Edgar Filing: COMERICA INC /NEW/

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

¨	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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

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

$5 par value common stock:

Outstanding as of April 26, 2011: 176,770,800 shares

COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


ITEM 1. Financial Statements

Consolidated Balance Sheets at March 31, 2011 (unaudited), December 31, 2010 and March 31, 2010 (unaudited)			1

Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (unaudited)			2

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2011 and 2010 (unaudited)			3

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)			4

Notes to Consolidated Financial Statements (unaudited)			5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			65

ITEM 4. Controls and Procedures			65

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings			65

ITEM 1A. Risk Factors			65

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			65

ITEM 6. Exhibits			66

Signature			68

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries


(in millions, except share data)	March 31, 2011			December 31, 2010			March 31, 2010
	(unaudited)						(unaudited)
ASSETS
Cash and due from banks	$	875		$	668		$	769

Interest-bearing deposits with banks		3,570			1,415			3,860
Other short-term investments		154			141			165

Investment securities available-for-sale		7,406			7,560			7,346

Commercial loans		21,360			22,145			20,756
Real estate construction loans		2,023			2,253			3,202
Commercial mortgage loans		9,697			9,767			10,358
Residential mortgage loans		1,550			1,619			1,631
Consumer loans		2,262			2,311			2,472
Lease financing		958			1,009			1,120
International loans		1,326			1,132			1,306

Total loans		39,176			40,236			40,845
Less allowance for loan losses		(849	)		(901	)		(987	)

Net loans		38,327			39,335			39,858
Premises and equipment		637			630			637
Customers’ liability on acceptances outstanding		14			9			21
Accrued income and other assets		4,034			3,909			4,450

Total assets	$	55,017		$	53,667		$	57,106

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	16,357		$	15,538		$	15,290

Money market and NOW deposits		17,888			17,622			16,009
Savings deposits		1,457			1,397			1,462
Customer certificates of deposit		5,672			5,482			5,979
Other time deposits		—			—			814
Foreign office time deposits		499			432			412

Total interest-bearing deposits		25,516			24,933			24,676

Total deposits		41,873			40,471			39,966
Short-term borrowings		61			130			489
Acceptances outstanding		14			9			21
Accrued expenses and other liabilities		1,076			1,126			1,047
Medium- and long-term debt		6,116			6,138			9,915

Total liabilities		49,140			47,874			51,438
Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 203,878,110 shares		1,019			1,019			1,019
Capital surplus		1,464			1,481			1,468
Accumulated other comprehensive loss		(382	)		(389	)		(303	)
Retained earnings		5,317			5,247			5,064
Less cost of common stock in treasury - 27,103,941 shares at 3/31/11, 27,342,518 shares at 12/31/10, and 27,575,283 shares at 3/31/10		(1,541	)		(1,565	)		(1,580	)

Total shareholders’ equity		5,877			5,793			5,668

Total liabilities and shareholders’ equity	$	55,017		$	53,667		$	57,106

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Comerica Incorporated and Subsidiaries


	Three Months Ended March 31,
(in millions, except per share data)	2011			2010
INTEREST INCOME
Interest and fees on loans	$	375		$	412
Interest on investment securities		57			61
Interest on short-term investments		2			3

Total interest income		434			476
INTEREST EXPENSE
Interest on deposits		22			35
Interest on medium- and long-term debt		17			26

Total interest expense		39			61

Net interest income		395			415
Provision for loan losses		49			175

Net interest income after provision for loan losses		346			240
NONINTEREST INCOME
Service charges on deposit accounts		52			56
Fiduciary income		39			39
Commercial lending fees		21			22
Letter of credit fees		18			18
Card fees		15			13
Foreign exchange income		9			10
Bank-owned life insurance		8			8
Brokerage fees		6			6
Net securities gains		2			2
Other noninterest income		37			20

Total noninterest income		207			194
NONINTEREST EXPENSES
Salaries		188			169
Employee benefits		50			44

Total salaries and employee benefits		238			213
Net occupancy expense		40			41
Equipment expense		15			17
Outside processing fee expense		24			23
Software expense		23			22
FDIC insurance expense		15			17
Legal fees		9			8
Advertising expense		7			8
Other real estate expense		8			12
Litigation and operational losses		3			1
Provision for credit losses on lending-related commitments		(3	)		7
Other noninterest expenses		36			35

Total noninterest expenses		415			404

Income from continuing operations before income taxes		138			30
Provision (benefit) for income taxes		35			(5	)

Income from continuing operations		103			35
Income from discontinued operations, net of tax		—			17

NET INCOME		103			52
Less:
Preferred stock dividends		—			123
Income allocated to participating securities		1			—

