2014 Q1 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
Or
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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)
___________________________________________________________________________________
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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.
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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 April 25, 2014: 181,673,675 shares
COMERICA INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Comerica Incorporated and Subsidiaries
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| | | | | | | |
(in millions, except share data) | March 31, 2014 | | December 31, 2013 |
| (unaudited) | | |
ASSETS | | | |
Cash and due from banks | $ | 1,186 |
| | $ | 1,140 |
|
| | | |
Interest-bearing deposits with banks | 4,434 |
| | 5,311 |
|
Other short-term investments | 105 |
| | 112 |
|
| | | |
Investment securities available-for-sale | 9,487 |
| | 9,307 |
|
| | | |
Commercial loans | 29,774 |
| | 28,815 |
|
Real estate construction loans | 1,847 |
| | 1,762 |
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Commercial mortgage loans | 8,801 |
| | 8,787 |
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Lease financing | 849 |
| | 845 |
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International loans | 1,250 |
| | 1,327 |
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Residential mortgage loans | 1,751 |
| | 1,697 |
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Consumer loans | 2,217 |
| | 2,237 |
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Total loans | 46,489 |
| | 45,470 |
|
Less allowance for loan losses | (594 | ) | | (598 | ) |
Net loans | 45,895 |
| | 44,872 |
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Premises and equipment | 583 |
| | 594 |
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Accrued income and other assets | 3,991 |
| | 3,888 |
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Total assets | $ | 65,681 |
| | $ | 65,224 |
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| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Noninterest-bearing deposits | $ | 23,955 |
| | $ | 23,875 |
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| | | |
Money market and interest-bearing checking deposits | 22,485 |
| | 22,332 |
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Savings deposits | 1,742 |
| | 1,673 |
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Customer certificates of deposit | 5,099 |
| | 5,063 |
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Foreign office time deposits | 469 |
| | 349 |
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Total interest-bearing deposits | 29,795 |
| | 29,417 |
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Total deposits | 53,750 |
| | 53,292 |
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Short-term borrowings | 160 |
| | 253 |
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Accrued expenses and other liabilities | 954 |
| | 986 |
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Medium- and long-term debt | 3,534 |
| | 3,543 |
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Total liabilities | 58,398 |
| | 58,074 |
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| | | |
Common stock - $5 par value: | | | |
Authorized - 325,000,000 shares | | | |
Issued - 228,164,824 shares | 1,141 |
| | 1,141 |
|
Capital surplus | 2,182 |
| | 2,179 |
|
Accumulated other comprehensive loss | (325 | ) | | (391 | ) |
Retained earnings | 6,414 |
| | 6,318 |
|
Less cost of common stock in treasury - 46,492,524 shares at 3/31/14
and 45,860,786 shares at 12/31/13 | (2,129 | ) | | (2,097 | ) |
Total shareholders’ equity | 7,283 |
| | 7,150 |
|
Total liabilities and shareholders’ equity | $ | 65,681 |
| | $ | 65,224 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Comerica Incorporated and Subsidiaries
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| | | | | | | |
| Three Months Ended March 31, |
(in millions, except per share data) | 2014 | | 2013 |
INTEREST INCOME | | | |
Interest and fees on loans | $ | 376 |
| | $ | 390 |
|
Interest on investment securities | 55 |
| | 53 |
|
Interest on short-term investments | 4 |
| | 3 |
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Total interest income | 435 |
| | 446 |
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INTEREST EXPENSE | | | |
Interest on deposits | 11 |
| | 15 |
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Interest on medium- and long-term debt | 14 |
| | 15 |
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Total interest expense | 25 |
| | 30 |
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Net interest income | 410 |
| | 416 |
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Provision for credit losses | 9 |
| | 16 |
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Net interest income after provision for credit losses | 401 |
| | 400 |
|
NONINTEREST INCOME | | | |
Service charges on deposit accounts | 54 |
| | 55 |
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Fiduciary income | 44 |
| | 43 |
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Commercial lending fees | 20 |
| | 21 |
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Card fees | 19 |
| | 17 |
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Letter of credit fees | 14 |
| | 16 |
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Bank-owned life insurance | 9 |
| | 9 |
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Foreign exchange income | 9 |
| | 9 |
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Brokerage fees | 5 |
| | 5 |
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Net securities gains | 1 |
| | — |
|
Other noninterest income | 33 |
| | 38 |
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Total noninterest income | 208 |
| | 213 |
