COMERICA INC /NEW/ - Quarter Report: 2018 September (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 September 30, 2018
Or
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 every Interactive Data File required to be submitted 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 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 | 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 October 25, 2018: 161,698,314 shares
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
(in millions, except share data) | September 30, 2018 | December 31, 2017 | |||||
(unaudited) | |||||||
ASSETS | |||||||
Cash and due from banks | $ | 945 | $ | 1,438 | |||
Interest-bearing deposits with banks | 4,894 | 4,407 | |||||
Other short-term investments | 136 | 96 | |||||
Investment securities available-for-sale | 11,862 | 10,938 | |||||
Investment securities held-to-maturity | — | 1,266 | |||||
Commercial loans | 30,889 | 31,060 | |||||
Real estate construction loans | 3,158 | 2,961 | |||||
Commercial mortgage loans | 9,019 | 9,159 | |||||
Lease financing | 471 | 468 | |||||
International loans | 1,090 | 983 | |||||
Residential mortgage loans | 1,947 | 1,988 | |||||
Consumer loans | 2,436 | 2,554 | |||||
Total loans | 49,010 | 49,173 | |||||
Less allowance for loan losses | (664 | ) | (712 | ) | |||
Net loans | 48,346 | 48,461 | |||||
Premises and equipment | 472 | 466 | |||||
Accrued income and other assets | 4,793 | 4,495 | |||||
Total assets | $ | 71,448 | $ | 71,567 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Noninterest-bearing deposits | $ | 29,301 | $ | 32,071 | |||
Money market and interest-bearing checking deposits | 22,449 | 21,500 | |||||
Savings deposits | 2,192 | 2,152 | |||||
Customer certificates of deposit | 2,051 | 2,165 | |||||
Foreign office time deposits | 13 | 15 | |||||
Total interest-bearing deposits | 26,705 | 25,832 | |||||
Total deposits | 56,006 | 57,903 | |||||
Short-term borrowings | 84 | 10 | |||||
Accrued expenses and other liabilities | 1,154 | 1,069 | |||||
Medium- and long-term debt | 6,418 | 4,622 | |||||
Total liabilities | 63,662 | 63,604 | |||||
Common stock - $5 par value: | |||||||
Authorized - 325,000,000 shares | |||||||
Issued - 228,164,824 shares | 1,141 | 1,141 | |||||
Capital surplus | 2,144 | 2,122 | |||||
Accumulated other comprehensive loss | (611 | ) | (451 | ) | |||
Retained earnings | 8,587 | 7,887 | |||||
Less cost of common stock in treasury - 62,224,198 shares at 9/30/18 and 55,306,483 shares at 12/31/17 | (3,475 | ) | (2,736 | ) | |||
Total shareholders’ equity | 7,786 | 7,963 | |||||
Total liabilities and shareholders’ equity | $ | 71,448 | $ | 71,567 |
1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Comerica Incorporated and Subsidiaries
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||
INTEREST INCOME | |||||||||||||||
Interest and fees on loans | $ | 581 | $ | 500 | $ | 1,658 | $ | 1,374 | |||||||
Interest on investment securities | 66 | 63 | 194 | 186 | |||||||||||
Interest on short-term investments | 28 | 16 | 63 | 44 | |||||||||||
Total interest income | 675 | 579 | 1,915 | 1,604 | |||||||||||
INTEREST EXPENSE | |||||||||||||||
Interest on deposits | 35 | 11 | 79 | 29 | |||||||||||
Interest on short-term borrowings | 1 | 3 | 1 | 3 | |||||||||||
Interest on medium- and long-term debt | 40 | 19 | 97 | 56 | |||||||||||
Total interest expense | 76 | 33 | 177 | 88 | |||||||||||
Net interest income | 599 | 546 | 1,738 | 1,516 | |||||||||||
Provision for credit losses | — | 24 | (17 | ) | 57 | ||||||||||
Net interest income after provision for credit losses | 599 | 522 | 1,755 | 1,459 | |||||||||||
NONINTEREST INCOME | |||||||||||||||
Card fees | 61 | 85 | 180 | 242 | |||||||||||
Service charges on deposit accounts | 53 | 57 | 160 | 172 | |||||||||||
Fiduciary income | 51 | 48 | 155 | 148 | |||||||||||
Commercial lending fees | 21 | 21 | 62 | 63 | |||||||||||
Letter of credit fees | 9 | 11 | 30 | 34 | |||||||||||
Bank-owned life insurance | 11 | 12 | 29 | 31 | |||||||||||
Foreign exchange income | 12 | 11 | 36 | 33 | |||||||||||
Brokerage fees | 7 | 6 | 20 | 17 | |||||||||||
Net securities losses | (20 | ) | — | (19 | ) | — | |||||||||
Other noninterest income | 29 | 24 | 73 | 82 | |||||||||||
Total noninterest income | 234 | 275 | 726 | 822 | |||||||||||
NONINTEREST EXPENSES | |||||||||||||||
Salaries and benefits expense | 254 | 237 | 759 | 713 | |||||||||||
Outside processing fee expense | 65 | 92 | 190 | 267 | |||||||||||
Net occupancy expense | 38 | 38 | 113 | 114 | |||||||||||
Equipment expense | 12 | 12 | 34 | 34 | |||||||||||
Restructuring charges | 12 | 7 | 39 | 32 | |||||||||||
Software expense | 32 | 35 | 95 | 95 | |||||||||||
FDIC insurance expense | 11 | 13 | 36 | 38 | |||||||||||
Advertising expense | 8 | 8 | 22 | 19 | |||||||||||
Litigation-related expense | — | — | — | (2 | ) | ||||||||||
Other noninterest expenses | 20 | 21 | 58 | 67 | |||||||||||
Total noninterest expenses | 452 | 463 | 1,346 | 1,377 | |||||||||||
Income before income taxes | 381 | 334 | 1,135 | 904 | |||||||||||
Provision for income taxes | 63 | 108 | 210 | 273 | |||||||||||
NET INCOME | 318 | 226 | 925 | 631 | |||||||||||
Less income allocated to participating securities | 2 | 2 | 6 | 5 | |||||||||||
Net income attributable to common shares | $ | 316 | $ | 224 | $ | 919 | $ | 626 | |||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 1.89 | $ | 1.29 | $ | 5.41 | $ | 3.58 | |||||||
Diluted | 1.86 | 1.26 | 5.32 | 3.50 | |||||||||||
Comprehensive income | 296 | 228 | 764 | 655 | |||||||||||
Cash dividends declared on common stock | 100 | 53 | 210 | 141 | |||||||||||
Cash dividends declared per common share | 0.60 | 0.30 | 1.24 | 0.79 |
See notes to consolidated financial statements (unaudited).
