COMERICA INC /NEW/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________

(Mark One)



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

For the quarterly period ended September 30, 2019



☐	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)

_________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $5 par value	CMA	New York Stock Exchange

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, a 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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 ☐ No ☒

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, 2019: 144,154,334 shares

Table of Contents

COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018	1

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	1

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	3

Notes to Consolidated Financial Statements (unaudited)	4

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	56

ITEM 4. Controls and Procedures	56

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings	59

ITEM 1A. Risk Factors	59

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	59

ITEM 6. Exhibits	59

Signature	60

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, 2019			December 31, 2018
	(unaudited)
ASSETS
Cash and due from banks	$	1,229		$	1,390

Interest-bearing deposits with banks	2,888			3,171
Other short-term investments	146			134

Investment securities available-for-sale	12,429			12,045

Commercial loans	32,890			31,976
Real estate construction loans	3,377			3,077
Commercial mortgage loans	9,234			9,106
Lease financing	578			507
International loans	1,055			1,013
Residential mortgage loans	1,906			1,970
Consumer loans	2,451			2,514
Total loans	51,491			50,163
Less allowance for loan losses	(652		)	(671		)
Net loans	50,839			49,492

Premises and equipment	467			475
Accrued income and other assets	4,850			4,111
Total assets	$	72,848		$	70,818

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	27,134		$	28,690

Money market and interest-bearing checking deposits	23,992			22,560
Savings deposits	2,156			2,172
Customer certificates of deposit	2,853			2,131
Other time deposits	647			—
Foreign office time deposits	27			8
Total interest-bearing deposits	29,675			26,871
Total deposits	56,809			55,561

Short-term borrowings	51			44
Accrued expenses and other liabilities	1,477			1,243
Medium- and long-term debt	7,311			6,463
Total liabilities	65,648			63,311

Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 228,164,824 shares	1,141			1,141
Capital surplus	2,172			2,148
Accumulated other comprehensive loss	(336		)	(609		)
Retained earnings	9,369			8,781
Less cost of common stock in treasury - 84,028,400 shares at 9/30/19 and 68,081,176 shares at 12/31/18	(5,146		)	(3,954		)
Total shareholders’ equity	7,200			7,507
Total liabilities and shareholders’ equity	$	72,848		$	70,818

See notes to consolidated financial statements (unaudited).



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions, except per share data)	2019		2018			2019			2018
INTEREST INCOME
Interest and fees on loans	$	619	$	581		$	1,875		$	1,658
Interest on investment securities	75		66			222			194
Interest on short-term investments	17		28			51			63
Total interest income	711		675			2,148			1,915
INTEREST EXPENSE
Interest on deposits	73		35			192			79
Interest on short-term borrowings	2		1			9			1
Interest on medium- and long-term debt	50		40			152			97
Total interest expense	125		76			353			177
Net interest income	586		599			1,795			1,738
Provision for credit losses	35		—			66			(17		)
Net interest income after provision for credit losses	551		599			1,729			1,755
NONINTEREST INCOME
Card fees	67		61			195			180
Service charges on deposit accounts	51		53			153			160
Fiduciary income	53		51			154			155
Commercial lending fees	23		21			66			62
Foreign exchange income	11		12			33			36
Letter of credit fees	10		9			29			30
Bank-owned life insurance	11		11			31			29
Brokerage fees	7		7			21			20
Net securities losses	—		(20		)	(8		)	(19		)
Other noninterest income	23		29			70			73
Total noninterest income	256		234			744			726
NONINTEREST EXPENSES
Salaries and benefits expense	253		254			763			759
Outside processing fee expense	66		65			194			190
Occupancy expense	39		38			113			113
Software expense	30		32			87			95
Equipment expense	13		12			37			34
FDIC insurance expense	6		11			17			36
Advertising expense	10		8			24			22
Restructuring charges	—		12			—			39
Other noninterest expenses	18		20			57			58
Total noninterest expenses	435		452			1,292			1,346
Income before income taxes	372		381			1,181			1,135
Provision for income taxes	80		63			252			210
NET INCOME	292		318			929			925
Less income allocated to participating securities	2		2			5			6
Net income attributable to shares	$	290	$	316		$	924		$	919
Earnings per share:
Basic	$	1.98	$	1.89		$	6.08		$	5.41
Diluted	1.96		1.86			6.02			5.32

Comprehensive income	338		296			1,202			764

Cash dividends declared on stock	97		100			302			210
Cash dividends declared per share	0.67		0.60			2.01			1.24

See notes to consolidated financial statements (unaudited).