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NONINTEREST EXPENSES | | | |
Salaries and benefits expense | 247 |
| | 251 |
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Net occupancy expense | 40 |
| | 39 |
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Equipment expense | 14 |
| | 15 |
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Outside processing fee expense | 28 |
| | 28 |
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Software expense | 22 |
| | 22 |
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Litigation-related expense | 3 |
| | 3 |
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FDIC insurance expense | 8 |
| | 9 |
|
Advertising expense | 6 |
| | 6 |
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Other noninterest expenses | 38 |
| | 43 |
|
Total noninterest expenses | 406 |
| | 416 |
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Income before income taxes | 203 |
| | 197 |
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Provision for income taxes | 64 |
| | 63 |
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NET INCOME | 139 |
| | 134 |
|
Less income allocated to participating securities | 2 |
| | 2 |
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Net income attributable to common shares | $ | 137 |
| | $ | 132 |
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Earnings per common share: | | | |
Basic | $ | 0.76 |
| | $ | 0.71 |
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Diluted | 0.73 |
| | 0.70 |
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| | | |
Comprehensive income | 205 |
| | 137 |
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| | | |
Cash dividends declared on common stock | 35 |
| | 32 |
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Cash dividends declared per common share | 0.19 |
| | 0.17 |
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
Comerica Incorporated and Subsidiaries
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Accumulated Other Comprehensive Loss | | | | | | Total Shareholders’ Equity |
(in millions, except per share data) | Shares Outstanding | | Amount | | Capital Surplus | | | Retained Earnings | | Treasury Stock | |
BALANCE AT DECEMBER 31, 2012 | 188.3 |
| | $ | 1,141 |
| | $ | 2,162 |
| | $ | (413 | ) | | $ | 5,928 |
| | $ | (1,879 | ) | | $ | 6,939 |
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Net income | — |
| | — |
| | — |
| | — |
| | 134 |
| | — |
| | 134 |
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Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
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Cash dividends declared on common stock ($0.17 per share) | — |
| | — |
| | — |
| | — |
| | (32 | ) | | — |
| | (32 | ) |
Purchase of common stock | (2.2 | ) | | — |
| | — |
| | — |
| | — |
| | (74 | ) | | (74 | ) |
Net issuance of common stock under employee stock plans | 0.7 |
| | — |
| | (15 | ) | | — |
| | (13 | ) | | 33 |
| | 5 |
|
Share-based compensation | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
|
BALANCE AT MARCH 31, 2013 | 186.8 |
| | $ | 1,141 |
| | $ | 2,157 |
| | $ | (410 | ) | | $ | 6,017 |
| | $ | (1,920 | ) | | $ | 6,985 |
|
| | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2013 | 182.3 |
| | $ | 1,141 |
| | $ | 2,179 |
| | $ | (391 | ) | | $ | 6,318 |
| | $ | (2,097 | ) | | $ | 7,150 |
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Net income | — |
| | — |
| | — |
| | — |
| | 139 |
| | — |
| | 139 |
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Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 66 |
| | — |
| | — |
| | 66 |
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Cash dividends declared on common stock ($0.19 per share) | — |
| | — |
| | — |
| | — |
| | (35 | ) | | — |
| | (35 | ) |
Purchase of common stock | (1.7 | ) | | — |
| | — |
| | — |
| | — |
| | (80 | ) | | (80 | ) |
Net issuance of common stock under employee stock plans | 1.1 |
| | — |
| | (11 | ) | | — |
| | (8 | ) | | 48 |
| | 29 |
|
Share-based compensation | — |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
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BALANCE AT MARCH 31, 2014 | 181.7 |
| | $ | 1,141 |
| | $ | 2,182 |
| | $ | (325 | ) | | $ | 6,414 |
| | $ | (2,129 | ) | | $ | 7,283 |
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Comerica Incorporated and Subsidiaries
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| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2014 | | 2013 |
OPERATING ACTIVITIES | | | |
Net income | $ | 139 |
| | $ | 134 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | 9 |
| | 16 |
|
Provision (benefit) for deferred income taxes | (5 | ) | | 29 |
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Depreciation and amortization | 29 |
| | 30 |
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Net periodic defined benefit cost | 9 |
| | 21 |
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Share-based compensation expense | 14 |
| | 10 |
|
Net amortization of securities | 2 |
| | 10 |
|
Accretion of loan purchase discount | (12 | ) | | (11 | ) |
Net securities gains | (1 | ) | | — |
|
Net gain on foreclosed property sold | (1 | ) | | (1 | ) |
Excess tax benefits from share-based compensation arrangements | (5 | ) | | (1 | ) |
Net change in: | | | |
Trading securities | 5 |
| | 10 |
|
Accrued income receivable | — |
| | (10 | ) |
Accrued expenses payable | (61 | ) | | (72 | ) |
Other, net | 92 |
| | 94 |
|
Net cash provided by operating activities | 214 |
| | 259 |
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INVESTING ACTIVITIES | | | |
Investment securities available-for-sale: | | | |
Maturities and redemptions | 411 |
| | 938 |
|
Purchases | (499 | ) | | (955 | ) |
Net change in loans | (1,026 | ) | | 971 |
|
Proceeds from sales of foreclosed property | 3 |
| | 18 |
|
Net increase in premises and equipment | (16 | ) | | (19 | ) |
Other, net | (1 | ) | | 5 |
|
Net cash (used in) provided by investing activities | (1,128 | ) | | 958 |