Net income (loss) attributable to common shares	$	102		$	(71	)

Basic earnings per common share:
Income (loss) from continuing operations	$	0.58		$	(0.57	)
Net income (loss)		0.58			(0.46	)
Diluted earnings per common share:
Income (loss) from continuing operations		0.57			(0.57	)
Net income (loss)		0.57			(0.46	)
Cash dividends declared on common stock		18			9
Cash dividends declared per common share		0.10			0.05

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Comerica Incorporated and Subsidiaries


	Preferred Stock			Common Stock					Capital Surplus			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Shareholders’ Equity
				Shares
(in millions, except per share data)				Outstanding			Amount
BALANCE AT DECEMBER 31, 2009	$	2,151			151.2		$	894	$	740		$	(336	)	$	5,161		$	(1,581	)	$	7,029
Net income		—			—			—		—			—			52			—			52
Other comprehensive income, net of tax		—			—			—		—			33			—			—			33

Total comprehensive income																						85
Cash dividends declared on preferred stock		—			—			—		—			—			(38	)		—			(38	)
Cash dividends declared on common stock ($0.05 per share)		—			—			—		—			—			(9	)		—			(9	)
Purchase of common stock		—			—			—		—			—			—			(2	)		(2	)
Issuance of common stock		—			25.1			125		724			—			—			—			849
Redemption of preferred stock		(2,250	)		—			—		—			—			—			—			(2,250	)
Redemption discount accretion on preferred stock		94			—			—		—			—			(94	)		—			—
Accretion of discount on preferred stock		5			—			—		—			—			(5	)		—			—
Net issuance of common stock under employee stock plans		—			—			—		—			—			(3	)		3			—
Share-based compensation		—			—			—		4			—			—			—			4

BALANCE AT MARCH 31, 2010	$	—			176.3		$	1,019	$	1,468		$	(303	)	$	5,064		$	(1,580	)	$	5,668

BALANCE AT DECEMBER 31, 2010	$	—			176.5		$	1,019	$	1,481		$	(389	)	$	5,247		$	(1,565	)	$	5,793
Net income		—			—			—		—			—			103			—			103
Other comprehensive income, net of tax		—			—			—		—			7			—			—			7

Total comprehensive income																						110
Cash dividends declared on common stock ($0.10 per share)		—			—			—		—			—			(18	)		—			(18	)
Purchase of common stock		—			(0.5	)		—		—			—			—			(21	)		(21	)
Net issuance of common stock under employee stock plans		—			0.8			—		(30	)		—			(15	)		45			—
Share-based compensation		—			—			—		13			—			—			—			13

BALANCE AT MARCH 31, 2011	$	—			176.8		$	1,019	$	1,464		$	(382	)	$	5,317		$	(1,541	)	$	5,877

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries


	Three Months Ended March 31,
(in millions)	2011			2010
OPERATING ACTIVITIES
Net income	$	103		$	52
Income from discontinued operations, net of tax		—			17

Income from continuing operations, net of tax		103			35
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		49			175
Provision for credit losses on lending-related commitments		(3	)		7
Provision (benefit) for deferred income taxes		13			(126	)
Depreciation and software amortization		29			32
Share-based compensation expense		13			4
Net amortization of securities		7			4
Net securities gains		(2	)		(2	)
Excess tax benefits from share-based compensation arrangements		(1	)		—
Net increase in trading securities		(13	)		(26	)
Net increase in loans held-for-sale		—			(1	)
Net (increase) decrease in accrued income receivable		(2	)		5
Net decrease in accrued expenses		(59	)		(16	)
Other, net		16			201
Discontinued operations, net		—			17

Net cash provided by operating activities		150			309
INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities available-for-sale		592			368
Proceeds from sales of investment securities available-for-sale		—			6
Purchases of investment securities available-for-sale		(448	)		(300	)
Proceeds from sales of indirect private equity and venture capital funds		31			—
Net decrease in loans		946			1,135
Net increase in fixed assets		(30	)		(17	)
Net increase in customers’ liability on acceptances outstanding		(5	)		(10	)
Sales of Federal Home Loan Bank stock		—			41

Net cash provided by investing activities		1,086			1,182
FINANCING ACTIVITIES
Net increase in deposits		1,226			56
Net (decrease) increase in short-term borrowings		(69	)		27
Net increase in acceptances outstanding		5			10
Repayments of medium- and long-term debt		—			(1,165	)
Proceeds from issuance of common stock		—			849
Redemption of preferred stock		—			(2,250	)
Proceeds from issuance of common stock under employee stock plans		2			1
Excess tax benefits from share-based compensation arrangements		1			—
Purchase of common stock for treasury		(21	)		(2	)
Dividends paid on common stock		(18	)		(8	)
Dividends paid on preferred stock		—			(38	)