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Comerica Incorporated and Subsidiaries



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

BALANCE AT JUNE 30, 2018	170.9		$	1,141	$	2,144		$	(589	)	$	8,374		$	(2,991	)	$	8,079
Net income	—		—		—			—			318			—			318
Other comprehensive loss, net of tax	—		—		—			(22		)	—			—			(22		)
Cash dividends declared on common stock ($0.60 per share)	—		—		—			—			(100		)	—			(100		)
Purchase of common stock	(5.3	)	—		(7		)	—			—			(493		)	(500		)
Net issuance of common stock under employee stock plans	0.2		—		2			—			(3		)	5			4
Net issuance of common stock for warrants	0.1		—		(2		)	—			(2		)	4			—
Share-based compensation	—		—		7			—			—			—			7
BALANCE AT SEPTEMBER 30, 2018	165.9		$	1,141	$	2,144		$	(611	)	$	8,587		$	(3,475	)	$	7,786

BALANCE AT JUNE 30, 2019	149.8		$	1,141	$	2,168		$	(382	)	$	9,176		$	(4,780	)	$	7,323
Net income	—		—		—			—			292			—			292
Other comprehensive income, net of tax	—		—		—			46			—			—			46
Cash dividends declared on common stock ($0.67 per share)	—		—		—			—			(97		)	—			(97		)
Purchase of common stock	(5.7	)	—		—			—			—			(370		)	(370		)
Net issuance of common stock under employee stock plans	—		—		(1		)	—			(2		)	4			1
Share-based compensation	—		—		5			—			—			—			5
BALANCE AT SEPTEMBER 30, 2019	144.1		$	1,141	$	2,172		$	(336	)	$	9,369		$	(5,146	)	$	7,200

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

BALANCE AT DECEMBER 31, 2018	160.1		$	1,141	$	2,148		$	(609	)	$	8,781		$	(3,954	)	$	7,507
Cumulative effect of change in accounting principle	—		—		—			—			(14		)	—			(14		)
Net income	—		—		—			—			929			—			929
Other comprehensive income, net of tax	—		—		—			273			—			—			273
Cash dividends declared on common stock ($2.01 per share)	—		—		—			—			(302		)	—			(302		)
Purchase of common stock	(16.6	)	—		—			—			—			(1,229		)	(1,229		)
Net issuance of common stock under employee stock plans	0.6		—		(13		)	—			(25		)	37			(1		)
Share-based compensation	—		—		37			—			—			—			37
BALANCE AT SEPTEMBER 30, 2019	144.1		$	1,141	$	2,172		$	(336	)	$	9,369		$	(5,146	)	$	7,200

See notes to consolidated financial statements (unaudited).

