Edgar Filing: COMERICA INC /NEW/

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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 September 30, 2016



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 October 24, 2016: 172,262,981 shares

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COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at September 30, 2016 (unaudited) and December 31, 2015	1

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	2

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	3

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	4

Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	62

ITEM 4. Controls and Procedures	62

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings	62

ITEM 1A. Risk Factors	62

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	62

ITEM 6. Exhibits	63

Signature	64

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries



(in millions, except share data)	September 30, 2016			December 31, 2015
	(unaudited)
ASSETS
Cash and due from banks	$	1,292		$	1,157

Interest-bearing deposits with banks	6,748			4,990
Other short-term investments	92			113

Investment securities available-for-sale	10,789			10,519
Investment securities held-to-maturity	1,695			1,981

Commercial loans	31,152			31,659
Real estate construction loans	2,743			2,001
Commercial mortgage loans	9,013			8,977
Lease financing	648			724
International loans	1,303			1,368
Residential mortgage loans	1,874			1,870
Consumer loans	2,541			2,485
Total loans	49,274			49,084
Less allowance for loan losses	(727		)	(634		)
Net loans	48,547			48,450
Premises and equipment	528			550
Accrued income and other assets	4,433			4,117
Total assets	$	74,124		$	71,877

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	31,776		$	30,839

Money market and interest-bearing checking deposits	22,436			23,532
Savings deposits	2,052			1,898
Customer certificates of deposit	2,967			3,552
Foreign office time deposits	30			32
Total interest-bearing deposits	27,485			29,014
Total deposits	59,261			59,853
Short-term borrowings	12			23
Accrued expenses and other liabilities	1,234			1,383
Medium- and long-term debt	5,890			3,058
Total liabilities	66,397			64,317

Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 228,164,824 shares	1,141			1,141
Capital surplus	2,174			2,173
Accumulated other comprehensive loss	(292		)	(429		)
Retained earnings	7,262			7,084
Less cost of common stock in treasury - 56,096,416 shares at 9/30/16 and 52,457,113 shares at 12/31/15	(2,558		)	(2,409		)
Total shareholders’ equity	7,727			7,560
Total liabilities and shareholders’ equity	$	74,124		$	71,877

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Comerica Incorporated and Subsidiaries



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions, except per share data)	2016		2015			2016			2015
INTEREST INCOME
Interest and fees on loans	$	411	$	390		$	1,223		$	1,156
Interest on investment securities	61		54			185			160
Interest on short-term investments	8		4			17			11
Total interest income	480		448			1,425			1,327
INTEREST EXPENSE
Interest on deposits	10		11			30			33
Interest on medium- and long-term debt	20		15			53			38
Total interest expense	30		26			83			71
Net interest income	450		422			1,342			1,256
Provision for credit losses	16		26			213			87
Net interest income after provision for credit losses	434		396			1,129			1,169
NONINTEREST INCOME
Card fees	76		71			224			203
Service charges on deposit accounts	55		57			165			168
Fiduciary income	47		47			142			142
Commercial lending fees	26		22			68			69
Letter of credit fees	12		13			38			39
Bank-owned life insurance	12		10			30			29
Foreign exchange income	10		10			31			29
Brokerage fees	5		5			14			13
Net securities losses	—		—			(3		)	(2		)
Other noninterest income	29		25			75			79
Total noninterest income	272		260			784			769
NONINTEREST EXPENSES
Salaries and benefits expense	247		243			742			747
Outside processing fee expense	86		83			247			239
Net occupancy expense	40		41			117			118
Equipment expense	13		13			40			39
Restructuring charges	20		—			73			—
Software expense	31		26			90			73
FDIC insurance expense	14		9			39			27
Advertising expense	5		6			15			17
Litigation-related expense	—		(3		)	—			(32		)
Other noninterest expenses	37		39			106			117
Total noninterest expenses	493		457			1,469			1,345
Income before income taxes	213		199			444			593
Provision for income taxes	64		63			131			188
NET INCOME	149		136			313			405
Less income allocated to participating securities	1		2			3			5
Net income attributable to common shares	$	148	$	134		$	310		$	400
Earnings per common share:
Basic	$	0.87	$	0.76		$	1.80		$	2.27
Diluted	0.84		0.74			1.76			2.20

Comprehensive income	152		187			450			472

Cash dividends declared on common stock	40		37			115			110
Cash dividends declared per common share	0.23		0.21			0.66			0.62

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, 2014	179.0		$	1,141	$	2,188		$	(412	)	$	6,744		$	(2,259	)	$	7,402
Net income	—		—		—			—			405			—			405
Other comprehensive income, net of tax	—		—		—			67			—			—			67
Cash dividends declared on common stock ($0.62 per share)	—		—		—			—			(110		)	—			(110		)
Purchase of common stock	(3.8	)	—		—			—			—			(175		)	(175		)
Purchase and retirement of warrants	—		—		(10		)	—			—			—			(10		)
Net issuance of common stock under employee stock plans	1.0		—		(21		)	—			(10		)	45			14
Net issuance of common stock for warrants	1.0		—		(21		)	—			(22		)	43			—
Share-based compensation	—		—		29			—			—			—			29
BALANCE AT SEPTEMBER 30, 2015	177.2		$	1,141	$	2,165		$	(345	)	$	7,007		$	(2,346	)	$	7,622