Net cash provided by (used in) financing activities		1,126			(2,520	)

Net increase (decrease) in cash and cash equivalents		2,362			(1,029	)
Cash and cash equivalents at beginning of period		2,083			5,617

Cash and cash equivalents at end of period	$	4,445		$	4,588


Interest paid	$	34		$	63

Income taxes, tax deposits and tax-related interest paid	$	14		$	69

Noncash investing and financing activities:
Loans transferred to other real estate	$	13		$	9

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 1 – BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

Pending Accounting Pronouncements

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

NOTE 2 – PENDING ACQUISITION

On January 18, 2011, the Corporation announced a definitive agreement to acquire Sterling Bancshares, Inc. (“Sterling”), a bank holding company headquartered in Houston, Texas, in a stock-for-stock transaction. Sterling operates 57 banking centers located in Houston, San Antonio, Fort Worth and Dallas, Texas. At March 31, 2011, Sterling had $5.0 billion in assets, including $2.6 billion of loans and $1.6 billion of investment securities, and $4.4 billion of liabilities, including $4.1 billion of deposits. The merger requires the approval of various regulatory agencies and Sterling’s shareholders. Assuming all approvals are obtained, the merger is expected to be completed in the second quarter 2011. Under the terms of the merger agreement, Sterling common shareholders will receive 0.2365 shares of the Corporation’s common stock in exchange for each share of Sterling common stock. At March 31, 2011, Sterling had approximately 102 million shares of common stock outstanding. On the date of the announcement, the Corporation estimated that the transaction would result in approximately $745 million of goodwill at closing. The actual amount of goodwill will be determined on the date of closing.

NOTE 3 – FAIR VALUE MEASUREMENTS

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

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

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


Level 1		Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2		Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3		Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

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

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

Trading securities and associated deferred compensation plan liabilities

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

Loans held-for-sale

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

Investment securities available-for-sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, an adjustment to the quoted prices may be necessary. In some circumstances, the Corporation may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate to estimate an instrument’s fair value. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include residential mortgage-backed securities issued by U.S. government-sponsored enterprises, corporate debt securities and state and municipal securities. The fair value of Level 2 securities was determined using quoted prices of securities with similar characteristics or pricing models based on observable market data inputs, primarily interest rates, spreads and prepayment information. Securities classified as Level 3, of which the substantial majority are auction-rate securities (ARS), represent securities in less liquid markets requiring significant management assumptions when determining fair value. Due to the lack of a robust secondary auction-rate securities market with active fair value indicators, fair value at March 31, 2011, December 31, 2010 and March 31, 2010 was determined using an income approach based on a discounted cash flow model utilizing two significant assumptions: discount rate (including a liquidity risk premium) and workout period. The discount rate was calculated using credit spreads of the underlying collateral or similar securities plus a liquidity risk premium. The liquidity risk premium was based on observed industry auction-rate securities valuations by third parties and incorporated the rate at which the various types of similar ARS had been redeemed or sold since acquisition in 2008. The workout period was based on an assessment of publicly available information on efforts to re-establish functioning markets for these securities and the Corporation’s redemption experience. As of March 31, 2011, approximately 55 percent of the aggregate ARS par value had been redeemed or sold since acquisition at or above carrying value.

Loans

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

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

Customers’ liability on acceptances outstanding and acceptances outstanding

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

Derivative assets and derivative liabilities

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

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

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

Nonmarketable equity securities

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

The Corporation also holds restricted equity investments, primarily Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock. Restricted equity securities are not readily marketable and are recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. No significant observable market data for these instruments is available. The Corporation considers the profitability and asset quality of the issuer, dividend payment history and recent redemption

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

experience, when determining the ultimate recoverability of the par value. The Corporation’s investment in FHLB stock totaled $128 million at both March 31, 2011 and December 31, 2010, and its investment in FRB stock totaled $59 million at both March 31, 2011 and December 31, 2010. The Corporation believes its investments in FHLB and FRB stock are ultimately recoverable at par.

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

Other real estate

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

Loan servicing rights

Loan servicing rights, included in “accrued income and other assets” on the consolidated balance sheets, are subject to impairment testing. A valuation model is used for impairment testing, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.

Deposit liabilities

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

Short-term borrowings

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

Medium- and long-term debt

The carrying value of variable-rate FHLB advances approximates the estimated fair value. The estimated fair value of the Corporation’s remaining variable- and fixed-rate medium- and long-term debt is based on quoted market values. If quoted market values are not available, the estimated fair value is based on the market values of debt with similar characteristics.