|
FINANCING ACTIVITIES | | | |
Net change in: | | | |
Deposits | 255 |
| | — |
|
Short-term borrowings | (93 | ) | | (52 | ) |
Common stock: | | | |
Repurchases | (80 | ) | | (74 | ) |
Cash dividends paid | (31 | ) | | (29 | ) |
Issuances under employee stock plans | 26 |
| | 5 |
|
Excess tax benefits from share-based compensation arrangements | 5 |
| | 1 |
|
Other, net | 1 |
| | (5 | ) |
Net cash provided by (used in) financing activities | 83 |
| | (154 | ) |
Net (decrease) increase in cash and cash equivalents | (831 | ) | | 1,063 |
|
Cash and cash equivalents at beginning of period | 6,451 |
| | 4,534 |
|
Cash and cash equivalents at end of period | $ | 5,620 |
| | $ | 5,597 |
|
Interest paid | $ | 25 |
| | $ | 29 |
|
Income taxes and tax-related interest paid | — |
| | 1 |
|
Noncash investing and financing activities: | | | |
Loans transferred to other real estate | 7 |
| | 5 |
|
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Organization
The accompanying unaudited consolidated financial statements were prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation were included. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.
Recently Adopted Accounting Pronouncement
Effective January 1, 2014, the Corporation early adopted Accounting Standards Update (ASU) No. 2014-01, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” an amendment to GAAP which enables companies that invest in affordable housing projects that qualify for the low-income housing tax credit (LIHTC) to elect to use the proportional amortization method if certain conditions are met. Under the proportional amortization method, the initial investment cost of the project is amortized in proportion to the amount of tax credits and other benefits received, with the results of the investment presented on a net basis as a component of the provision for income taxes. Previously, LIHTC investments were accounted for under the cost or equity method, and the amortization was recorded as a reduction to other noninterest income, with the tax credits and other benefits received recorded as a component of the provision for income taxes. The Corporation believes the proportional amortization method better represents the economics of LIHTC investments and provides users with a better understanding of the returns from such investments than the cost or equity method.
The cumulative effect of the retrospective application of the change in amortization method was a $3 million decrease to both "accrued income and other assets" and "retained earnings" on the consolidated balance sheets as of January 1, 2013. The unaudited consolidated financial statements have been retrospectively adjusted to reflect the prior period effect of the adoption of the amendment, which resulted in a $13 million increase to both "other noninterest income" and "provision for income taxes" for the three months ended March 31, 2013. The adoption of ASU 2014-01 had no effect on net income or earnings per common share for any period presented.
See Note 6 to these unaudited consolidated financial statements for additional information regarding LIHTC and other tax credit investments.
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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.
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 securities and investment securities available-for-sale, 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
Trading securities include securities held for trading purposes as well as assets held related to employee deferred compensation plans. Trading securities 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 trading securities 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
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
securities. 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. 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 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 represent securities in less liquid markets requiring significant management assumptions when determining fair value. Auction-rate securities comprise Level 3 investment securities available-for-sale. 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. The Corporate Development Department, with appropriate oversight and approval provided by senior management, 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. 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.
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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 on its derivative positions based on whether the derivatives are being settled through a clearinghouse or bilaterally with each counterparty. For derivative positions settled on a counterparty-by-counterparty basis, the Corporation 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.
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 Corporation holds a portfolio of warrants for generally nonmarketable equity securities with a fair value of $3 million at March 31, 2014, included in "accrued income and other assets" on the consolidated balance sheets. These warrants are primarily from non-public technology companies obtained as part of the loan origination process. 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 March 31, 2014, the fair value of the contract was a liability of $2 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 $12 million and $5 million, respectively, at March 31, 2014. 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 16 years. Recently issued federal regulations may require the Corporation to sell certain of these funds prior to liquidation. The investments are accounted for either 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 net asset value, 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
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
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 not significant at March 31, 2014 or December 31, 2013.
