Edgar Filing: COMERICA INC /NEW/

CMA-2013.6.30 10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________

(Mark One)



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

For the quarterly period ended June 30, 2013



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

For the transition period from to

Commission file number 1-10706

____________________________________________________________________________________

Comerica Incorporated

(Exact name of registrant as specified in its charter)

___________________________________________________________________________________



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

Comerica Bank Tower

1717 Main Street, MC 6404

Dallas, Texas 75201

(Address of principal executive offices)

(Zip Code)

(214) 462-6831

(Registrant’s telephone number, including area code)

_________________________________________________________________________

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

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

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



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

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

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

$5 par value common stock:

Outstanding as of July 25, 2013: 184,961,609 shares

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COMERICA INCORPORATED AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012	1

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	2

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2013 and 2012 (unaudited)	3

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)	4

Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	68

ITEM 4. Controls and Procedures	68

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings	68

ITEM 1A. Risk Factors	68

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	68

ITEM 6. Exhibits	69

Signature	70

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries



(in millions, except share data)	June 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Cash and due from banks	$	1,016		$	1,395

Federal funds sold	31			100
Interest-bearing deposits with banks	2,878			3,039
Other short-term investments	119			125

Investment securities available-for-sale	9,631			10,297

Commercial loans	29,186			29,513
Real estate construction loans	1,479			1,240
Commercial mortgage loans	9,007			9,472
Lease financing	843			859
International loans	1,209			1,293
Residential mortgage loans	1,611			1,527
Consumer loans	2,124			2,153
Total loans	45,459			46,057
Less allowance for loan losses	(613		)	(629		)
Net loans	44,846			45,428
Premises and equipment	604			622
Accrued income and other assets	3,822			4,063
Total assets	$	62,947		$	65,069

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	21,870		$	23,279

Money market and interest-bearing checking deposits	21,677			21,273
Savings deposits	1,677			1,606
Customer certificates of deposit	5,594			5,531
Foreign office time deposits	437			502
Total interest-bearing deposits	29,385			28,912
Total deposits	51,255			52,191
Short-term borrowings	131			110
Accrued expenses and other liabilities	1,049			1,106
Medium- and long-term debt	3,601			4,720
Total liabilities	56,036			58,127

Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 228,164,824 shares	1,141			1,141
Capital surplus	2,160			2,162
Accumulated other comprehensive loss	(538		)	(413		)
Retained earnings	6,127			5,931
Less cost of common stock in treasury - 42,999,083 shares at 6/30/13 and 39,889,610 shares at 12/31/12	(1,979		)	(1,879		)
Total shareholders’ equity	6,911			6,942
Total liabilities and shareholders’ equity	$	62,947		$	65,069

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Comerica Incorporated and Subsidiaries



	Three Months Ended June 30,					Six Months Ended June 30,
(in millions, except per share data)	2013			2012		2013			2012
INTEREST INCOME
Interest and fees on loans	$	388		$	408	$	778		$	819
Interest on investment securities	52			59		105			122
Interest on short-term investments	3			3		6			6
Total interest income	443			470		889			947
INTEREST EXPENSE
Interest on deposits	15			18		30			37
Interest on medium- and long-term debt	14			17		29			33
Total interest expense	29			35		59			70
Net interest income	414			435		830			877
Provision for credit losses	13			19		29			41
Net interest income after provision for credit losses	401			416		801			836
NONINTEREST INCOME
Service charges on deposit accounts	53			53		108			109
Fiduciary income	44			39		87			77
Commercial lending fees	22			24		43			49
Letter of credit fees	16			18		32			35
Card fees	13			12		25			23
Foreign exchange income	9			10		18			20
Bank-owned life insurance	10			10		19			20
Brokerage fees	4			4		9			9
Net securities (losses) gains	(2		)	6		(2		)	11
Other noninterest income	39			35		69			64
Total noninterest income	208			211		408			417
NONINTEREST EXPENSES
Salaries	182			189		370			390
Employee benefits	63			61		126			120
Total salaries and employee benefits	245			250		496			510
Net occupancy expense	39			40		78			81
Equipment expense	15			16		30			33
Outside processing fee expense	30			26		58			52
Software expense	22			21		44			44
Merger and restructuring charges	—			8		—			8
FDIC insurance expense	8			10		17			20
Advertising expense	6			7		12			14
Other real estate expense	1			1		2			4
Other noninterest expenses	50			55		95			115
Total noninterest expenses	416			434		832			881
Income before income taxes	193			193		377			372
Provision for income taxes	50			50		100			98
NET INCOME	143			143		277			274
Less income allocated to participating securities	2			2		4			3
Net income attributable to common shares	$	141		$	141	$	273		$	271
Earnings per common share:
Basic	$	0.77		$	0.73	$	1.48		$	1.39
Diluted	0.76			0.73		1.46			1.39