Credit-related financial instruments

The estimated fair value of unused commitments to extend credit and standby and commercial letters of credit is represented by the estimated cost to terminate or otherwise settle the obligations with the counterparties. This amount is approximated by the fees currently charged to enter into similar arrangements, considering the remaining terms of the agreements and any changes in the credit quality of counterparties since the agreements were executed. This estimate of fair value does not take into account the significant value of the customer relationships and the future earnings potential involved in such arrangements as the Corporation does not believe that it would be practicable to estimate a representational fair value for these items.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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


(in millions)	Total		Level 1		Level 2		Level 3
March 31, 2011
Trading securities:
Deferred compensation plan assets	$	90	$	90	$	—	$	—
Residential mortgage-backed securities (a)		4		—		4		—
State and municipal securities		34		—		34		—
Corporate debt securities		2		—		2		—
Other securities		1		1		—		—

Total trading securities		131		91		40		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities		130		130		—		—
Residential mortgage-backed securities (a)		6,622		—		6,622		—
State and municipal securities (b)		26		—		—		26
Corporate debt securities:
Auction-rate debt securities		1		—		—		1
Other corporate debt securities		49		—		48		1
Equity and other non-debt securities:
Auction-rate preferred securities		504		—		—		504
Money market and other mutual funds		74		74		—		—

Total investment securities available-for-sale		7,406		204		6,670		532
Derivative assets (c):
Interest rate contracts		476		—		476		—
Energy derivative contracts		159		—		159		—
Foreign exchange contracts		51		—		51		—
Warrants		8		—		—		8

Total derivative assets		694		—		686		8

Total assets at fair value	$	8,231	$	295	$	7,396	$	540

Derivative liabilities (d):
Interest rate contracts	$	212	$	—	$	212	$	—
Energy derivative contracts		159		—		159		—
Foreign exchange contracts		44		—		44		—
Other		2		—		—		2

Total derivative liabilities		417		—		415		2
Deferred compensation plan liabilities (d)		90		90		—		—

Total liabilities at fair value	$	507	$	90	$	415	$	2

(a)

Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

(b)

Primarily auction-rate securities.

(c)

Recorded in “accrued income and other assets” on the consolidated balance sheets.

(d)

Recorded in “accrued expenses and other liabilities” on the consolidated balance sheets.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)


(in millions)	Total		Level 1		Level 2		Level 3
December 31, 2010
Trading securities:
Deferred compensation plan assets	$	86	$	86	$	—	$	—
Residential mortgage-backed securities (a)		7		—		7		—
Other government-sponsored enterprise securities		1		—		1		—
State and municipal securities		19		—		19		—
Corporate debt securities		4		—		4		—
Other securities		1		—		—		1

Total trading securities		118		86		31		1
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities		131		131		—		—
Residential mortgage-backed securities (a)		6,709		—		6,709		—
State and municipal securities (b)		39		—		—		39
Corporate debt securities:
Auction-rate debt securities		1		—		—		1
Other corporate debt securities		26		—		25		1
Equity and other non-debt securities:
Auction-rate preferred securities		570		—		—		570
Money market and other mutual funds		84		84		—		—

Total investment securities available-for-sale		7,560		215		6,734		611
Derivative assets (c):
Interest rate contracts		542		—		542		—
Energy derivative contracts		103		—		103		—
Foreign exchange contracts		51		—		51		—
Warrants		7		—		—		7

Total derivative assets		703		—		696		7

Total assets at fair value	$	8,381	$	301	$	7,461	$	619

Derivative liabilities (d):
Interest rate contracts	$	249	$	—	$	249	$	—
Energy derivative contracts		103		—		103		—
Foreign exchange contracts		48		—		48		—
Other		1		—		—		1

Total derivative liabilities		401		—		400		1
Deferred compensation plan liabilities (d)		86		86		—		—

Total liabilities at fair value	$	487	$	86	$	400	$	1

(a)

Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

(b)

Primarily auction-rate securities.

(c)

Recorded in “accrued income and other assets” on the consolidated balance sheets.

(d)

Recorded in “accrued expenses and other liabilities” on the consolidated balance sheets.

There were no significant transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1 and Level 2 fair value measurements during the three-month periods ended March 31, 2011 and 2010.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three-month periods ended March 31, 2011 and 2010.