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) in "accrued income and other assets" on the consolidated balance sheets 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 at both March 31, 2014 and December 31, 2013, and its investment in FRB stock totaled $85 million at both March 31, 2014 and December 31, 2013. 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 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. 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.
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 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.
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 March 31, 2014 and December 31, 2013.
|
| | | | | | | | | | | | | | | | |
(in millions) | Total | | Level 1 | | Level 2 | | Level 3 | |
March 31, 2014 | | | | | | | | |
Trading securities: | | | | | | | | |
Deferred compensation plan assets | $ | 97 |
| | $ | 97 |
| | $ | — |
| | $ | — |
| |
Equity and other non-debt securities | 1 |
| | 1 |
| | — |
| | — |
| |
Residential mortgage-backed securities (a) | 3 |
| | — |
| | 3 |
| | — |
| |
State and municipal securities | 1 |
| | — |
| | 1 |
| | — |
| |
Corporate debt securities | 1 |
| | — |
| | 1 |
| | — |
| |
Total trading securities | 103 |
| | 98 |
| | 5 |
| | — |
| |
Investment securities available-for-sale: | | | | | | | | |
U.S. Treasury and other U.S. government agency securities | 45 |
| | 45 |
| | — |
| | — |
| |
Residential mortgage-backed securities (a) | 9,123 |
| | — |
| | 9,123 |
| | — |
| |
State and municipal securities | 23 |
| | — |
| | — |
| | 23 |
| (b) |
Corporate debt securities | 54 |
| | — |
| | 53 |
| | 1 |
| (b) |
Equity and other non-debt securities | 242 |
| | 124 |
| | — |
| | 118 |
| (b) |
Total investment securities available-for-sale | 9,487 |
| | 169 |
| | 9,176 |
| | 142 |
| |
Derivative assets: | | | | | | | | |
Interest rate contracts | 358 |
| | — |
| | 358 |
| | — |
| |
Energy derivative contracts | 103 |
| | — |
| | 103 |
| | — |
| |
Foreign exchange contracts | 18 |
| | — |
| | 18 |
| | — |
| |
Warrants | 3 |
| | — |
| | — |
| | 3 |
| |
Total derivative assets | 482 |
| | — |
| | 479 |
| | 3 |
| |
Total assets at fair value | $ | 10,072 |
| | $ | 267 |
| | $ | 9,660 |
| | $ | 145 |
| |
Derivative liabilities: | | | | | | | | |
Interest rate contracts | $ | 118 |
| | $ | — |
| | $ | 118 |
| | $ | — |
| |
Energy derivative contracts | 101 |
| | — |
| | 101 |
| | — |
| |
Foreign exchange contracts | 17 |
| | — |
| | 17 |
| | — |
| |
Other | 2 |
| | — |
| | — |
| | 2 |
| |
Total derivative liabilities | 238 |
| | — |
| | 236 |
| | 2 |
| |
Deferred compensation plan liabilities | 97 |
| | 97 |
| | — |
| | — |
| |
Total liabilities at fair value | $ | 335 |
| | $ | 97 |
| | $ | 236 |
| | $ | 2 |
| |
| |
(a) | Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
| |
(b) | Auction-rate securities. |
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
|
| | | | | | | | | | | | | | | | |
(in millions) | Total | | Level 1 | | Level 2 | | Level 3 | |
December 31, 2013 | | | | | | | | |
Trading securities: | | | | | | | | |
Deferred compensation plan assets | $ | 96 |
| | $ | 96 |
| | $ | — |
| | $ | — |
| |
Equity and other non-debt securities | 7 |
| | 7 |
| | — |
| | — |
| |
Residential mortgage-backed securities (a) | 2 |
| | — |
| | 2 |
| | — |
| |
State and municipal securities | 3 |
| | — |
| | 3 |
| | — |
| |
Total trading securities | 108 |
| | 103 |
| | 5 |
| | — |
| |
Investment securities available-for-sale: | | | | | | | | |
U.S. Treasury and other U.S. government agency securities | 45 |
| | 45 |
| | — |
| | — |
| |
Residential mortgage-backed securities (a) | 8,926 |
| | — |
| | 8,926 |
| | — |
| |
State and municipal securities | 22 |
| | — |
| | — |
| | 22 |
| (b) |
Corporate debt securities | 56 |
| | — |
| | 55 |
| | 1 |
| (b) |
Equity and other non-debt securities | 258 |
| | 122 |