2
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 | Retained Earnings | Treasury Stock | |||||||||||||||||||||
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 | — | — | — | — | 631 | — | 631 | |||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 24 | — | — | 24 | |||||||||||||||||||
Cash dividends declared on common stock ($0.79 per share) | — | — | — | — | (141 | ) | — | (141 | ) | |||||||||||||||||
Purchase of common stock | (5.7 | ) | — | — | — | — | (396 | ) | (396 | ) | ||||||||||||||||
Net issuance of common stock under employee stock plans | 3.0 | — | (26 | ) | — | (22 | ) | 138 | 90 | |||||||||||||||||
Net issuance of common stock for warrants | 1.7 | — | (28 | ) | — | (51 | ) | 79 | — | |||||||||||||||||
Share-based compensation | — | — | 29 | — | — | — | 29 | |||||||||||||||||||
Other | — | — | (1 | ) | — | — | 1 | — | ||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2017 | 174.3 | $ | 1,141 | $ | 2,112 | $ | (359 | ) | $ | 7,746 | $ | (2,606 | ) | $ | 8,034 | |||||||||||
BALANCE AT DECEMBER 31, 2017 | 172.9 | $ | 1,141 | $ | 2,122 | $ | (451 | ) | $ | 7,887 | $ | (2,736 | ) | $ | 7,963 | |||||||||||
Cumulative effect of change in accounting principles | — | — | — | 1 | 14 | — | 15 | |||||||||||||||||||
Net income | — | — | — | — | 925 | — | 925 | |||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (161 | ) | — | — | (161 | ) | |||||||||||||||||
Cash dividends declared on common stock ($1.24 per share) | — | — | — | — | (210 | ) | — | (210 | ) | |||||||||||||||||
Purchase of common stock | (8.7 | ) | — | (7 | ) | — | — | (821 | ) | (828 | ) | |||||||||||||||
Net issuance of common stock under employee stock plans | 1.5 | — | (9 | ) | — | (24 | ) | 74 | 41 | |||||||||||||||||
Net issuance of common stock for warrants | 0.2 | — | (3 | ) | — | (5 | ) | 8 | — | |||||||||||||||||
Share-based compensation | — | — | 41 | — | — | — | 41 | |||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2018 | 165.9 | $ | 1,141 | $ | 2,144 | $ | (611 | ) | $ | 8,587 | $ | (3,475 | ) | $ | 7,786 |
See notes to consolidated financial statements (unaudited).
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Comerica Incorporated and Subsidiaries
Nine Months Ended September 30, | |||||||
(in millions) | 2018 | 2017 | |||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 925 | $ | 631 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for credit losses | (17 | ) | 57 | ||||
Provision (benefit) for deferred income taxes | 37 | (48 | ) | ||||
Depreciation and amortization | 90 | 91 | |||||
Net periodic defined benefit credit | (14 | ) | (14 | ) | |||
Share-based compensation expense | 41 | 29 | |||||
Net amortization of securities | 3 | 5 | |||||
Accretion of loan purchase discount | (1 | ) | (3 | ) | |||
Net securities losses | 19 | — | |||||
Net gains on sales of foreclosed property | (1 | ) | (2 | ) | |||
Net change in: | |||||||
Accrued income receivable | (36 | ) | (21 | ) | |||
Accrued expenses payable | 19 | 28 | |||||
Other, net | (98 | ) | 97 | ||||
Net cash provided by operating activities | 967 | 850 | |||||
INVESTING ACTIVITIES | |||||||
Investment securities available-for-sale: | |||||||
Maturities and redemptions | 1,366 | 1,198 | |||||
Sales | 1,256 | 1,259 | |||||
Purchases | (2,618 | ) | (2,655 | ) | |||
Investment securities held-to-maturity: | |||||||
Maturities and redemptions | — | 241 | |||||
Net change in loans | 120 | (193 | ) | ||||
Proceeds from sales of foreclosed property | 7 | 18 | |||||
Net increase in premises and equipment | (65 | ) | (43 | ) | |||
Federal Home Loan Bank stock: | |||||||
Purchases | (41 | ) | (42 | ) | |||
Redemptions | — | 21 | |||||
Proceeds from bank-owned life insurance settlements | 4 | 8 | |||||
Other, net | (2 | ) | 2 | ||||
Net cash provided by (used in) investing activities | 27 | (186 | ) | ||||
FINANCING ACTIVITIES | |||||||
Net change in: | |||||||
Deposits | (1,978 | ) | (1,208 | ) | |||
Short-term borrowings | 74 | 484 | |||||
Medium- and long-term debt: | |||||||
Maturities | — | (500 | ) | ||||
Issuances and advances | 1,850 | — | |||||
Terminations | — | (16 | ) | ||||
Common stock: | |||||||
Repurchases | (837 | ) | (412 | ) | |||
Cash dividends paid | (161 | ) | (128 | ) | |||
Issuances under employee stock plans | 50 | 106 | |||||
Other, net | 2 | (4 | ) | ||||
Net cash used in financing activities | (1,000 | ) | (1,678 | ) | |||
Net decrease in cash and cash equivalents | (6 | ) | (1,014 | ) | |||
Cash and cash equivalents at beginning of period | 5,845 | 7,218 | |||||
Cash and cash equivalents at end of period | $ | 5,839 | $ | 6,204 | |||
Interest paid | $ | 172 | $ | 89 | |||
Income tax paid | 125 | 247 | |||||
Noncash investing and financing activities: | |||||||
Loans transferred to other real estate | 2 | 6 | |||||
Securities transferred from held-to-maturity to available-for-sale | 1,266 | — | |||||
Securities transferred from available-for-sale to equity securities | 81 | — |
See notes to consolidated financial statements (unaudited).
