—		384		384
Total real estate construction	—		—		—		—		—		2,869		2,869
Commercial mortgage:
Commercial Real Estate business line (a)	5		—		—		5		9		2,004		2,018
Other business lines (b)	58		5		5		68		37		6,808		6,913
Total commercial mortgage	63		5		5		73		46		8,812		8,931
Lease financing	—		—		—		—		6		566		572
International	1		—		—		1		14		1,243		1,258
Total business loans	94		17		19		130		511		43,983		44,624
Retail loans:
Residential mortgage	7		3		—		10		39		1,893		1,942
Consumer:
Home equity	4		3		—		7		28		1,765		1,800
Other consumer	1		—		—		1		4		717		722
Total consumer	5		3		—		8		32		2,482		2,522
Total retail loans	12		6		—		18		71		4,375		4,464
Total loans	$	106	$	23	$	19	$	148	$	582	$	48,358	$	49,088


(a)	Primarily loans to real estate developers.


(b)	Primarily loans secured by owner-occupied real estate.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table presents loans by credit quality indicator, based on internal risk ratings assigned to each business loan at the time of approval and subjected to subsequent reviews, generally at least annually, and to pools of retail loans with similar risk characteristics.



	Internally Assigned Rating
(in millions)	Pass (a)		Special Mention (b)		Substandard (c)		Nonaccrual (d)		Total
March 31, 2017
Business loans:
Commercial	$	28,088	$	795	$	932	$	400	$	30,215
Real estate construction:
Commercial Real Estate business line (e)	2,552		15		—		—		2,567
Other business lines (f)	362		—		1		—		363
Total real estate construction	2,914		15		1		—		2,930
Commercial mortgage:
Commercial Real Estate business line (e)	1,958		31		19		8		2,016
Other business lines (f)	6,755		111		106		33		7,005
Total commercial mortgage	8,713		142		125		41		9,021
Lease financing	528		11		5		6		550
International	1,015		58		25		8		1,106
Total business loans	41,258		1,021		1,088		455		43,822
Retail loans:
Residential mortgage	1,904		1		—		39		1,944
Consumer:
Home equity	1,760		1		3		26		1,790
Other consumer	745		—		1		1		747
Total consumer	2,505		1		4		27		2,537
Total retail loans	4,409		2		4		66		4,481
Total loans	$	45,667	$	1,023	$	1,092	$	521	$	48,303
December 31, 2016
Business loans:
Commercial	$	28,616	$	944	$	989	$	445	$	30,994
Real estate construction:
Commercial Real Estate business line (e)	2,485		—		—		—		2,485
Other business lines (f)	381		—		3		—		384
Total real estate construction	2,866		—		3		—		2,869
Commercial mortgage:
Commercial Real Estate business line (e)	1,970		19		20		9		2,018
Other business lines (f)	6,645		109		122		37		6,913
Total commercial mortgage	8,615		128		142		46		8,931
Lease financing	550		11		5		6		572
International	1,200		22		22		14		1,258
Total business loans	41,847		1,105		1,161		511		44,624
Retail loans:
Residential mortgage	1,900		3		—		39		1,942
Consumer:
Home equity	1,767		1		4		28		1,800
Other consumer	718		—		—		4		722
Total consumer	2,485		1		4		32		2,522
Total retail loans	4,385		4		4		71		4,464
Total loans	$	46,232	$	1,109	$	1,165	$	582	$	49,088


(a)	Includes all loans not included in the categories of special mention, substandard or nonaccrual.


(b)	Special mention loans are accruing loans that have potential credit weaknesses that deserve management’s close attention, such as loans to borrowers who may be experiencing financial difficulties that may result in deterioration of repayment prospects from the borrower at some future date.

(c)

Substandard loans are accruing loans that have a well-defined weakness, or weaknesses, such as loans to borrowers who may be experiencing losses from operations or inadequate liquidity of a degree and duration that jeopardizes the orderly repayment of the loan. Substandard loans also are distinguished by the distinct possibility of loss in the future if these weaknesses are not corrected. This category is generally consistent with the "substandard" category as defined by regulatory authorities.