			Net Realized/Unrealized Gains (Losses)
	Balance at Beginning of Period		Recorded in Earnings					Recorded in Other Comprehensive Income (Pre-tax)
(in millions)	Balance at Beginning of Period		Realized		Unrealized			Recorded in Other Comprehensive Income (Pre-tax)			Sales			Settlements			Balance at End of Period
Three months ended March 31, 2011
Trading securities:
Other securities	$	1	$	—	$	—		$	—		$	(1	)	$	—		$	—

Total trading securities		1		—		—			—			(1	)		—			—
Investment securities available-for-sale:
State and municipal securities (a)		39		—		—			—			(13	)		—			26
Auction-rate debt securities		1		—		—			—			—			—			1
Other corporate debt securities		1		—		—			—			—			—			1
Auction-rate preferred securities		570		3		—			(11	)		(58	)		—			504

Total investment securities available-for-sale		611		3		—			(11	)		(71	)		—			532
Derivative assets:
Warrants		7		2		1			—			(2	)		—			8
Derivative liabilities:
Other		1		—		(1	)		—			—			—			2

Three months ended March 31, 2010
Investment securities available-for-sale:
State and municipal securities (a)	$	46	$	—	$	—		$	(1	)	$	—		$	—		$	45
Auction-rate debt securities		150		—		—			(5	)		(1	)		—			144
Other corporate debt securities		7		27		—			—			—			(33	)		1
Auction-rate preferred securities		706		2		—			1			(46	)		—			663

Total investment securities available-for-sale		909		29		—			(5	)		(47	)		(33	)		853
Derivative assets:
Warrants		7		2		—			—			(2	)		—			7

(a)	Primarily auction-rate securities

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the three-month periods ended March 31, 2011 and 2010.

The following table presents the income statement classification of realized and unrealized gains and losses due to changes in fair value recorded in earnings for the three-month periods ended March 31, 2011 and 2010 for recurring Level 3 assets and liabilities, as shown in the previous table.


	Net Securities Gains (Losses)					Other Noninterest Income				Discontinued Operations		Total
(in millions)	Realized		Unrealized			Realized		Unrealized		Realized		Realized		Unrealized
Three months ended March 31, 2011
Investment securities available-for-sale:
Auction-rate preferred securities	$	3	$	—		$	—	$	—	$	—	$	3	$	—

Total investment securities available-for-sale		3		—			—		—		—		3		—
Derivative assets:
Warrants		—		—			2		1		—		2		1
Derivative liabilities:
Other		—		(1	)		—		—		—		—		(1	)

Three months ended March 31, 2010
Investment securities available-for-sale:
Other corporate debt securities	$	—	$	—		$	—	$	—	$	27	$	27	$	—
Auction-rate preferred securities		2		—			—		—		—		2		—

Total investment securities available-for-sale		2		—			—		—		27		29		—
Derivative assets:
Warrants		—		—			2		—		—		2		—

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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


(in millions)	Total		Level 2		Level 3
March 31, 2011
Loans held-for-sale:
Residential mortgage	$	4	$	4	$	—
Loans:
Commercial		182		—		182
Real estate construction		181		—		181
Commercial mortgage		403		—		403
Lease financing		7		—		7
International		4		—		4

Total loans		777		—		777
Nonmarketable equity securities		5		—		5
Other real estate		15		—		15
Loan servicing rights		4		—		4

Total assets at fair value	$	805	$	4	$	801

Total liabilities at fair value	$	—	$	—	$	—

December 31, 2010
Loans held-for-sale:
Residential mortgage	$	6	$	6	$	—
Loans:
Commercial		200		—		200
Real estate construction		247		—		247
Commercial mortgage		398		—		398
Lease financing		7		—		7
International		2		—		2

Total loans		854		—		854
Nonmarketable equity securities		9		—		9
Other real estate		33		—		33
Loan servicing rights		5		—		5

Total assets at fair value	$	907	$	6	$	901

Total liabilities at fair value	$	—	$	—	$	—

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 – FAIR VALUE MEASUREMENTS (continued)

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

The Corporation typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of trust operations and other fee generating businesses. The Corporation believes the imprecision of an estimate could be significant.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Corporation’s consolidated balance sheets are as follows:


	March 31, 2011						December 31, 2010
(in millions)	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Assets
Cash and due from banks	$	875		$	875		$	668		$	668
Interest-bearing deposits with banks		3,570			3,570			1,415			1,415
Loans held-for-sale		23			23			23			23
Total loans, net of allowance for loan losses (a)		38,327			38,369			39,335			39,212
Customers’ liability on acceptances outstanding		14			14			9			9
Nonmarketable equity securities (b)		18			29			47			77
Loan servicing rights (c)		4			4			5			5
Liabilities
Demand deposits (noninterest-bearing)		16,357			16,357			15,538			15,538
Interest-bearing deposits		25,516			25,521			24,933			24,945

Total deposits		41,873			41,878			40,471			40,483
Short-term borrowings		61			61			130			130
Acceptances outstanding		14			14			9			9
Medium- and long-term debt		6,116			6,009			6,138			6,008
Credit-related financial instruments		(96	)		(96	)		(99	)		(99	)

(a)

Included $777 million and $854 million of impaired loans recorded at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010, respectively.