4
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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.
Revenue Recognition
Effective January 1, 2018, the Corporation adopted the provision of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers" (Topic 606), using the modified retrospective method applied to all open contracts as of January 1, 2018.
Under Topic 606, card fee revenue from certain products is generally presented net of network costs, including interchange costs, surcharge fees and assessment fees, as opposed to the previous presentation of associated network costs in outside processing fees in the Consolidated Statements of Comprehensive Income. Similar adjustments were made for other revenue streams that resulted in certain costs being recognized in the same category as the associated revenues in noninterest income.
The adoption of Topic 606 resulted in decreases of $34 million in card fees and $2 million in service charges on deposits accounts, included in noninterest income, and a corresponding $36 million decrease in outside processing fees included in noninterest expenses, in the Consolidated Statements of Comprehensive Income for the three months ended September 30, 2018. For the nine months ended September 30, 2018, the impact on the Consolidated Statements of Comprehensive Income was a $105 million decrease in card fees, a $4 million decrease in service charges on deposit accounts and a $109 million decrease in outside processing fee expense.
The Corporation previously deferred recognition of certain treasury management fees included in service charges on deposit accounts in the Consolidated Statements of Comprehensive Income until the amount of compensation was considered fixed and determinable. Under the new guidance, the portion of these fees that are based on agreed-upon rates less estimated credits expected to be earned by the customer is recognized as services are rendered. As a result, the Corporation recorded a transition adjustment of $14 million, after tax, to retained earnings, included in cumulative effect of change in accounting principles in the accompanying Consolidated Statements of Changes in Shareholders Equity. Similar adjustments were made for other revenue streams that resulted in an additional cumulative transition after-tax adjustment to retained earnings of $2 million.
Revenues from contracts with customers may be recognized when services are complete or as they are rendered, although contracts are generally short-term by nature. Services provided over a period of time are typically transferred to customers evenly over the term of the contracts and revenue is recognized evenly over the period services are provided. Contract receivables are included in accrued income and other assets on the Consolidated Balance Sheets. Payment terms vary by services offered, and the time between completion of performance obligations and payment is typically not significant.
Card fees comprise interchange and other fee income earned on government card, commercial card, debit/automated teller machine card and merchant payment processing programs. Card fees are presented net of network costs, as performance obligations for card services are limited to transaction processing and settlement with the card network on behalf of the customers. Network costs were approximately $34 million and $29 million for the three months ended September 30, 2018 and 2017, respectively, and $105 million and $80 million for the nine months ended September 30, 2018 and 2017, respectively. Fees for these services are primarily based on interchange rates set by the network and transaction volume. The Corporation also provides ongoing card program support services, for which fees are based on contractually agreed prices and customer demand for services.
Service charges on deposit accounts comprise charges on retail and business accounts, including fees for treasury management services. These treasury management services include transaction-based services related to payment processing, overdrafts, non-sufficient funds and other deposit account activity, as well as account management services that are provided over time. Business customers can earn credits depending on deposit balances maintained with the Corporation, which may be used to offset fees. Fees and credits are based on predetermined, agreed-upon rates.
5
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
Fiduciary income includes fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided primarily to personal and institutional trust customers. Revenue is recognized as the services are performed and is based either on the market value of the assets managed or the services provided, as well as agreed-upon rates.
Commercial lending fees include both revenue from contracts with customers (primarily loan servicing fees) and other sources of revenue. Commercial loan servicing fees are based on contractually agreed-upon prices and when the services are provided. Other sources of revenue in commercial lending fees primarily include fees assessed on the unused portion of commercial lines of credit (unused commitment fees) and syndication arrangements.
Brokerage fees are commissions earned for facilitating securities transactions for customers, as well as other brokerage services provided. Revenue is recognized when services are complete and are based on the type of services provided and agreed-upon rates. The Corporation pays commissions based on brokerage fee revenue. These are typically recognized when incurred because the amortization period is one year or less and are included in salaries and benefits expense in the Consolidated Statements of Comprehensive Income.
Other revenues, consisting primarily of other retail fees, investment banking fees and insurance commissions, are typically recognized when services or transactions are completed and are based on the type of services provided and agreed-upon rates.
Except as discussed above, commissions and other incentives paid to employees are generally based on several internal and external metrics and, as a result, are not solely dependent on revenue generating activities.
Classification and Measurement of Financial Instruments
Effective January 1, 2018, the Corporation adopted the provisions of Accounting Standards Update (ASU) No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities," (ASU 2016-01). ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. At adoption, an immaterial amount of cumulative net unrealized losses on equity securities previously recognized in accumulated other comprehensive income (AOCI) was reclassified to the opening balance of retained earnings, included in cumulative effect of change in accounting principles in the accompanying Consolidated Statements of Changes in Shareholders Equity. Changes to the fair value of equity securities occurring after December 31, 2017, other than equity method investments, are included in net securities losses in the Consolidated Statements of Comprehensive Income. Also, as part of adopting ASU 2016-01, the Corporation refined the calculation used to determine the estimated fair value of loans disclosed in note 2 to the consolidated financial statements.
Statement of Cash Flows
The Corporation adopted FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” (ASU 2016-15) on January 1, 2018 and, as a result, reclassified $8 million of proceeds from settlement of bank-owned life insurance policies from operating activities to investing activities for the nine-month period ended September 30, 2017.
Defined Benefit Pension and Other Postretirement Costs
The Corporation retrospectively adopted the provisions of 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) on January 1, 2018, which requires employers to report service cost as part of compensation expense and the other components of net benefit credit separately from service cost. As a result, $12 million and $36 million of benefit from the other components of net benefit credit was reclassified from salaries and benefits expense to other noninterest expenses in the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017, respectively. The Corporation based the adjustment to the prior periods on amounts disclosed in note 10.