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries



	Nine Months Ended September 30,
(in millions)	2019			2018
OPERATING ACTIVITIES
Net income	$	929		$	925
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	66			(17		)
Provision for deferred income taxes	4			37
Depreciation and amortization	84			90
Net periodic defined benefit credit	(23		)	(14		)
Share-based compensation expense	37			41
Net amortization of securities	2			3
Accretion of loan purchase discount	—			(1		)
Net securities losses	8			19
Net gains on sales of foreclosed property	—			(1		)
Net change in:
Accrued income receivable	1			(36		)
Accrued expenses payable	(39		)	19
Other, net	(200		)	(98		)
Net cash provided by operating activities	869			967
INVESTING ACTIVITIES
Investment securities available-for-sale:
Maturities and redemptions	1,615			1,366
Sales	987			1,256
Purchases	(2,721		)	(2,618		)
Net change in loans	(1,419		)	120
Proceeds from sales of foreclosed property	1			7
Net increase in premises and equipment	(62		)	(65		)
Federal Home Loan Bank stock:
Purchases	(201		)	(41		)
Redemptions	201			—
Proceeds from bank-owned life insurance settlements	7			4
Other, net	2			(2		)
Net cash (used in) provided by investing activities	(1,590		)	27
FINANCING ACTIVITIES
Net change in:
Deposits	1,105			(1,978		)
Short-term borrowings	7			74
Medium- and long-term debt:
Maturities	(350		)	—
Issuances and advances	1,050			1,850
Common stock:
Repurchases	(1,242		)	(837		)
Cash dividends paid	(303		)	(161		)
Issuances under employee stock plans	12			50
Other, net	(2		)	2
Net cash provided by (used in) financing activities	277			(1,000		)
Net decrease in cash and cash equivalents	(444		)	(6		)
Cash and cash equivalents at beginning of period	4,561			5,845
Cash and cash equivalents at end of period	$	4,117		$	5,839
Interest paid	$	347		$	172
Income tax paid	221			125
Noncash investing and financing activities:
Loans transferred to other real estate	3			2
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).

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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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

Leases

Effective January 1, 2019, the Corporation adopted the provisions of Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” (ASU 2016-02), for all open leases with a term greater than one year as of the adoption date, using the modified retrospective approach. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification (ASC) 840, “Leases.”

Topic 842 requires the recognition of a lease liability, measured as the present value of unpaid lease payments for operating leases where the Corporation is the lessee, and a corresponding right-of-use (ROU) asset for the right to use the leased properties. The Corporation elected not to reassess whether contracts are or contain leases, lease classification or initial direct costs for existing leases, a set of practical expedients for transition provided by ASU 2016-12. Further, the Corporation elected the practical expedient to use hindsight in determining the lease term and assessing impairment. The election of the hindsight practical expedient resulted in longer lease terms for a limited number of strategic locations based on relevant factors as of the adoption date.

The impact at adoption was increases of $329 million and $343 million to total assets and liabilities, respectively, and a $14 million reduction to retained earnings. The increase in total assets was due to the recognition of ROU assets recorded in accrued income and other assets, and the increase in total liabilities was due to corresponding recognition of lease payment liabilities recorded in accrued expenses and other liabilities.

Operating lease liabilities reflect the Corporation’s obligation to make future lease payments, primarily for real estate locations. Lease terms typically comprise contractual terms but may include extension options reasonably certain of being exercised at lease inception for certain strategic locations such as regional headquarters. Payments are discounted using the rate the Corporation would pay to borrow amounts equal to the lease payments over the lease term (the Corporation’s incremental borrowing rate). The Corporation does not separate lease and non-lease components for contracts in which it is the lessee. ROU assets are measured based on lease liabilities adjusted for incentives as well as accrued and prepaid rent. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are recognized as incurred. Common area maintenance and other executory costs are the main components of variable lease payments. Operating and variable lease expenses are recorded in net occupancy expense in the Consolidated Statements of Income.

The Corporation is the lessor in sales-type, direct finance and leveraged lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. The impact of adopting Topic 842 for lessor accounting was not significant.

Pending Accounting Pronouncements

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 conditions, as well as reasonable and supportable forecasts of future events. ASU 2016-13 also requires additional qualitative and quantitative disclosure 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 generally be applied using the modified retrospective approach with a cumulative effect adjustment to retained earnings. In prior periods, the Corporation developed and completed internal validations of new credit estimation models. The Corporation has implemented new processes and controls for the execution of the new model and is in the process of testing them. The implementation team continues to challenge current model assumptions and outputs, refine the qualitative framework and finalize policies and disclosures. Additionally, parallel runs will continue in fourth quarter 2019 as more end-to-end processes, controls and policies are fina

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

lized.