(b)

Included $5 million and $9 million of nonmarketable equity securities recorded at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010, respectively.

(c)

Included $4 million and $5 million of loan servicing rights recorded at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010, respectively.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – INVESTMENT SECURITIES

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


(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2011
U.S. Treasury and other U.S. government agency securities	$	130	$	—	$	—	$	130
Residential mortgage-backed securities (a)		6,561		100		39		6,622
State and municipal securities (b)		32		—		6		26
Corporate debt securities:
Auction-rate debt securities		1		—		—		1
Other corporate debt securities		49		—		—		49
Equity and other non-debt securities:
Auction-rate preferred securities		542		2		40		504
Money market and other mutual funds		74		—		—		74

Total investment securities available-for-sale	$	7,389	$	102	$	85	$	7,406

December 31, 2010
U.S. Treasury and other U.S. government agency securities	$	131	$	—	$	—	$	131
Residential mortgage-backed securities (a)		6,653		95		39		6,709
State and municipal securities (b)		46		—		7		39
Corporate debt securities:
Auction-rate debt securities		1		—		—		1
Other corporate debt securities		26		—		—		26
Equity and other non-debt securities:
Auction-rate preferred securities		597		3		30		570
Money market and other mutual funds		84		—		—		84

Total investment securities available-for-sale	$	7,538	$	98	$	76	$	7,560

(a)

Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.

(b)

Primarily auction-rate securities.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – INVESTMENT SECURITIES (continued)

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


	Impaired
	Less than 12 months				12 months or more				Total
(in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2011
Residential mortgage-backed securities (a)	$	1,763	$	39	$	—	$	—	$	1,763	$	39
State and municipal securities (b)		—		—		25		6		25		6
Equity and other non-debt securities:
Auction-rate preferred securities		—		—		406		40		406		40

Total impaired securities	$	1,763	$	39	$	431	$	46	$	2,194	$	85

December 31, 2010
Residential mortgage-backed securities (a)	$	1,702	$	39	$	—	$	—	$	1,702	$	39
State and municipal securities (b)		—		—		38		7		38		7
Equity and other non-debt securities:
Auction-rate preferred securities		—		—		436		30		436		30

Total impaired securities	$	1,702	$	39	$	474	$	37	$	2,176	$	76

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

(b)	Primarily auction-rate securities.

As of March 31, 2011, 95 percent of the Corporation’s auction-rate portfolio was rated Aaa/AAA by the credit rating agencies.

At March 31, 2011, the Corporation had 254 securities in an unrealized loss position with no credit impairment, including 191 auction-rate preferred securities, 37 residential mortgage-backed securities and 26 state and municipal auction-rate securities. The unrealized losses for these securities resulted from changes in market interest rates and liquidity. The Corporation ultimately expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Corporation will be required to sell the securities in an unrealized loss position prior to recovery of amortized cost. The Corporation does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

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


	Three Months Ended March 31,
(in millions)	2011			2010
Securities gains	$	3		$	3
Securities losses		(1	)		(1	)

Total net securities gains	$	2		$	2

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 4 – INVESTMENT SECURITIES (continued)

The table below summarizes the amortized cost and fair values of debt securities by contractual maturity. Securities with multiple maturity dates are classified in the period of final maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(in millions) March 31, 2011	Amortized Cost		Fair Value
Contractual maturity
Within one year	$	179	$	179
After one year through five years		213		222
After five years through ten years		82		82
After ten years		6,299		6,345

Subtotal		6,773		6,828
Equity and other nondebt securities:
Auction-rate preferred securities		542		504
Money market and other mutual funds		74		74

Total investment securities available-for-sale	$	7,389	$	7,406

Included in the contractual maturity distribution in the table above were auction-rate securities with a total amortized cost and fair value of $32 million and $25 million, respectively. Auction-rate securities are long-term, floating rate instruments for which interest rates are reset at periodic auctions. At each successful auction, the Corporation has the option to sell the security at par value. Additionally, the issuers of auction-rate securities generally have the right to redeem or refinance the debt. As a result, the expected life of auction-rate securities may differ significantly from the contractual life. Also included in the table above were residential mortgage-backed securities with a total amortized cost and fair value of $6,561 million and $6,622 million, respectively. The actual cash flows of mortgage-backed securities may differ from contractual maturity as the borrowers of the underlying loans may exercise prepayment options.