| | — |
| | 136 |
| (b) |
Total investment securities available-for-sale | 9,307 |
| | 167 |
| | 8,981 |
| | 159 |
| |
Derivative assets: | | | | | | | | |
Interest rate contracts | 380 |
| | — |
| | 380 |
| | — |
| |
Energy derivative contracts | 105 |
| | — |
| | 105 |
| | — |
| |
Foreign exchange contracts | 15 |
| | — |
| | 15 |
| | — |
| |
Warrants | 3 |
| | — |
| | — |
| | 3 |
| |
Total derivative assets | 503 |
| | — |
| | 500 |
| | 3 |
| |
Total assets at fair value | $ | 9,918 |
| | $ | 270 |
| | $ | 9,486 |
| | $ | 162 |
| |
Derivative liabilities: | | | | | | | | |
Interest rate contracts | $ | 133 |
| | $ | — |
| | $ | 133 |
| | $ | — |
| |
Energy derivative contracts | 102 |
| | — |
| | 102 |
| | — |
| |
Foreign exchange contracts | 14 |
| | — |
| | 14 |
| | — |
| |
Other | 2 |
| | — |
| | — |
| | 2 |
| |
Total derivative liabilities | 251 |
| | — |
| | 249 |
| | 2 |
| |
Deferred compensation plan liabilities | 96 |
| | 96 |
| | — |
| | — |
| |
Total liabilities at fair value | $ | 347 |
| | $ | 96 |
| | $ | 249 |
| | $ | 2 |
| |
| |
(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 months ended March 31, 2014 and 2013.
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 months ended March 31, 2014 and 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
Three Months Ended March 31, 2014 | | | | | | | | | | | | |
Investment securities available-for-sale: | | | | | | | | | | | | |
State and municipal securities (a) | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| (b) | | $ | — |
| | $ | 23 |
|
Corporate debt securities (a) | 1 |
| | — |
| | — |
| | — |
| | | — |
| | 1 |
|
Equity and other non-debt securities (a) | 136 |
| | 1 |
| (c) | — |
| | 5 |
| (b) | | (24 | ) | | 118 |
|
Total investment securities available-for-sale | 159 |
| | 1 |
| (c) | — |
| | 6 |
| (b) | | (24 | ) | | 142 |
|
Derivative assets: | | | | | | | | | | | | |
Warrants | 3 |
| | — |
| | 1 |
| (d) | — |
| | | (1 | ) | | 3 |
|
Derivative liabilities: | | | | | | | | | | | | |
Other | 2 |
| | — |
| | — |
| | — |
| | | — |
| | 2 |
|
Three Months Ended March 31, 2013 | | | | | | | | | | | | |
Investment securities available-for-sale: | | | | | | | | | | | | |
State and municipal securities (a) | $ | 23 |
| | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
| | $ | 23 |
|
Corporate debt securities (a) | 1 |
| | — |
| | — |
| | — |
| | | — |
| | 1 |
|
Equity and other non-debt securities (a) | 156 |
| | — |
| | — |
| | 1 |
| (b) | | (4 | ) | | 153 |
|
Total investment securities available-for-sale | 180 |
| | — |
| | — |
| | 1 |
| (b) | | (4 | ) | | 177 |
|
Derivative assets: | | | | | | | | | | | | |
Warrants | 3 |
| | 1 |
| (d) | — |
| | — |
| | | (1 | ) | | 3 |
|
Derivative liabilities: | | | | | | | | | | | | |
Other | 1 |
| | — |
| | — |
| | — |
| | | — |
| | 1 |
|
| |
(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" 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. |
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 March 31, 2014 and December 31, 2013 and are presented in the following table. No liabilities were recorded at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013.
|
| | | | |
(in millions) | | Level 3 |
March 31, 2014 | | |
Loans: | | |
Commercial | | $ | 20 |
|
Real estate construction | | 17 |
|
Commercial mortgage | | 74 |
|
Total loans | | 111 |
|
Nonmarketable equity securities | | 2 |
|
Other real estate | | 3 |
|
Total assets at fair value | | $ | 116 |
|
December 31, 2013 | | |
Loans: | | |
Commercial | | $ | 43 |
|
Real estate construction | | 20 |
|
Commercial mortgage | | 61 |
|
International | | 4 |
|
Total loans | | 128 |
|
Nonmarketable equity securities | | 2 |
|
Other real estate | | 5 |
|
Total assets at fair value | | $ | 135 |
|
Level 3 assets recorded at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013 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.