Incorporating reasonable and supportable forecasts of economic conditions into the estimate of expected credit losses will require significant judgment, such as selecting economic variables and forecast scenarios as well as determining the appropriate length of the forecast horizon. Management will select economic variables it believes to be most relevant based on the composition of the loan portfolio and customer base, likely to include forecasted levels of employment, gross domestic product, corporate bond and treasury spreads, industrial production levels, consumer and commercial real estate price indices as well as housing statistics. Different economic forecasts ranging from more benign to more severe will be evaluated each reporting period to forecast losses over the contractual life of the loan portfolio. The Corporation anticipates using a two-year forecast horizon, which encompasses most of the remaining contractual life of its portfolio of commercial loans, reverting to its longer-term historical loss experience to estimate expected losses over any remaining contractual life.

The ultimate impact of ASU 2016-13 will depend on the composition of the portfolio as well as economic conditions and forecasts at the time of adoption. Based on current factors, the Corporation estimates overall allowance for credit losses to remain within 5 percent of current levels. The commercial portfolio, comprising the majority of the Corporation’s portfolio, consists of loans and lending arrangements with short contractual maturities that are expected to result in a reduction of up to 5 percent in the allowance for credit losses. The allowance for credit losses is expected to increase between 60 to 80 percent for the consumer portfolio given its longer contractual maturities.

ASU 2016-13 also requires expected credit losses on available-for-sale securities (AFS) debt securities be recorded as an allowance for credit losses. For certain types of debt securities, such as U.S. Treasuries and other securities with government guarantees, entities may expect zero credit losses. The Corporation believes the zero-loss expectation currently applies to all of its AFS securities.

ASU 2016-13 will be adopted in first quarter 2020.

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), 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, 2018 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.

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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, 2019 and December 31, 2018.



(in millions)	Total		Level 1		Level 2		Level 3
September 30, 2019
Deferred compensation plan assets	$	92	$	92	$	—	$	—
Equity securities	49		49		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,796		2,796		—		—
Residential mortgage-backed securities (a)	9,633		—		9,633		—
Total investment securities available-for-sale	12,429		2,796		9,633		—
Derivative assets:
Interest rate contracts	275		—		247		28
Energy derivative contracts	160		—		160		—
Foreign exchange contracts	13		—		13		—
Total derivative assets	448		—		420		28
Total assets at fair value	$	13,018	$	2,937	$	10,053	$	28
Derivative liabilities:
Interest rate contracts	$	43	$	—	$	43	$	—
Energy derivative contracts	156		—		156		—
Foreign exchange contracts	10		—		10		—
Total derivative liabilities	209		—		209		—
Deferred compensation plan liabilities	92		92		—		—
Total liabilities at fair value	$	301	$	92	$	209	$	—
December 31, 2018
Deferred compensation plan assets	$	88	$	88	$	—	$	—
Equity securities	43		43		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,727		2,727		—		—
Residential mortgage-backed securities (a)	9,318		—		9,318		—
Total investment securities available-for-sale	12,045		2,727		9,318		—
Derivative assets:
Interest rate contracts	67		—		58		9
Energy derivative contracts	189		—		189		—
Foreign exchange contracts	19		—		19		—
Total derivative assets	275		—		266		9
Total assets at fair value	$	12,451	$	2,858	$	9,584	$	9
Derivative liabilities:
Interest rate contracts	$	70	$	—	$	70	$	—
Energy derivative contracts	186		—		186		—
Foreign exchange contracts	13		—		13		—
Total derivative liabilities	269		—		269		—
Deferred compensation plan liabilities	88		88		—		—
Total liabilities at fair value	$	357	$	88	$	269	$	—


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

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, 2019 and 2018.

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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- and nine-month periods ended September 30, 2019 and 2018.