At March 31, 2011, investment securities with a carrying value of $2.3 billion were pledged where permitted or required by law to secure $1.6 billion of liabilities, primarily public and other deposits of state and local government agencies and derivative instruments.

NOTE 5 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

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


(in millions)	March 31, 2011		December 31, 2010
Nonaccrual loans	$	996	$	1,080
Reduced-rate loans (a)		34		43

Total nonperforming loans		1,030		1,123
Foreclosed property		74		112

Total nonperforming assets	$	1,104	$	1,235

(a)	Reduced-rate business loans totaled $16 million and $26 million, respectively, and reduced-rate retail loans totaled $18 million and $17 million, respectively, at March 31, 2011 and December 31, 2010.

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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

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


	Loans Past Due and Still Accruing
(in millions)	30-59 Days		60-89 Days		90 Days or More		Total		Nonaccrual Loans		Current Loans		Total Loans
March 31, 2011
Business loans:
Commercial	$	51	$	21	$	15	$	87	$	226	$	21,047	$	21,360
Real estate construction:
Commercial Real Estate business line (a)		69		27		10		106		195		1,305		1,606
Other business lines (b)		5		—		2		7		3		407		417

Total real estate construction		74		27		12		113		198		1,712		2,023
Commercial mortgage:
Commercial Real Estate business line (a)		29		25		6		60		197		1,661		1,918
Other business lines (b)		56		27		8		91		293		7,395		7,779

Total commercial mortgage		85		52		14		151		490		9,056		9,697
Lease financing		—		—		—		—		7		951		958
International		3		—		—		3		4		1,319		1,326

Total business loans		213		100		41		354		925		34,085		35,364
Retail loans:
Residential mortgage		24		15		17		56		58		1,436		1,550
Consumer:
Home equity		12		4		9		25		6		1,630		1,661
Other consumer		4		1		5		10		7		584		601

Total consumer		16		5		14		35		13		2,214		2,262

Total retail loans		40		20		31		91		71		3,650		3,812

Total loans	$	253	$	120	$	72	$	445	$	996	$	37,735	$	39,176

December 31, 2010
Business loans:
Commercial	$	84	$	28	$	3	$	115	$	252	$	21,778	$	22,145
Real estate construction:
Commercial Real Estate business line (a)		27		—		17		44		259		1,523		1,826
Other business lines (b)		2		—		5		7		4		416		427

Total real estate construction		29		—		22		51		263		1,939		2,253
Commercial mortgage:
Commercial Real Estate business line (a)		8		1		—		9		181		1,747		1,937
Other business lines (b)		28		25		16		69		302		7,459		7,830

Total commercial mortgage		36		26		16		78		483		9,206		9,767
Lease financing		—		—		—		—		7		1,002		1,009
International		1		—		—		1		2		1,129		1,132

Total business loans		150		54		41		245		1,007		35,054		36,306
Retail loans:
Residential mortgage		33		23		7		63		55		1,501		1,619
Consumer:
Home equity		11		4		10		25		5		1,674		1,704
Other consumer		4		2		4		10		13		584		607

Total consumer		15		6		14		35		18		2,258		2,311

Total retail loans		48		29		21		98		73		3,759		3,930

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

(a)	Primarily loans to real estate investors and developers.

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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

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


	Three Months Ended March 31, 2011
(in millions)	Business Loans			Retail Loans			Total			Three Months Ended March 31, 2010
Allowance for loan losses:
Balance at January 1	$	839		$	62		$	901		$	985
Loan charge-offs		(113	)		(10	)		(123	)		(184	)
Recoveries on loans previously charged-off		21			1			22			11

Net loan charge-offs		(92	)		(9	)		(101	)		(173	)
Provision for loan losses		39			10			49			175

Balance at March 31	$	786		$	63		$	849		$	987

Allowance for loan losses:
Individually evaluated for impairment	$	168		$	5		$	173		$	192
Collectively evaluated for impairment		618			58			676			795

Total allowance for loan losses	$	786		$	63		$	849		$	987

As a percentage of total loans		2.22	%		1.65	%		2.17	%		2.42	%

Loans:
Individually evaluated for impairment	$	854		$	46		$	900		$	978
Collectively evaluated for impairment		34,510			3,766			38,276			39,867

Total loans evaluated for impairment	$	35,364		$	3,812		$	39,176		$	40,845

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


	Three Months Ended March 31,
(in millions)	2011			2010
Balance at beginning of period	$	35		$	37
Provision for credit losses on lending-related commitments		(3	)		7

Balance at end of period	$	32		$	44

Unfunded lending-related commitments sold	$	2		$	—

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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