The following table presents quantitative information related to the significant unobservable inputs utilized in the Corporation's Level 3 recurring fair value measurement as of March 31, 2014 and December 31, 2013. The Corporation's 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 March 31, 2014 workout periods reflect management's view that short-term interest rates could begin to rise in 2015.
|
| | | | | | | |
| | | Discounted Cash Flow Model |
| | | Unobservable Input |
| Fair Value (in millions) | | Discount Rate | | Workout Period (in years) |
March 31, 2014 | | | | | |
State and municipal securities (a) | $ | 23 |
| | 4% - 9% | | 1 - 4 |
Equity and other non-debt securities (a) | 118 |
| | 5% - 7% | | 1 - 3 |
December 31, 2013 | | | | | |
State and municipal securities (a) | $ | 22 |
| | 5% - 10% | | 3 - 4 |
Equity and other non-debt securities (a) | 136 |
| | 5% - 8% | | 2 - 3 |
| |
(a) | Auction-rate securities. |
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 |
March 31, 2014 | | | | | | | | | |
Assets | | | | | | | | | |
Cash and due from banks | $ | 1,186 |
| | $ | 1,186 |
| | $ | 1,186 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits with banks | 4,434 |
| | 4,434 |
| | 4,434 |
| | — |
| | — |
|
Loans held-for-sale | 2 |
| | 2 |
| | — |
| | 2 |
| | — |
|
Total loans, net of allowance for loan losses (a) | 45,895 |
| | 45,932 |
| | — |
| | — |
| | 45,932 |
|
Customers’ liability on acceptances outstanding | 12 |
| | 12 |
| | 12 |
| | — |
| | — |
|
Nonmarketable equity securities (b) | 12 |
| | 19 |
| | — |
| | — |
| | 19 |
|
Restricted equity investments | 133 |
| | 133 |
| | 133 |
| | — |
| | — |
|
Liabilities | | | | | | | | | |
Demand deposits (noninterest-bearing) | 23,955 |
| | 23,955 |
| | — |
| | 23,955 |
| | — |
|
Interest-bearing deposits | 24,696 |
| | 24,696 |
| | — |
| | 24,696 |
| | — |
|
Customer certificates of deposit | 5,099 |
| | 5,090 |
| | — |
| | 5,090 |
| | — |
|
Total deposits | 53,750 |
| | 53,741 |
| | — |
| | 53,741 |
| | — |
|
Short-term borrowings | 160 |
| | 160 |
| | 160 |
| | — |
| | — |
|
Acceptances outstanding | 12 |
| | 12 |
| | 12 |
| | — |
| | — |
|
Medium- and long-term debt | 3,534 |
| | 3,527 |
| | — |
| | 3,527 |
| | — |
|
Credit-related financial instruments | (91 | ) | | (91 | ) | | — |
| | — |
| | (91 | ) |
December 31, 2013 | | | | | | | | | |
Assets | | | | | | | | | |
Cash and due from banks | $ | 1,140 |
| | $ | 1,140 |
| | $ | 1,140 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits with banks | 5,311 |
| | 5,311 |
| | 5,311 |
| | — |
| | — |
|
Loans held-for-sale | 4 |
| | 4 |
| | — |
| | 4 |
| | — |
|
Total loans, net of allowance for loan losses (a) | 44,872 |
| | 44,801 |
| | — |
| | — |
| | 44,801 |
|
Customers’ liability on acceptances outstanding | 11 |
| | 11 |
| | 11 |
| | — |
| | — |
|
Nonmarketable equity securities (b) | 12 |
| | 19 |
| | — |
| | — |
| | 19 |
|
Restricted equity investments | 133 |
| | 133 |
| | 133 |
| | — |
| | — |
|
Liabilities | | | | | | | | | |
Demand deposits (noninterest-bearing) | 23,875 |
| | 23,875 |
| | — |
| | 23,875 |
| | — |
|
Interest-bearing deposits | 24,354 |
| | 24,354 |
| | — |
| | 24,354 |
| | — |
|
Customer certificates of deposit | 5,063 |
| | 5,055 |
| | — |
| | 5,055 |
| | — |
|
Total deposits | 53,292 |
| | 53,284 |
| | — |
| | 53,284 |
| | — |
|
Short-term borrowings | 253 |
| | 253 |
| | 253 |
| | — |
| | — |
|
Acceptances outstanding | 11 |
| | 11 |
| | 11 |
| | — |
| | — |
|
Medium- and long-term debt | 3,543 |
| | 3,540 |
| | — |
| | 3,540 |
| | — |
|
Credit-related financial instruments | (88 | ) | | (88 | ) | | — |
| | — |
| | (88 | ) |
| |
(a) | Included $111 million and $128 million of impaired loans recorded at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013, respectively. |
| |
(b) | Included $2 million of nonmarketable equity securities recorded at fair value on a nonrecurring basis at both March 31, 2014 and December 31, 2013. |
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 |
March 31, 2014 | | | | | | | |
U.S. Treasury and other U.S. government agency securities | $ | 45 |
| | $ | — |
| | $ | — |
| | $ | 45 |
|
Residential mortgage-backed securities (a) | 9,133 |