						Net Realized/Unrealized Gains (Losses) (Pretax) Recorded in Earnings (b)
	Balance at Beginning of Period		Change in Classification (a)											Balance at End of Period
											Payments, Sales and Redemptions
(in millions)						Realized		Unrealized			Payments, Sales and Redemptions
Three Months Ended September 30, 2019
Derivative assets:
Interest rate contracts	$	21	$	—		$	1	$	7		$	(1	)	$	28

Three Months Ended September 30, 2018
Derivative assets:
Interest rate contracts	$	6	$	—		$	—	$	(4	)	$	—		$	2

Nine Months Ended September 30, 2019
Derivative assets:
Interest rate contracts	$	9	—			1		19			(1		)	28

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		)	—			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 are recorded in other noninterest income on the Consolidated Statements of Comprehensive Income.


(c)	Auction-rate securities.

Assets 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, 2019 and December 31, 2018. No liabilities were recorded at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018.



(in millions)	Level 3
September 30, 2019
Loans:
Commercial	$	25
Total assets at fair value	$	25
December 31, 2018
Loans:
Commercial	$	33
Commercial mortgage	2
Total assets at fair value	$	35

Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018 included loans for which a specific allowance was established based on the fair value of collateral. 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.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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.

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, 2019
Assets
Cash and due from banks	$	1,229		$	1,229		$	1,229	$	—	$	—
Interest-bearing deposits with banks	2,888			2,888			2,888		—		—
Loans held-for-sale	4			4			—		4		—
Total loans, net of allowance for loan losses (a)	50,839			51,008			—		—		51,008
Customers’ liability on acceptances outstanding	2			2			2		—		—
Restricted equity investments	248			248			248		—		—
Nonmarketable equity securities (b)	6			10			—		—		—
Liabilities
Demand deposits (noninterest-bearing)	27,134			27,134			—		27,134		—
Interest-bearing deposits	26,175			26,175			—		26,175		—
Customer certificates of deposit	2,853			2,842			—		2,842		—
Other time deposits	647			647			—		647		—
Total deposits	56,809			56,798			—		56,798		—
Short-term borrowings	51			51			51		—		—
Acceptances outstanding	2			2			2		—		—
Medium- and long-term debt	7,311			7,316			—		7,316		—
Credit-related financial instruments	(56		)	(56		)	—		—		(56		)
December 31, 2018
Assets
Cash and due from banks	$	1,390		$	1,390		$	1,390	$	—	$	—
Interest-bearing deposits with banks	3,171			3,171			3,171		—		—
Loans held-for-sale	3			3			—		3		—
Total loans, net of allowance for loan losses (a)	49,492			48,889			—		—		48,889
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)	28,690			28,690			—		28,690		—
Interest-bearing deposits	24,740			24,740			—		24,740		—
Certificates of deposit	2,131			2,100			—		2,100		—
Total deposits	55,561			55,530			—		55,530		—
Short-term borrowings	44			44			44		—		—
Acceptances outstanding	4			4			4		—		—
Medium- and long-term debt	6,463			6,436			—		6,436		—
Credit-related financial instruments	(57		)	(57		)	—		—		(57		)


(a)	Included $25 million and $35 million of impaired loans recorded at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018, 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.

Table of Contents

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, 2019
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,744	$	52	$	—	$	2,796
Residential mortgage-backed securities (a)	9,590		74		31		9,633
Total investment securities available-for-sale	$	12,334	$	126	$	31	$	12,429

December 31, 2018
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,732	$	14	$	19	$	2,727
Residential mortgage-backed securities (a)	9,493		22		197		9,318
Total investment securities available-for-sale	$	12,225	$	36	$	216	$	12,045


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

A summary of the Corporation’s investment securities in an unrealized loss position as of September 30, 2019 and December 31, 2018 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, 2019
Residential mortgage-backed securities (a)	$	1,412	$	4	$	2,130	$	27	$	3,542	$	31
Total temporarily impaired securities	$	1,412	$	4	$	2,130	$	27	$	3,542	$	31
December 31, 2018
U.S. Treasury and other U.S. government agency securities	$	—	$	—	$	1,457	$	19	$	1,457	$	19
Residential mortgage-backed securities (a)	1,008		9		6,412		188		7,420		197
Total temporarily impaired securities	$	1,008	$	9	$	7,869	$	207	$	8,877	$	216


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

At September 30, 2019, the Corporation had 178 residential mortgage-backed securities in an unrealized loss position with no credit impairment. The unrealized losses for these securities resulted from changes in market interest rates and liquidity, 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-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, 2019.