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


	Recorded Investment In:
(in millions)	Impaired Loans with No Related Allowance		Impaired Loans with Related Allowance		Total Impaired Loans		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2011
Business loans:
Commercial	$	3	$	214	$	217	$	368	$	47
Real estate construction:
Commercial Real Estate business line (a)		6		183		189		313		38
Other business lines (b)		—		—		—		—		—

Total real estate construction		6		183		189		313		38
Commercial mortgage:
Commercial Real Estate business line (a)		—		201		201		268		40
Other business lines (b)		—		236		236		304		40

Total commercial mortgage		—		437		437		572		80
Lease financing		—		7		7		16		1
International		—		4		4		10		2

Total business loans		9		845		854		1,279		168
Retail loans:
Residential mortgage		2		38		40		45		3
Consumer loans:
Other consumer		—		6		6		11		2

Total consumer		—		6		6		11		2

Total retail loans		2		44		46		56		5

Total individually evaluated impaired loans	$	11	$	889	$	900	$	1,335	$	173

December 31, 2010
Business loans:
Commercial	$	9	$	237	$	246	$	398	$	55
Real estate construction:
Commercial Real Estate business line (a)		—		249		249		400		51
Other business lines (b)		—		—		—		—		—

Total real estate construction		—		249		249		400		51
Commercial mortgage:
Commercial Real Estate business line (a)		—		178		178		282		35
Other business lines (b)		—		245		245		325		49

Total commercial mortgage		—		423		423		607		84
Lease financing		—		7		7		15		1
International		—		2		2		2		1

Total business loans		9		918		927		1,422		192
Retail loans:
Residential mortgage		8		29		37		41		3
Consumer loans:
Other consumer		—		10		10		14		2

Total consumer		—		10		10		14		2

Total retail loans		8		39		47		55		5

Total individually evaluated impaired loans	$	17	$	957	$	974	$	1,477	$	197

(a)	Primarily loans to real estate investors and developers.

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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

The following table presents information regarding average individually evaluated impaired loans and the related interest recognized for the three months ended March 31, 2011 and 2010.


	2011				2010
(in millions)	Average Impaired Loans for the Period		Interest Income Recognized for the Period		Average Impaired Loans for the Period		Interest Income Recognized for the Period
Three Months Ended March 31
Business loans:
Commercial	$	231	$	1	$	201	$	—
Real estate construction:
Commercial Real Estate business line (a)		219		—		399		—
Other business lines (b)		—		—		2		—

Total real estate construction		219		—		401		—
Commercial mortgage:
Commercial Real Estate business line (a)		189		—		148		—
Other business lines (b)		241		1		172		—

Total commercial mortgage		430		1		320		—
Lease financing		7		—		13		—
International		3		—		18		1

Total business loans		890		2		953		1
Retail loans:
Residential mortgage		39		—		28		—
Consumer loans:
Other consumer		8		—		1		—

Total consumer		8		—		1		—

Total retail loans		47		—		29		—

Total individually evaluated impaired loans	$	937	$	2	$	982	$	1

(a)	Primarily loans to real estate investors and developers.

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

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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

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 periodic reviews by the Corporation’s senior management, and to pools of retail loans with similar risk characteristics.


	Internally Assigned Rating
(in millions)	Pass (a)		Special Mention (b)		Substandard (c)		Nonaccrual (d)		Total
March 31, 2011
Business loans:
Commercial	$	19,267	$	926	$	941	$	226	$	21,360
Real estate construction:
Commercial Real Estate business line (e)		975		256		180		195		1,606
Other business lines (f)		374		21		19		3		417

Total real estate construction		1,349		277		199		198		2,023
Commercial mortgage:
Commercial Real Estate business line (e)		1,068		396		257		197		1,918
Other business lines (f)		6,552		467		467		293		7,779

Total commercial mortgage		7,620		863		724		490		9,697
Lease financing		916		12		23		7		958
International		1,231		46		45		4		1,326

Total business loans		30,383		2,124		1,932		925		35,364
Retail loans:
Residential mortgage		1,447		16		29		58		1,550
Consumer:
Home equity		1,607		28		20		6		1,661
Other consumer		573		8		13		7		601

Total consumer		2,180		36		33		13		2,262

Total retail loans		3,627		52		62		71		3,812

Total loans	$	34,010	$	2,176	$	1,994	$	996	$	39,176


December 31, 2010
Business loans:
Commercial	$	19,884	$	1,015	$	994	$	252	$	22,145
Real estate construction:
Commercial Real Estate business line (e)		1,025		333		209		259		1,826
Other business lines (f)		383		20		20		4		427

Total real estate construction		1,408		353		229		263		2,253
Commercial mortgage:
Commercial Real Estate business line (e)		1,104		372		280		181		1,937
Other business lines (f)		6,595		508		425		302

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