Derivatives Instruments and Hedging Activities
The Corporation adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12), effective January 1, 2018. At transition, the Corporation elected to change the measurement methodology of all long-haul fair value hedges existing at December 31, 2017. The prior period effect of this election was a $1 million reduction to opening retained earnings, included in cumulative effect of change in accounting principles in the Consolidated Statements of Shareholders' Equity. In addition, the Corporation made a transition election to reclassify the portfolio of held-to-maturity securities to available-for-sale in January 2018 as the securities are eligible to be hedged. This resulted in the recognition of additional unrealized losses of $11 million at the date of transfer.
6
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
Income Taxes
The Tax Cuts and Jobs Act (the "Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35 percent to 21 percent. Also, on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for tax effects of the Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Based on the information available and current interpretation of the rules, the Corporation has made reasonable estimates of the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, generally 21 percent. The provisional amount recorded related to the remeasurement of the Corporation's deferred tax balance was $99 million, including $107 million recognized in the year ended December 31, 2017 and an $8 million downward revision to the estimated impact recorded in the nine months ended September 30, 2018. The final impact of the Act may differ from these estimates as a result of changes in management’s interpretations and assumptions, as well as new guidance that may be issued by the Internal Revenue Service (IRS).
Pending Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (ASU 2016-02), to increase the transparency and comparability of lease recognition and disclosure. ASU 2016-02 requires lessees to recognize lease contracts with a term greater than one year on the balance sheet, while recognizing expenses on the income statement in a manner similar to current guidance. ASU 2016-02 is effective for the Corporation on January 1, 2019 and must be applied using the modified retrospective approach. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard to all open leases as of the adoption date. The Corporation expects to make use of this transition option and is currently finalizing review of key assumptions and evaluation of service contracts for embedded leases. Based on preliminary evaluation, the right-of-use asset and corresponding lease obligation liability are expected to range between $450 million and $550 million at adoption, resulting in an 8- to 10-basis point decrease in the common equity tier 1 capital (CET1) ratio. Preliminary estimates are based on the current interest rate environment which may differ from those at the time of adoption of the standard. The Corporation will continue to evaluate other impacts of adoption but does not anticipate these to be significant.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," (ASU 2016-13), which addresses concerns regarding the perceived delay in recognition of credit losses under the existing incurred loss model. The amendment introduces a new, single model for recognizing credit losses on all financial instruments presented on a cost basis. Under the new model, entities must estimate current expected credit losses by considering all available relevant information, including historical and current information, as well as reasonable and supportable forecasts of future events. The update also requires additional qualitative and quantitative information to allow users to better understand the credit risk within the portfolio and the methodologies for determining the allowance for credit losses. ASU 2016-13 is effective for the Corporation on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted. The Corporation will adopt the standard on January 1, 2020 and is currently evaluating the impact of adoption.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," (ASU 2018-15), to align the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs relating to internal-use software. The ASU 2018-15 update requires entities in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset and which costs to expense. ASU 2018-15 is effective for the Corporation on January 1, 2020 and may be applied using either the retrospective or prospective approach. Early adoption is permitted. The Corporation is currently evaluating the impact of adopting ASU 2018-15.
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.
Equity securities, investment securities available-for-sale, derivatives and deferred compensation plan assets and 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),
7
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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, 2017 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 significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis.
8
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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 September 30, 2018 and December 31, 2017.
(in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
September 30, 2018 | ||||||||||||||||
Deferred compensation plan assets | $ | 94 | $ | 94 | $ | — | $ | — | ||||||||
Equity securities | 40 | 40 | — | — | ||||||||||||
Investment securities available-for-sale: | ||||||||||||||||
U.S. Treasury and other U.S. government agency securities | 2,699 | 2,699 | — | — | ||||||||||||
Residential mortgage-backed securities (a) | 9,163 | — | 9,163 | — | ||||||||||||
Total investment securities available-for-sale | 11,862 | 2,699 | 9,163 | — | ||||||||||||
Derivative assets: | ||||||||||||||||
Interest rate contracts | 31 | — | 29 | 2 | ||||||||||||
Energy derivative contracts | 219 | — | 219 | — | ||||||||||||
Foreign exchange contracts | 17 | — | 17 | — | ||||||||||||
Warrants | 2 | — | — | 2 | ||||||||||||
Total derivative assets | 269 | — | 265 | 4 | ||||||||||||
Total assets at fair value | $ | 12,265 | $ | 2,833 | $ | 9,428 | $ | 4 | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate contracts | $ | 131 | $ | — | $ | 131 | $ | — | ||||||||
Energy derivative contracts | 219 | — | 219 | — | ||||||||||||
Foreign exchange contracts | 14 | — | 14 | — | ||||||||||||
Total derivative liabilities | 364 | — | 364 | — | ||||||||||||
Deferred compensation plan liabilities | 94 | 94 | — | — | ||||||||||||
Total liabilities at fair value | $ | 458 | $ | 94 | $ | 364 | $ | — | ||||||||
December 31, 2017 | ||||||||||||||||
Trading securities: | ||||||||||||||||
Deferred compensation plan assets | $ | 92 | $ | 92 | $ | — | $ | — | ||||||||
Investment securities available-for-sale: | ||||||||||||||||
U.S. Treasury and other U.S. government agency securities | 2,727 | 2,727 | — | — | ||||||||||||
Residential mortgage-backed securities (a) | 8,124 | — | 8,124 | — | ||||||||||||
State and municipal securities | 5 | — | — | 5 | (b) | |||||||||||
Equity and other non-debt securities | 82 | 38 | — | 44 | (b) | |||||||||||
Total investment securities available-for-sale | 10,938 | 2,765 | 8,124 | 49 | ||||||||||||
Derivative assets: | ||||||||||||||||
Interest rate contracts | 57 | — | 43 | 14 | ||||||||||||
Energy derivative contracts | 93 | — | 93 | — | ||||||||||||
Foreign exchange contracts | 42 | — | 42 | — | ||||||||||||
Warrants | 2 | — | — | 2 | ||||||||||||
Total derivative assets | 194 | — | 178 | 16 | ||||||||||||
Total assets at fair value | $ | 11,224 | $ | 2,857 | $ | 8,302 | $ | 65 | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate contracts | $ | 59 | $ | — | $ | 59 | $ | — | ||||||||
Energy derivative contracts | 91 | — | 91 | — | ||||||||||||
Foreign exchange contracts | 40 | — | 40 | — | ||||||||||||
Total derivative liabilities | 190 | — | 190 | — | ||||||||||||
Deferred compensation plan liabilities | 92 | 92 | — | — | ||||||||||||
Total liabilities at fair value | $ | 282 | $ | 92 | $ | 190 | $ | — |
(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- and nine-month periods ended September 30, 2018 and 2017.