Comprehensive income	15			169		152			329

Cash dividends declared on common stock	32			29		64			49
Cash dividends declared per common share	0.17			0.15		0.34			0.25

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Comerica Incorporated and Subsidiaries



	Common Stock							Accumulated Other Comprehensive Loss									Total Shareholders’ Equity
(in millions, except per share data)	Shares Outstanding		Amount		Capital Surplus			Accumulated Other Comprehensive Loss			Retained Earnings			Treasury Stock			Total Shareholders’ Equity
BALANCE AT DECEMBER 31, 2011	197.3		$	1,141	$	2,170		$	(356	)	$	5,546		$	(1,633	)	$	6,868
Net income	—		—		—			—			274			—			274
Other comprehensive income, net of tax	—		—		—			55			—			—			55
Cash dividends declared on common stock ($0.25 per share)	—		—		—			—			(49		)	—			(49		)
Purchase of common stock	(4.1	)	—		—			—			—			(125		)	(125		)
Net issuance of common stock under employee stock plans	1.1		—		(49		)	—			(27		)	60			(16		)
Share-based compensation	—		—		21			—			—			—			21
Other	—		—		2			—			—			(2		)	—
BALANCE AT JUNE 30, 2012	194.3		$	1,141	$	2,144		$	(301	)	$	5,744		$	(1,700	)	$	7,028

BALANCE AT DECEMBER 31, 2012	188.3		$	1,141	$	2,162		$	(413	)	$	5,931		$	(1,879	)	$	6,942
Net income	—		—		—			—			277			—			277
Other comprehensive loss, net of tax	—		—		—			(125		)	—			—			(125		)
Cash dividends declared on common stock ($0.34 per share)	—		—		—			—			(64		)	—			(64		)
Purchase of common stock	(4.1	)	—		—			—			—			(146		)	(146		)
Net issuance of common stock under employee stock plans	1.0		—		(19		)	—			(17		)	45			9
Share-based compensation	—		—		18			—			—			—			18
Other	—		—		(1		)	—			—			1			—
BALANCE AT JUNE 30, 2013	185.2		$	1,141	$	2,160		$	(538	)	$	6,127		$	(1,979	)	$	6,911

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries



	Six Months Ended June 30,
(in millions)	2013			2012
OPERATING ACTIVITIES
Net income	$	277		$	274
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	29			41
Provision for deferred income taxes	26			64
Depreciation and amortization	62			67
Net periodic defined benefit cost	44			41
Share-based compensation expense	18			21
Net amortization of securities	18			23
Accretion of loan purchase discount	(18		)	(43		)
Net securities losses (gains)	2			(11		)
Excess tax benefits from share-based compensation arrangements	(2		)	(1		)
Net change in:
Trading securities	4			(23		)
Accrued income receivable	(5		)	1
Accrued expenses payable	(35		)	(47		)
Other, net	(135		)	39
Net cash provided by operating activities	285			446
INVESTING ACTIVITIES
Investment securities available-for-sale:
Maturities and redemptions	1,761			1,893
Purchases	(1,355		)	(1,689		)
Net change in loans	563			(1,379		)
Sales of Federal Home Loan Bank stock	41			3
Proceeds from sales of indirect private equity and venture capital funds	—			1
Other, net	(37		)	(34		)
Net cash provided by (used in) investing activities	973			(1,205		)
FINANCING ACTIVITIES
Net change in:
Deposits	(636		)	1,689
Short-term borrowings	21			13
Medium- and long-term debt:
Maturities and redemptions	(1,055		)	(193		)
Common stock:
Repurchases	(146		)	(125		)
Cash dividends paid	(61		)	(40		)
Excess tax benefits from share-based compensation arrangements	2			1
Other, net	8			(2		)
Net cash (used in) provided by financing activities	(1,867		)	1,343
Net (decrease) increase in cash and cash equivalents	(609		)	584
Cash and cash equivalents at beginning of period	4,534			3,556
Cash and cash equivalents at end of period	$	3,925		$	4,140
Interest paid	$	61		$	69
Income taxes, tax deposits and tax-related interest paid	22			64
Noncash investing and financing activities:
Loans transferred to other real estate	9			20

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Organization

The accompanying unaudited consolidated financial statements were prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation were included. The results of operations for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.