| | 107 |
| | 117 |
| | 9,123 |
|
State and municipal securities | 24 |
| | — |
| | 1 |
| | 23 |
|
Corporate debt securities | 54 |
| | — |
| | — |
| | 54 |
|
Equity and other non-debt securities | 245 |
| | 1 |
| | 4 |
| | 242 |
|
Total investment securities available-for-sale (b) | $ | 9,501 |
| | $ | 108 |
| | $ | 122 |
| | $ | 9,487 |
|
| | | | | | | |
December 31, 2013 | | | | | | | |
U.S. Treasury and other U.S. government agency securities | $ | 45 |
| | $ | — |
| | $ | — |
| | $ | 45 |
|
Residential mortgage-backed securities (a) | 9,023 |
| | 91 |
| | 188 |
| | 8,926 |
|
State and municipal securities | 24 |
| | — |
| | 2 |
| | 22 |
|
Corporate debt securities | 56 |
| | — |
| | — |
| | 56 |
|
Equity and other non-debt securities | 266 |
| | 1 |
| | 9 |
| | 258 |
|
Total investment securities available-for-sale (b) | $ | 9,414 |
| | $ | 92 |
| | $ | 199 |
| | $ | 9,307 |
|
| |
(a) | Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
| |
(b) | Included auction-rate securities at amortized cost and fair value of $146 million and $142 million, respectively, as of March 31, 2014 and $169 million and $159 million, respectively, as of December 31, 2013. |
A summary of the Corporation’s investment securities available-for-sale in an unrealized loss position as of March 31, 2014 and December 31, 2013 follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Temporarily Impaired |
| Less than 12 Months | | 12 Months or more | | Total |
(in millions) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
March 31, 2014 | | | | | | | | | | | | | | |
Residential mortgage-backed securities (a) | $ | 4,797 |
| | $ | 111 |
| | | $ | 138 |
| | $ | 6 |
| | | $ | 4,935 |
| | $ | 117 |
| |
State and municipal securities (b) | — |
| | — |
| | | 23 |
| | 1 |
| | | 23 |
| | 1 |
| |
Corporate debt securities (b) | — |
| | — |
| | | 1 |
| | — |
| (c) | | 1 |
| | — |
| (c) |
Equity and other non-debt securities (b) | — |
| | — |
| | | 130 |
| | 4 |
| | | 130 |
| | 4 |
| |
Total impaired securities | $ | 4,797 |
| | $ | 111 |
| | | $ | 292 |
|
| $ | 11 |
| | | $ | 5,089 |
| | $ | 122 |
| |
December 31, 2013 | | | | | | | | | | | | | | |
Residential mortgage-backed securities (a) | $ | 5,825 |
| | $ | 187 |
| | | $ | 11 |
| | $ | 1 |
| | | $ | 5,836 |
| | $ | 188 |
| |
State and municipal securities (b) | — |
| | — |
| | | 22 |
| | 2 |
| | | 22 |
| | 2 |
| |
Corporate debt securities (b) | — |
| | — |
| | | 1 |
| | — |
| (c) | | 1 |
| | — |
| (c) |
Equity and other non-debt securities (b) | — |
| | — |
| | | 148 |
| | 9 |
| | | 148 |
| | 9 |
| |
Total impaired securities | $ | 5,825 |
| | $ | 187 |
| | | $ | 182 |
| | $ | 12 |
| | | $ | 6,007 |
| | $ | 199 |
| |
| |
(a) | Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
| |
(b) | Auction-rate securities. |
| |
(c) | Unrealized losses less than $0.5 million. |
At March 31, 2014, the Corporation had 169 securities in an unrealized loss position with no credit impairment, including 103 residential mortgage-backed securities, 48 equity and other non-debt auction-rate preferred securities, 17 state and municipal auction-rate securities, one corporate auction-rate debt security and one mutual fund. As of March 31, 2014, approximately 89 percent of the aggregate par value of auction-rate securities have been redeemed or sold since acquisition, of which approximately 95 percent were redeemed at or above cost. The unrealized losses for these securities resulted from changes in market interest rates and liquidity. The Corporation ultimately expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Corporation will be required to sell the securities in an unrealized loss position prior to recovery of amortized cost. The Corporation does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
Sales, calls and write-downs of investment securities available-for-sale resulted in gains of $1 million and no losses for the three months ended March 31, 2014. No securities gains or losses were recognized for the three months ended March 31, 2013. Securities gains and losses are recorded in “net securities gains” on the consolidated statements of comprehensive income, computed based on the adjusted cost of the specific security.