9
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- and nine-month periods ended September 30, 2018 and 2017.
Net Realized/Unrealized Gains (Losses) (Pretax) | ||||||||||||||||||||||||||||
Balance at Beginning of Period | Recorded in Earnings | Recorded in Other Comprehensive Income | Balance at End of Period | |||||||||||||||||||||||||
Change in Classification (a) | Sales and Redemptions | |||||||||||||||||||||||||||
(in millions) | Realized | Unrealized | ||||||||||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||
Interest rate contracts | $ | 6 | $ | — | $ | — | $ | (4 | ) | (b) | $ | — | $ | — | $ | 2 | ||||||||||||
Warrants | 2 | — | 2 | (b) | — | — | (2 | ) | 2 | |||||||||||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||
State and municipal securities (c) | $ | 5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5 | ||||||||||||||
Equity and other non-debt securities (c) | 46 | — | — | — | (1 | ) | — | 45 | ||||||||||||||||||||
Total investment securities available-for-sale | 51 | — | — | — | (1 | ) | — | 50 | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||
Interest rate contracts | 13 | — | — | 1 | (b) | — | — | 14 | ||||||||||||||||||||
Warrants | 2 | — | — | — | — | — | 2 | |||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||
Equity securities | $ | — | $ | 44 | $ | — | $ | — | $ | — | $ | (44 | ) | $ | — | |||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||
State and municipal securities (c) | 5 | — | — | — | — | (5 | ) | — | ||||||||||||||||||||
Equity and other non-debt securities (c) | 44 | (44 | ) | — | — | — | — | — | ||||||||||||||||||||
Total investment securities available-for-sale | 49 | (44 | ) | — | — | — | (5 | ) | — | |||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||
Interest rate contracts | 14 | — | — | (12 | ) | (b) | — | — | 2 | |||||||||||||||||||
Warrants | 2 | — | 3 | (b) | — | — | (3 | ) | 2 | |||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||
State and municipal securities (c) | $ | 7 | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 5 | |||||||||||||
Equity and other non-debt securities (c) | 47 | — | — | — | (1 | ) | (1 | ) | 45 | |||||||||||||||||||
Total investment securities available-for-sale | 54 | — | — | — | (1 | ) | (3 | ) | 50 | |||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||
Interest rate contracts | 11 | — | — | 3 | (b) | — | — | 14 | ||||||||||||||||||||
Warrants | 3 | — | 5 | (b) | (1 | ) | (b) | — | (5 | ) | 2 |
(a) | Reflects the reclassification of equity securities resulting from the adoption of ASU 2016-01. |
(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. |
(c) | Auction-rate securities. |
10
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
ASSESTS AND LIABILITIES AT FAIR VALUE ON A NONRECURRING BASIS
The Corporation may be required 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, and were recognized at fair value since it was less than cost at the end of the period.
The following table presents assets recorded at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017. No liabilities were recorded at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017.
(in millions) | Level 3 | ||
September 30, 2018 | |||
Loans: | |||
Commercial | $ | 54 | |
Commercial mortgage | 4 | ||
Total loans | 58 | ||
Other real estate | 1 | ||
Total assets at fair value | $ | 59 | |
December 31, 2017 | |||
Loans: | |||
Commercial | $ | 111 | |
Commercial mortgage | 5 | ||
Total assets at fair value | $ | 116 |
Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017 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.
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.
11
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 | |||||||||||||||
September 30, 2018 | |||||||||||||||||||
Assets | |||||||||||||||||||
Cash and due from banks | $ | 945 | $ | 945 | $ | 945 | $ | — | $ | — | |||||||||
Interest-bearing deposits with banks | 4,894 | 4,894 | 4,894 | — | — | ||||||||||||||
Loans held-for-sale | 2 | 2 | — | 2 | — | ||||||||||||||
Total loans, net of allowance for loan losses (a) | 48,346 | 48,352 | — | — | 48,352 | ||||||||||||||
Customers’ liability on acceptances outstanding | 4 | 4 | 4 | — | — | ||||||||||||||
Restricted equity investments | 248 | 248 | 248 | — | — | ||||||||||||||
Nonmarketable equity securities (b) | 6 | 11 | |||||||||||||||||
Liabilities | |||||||||||||||||||
Demand deposits (noninterest-bearing) | 29,301 | 29,301 | — | 29,301 | — | ||||||||||||||
Interest-bearing deposits | 24,654 | 24,654 | — | 24,654 | — | ||||||||||||||
Customer certificates of deposit | 2,051 | 2,013 | — | 2,013 | — | ||||||||||||||
Total deposits | 56,006 | 55,968 | — | 55,968 | — | ||||||||||||||
Short-term borrowings | 84 | 84 | 84 | — | — | ||||||||||||||
Acceptances outstanding | 4 | 4 | 4 | — | — | ||||||||||||||
Medium- and long-term debt | 6,418 | 6,431 | — | 6,431 | — | ||||||||||||||
Credit-related financial instruments | (57 | ) | (57 | ) | — | — | (57 | ) | |||||||||||
December 31, 2017 | |||||||||||||||||||
Assets | |||||||||||||||||||
Cash and due from banks | $ | 1,438 | $ | 1,438 | $ | 1,438 | $ | — | $ | — | |||||||||
Interest-bearing deposits with banks | 4,407 | 4,407 | 4,407 | — | — | ||||||||||||||
Investment securities held-to-maturity | 1,266 | 1,246 | — | 1,246 | — | ||||||||||||||
Loans held-for-sale | 4 | 4 | — | 4 | — | ||||||||||||||
Total loans, net of allowance for loan losses (a) | 48,461 | 48,153 | — | — | 48,153 | ||||||||||||||
Customers’ liability on acceptances outstanding | 2 | 2 | 2 | — | — | ||||||||||||||
Restricted equity investments | 207 | 207 | 207 | — | — | ||||||||||||||
Nonmarketable equity securities (b) | 6 | 9 | |||||||||||||||||
Liabilities | |||||||||||||||||||
Demand deposits (noninterest-bearing) | 32,071 | 32,071 | — | 32,071 | — | ||||||||||||||
Interest-bearing deposits | 23,667 | 23,667 | — | 23,667 | — | ||||||||||||||