Allowance for Loan Losses

The allowance for loan losses represents management’s assessment of probable, estimable losses inherent in the Corporation’s loan portfolio. The allowance for loan losses includes specific allowances, based on individual evaluations of certain loans, and allowances for homogeneous pools of loans with similar risk characteristics.

The allowance for business loans which do not meet the criteria to be evaluated individually is determined by applying standard reserve factors to the pool of business loans within each internal risk rating. In the first quarter 2013, the Corporation enhanced the approach utilized for determining standard reserve factors by changing from a dollar-based migration method for developing probability of default statistics to a count-based method. Under the dollar-based method, each dollar that moved to default received equal weight in the determination of standard reserve factors for each internal risk rating. As a result, the movement of larger loans impacted standard reserve factors more than the movement of smaller loans. By moving to a count-based approach, where each loan that moves to default receives equal weighting, unusually large or small loans will not have a disproportionate influence on the standard reserve factors. The change resulted in a $40 million increase to the allowance for loan losses at March 31, 2013.

Recently Adopted Accounting Pronouncements

In the first quarter 2013, the Corporation adopted amendments to GAAP which require enhanced disclosures about the nature and effect or potential effect of an entity's rights of setoff associated with its derivative and certain other financial instruments. The required disclosures are provided in Note 5 to these unaudited financial statements.

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.

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

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

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The Corporation categorizes assets and liabilities recorded at fair value on a recurring or nonrecurring basis and the estimated fair value of financial instruments not recorded at fair value on a recurring basis 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.



	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.

The Corporation generally utilizes third-party pricing services to value Level 1 and Level 2 trading and investment securities, as well as certain derivatives designated as fair value hedges. Management reviews the methodologies and assumptions used by the third-party pricing services and evaluates the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data. The Corporation may occasionally adjust certain values provided by the third-party pricing service when management believes, as the result of its review, that the adjusted price most appropriately reflects the fair value of the particular security.

Following are 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. The descriptions include 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 interest-bearing deposits with banks

Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. As such, the Corporation classifies the estimated fair value of these instruments as Level 1.

Trading securities and associated deferred compensation plan liabilities

Securities held for trading purposes and associated deferred compensation plan liabilities are recorded at fair value on a recurring basis 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 residential 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. Loans held-for-sale may be carried at fair value on a nonrecurring basis when fair value is less than cost. The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifies both loans held-for-sale subjected to nonrecurring fair value adjustments and the estimated fair value of loans held-for sale as Level 2.

Investment securities available-for-sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, an adjustment to the quoted prices may be necessary. In some circumstances, the Corporation may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate to estimate an instrument's fair value. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include residential mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored entities and corporate debt

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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 is auction-rate securities, 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 for all periods presented was determined using an income approach based on a discounted cash flow model. The discounted cash flow model utilizes two significant inputs: discount rate 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 derived from the rate at which various types of similar auction-rate securities had been redeemed or sold. 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 own redemption experience. Significant increases in any of these inputs in isolation would result in a significantly lower fair value. Additionally, as the discount rate incorporates the liquidity risk premium, a change in an assumption used for the liquidity risk premium would be accompanied by a directionally similar change in the discount rate. The Corporate Development Department is responsible for determining the valuation methodology for auction-rate securities and for updating significant inputs based on changes to the factors discussed above. Valuation results, including an analysis of changes to the valuation methodology and significant inputs, are provided to senior management for review on a quarterly basis.

Loans

The Corporation does not record loans at fair value on a recurring basis. However, the Corporation may establish a specific allowance for an impaired loan based on the fair value of the underlying collateral. Such loan values are reported as nonrecurring fair value measurements. Collateral values supporting individually evaluated impaired loans are evaluated quarterly. 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 Level 3. The Special Assets Group is responsible for performing quarterly credit quality reviews for all impaired loans as part of the quarterly allowance for loan losses process overseen by the Chief Credit Officer, during which valuation adjustments to updated collateral values are determined.