The following table summarizes the amortized cost and fair values of debt securities by contractual maturity. Securities with multiple maturity dates are classified in the period of final maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | |
(in millions) | | | |
March 31, 2014 | Amortized Cost | | Fair Value |
Contractual maturity | | | |
Within one year | $ | 155 |
| | $ | 155 |
|
After one year through five years | 268 |
| | 269 |
|
After five years through ten years | 277 |
| | 287 |
|
After ten years | 8,556 |
| | 8,534 |
|
Subtotal | 9,256 |
| | 9,245 |
|
Equity and other non-debt securities | 245 |
| | 242 |
|
Total investment securities available-for-sale | $ | 9,501 |
| | $ | 9,487 |
|
Included in the contractual maturity distribution in the table above were auction-rate securities with a total amortized cost and fair value of $25 million and $24 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 total amortized cost and fair value of $9.1 billion. The actual cash flows of mortgage-backed securities may differ from contractual maturity as the borrowers of the underlying loans may exercise prepayment options.
At March 31, 2014, investment securities with a carrying value of $3.3 billion were pledged where permitted or required by law to secure $2.3 billion of liabilities, primarily public and other deposits of state and local government agencies and derivative instruments.
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries
NOTE 4 – CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES
The following table presents an aging analysis of the recorded balance of loans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans Past Due and Still Accruing | | | | | | |
(in millions) | 30-59 Days | | 60-89 Days | | 90 Days or More | | Total | | Nonaccrual Loans | | Current Loans (c) | | Total Loans |
March 31, 2014 | | | | | | | | | | | | | |
Business loans: | | | | | | | | | | | | | |
Commercial | $ | 30 |
| | $ | 20 |
| | $ | 3 |
| | $ | 53 |
| | $ | 54 |
| | $ | 29,667 |
| | $ | 29,774 |
|
Real estate construction: | | | | | | | | | | | | | |
Commercial Real Estate business line (a) | — |
| | — |
| | — |
| | — |
| | 18 |
| | 1,489 |
| | 1,507 |
|
Other business lines (b) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 339 |
| | 340 |
|
Total real estate construction | — |
| | — |
| | — |
| | — |
| | 19 |
| | 1,828 |
| | 1,847 |
|
Commercial mortgage: | | | | | | | | | | | | | |
Commercial Real Estate business line (a) | 25 |
| | — |
| | 1 |
| | 26 |
| | 58 |
| | 1,736 |
| | 1,820 |
|
Other business lines (b) | 40 |
| | 3 |
| | 4 |
| | 47 |
| | 104 |
| | 6,830 |
| | 6,981 |
|
Total commercial mortgage | 65 |
| | 3 |
| | 5 |
| | 73 |
| | 162 |
| | 8,566 |
| | 8,801 |
|
Lease financing | — |
| | — |
| | — |
| | — |
| | — |
| | 849 |
| | 849 |
|
International | 6 |
| | 3 |
| | — |
| | 9 |
| | — |
| | 1,241 |
| | 1,250 |
|
Total business loans | 101 |
| | 26 |
| | 8 |
| | 135 |
| | 235 |
| | 42,151 |
| | 42,521 |
|
Retail loans: | | | | | | | | | | | | | |
Residential mortgage | 15 |
| | 1 |
| | — |
| | 16 |
| | 48 |
| | 1,687 |
| | 1,751 |
|
Consumer: | | | | | | | | | | | | | |
Home equity | 6 |
| | 3 |
| | 1 |
| | 10 |
| | 32 |
| | 1,491 |
| | 1,533 |
|
Other consumer | 2 |
| | — |
| | 1 |
| | 3 |
| | 2 |
| | 679 |
| | 684 |
|
Total consumer | 8 |
| |