Customer certificates of deposit | 2,165 | 2,142 | — | 2,142 | — | ||||||||||||||
Total deposits | 57,903 | 57,880 | — | 57,880 | — | ||||||||||||||
Short-term borrowings | 10 | 10 | 10 | — | — | ||||||||||||||
Acceptances outstanding | 2 | 2 | 2 | — | — | ||||||||||||||
Medium- and long-term debt | 4,622 | 4,636 | — | 4,636 | — | ||||||||||||||
Credit-related financial instruments | (67 | ) | (67 | ) | — | — | (67 | ) |
(a) | Included $58 million and $116 million of impaired loans recorded at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017, 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. |
12
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 | |||||||||||
September 30, 2018 | |||||||||||||||
Investment securities available-for-sale: | |||||||||||||||
U.S. Treasury and other U.S. government agency securities | $ | 2,731 | $ | — | $ | 32 | $ | 2,699 | |||||||
Residential mortgage-backed securities (a) | 9,496 | 6 | 339 | 9,163 | |||||||||||
Total investment securities available-for-sale | $ | 12,227 | $ | 6 | $ | 371 | $ | 11,862 | |||||||
December 31, 2017 | |||||||||||||||
Investment securities available-for-sale: | |||||||||||||||
U.S. Treasury and other U.S. government agency securities | $ | 2,743 | $ | — | $ | 16 | $ | 2,727 | |||||||
Residential mortgage-backed securities (a) | 8,230 | 22 | 128 | 8,124 | |||||||||||
State and municipal securities | 5 | — | — | 5 | |||||||||||
Equity and other non-debt securities | 83 | 1 | 2 | 82 | |||||||||||
Total investment securities available-for-sale (b) | $ | 11,061 | $ | 23 | $ | 146 | $ | 10,938 | |||||||
Investment securities held-to-maturity (c): | |||||||||||||||
Residential mortgage-backed securities (a) | $ | 1,266 | $ | — | $ | 20 | $ | 1,246 |
(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 $51 million and $49 million, respectively, as of December 31, 2017. |
(c) | The amortized cost of investment securities held-to-maturity included net unrealized losses of $9 million at December 31, 2017 related to securities transferred from available-for-sale in 2014, which are included in accumulated other comprehensive loss. |
In connection with the adoption of ASU 2016-01 on January 1, 2018, cumulative unrealized gains and losses on available-for-sale equity and other non-debt securities were reclassified to retained earnings and the carrying value was reclassified to other short-term investments. Additionally, the Corporation transferred residential mortgage-backed securities with a book value of approximately $1.3 billion from held-to-maturity to available-for-sale upon the adoption of ASU 2017-12. For additional information about the adoption of ASU 2016-01, refer to note 1.
A summary of the Corporation’s investment securities in an unrealized loss position as of September 30, 2018 and December 31, 2017 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 | ||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||
U.S. Treasury and other U.S. government agency securities | $ | 1,852 | $ | 30 | $ | 182 | $ | 2 | $ | 2,034 | $ | 32 | ||||||||||||||
Residential mortgage-backed securities (a) | 4,280 | 106 | 4,363 | 233 | 8,643 | 339 | ||||||||||||||||||||
Total temporarily impaired securities | $ | 6,132 | $ | 136 | $ | 4,545 | $ | 235 | $ | 10,677 | $ | 371 | ||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||
U.S. Treasury and other U.S. government agency securities | $ | 2,727 | $ | 16 | $ | — | $ | — | $ | 2,727 | $ | 16 | ||||||||||||||
Residential mortgage-backed securities (a) | 3,845 | 32 | 4,003 | 125 | 7,848 | 157 | ||||||||||||||||||||
State and municipal securities (b) | — | — | 5 | — | (c) | 5 | — | (c) | ||||||||||||||||||
Equity and other non-debt securities (b) | — | — | 44 | 2 | 44 | 2 | ||||||||||||||||||||
Total temporarily impaired securities | $ | 6,572 | $ | 48 | $ | 4,052 | $ | 127 | $ | 10,624 | $ | 175 |
(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 September 30, 2018, the Corporation had 409 securities in an unrealized loss position with no credit impairment, including 19 U.S. Treasury securities and 390 residential mortgage-backed securities. The unrealized losses for these securities resulted from changes in market interest rates, not changes in credit quality. 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-
13
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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 September 30, 2018.
Sales, primarily from repositioning $1.3 billion of lower-yielding treasury securities, calls and write-downs of investment securities available-for-sale resulted in the following gains and losses recorded in “net securities losses” on the consolidated statements of comprehensive income, computed based on the adjusted cost of the specific security.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Securities gains | $ | — | $ | — | $ | 1 | $ | — | |||||||
Securities losses | (20 | ) | — | (20 | ) | — | |||||||||
Net securities losses | $ | (20 | ) | $ | — | $ | (19 | ) | $ | — |
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) | |||||||
September 30, 2018 | Amortized Cost | Fair Value | |||||
Contractual maturity | |||||||
Within one year | $ | 100 | $ | 100 | |||
After one year through five years | 2,993 | 2,958 | |||||
After five years through ten years | 1,634 | 1,598 | |||||
After ten years | 7,500 | 7,206 | |||||
Total investment securities | $ | 12,227 | $ | 11,862 |
Included in the contractual maturity distribution in the table above were residential mortgage-backed securities with total amortized cost of $9.5 billion and fair value of $9.2 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 September 30, 2018, investment securities with a carrying value of $317 million were pledged where permitted or required by law to secure $224 million of liabilities, primarily public and other deposits of state and local government agencies as well as derivative instruments.