The Corporation discloses fair value estimates for loans not recorded at fair value. The estimated fair value is determined based on characteristics such as loan category, repricing features and remaining maturity, and includes prepayment and credit loss estimates. For variable rate business loans that reprice frequently, the estimated fair value is based on carrying values adjusted for estimated credit losses inherent in the portfolio at the balance sheet date. For other business loans and retail loans, fair values are estimated using a discounted cash flow model that employs a discount rate that reflects the Corporation's current pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable. The Corporation classifies the estimated fair value of loans held for investment as Level 3.

Customers’ liability on acceptances outstanding and acceptances outstanding

Customers' liability on acceptances outstanding is included in "accrued income and other assets" and acceptances outstanding are included in "accrued expenses and other liabilities" on the consolidated balance sheets. Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. As such, the Corporation classifies the estimated fair value of these instruments as Level 1.

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 on a recurring basis using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities. The Corporation manages credit risk for its over-the-counter derivative positions on a counterparty-by-counterparty basis and calculates credit valuation adjustments, included in the fair value of these instruments, on the basis of its relationships at the counterparty portfolio/master netting agreement level. These credit valuation 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 classifies 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.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The Corporation holds a portfolio of warrants for generally nonmarketable equity securities with a fair value of $3 million at June 30, 2013. 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 on a recurring basis using a Black-Scholes valuation model. The Black-Scholes valuation model utilizes five inputs: risk-free rate, expected life, volatility, exercise price, and the per share market value of the underlying company. The Corporate Development Department is responsible for the warrant valuation process, which includes reviewing all significant inputs for reasonableness, and for providing valuation results to senior management. Increases in any of these inputs in isolation, with the exception of exercise price, would result in a higher fair value. Increases in exercise price in isolation would result in a lower fair value. The Corporation classifies warrants accounted for as derivatives as Level 3.

The Corporation also 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. At June 30, 2013, the fair value of the contract was a liability of $3 million. The recurring fair value of the derivative contract is based on unobservable inputs consisting of management's estimate of the litigation outcome, timing of litigation settlements and payments related to the derivative. Significant increases in the estimate of litigation outcome and the timing of litigation settlements in isolation would result in a significantly higher liability fair value. Significant increases in payments related to the derivative in isolation would result in a significantly lower liability fair value. The Corporation classifies the derivative liability as Level 3.

Nonmarketable equity securities

The Corporation has a portfolio of indirect (through funds) private equity and venture capital investments with a carrying value and unfunded commitments of $13 million and $6 million, respectively, at June 30, 2013. 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 17 years. 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. 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. On a quarterly basis, the Corporate Development Department is responsible, with appropriate oversight and approval provided by senior management, for performing the valuation procedures and updating significant inputs, as are primarily provided by the underlying fund's management. The Corporation classifies fair value measurements of nonmarketable equity securities as Level 3. Commitments to fund additional investments in nonmarketable equity securities recorded at fair value on a nonrecurring basis were insignificant and $2 million at June 30, 2013 and December 31, 2012, respectively.

The Corporation also holds restricted equity investments, primarily Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock. Restricted equity securities are not readily marketable and are recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. No significant observable market data for these instruments is available. The Corporation considers the profitability and asset quality of the issuer, dividend payment history and recent redemption experience when determining the ultimate recoverability of the par value. The Corporation’s investment in FHLB stock totaled $48 million and $89 million at June 30, 2013 and December 31, 2012, respectively, and its investment in FRB stock totaled $85 million at both June 30, 2013 and December 31, 2012. The Corporation believes its investments in FHLB and FRB stock are ultimately recoverable at par. Therefore, the carrying amount for these restricted equity investments approximates fair value. The Corporation classifies the estimated fair value of such investments as Level 1.

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

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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 of the property. The Special Assets Group obtains updated independent market prices and appraised values, as required by state regulation or deemed necessary based on market conditions, and determines if additional write-downs are necessary. On a quarterly basis, senior management reviews all other real estate and determines whether the carrying values are reasonable, based on the length of time elapsed since receipt of independent market price or appraised value and current market conditions. Other real estate carried at fair value based on an observable market price or a current appraised value is classified by the Corporation as Level 2. When management determines that the fair value of other real estate requires additional adjustments, either as a result of a non-current appraisal or when there is no observable market price, the Corporation classifies the other real estate as Level 3.