Sales, 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)	2019		2018			2019			2018
Securities gains	$	—	$	—		$	—		$	1
Securities losses	—		(20		)	(8		)	(20		)
Net securities	$	—	$	(20	)	$	(8	)	$	(19	)

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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, 2019	Amortized Cost		Fair Value
Contractual maturity
Within one year	$	30	$	31
After one year through five years	2,818		2,874
After five years through ten years	1,127		1,134
After ten years	8,359		8,390
Total investment securities	$	12,334	$	12,429

Included in the contractual maturity distribution in the table above were residential mortgage-backed securities with total amortized cost and fair value of $9.6 billion. The actual cash flows of mortgage-backed securities may differ as borrowers of the underlying loans may exercise prepayment options.

At September 30, 2019, investment securities with a carrying value of $375 million were pledged where permitted or required by law to secure $270 million of liabilities, primarily public and other deposits of state and local government agencies as well as derivative instruments.

Table of Contents

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, 2019
Business loans:
Commercial	$	44	$	28	$	28	$	100	$	152	$	32,638	$	32,890
Real estate construction:
Commercial Real Estate business line (a)	1		—		—		1		—		2,989		2,990
Other business lines (b)	—		—		—		—		—		387		387
Total real estate construction	1		—		—		1		—		3,376		3,377
Commercial mortgage:
Commercial Real Estate business line (a)	5		—		—		5		2		1,941		1,948
Other business lines (b)	37		3		2		42		11		7,233		7,286
Total commercial mortgage	42		3		2		47		13		9,174		9,234
Lease financing	—		—		—		—		—		578		578
International	—		—		1		1		2		1,052		1,055
Total business loans	87		31		31		149		167		46,818		47,134

Retail loans:
Residential mortgage	10		3		—		13		36		1,857		1,906
Consumer:
Home equity	4		1		—		5		17		1,700		1,722
Other consumer	2		—		—		2		—		727		729
Total consumer	6		1		—		7		17		2,427		2,451
Total retail loans	16		4		—		20		53		4,284		4,357
Total loans	$	103	$	35	$	31	$	169	$	220	$	51,102	$	51,491
December 31, 2018
Business loans:
Commercial	$	34	$	26	$	8	$	68	$	141	$	31,767	$	31,976
Real estate construction:
Commercial Real Estate business line (a)	6		—		—		6		—		2,681		2,687
Other business lines (b)	6		—		—		6		—		384		390
Total real estate construction	12		—		—		12		—		3,065		3,077
Commercial mortgage:
Commercial Real Estate business line (a)	4		—		—		4		2		1,737		1,743
Other business lines (b)	32		5		8		45		18		7,300		7,363
Total commercial mortgage	36		5		8		49		20		9,037		9,106
Lease financing	—		—		—		—		2		505		507
International	—		—		—		—		3		1,010		1,013
Total business loans	82		31		16		129		166		45,384		45,679

Retail loans:
Residential mortgage	11		3		—		14		36		1,920		1,970
Consumer:
Home equity	4		1		—		5		19		1,741		1,765
Other consumer	1		—		—		1		—		748		749
Total consumer	5		1		—		6		19		2,489		2,514
Total retail loans	16		4		—		20		55		4,409		4,484
Total loans	$	98	$	35	$	16	$	149	$	221	$	49,793	$	50,163


(a)	Primarily loans to real estate developers.