14
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 | ||||||||||||||||||||
September 30, 2018 | |||||||||||||||||||||||||||
Business loans: | |||||||||||||||||||||||||||
Commercial | $ | 74 | $ | 50 | $ | 25 | $ | 149 | $ | 149 | $ | 30,591 | $ | 30,889 | |||||||||||||
Real estate construction: | |||||||||||||||||||||||||||
Commercial Real Estate business line (a) | — | — | — | — | — | 2,780 | 2,780 | ||||||||||||||||||||
Other business lines (b) | 36 | — | — | 36 | — | 342 | 378 | ||||||||||||||||||||
Total real estate construction | 36 | — | — | 36 | — | 3,122 | 3,158 | ||||||||||||||||||||
Commercial mortgage: | |||||||||||||||||||||||||||
Commercial Real Estate business line (a) | 1 | — | — | 1 | 2 | 1,757 | 1,760 | ||||||||||||||||||||
Other business lines (b) | 31 | 6 | 3 | 40 | 20 | 7,199 | 7,259 | ||||||||||||||||||||
Total commercial mortgage | 32 | 6 | 3 | 41 | 22 | 8,956 | 9,019 | ||||||||||||||||||||
Lease financing | — | — | — | — | 2 | 469 | 471 | ||||||||||||||||||||
International | — | — | — | — | 4 | 1,086 | 1,090 | ||||||||||||||||||||
Total business loans | 142 | 56 | 28 | 226 | 177 | 44,224 | 44,627 | ||||||||||||||||||||
Retail loans: | |||||||||||||||||||||||||||
Residential mortgage | 11 | 7 | — | 18 | 34 | 1,895 | 1,947 | ||||||||||||||||||||
Consumer: | |||||||||||||||||||||||||||
Home equity | 6 | 2 | — | 8 | 19 | 1,699 | 1,726 | ||||||||||||||||||||
Other consumer | 2 | — | — | 2 | — | 708 | 710 | ||||||||||||||||||||
Total consumer | 8 | 2 | — | 10 | 19 | 2,407 | 2,436 | ||||||||||||||||||||
Total retail loans | 19 | 9 | — | 28 | 53 | 4,302 | 4,383 | ||||||||||||||||||||
Total loans | $ | 161 | $ | 65 | $ | 28 | $ | 254 | $ | 230 | $ | 48,526 | $ | 49,010 | |||||||||||||
December 31, 2017 | |||||||||||||||||||||||||||
Business loans: | |||||||||||||||||||||||||||
Commercial | $ | 79 | $ | 134 | $ | 12 | $ | 225 | $ | 309 | $ | 30,526 | $ | 31,060 | |||||||||||||
Real estate construction: | |||||||||||||||||||||||||||
Commercial Real Estate business line (a) | 3 | — | — | 3 | — | 2,627 | 2,630 | ||||||||||||||||||||
Other business lines (b) | 4 | — | — | 4 | — | 327 | 331 | ||||||||||||||||||||
Total real estate construction | 7 | — | — | 7 | — | 2,954 | 2,961 | ||||||||||||||||||||
Commercial mortgage: | |||||||||||||||||||||||||||
Commercial Real Estate business line (a) | 14 | — | — | 14 | 9 | 1,808 | 1,831 | ||||||||||||||||||||
Other business lines (b) | 27 | 6 | 22 | 55 | 22 | 7,251 | 7,328 | ||||||||||||||||||||
Total commercial mortgage | 41 | 6 | 22 | 69 | 31 | 9,059 | 9,159 | ||||||||||||||||||||
Lease financing | — | — | — | — | 4 | 464 | 468 | ||||||||||||||||||||
International | 13 | — | — | 13 | 6 | 964 | 983 | ||||||||||||||||||||
Total business loans | 140 | 140 | 34 | 314 | 350 | 43,967 | 44,631 | ||||||||||||||||||||
Retail loans: | |||||||||||||||||||||||||||
Residential mortgage | 10 | 2 | — | 12 | 31 | 1,945 | 1,988 | ||||||||||||||||||||
Consumer: | |||||||||||||||||||||||||||
Home equity | 5 | 1 | — | 6 | 21 | 1,789 | 1,816 | ||||||||||||||||||||
Other consumer | 4 | — | 1 | 5 | — | 733 | 738 | ||||||||||||||||||||
Total consumer | 9 | 1 | 1 | 11 | 21 | 2,522 | 2,554 | ||||||||||||||||||||
Total retail loans | 19 | 3 | 1 | 23 | 52 | 4,467 | 4,542 | ||||||||||||||||||||
Total loans | $ | 159 | $ | 143 | $ | 35 | $ | 337 | $ | 402 | $ | 48,434 | $ | 49,173 |
(a) | Primarily loans to real estate developers. |
(b) | Primarily loans secured by owner-occupied real estate. |
15
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 | ||||||||||||||
September 30, 2018 | |||||||||||||||||||
Business loans: | |||||||||||||||||||
Commercial | $ | 29,628 | $ | 580 | $ | 532 | $ | 149 | $ | 30,889 | |||||||||
Real estate construction: | |||||||||||||||||||
Commercial Real Estate business line (e) | 2,757 | 23 | — | — | 2,780 | ||||||||||||||
Other business lines (f) | 370 | 8 | — | — | 378 | ||||||||||||||
Total real estate construction | 3,127 | 31 | — | — | 3,158 | ||||||||||||||
Commercial mortgage: | |||||||||||||||||||
Commercial Real Estate business line (e) | 1,698 | 15 | 45 | 2 | 1,760 | ||||||||||||||
Other business lines (f) | 7,044 | 120 | 75 | 20 | 7,259 | ||||||||||||||
Total commercial mortgage | 8,742 | 135 | 120 | 22 | 9,019 | ||||||||||||||
Lease financing | 464 | 3 | 2 | 2 | 471 | ||||||||||||||
International | 1,066 | 3 | 17 | 4 | 1,090 | ||||||||||||||
Total business loans | 43,027 | 752 | 671 | 177 | 44,627 | ||||||||||||||
Retail loans: | |||||||||||||||||||