Loan servicing rights

Loan servicing rights with a carrying value of $2 million at June 30, 2013, included in “accrued income and other assets” on the consolidated balance sheets and primarily related to Small Business Administration loans, are subject to impairment testing. Loan servicing rights may be carried at fair value on a nonrecurring basis when impairment testing indicates that the fair value of the loan servicing rights is less than the recorded value. A valuation model is used for impairment testing on a quarterly basis, which utilizes a discounted cash flow model, using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management. On a quarterly basis, the Accounting Department is responsible for performing the valuation procedures and updating significant inputs, which are primarily obtained from available third-party market data, with appropriate oversight and approval provided by senior 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 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. As such, the Corporation classifies the estimated fair value of deposit liabilities as Level 2.

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. As such, the Corporation classifies the estimated fair value of short-term borrowings as Level 1.

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 when available. If quoted market values are not available, the estimated fair value is based on the market values of debt with similar characteristics. The Corporation classifies the estimated fair value of medium- and long-term debt as Level 2.

Credit-related financial instruments

Credit-related financial instruments include unused commitments to extend credit and standby and commercial letters of credit. These instruments generate ongoing fees which are recognized over the term of the commitment. In situations where credit losses are probable, the Corporation records an allowance. The carrying value of these instruments included in "accrued expenses and other liabilities" on the consolidated balance sheets, which includes the carrying value of the deferred fees plus the related allowance, approximates the estimated fair value. The Corporation classifies the estimated fair value of credit-related financial instruments as Level 3.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

ASSETS AND LIABLILITIES RECORDED AT FAIR VALUE ON A RECURRING BASIS

The following tables present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012.



(in millions)	Total		Level 1		Level 2		Level 3
June 30, 2013
Trading securities:
Deferred compensation plan assets	$	92	$	92	$	—	$	—
Residential mortgage-backed securities (a)	7		—		7		—
State and municipal securities	8		—		8		—
Corporate debt securities	3		—		3		—
Total trading securities	110		92		18		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	20		20		—		—
Residential mortgage-backed securities (a)	9,270		—		9,270		—
State and municipal securities	25		—		—		25		(b)
Corporate debt securities	56		—		55		1		(b)
Equity and other non-debt securities	260		114		—		146		(b)
Total investment securities available-for-sale	9,631		134		9,325		172
Derivative assets:
Interest rate contracts	428		—		428		—
Energy derivative contracts	138		—		138		—
Foreign exchange contracts	24		—		24		—
Warrants	3		—		—		3
Total derivative assets	593		—		590		3
Total assets at fair value	$	10,334	$	226	$	9,933	$	175
Derivative liabilities:
Interest rate contracts	$	153	$	—	$	153	$	—
Energy derivative contracts	23		—		23		—
Foreign exchange contracts	138		—		138		—
Other	3		—		—		3
Total derivative liabilities	317		—		314		3
Deferred compensation plan liabilities	92		92		—		—
Total liabilities at fair value	$	409	$	92	$	314	$	3


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


(b)	Auction-rate securities.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries



(in millions)	Total		Level 1		Level 2		Level 3
December 31, 2012
Trading securities:
Deferred compensation plan assets	$	88	$	88	$	—	$	—
Residential mortgage-backed securities (a)	4		—		4		—
State and municipal securities	19		—		19		—
Corporate debt securities	3		—		3		—
Total trading securities	114		88		26		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	20		20		—		—
Residential mortgage-backed securities (a)	9,935		—		9,935		—
State and municipal securities	23		—		—		23		(b)
Corporate debt securities	58		—		57		1		(b)
Equity and other non-debt securities	261		105		—		156		(b)
Total investment securities available-for-sale	10,297		125		9,992		180
Derivative assets:
Interest rate contracts	556		—		556		—
Energy derivative contracts	173		—		173		—
Foreign exchange contracts	21		—		21		—
Warrants	3		—		—		3
Total derivative assets	753		—		750		3
Total assets at fair value	$	11,164	$	213	$	10,768	$	183
Derivative liabilities:
Interest rate contracts	$	218	$	—	$	218	$	—
Energy derivative contracts	172		—		172		—
Foreign exchange contracts	18		—		18		—
Other	1		—		—		1
Total derivative liabilities	409		—		408		1
Deferred compensation plan liabilities	88		88		—		—
Total liabilities at fair value	$	497	$	88	$	408	$	1


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


(b)	Auction-rate securities.