(d)

Nonaccrual loans are loans for which the accrual of interest has been discontinued. For further information regarding nonaccrual loans, refer to the Nonperforming Assets subheading in Note 1 - Basis of Presentation and Accounting Policies - on page F-56 in the Corporation's 2016 Annual Report. A significant majority of nonaccrual loans are generally consistent with the "substandard" category and the remainder are generally consistent with the "doubtful" category as defined by regulatory authorities.


(e)	Primarily loans to real estate developers.


(f)	Primarily loans secured by owner-occupied real estate.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table summarizes nonperforming assets.



(in millions)	March 31, 2017		December 31, 2016
Nonaccrual loans	$	521	$	582
Reduced-rate loans (a)	8		8
Total nonperforming loans	529		590
Foreclosed property (b)	16		17
Total nonperforming assets	$	545	$	607


(a)	There were no reduced-rate business loans at both March 31, 2017 and December 31, 2016. Reduced-rate retail loans were $8 million at both March 31, 2017 and December 31, 2016.


(b)	Included $2 million and $3 million of foreclosed residential real estate properties at March 31, 2017 and December 31, 2016, respectively.

There were no retail loans secured by residential real estate properties in process of foreclosure included in nonaccrual loans at both March 31, 2017 and December 31, 2016.

Allowance for Credit Losses

The following table details the changes in the allowance for loan losses and related loan amounts.



	2017									2016
(in millions)	Business Loans			Retail Loans			Total			Business Loans			Retail Loans			Total

Three Months Ended March 31
Allowance for loan losses:
Balance at beginning of period	$	682		$	48		$	730		$	579		$	55		$	634
Loan charge-offs	(42		)	(2		)	(44		)	(75		)	(2		)	(77		)
Recoveries on loans previously charged-off	9			2			11			24			1			25
Net loan charge-offs	(33		)	—			(33		)	(51		)	(1		)	(52		)
Provision for loan losses	12			(1		)	11			145			(4		)	141
Foreign currency translation adjustment	—			—			—			1			—			1
Balance at end of period	$	661		$	47		$	708		$	674		$	50		$	724

As a percentage of total loans	1.51		%	1.05		%	1.47		%	1.50		%	1.14		%	1.47		%

March 31
Allowance for loan losses:
Individually evaluated for impairment	$	87		$	2		$	89		$	88		$	—		$	88
Collectively evaluated for impairment	574			45			619			586			50			636
Total allowance for loan losses	$	661		$	47		$	708		$	674		$	50		$	724
Loans:
Individually evaluated for impairment	$	535		$	41		$	576		$	755		$	27		$	782
Collectively evaluated for impairment	43,287			4,440			47,727			44,265			4,330			48,595
Total loans evaluated for impairment	$	43,822		$	4,481		$	48,303		$	45,020		$	4,357		$	49,377

Changes in the allowance for credit losses on lending-related commitments, included in "accrued expenses and other liabilities" on the consolidated balance sheets, are summarized in the following table.



	Three Months Ended March 31,
(in millions)	2017		2016
Balance at beginning of period	$	41	$	45
Charge-offs on lending related commitments (a)	—		(6		)
Provision for credit losses on lending-related commitments	5		7
Balance at end of period	$	46	$	46

(a) Charge-offs result from the sale of unfunded lending-related commitments.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

Individually Evaluated Impaired Loans

The following table presents additional information regarding individually evaluated impaired loans.



	Recorded Investment In:
(in millions)	Impaired Loans with No Related Allowance		Impaired Loans with Related Allowance		Total Impaired Loans		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2017
Business loans:
Commercial	$	101	$	384	$	485	$	576	$	80
Commercial mortgage:
Commercial Real Estate business line (a)	—		7		7		16		5
Other business lines (b)	3		32		35		44		1
Total commercial mortgage	3		39		42		60		6
International	1		7		8		17		1
Total business loans	105		430		535		653		87
Retail loans:
Residential mortgage	18		9		27		29		2
Consumer:
Home equity	12		—		12		16		—
Other consumer	2		—		2		3		—
Total consumer	14		—		14		19		—
Total retail loans (c)	32		9		41		48		2
Total individually evaluated impaired loans	$	137	$	439	$	576