Residential mortgage | 1,906 | 7 | — | 34 | 1,947 | ||||||||||||||
Consumer: | |||||||||||||||||||
Home equity | 1,698 | — | 9 | 19 | 1,726 | ||||||||||||||
Other consumer | 709 | 1 | — | — | 710 | ||||||||||||||
Total consumer | 2,407 | 1 | 9 | 19 | 2,436 | ||||||||||||||
Total retail loans | 4,313 | 8 | 9 | 53 | 4,383 | ||||||||||||||
Total loans | $ | 47,340 | $ | 760 | $ | 680 | $ | 230 | $ | 49,010 | |||||||||
December 31, 2017 | |||||||||||||||||||
Business loans: | |||||||||||||||||||
Commercial | $ | 29,263 | $ | 591 | $ | 897 | $ | 309 | $ | 31,060 | |||||||||
Real estate construction: | |||||||||||||||||||
Commercial Real Estate business line (e) | 2,630 | — | — | — | 2,630 | ||||||||||||||
Other business lines (f) | 327 | 4 | — | — | 331 | ||||||||||||||
Total real estate construction | 2,957 | 4 | — | — | 2,961 | ||||||||||||||
Commercial mortgage: | |||||||||||||||||||
Commercial Real Estate business line (e) | 1,759 | 20 | 43 | 9 | 1,831 | ||||||||||||||
Other business lines (f) | 7,099 | 115 | 92 | 22 | 7,328 | ||||||||||||||
Total commercial mortgage | 8,858 | 135 | 135 | 31 | 9,159 | ||||||||||||||
Lease financing | 440 | 23 | 1 | 4 | 468 | ||||||||||||||
International | 946 | 11 | 20 | 6 | 983 | ||||||||||||||
Total business loans | 42,464 | 764 | 1,053 | 350 | 44,631 | ||||||||||||||
Retail loans: | |||||||||||||||||||
Residential mortgage | 1,955 | 2 | — | 31 | 1,988 | ||||||||||||||
Consumer: | |||||||||||||||||||
Home equity | 1,786 | 1 | 8 | 21 | 1,816 | ||||||||||||||
Other consumer | 737 | 1 | — | — | 738 | ||||||||||||||
Total consumer | 2,523 | 2 | 8 | 21 | 2,554 | ||||||||||||||
Total retail loans | 4,478 | 4 | 8 | 52 | 4,542 | ||||||||||||||
Total loans | $ | 46,942 | $ | 768 | $ | 1,061 | $ | 402 | $ | 49,173 |
(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. This category is generally consistent with the "special mention" category as defined by regulatory authorities. |
(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 pages F-51 and F-52 in the Corporation's 2017 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. |
16
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
The following table summarizes nonperforming assets.
(in millions) | September 30, 2018 | December 31, 2017 | |||||
Nonaccrual loans | $ | 230 | $ | 402 | |||
Reduced-rate loans (a) | 9 | 8 | |||||
Total nonperforming loans | 239 | 410 | |||||
Foreclosed property (b) | 1 | 5 | |||||
Total nonperforming assets | $ | 240 | $ | 415 |
(a) | There were no reduced-rate business loans at both September 30, 2018 and December 31, 2017. Reduced-rate retail loans were $9 million at September 30, 2018 and $8 million at December 31, 2017. |
(b) | Included $1 million and $4 million of foreclosed residential real estate properties at September 30, 2018 and December 31, 2017, respectively. |
There were no retail loans secured by residential real estate properties in process of foreclosure included in nonaccrual loans at both September 30, 2018 and December 31, 2017.
Allowance for Credit Losses
The following table details the changes in the allowance for loan losses and related loan amounts.
2018 | 2017 | ||||||||||||||||||||||
(in millions) | Business Loans | Retail Loans | Total | Business Loans | Retail Loans | Total | |||||||||||||||||
Three Months Ended September 30 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Balance at beginning of period | $ | 635 | $ | 42 | $ | 677 | $ | 661 | $ | 44 | $ | 705 | |||||||||||
Loan charge-offs | (24 | ) | (1 | ) | (25 | ) | (36 | ) | (1 | ) | (37 | ) | |||||||||||
Recoveries on loans previously charged-off | 9 | 1 | 10 | 10 | 2 | 12 | |||||||||||||||||
Net loan (charge-offs) recoveries | (15 | ) | — | (15 | ) | (26 | ) | 1 | (25 | ) | |||||||||||||
Provision for loan losses | (1 | ) | 2 | 1 | 21 | 10 | 31 | ||||||||||||||||
Foreign currency translation adjustment | 1 | — | 1 | 1 | — | 1 | |||||||||||||||||
Balance at end of period | $ | 620 | $ | 44 | $ | 664 | $ | 657 | $ | 55 | $ | 712 | |||||||||||
Nine Months Ended September 30 | |||||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||||
Balance at beginning of period | $ | 661 | $ | 51 | $ | 712 | $ | 682 | $ | 48 | $ | 730 | |||||||||||
Loan charge-offs | (78 | ) | (4 | ) | (82 | ) | (115 | ) | (5 | ) | (120 | ) | |||||||||||
Recoveries on loans previously charged-off | 39 | 3 | 42 | 39 | 5 | 44 | |||||||||||||||||
Net loan charge-offs | (39 | ) | (1 | ) | (40 | ) | (76 | ) | — | (76 | ) | ||||||||||||
Provision for loan losses |