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1, Level 2 and Level 3 fair value measurements during the three- and six-month periods ended June 30, 2013 and 2012.

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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 six-month periods ended June 30, 2013 and 2012.



			Net Realized/Unrealized Gains (Losses) (Pretax)

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

(in millions)			Realized			Unrealized								Sales			Settlements
Three Months Ended June 30, 2013
Investment securities available-for-sale:
State and municipal securities (a)	$	23	$	—		$	—			$	2		(b)	$	—		$	—		$	25
Corporate debt securities (a)	1		—			—				—				—			—			1
Equity and other non-debt securities (a)	153		—			—				(7		)	(b)	—			—			146
Total investment securities available-for-sale	177		—			—				(5		)	(b)	—			—			172
Derivative assets:
Warrants	3		—			1			(d)	—				(1		)	—			3
Derivative liabilities:
Other	1		—			(2		)	(c)	—				—			—			3
Three Months Ended June 30, 2012
Investment securities available-for-sale:
State and municipal securities (a)	$	23	$	—		$	—			$	2		(b)	$	(1	)	$	—		$	24
Corporate debt securities (a)	1		—			—				—				—			—			1
Equity and other non-debt securities (a)	320		6		(c)	—				7			(b)	(118		)	—			215
Total investment securities available-for-sale	344		6		(c)	—				9			(b)	(119		)	—			240
Derivative assets:
Warrants	3		2		(d)	1			(d)	—				(3		)	—			3
Six Months Ended June 30, 2013
Investment securities available-for-sale:
State and municipal securities (a)	$	23	$	—		$	—			$	2		(b)	$	—		$	—		$	25
Corporate debt securities (a)	1		—			—				—				—			—			1
Equity and other non-debt securities (a)	156		—			—				(6		)	(b)	(4		)	—			146
Total investment securities available-for-sale	180		—			—				(4		)	(b)	(4		)	—			172
Derivative assets:
Warrants	3		1		(d)	1			(d)	—				(2		)	—			3
Derivative liabilities:
Other	1		—			(2		)	(c)	—				—			—			3
Six Months Ended June 30, 2012
Investment securities available-for-sale:
State and municipal securities (a)	$	24	$	—		$	—			$	1		(b)	$	(1	)	$	—		$	24
Corporate debt securities (a)	1		—			—				—				—			—			1
Equity and other non-debt securities (a)	408		11		(c)	—				11			(b)	(215		)	—			215
Total investment securities available-for-sale	433		11		(c)	—				12			(b)	(216		)	—			240
Derivative assets:
Warrants	3		3		(d)	1			(d)	—				(4		)	—			3
Derivative liabilities:
Other	6		—			—				—				—			(6		)	—


(a)	Auction-rate securities.


(b)	Recorded in "net unrealized gains (losses) on investment securities available-for-sale" in other comprehensive income.


(c)	Realized and unrealized gains and losses due to changes in fair value recorded in "net securities gains (losses)" on the consolidated statements of comprehensive income.


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

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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. All assets recorded at fair value on a nonrecurring basis were classified as Level 3 at June 30, 2013 and December 31, 2012 and are presented in the following table. No liabilities were recorded at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012.



(in millions)	Level 3
June 30, 2013
Loans:
Commercial	$	60
Real estate construction	24
Commercial mortgage	94
Total loans	178
Nonmarketable equity securities	1
Other real estate	20
Loan servicing rights	2
Total assets at fair value	$	201
December 31, 2012
Loans:
Commercial	$	42
Real estate construction	25
Commercial mortgage	145
Lease financing	2
Total loans	214
Nonmarketable equity securities	2
Other real estate	24
Loan servicing rights	2
Total assets at fair value	$	242

The following table presents quantitative information related to the significant unobservable inputs utilized in the Corporation's significant Level 3 recurring fair value measurement as of June 30, 2013 and December 31, 2012. The Corporation's significant Level 3 recurring fair value measurements include auction-rate securities where fair value is determined using an income approach based on a discounted cash flow model. The inputs in the table below reflect management's expectation of continued illiquidity in the secondary auction-rate securities market due to a lack of market activity for the issuers remaining in the portfolio, a lack of market incentives for issuer redemptions, and the expectation for the low interest rate environment continuing into 2015. The June 30, 2013 discount rates reflect changes in liquidity premiums based on sustained illiquid market conditions for the securities during the second quarter 2013.