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

Table of Contents

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, 2019
Business loans:
Commercial	$	31,420	$	724	$	594	$	152	$	32,890
Real estate construction:
Commercial Real Estate business line (e)	2,954		36		—		—		2,990
Other business lines (f)	387		—		—		—		387
Total real estate construction	3,341		36		—		—		3,377
Commercial mortgage:
Commercial Real Estate business line (e)	1,892		13		41		2		1,948
Other business lines (f)	7,097		99		79		11		7,286
Total commercial mortgage	8,989		112		120		13		9,234
Lease financing	566		10		2		—		578
International	1,025		23		5		2		1,055
Total business loans	45,341		905		721		167		47,134

Retail loans:
Residential mortgage	1,868		2		—		36		1,906
Consumer:
Home equity	1,698		1		6		17		1,722
Other consumer	723		6		—		—		729
Total consumer	2,421		7		6		17		2,451
Total retail loans	4,289		9		6		53		4,357
Total loans	$	49,630	$	914	$	727	$	220	$	51,491
December 31, 2018
Business loans:
Commercial	$	30,817	$	464	$	554	$	141	$	31,976
Real estate construction:
Commercial Real Estate business line (e)	2,664		23		—		—		2,687
Other business lines (f)	382		8		—		—		390
Total real estate construction	3,046		31		—		—		3,077
Commercial mortgage:
Commercial Real Estate business line (e)	1,682		14		45		2		1,743
Other business lines (f)	7,157		118		70		18		7,363
Total commercial mortgage	8,839		132		115		20		9,106
Lease financing	500		3		2		2		507
International	996		4		10		3		1,013
Total business loans	44,198		634		681		166		45,679

Retail loans:
Residential mortgage	1,931		3		—		36		1,970
Consumer:
Home equity	1,738		—		8		19		1,765
Other consumer	748		1		—		—		749
Total consumer	2,486		1		8		19		2,514
Total retail loans	4,417		4		8		55		4,484
Total loans	$	48,615	$	638	$	689	$	221	$	50,163


(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-52 and F-53 in the Corporation's 2018 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.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table summarizes nonperforming assets.



(in millions)	September 30, 2019		December 31, 2018
Nonaccrual loans	$	220	$	221
Reduced-rate loans (a)	6		8
Total nonperforming loans	226		229
Foreclosed property	3		1
Total nonperforming assets	$	229	$	230


(a)	Comprised of reduced-rate retail loans.

There were no retail loans secured by residential real estate properties in process of foreclosure included in nonaccrual loans at September 30, 2019, compared to $1 million at December 31, 2018.

Allowance for Credit Losses

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



	2019									2018
(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	$	618		$	39		$	657		$	635		$	42		$	677
Loan charge-offs	(59		)	(2		)	(61		)	(24		)	(1		)	(25		)
Recoveries on loans previously charged-off	17			2			19			9			1			10
Net loan charge-offs	(42		)	—			(42		)	(15		)	—			(15		)
Provision for loan losses	39			(2		)	37			(1		)	2			1
Foreign currency translation adjustment	—			—			—			1			—			1
Balance at end of period	$	615		$	37		$	652		$	620		$	44		$	664

Nine Months Ended September 30
Allowance for loan losses:
Balance at beginning of period	$	627		$	44		$	671		$	661		$	51		$	712
Loan charge-offs	(121		)	(4		)	(125		)	(78		)	(4		)	(82		)
Recoveries on loans previously charged-off	35			4			39			39			3			42
Net loan charge-offs	(86		)	—			(86		)	(39		)	(1		)	(40		)
Provision for loan losses	74			(7		)	67			(2		)	(6		)	(8		)
Balance at end of period	$	615		$	37		$	652		$	620		$	44		$	664

As a percentage of total loans	1.30		%	0.86		%	1.27		%	1.39		%	1.00		%	1.35		%

September 30
Allowance for loan losses:
Individually evaluated for impairment	$	34		$	—		$	34		$	29		$	—		$	29
Collectively evaluated for impairment	581			37			618			591			44			635
Total allowance for loan losses	$	615		$	37		$	652		$	620		$	44		$	664
Loans:
Individually evaluated for impairment	$	209		$	34		$	243		$	269		$	34		$	303
Collectiv