			Discounted Cash Flow Model
			Unobservable Input
	Fair Value (in millions)		Discount Rate	Workout Period (in years)
June 30, 2013
State and municipal securities (a)	$	25	5% - 9%	4 - 5
Equity and other non-debt securities (a)	146		6% - 9%	2 - 4
December 31, 2012
State and municipal securities (a)	$	23	6% - 10%	4 - 6
Equity and other non-debt securities (a)	156		4% - 6%	2 - 4


(a)	Auction-rate securities.

Level 3 assets recorded at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012 included loans for which a specific allowance was established based on the fair value of collateral and other real estate for which fair value of the properties was less than the cost basis. For both asset classes, the unobservable inputs were the additional adjustments applied by management to the appraised values to reflect such factors as non-current appraisals and revisions to estimated time to sell. These adjustments are determined based on qualitative judgments made by management on a case-by-case basis and are not quantifiable inputs, although they are used in the determination of fair value.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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
June 30, 2013
Assets
Cash and due from banks	$	1,016		$	1,016		$	1,016	$	—	$	—
Federal funds sold	31			31			31		—		—
Interest-bearing deposits with banks	2,878			2,878			2,878		—		—
Loans held-for-sale	9			9			—		9		—
Total loans, net of allowance for loan losses (a)	44,846			44,922			—		—		44,922
Customers’ liability on acceptances outstanding	13			13			13		—		—
Nonmarketable equity securities (b)	13			20			—		—		20
Restricted equity investments	133			133			133		—		—
Liabilities
Demand deposits (noninterest-bearing)	21,870			21,870			—		21,870		—
Interest-bearing deposits	23,791			23,791			—		23,791		—
Customer certificates of deposit	5,594			5,594			—		5,594		—
Total deposits	51,255			51,255			—		51,255		—
Short-term borrowings	131			131			131		—		—
Acceptances outstanding	13			13			13		—		—
Medium- and long-term debt	3,601			3,594			—		3,594		—
Credit-related financial instruments	(99		)	(99		)	—		—		(99		)
December 31, 2012
Assets
Cash and due from banks	$	1,395		$	1,395		$	1,395	$	—	$	—
Federal funds sold	100			100			100		—		—
Interest-bearing deposits with banks	3,039			3,039			3,039		—		—
Loans held-for-sale	12			12			—		12		—
Total loans, net of allowance for loan losses (a)	45,428			45,649			—		—		45,649
Customers’ liability on acceptances outstanding	18			18			18		—		—
Nonmarketable equity securities (b)	13			22			—		—		22
Restricted equity investments	174			174			174		—		—
Liabilities
Demand deposits (noninterest-bearing)	23,279			23,279			—		23,279		—
Interest-bearing deposits	23,381			23,381			—		23,381		—
Customer certificates of deposit	5,531			5,535			—		5,535		—
Total deposits	52,191			52,195			—		52,195		—
Short-term borrowings	110			110			110		—		—
Acceptances outstanding	18			18			18		—		—
Medium- and long-term debt	4,720			4,685			—		4,685		—
Credit-related financial instruments	(103		)	(103		)	—		—		(103		)


(a)	Included $178 million and $214 million of impaired loans recorded at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012, respectively.


(b)	Included $1 million and $2 million of nonmarketable equity securities recorded at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012, respectively.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 - INVESTMENT SECURITIES

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



(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2013
U.S. Treasury and other U.S. government agency securities	$	20	$	—	$	—	$	20
Residential mortgage-backed securities (a)	9,260		100		90		9,270
State and municipal securities	27		—		2		25
Corporate debt securities	56		—		—		56
Equity and other non-debt securities	273		—		13		260
Total investment securities available-for-sale (b)	$	9,636	$	100	$	105	$	9,631

December 31, 2012
U.S. Treasury and other U.S. government agency securities	$	20	$	—	$	—	$	20
Residential mortgage-backed securities (a)	9,687		248		—		9,935
State and municipal securities	27		—		4		23
Corporate debt securities	58		—		—		58
Equity and other non-debt securities	268		—		7		261
Total investment securities available-for-sale (b)	$	10,060	$	248	$	11	$	10,297


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


(b)