BALANCE AT DECEMBER 31, 2015	175.7		$	1,141	$	2,173		$	(429	)	$	7,084		$	(2,409	)	$	7,560
Net income	—		—		—			—			313			—			313
Other comprehensive income, net of tax	—		—		—			137			—			—			137
Cash dividends declared on common stock ($0.66 per share)	—		—		—			—			(115		)	—			(115		)
Purchase of common stock	(5.0	)	—		—			—			—			(211		)	(211		)
Net issuance of common stock under employee stock plans	1.4		—		(29		)	—			(20		)	62			13
Share-based compensation	—		—		30			—			—			—			30
BALANCE AT SEPTEMBER 30, 2016	172.1		$	1,141	$	2,174		$	(292	)	$	7,262		$	(2,558	)	$	7,727

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries



	Nine Months Ended September 30,
(in millions)	2016			2015
OPERATING ACTIVITIES
Net income	$	313		$	405
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	213			87
Benefit for deferred income taxes	(74		)	(52		)
Depreciation and amortization	91			90
Net periodic defined benefit cost	11			34
Share-based compensation expense	30			29
Net amortization of securities	7			11
Accretion of loan purchase discount	(4		)	(6		)
Net securities losses	3			2
Net gains on sales of foreclosed property	(3		)	(2		)
Excess tax benefits from share-based compensation arrangements	(1		)	(3		)
Net change in:
Accrued income receivable	(8		)	(9		)
Accrued expenses payable	71			(70		)
Other, net	(252		)	147
Net cash provided by operating activities	397			663
INVESTING ACTIVITIES
Investment securities available-for-sale:
Maturities and redemptions	1,259			1,333
Purchases	(1,396		)	(1,933		)
Investment securities held-to-maturity:
Maturities and redemptions	288			244
Purchases	—			(166		)
Net change in loans	(290		)	(436		)
Proceeds from sales of foreclosed property	15			8
Net increase in premises and equipment	(71		)	(78		)
Purchases of Federal Home Loan Bank stock	(115		)	—
Other, net	3			5
Net cash used in investing activities	(307		)	(1,023		)
FINANCING ACTIVITIES
Net change in:
Deposits	(686		)	1,361
Short-term borrowings	(11		)	(7		)
Medium- and long-term debt:
Maturities	—			(606		)
Issuances	2,800			1,016
Common stock:
Repurchases	(211		)	(175		)
Cash dividends paid	(112		)	(109		)
Issuances under employee stock plans	25			21
Purchase and retirement of warrants	—			(10		)
Excess tax benefits from share-based compensation arrangements	1			3
Other, net	(3		)	(5		)
Net cash provided by financing activities	1,803			1,489
Net increase in cash and cash equivalents	1,893			1,129
Cash and cash equivalents at beginning of period	6,147			6,071
Cash and cash equivalents at end of period	$	8,040		$	7,200
Interest paid	$	75		$	64
Income taxes paid	66			46
Noncash investing and financing activities:
Loans transferred to other real estate	21			9
Loans transferred from portfolio to held-for-sale	—			19
Loans transferred from held-for-sale to portfolio	17			—
Lease residual transferred to other assets	—			16

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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” (ASU 2016-02), to increase the transparency and comparability of lease recognition and disclosure. The update requires lessees to recognize lease contracts with a term greater than one year on the balance sheet, while recognizing expenses on the income statement in a manner similar to current guidance. For lessors, the update makes targeted changes to the classification criteria and the lessor accounting model to align the guidance with the new lessee model and revenue guidance. ASU 2016-02 is effective for the Corporation on January 1, 2019 and must be applied using the modified retrospective approach. Early adoption is permitted. The Corporation is currently evaluating the impact of adopting ASU 2016-02.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting,” (ASU 2016-09), which intends to simplify accounting for share based payment transactions, including the income tax consequences and classification of awards. Among other items, the update requires excess tax benefits and deficiencies to be recognized as a component of income taxes within the income statement rather than other comprehensive income as required in current guidance. ASU 2016-09 is effective for the Corporation on January 1, 2017. The recognition of excess tax benefits and deficiencies in the income statement must be adopted prospectively. The method of transition required will differ for other items being amended. Early adoption is permitted. The impact to the Corporation upon adoption is dependent on the market value per share of the Corporation's common stock at option expiration dates and restricted stock vesting dates.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," (ASU 2016-13), which addresses concerns regarding the perceived delay in recognition of credit losses under the existing incurred loss model. The amendment introduces a new, single model for recognizing credit losses on all financial instruments presented on cost basis. Under the new model, entities must estimate current expected credit losses by considering all available relevant information, including historical and current information, as well as reasonable and supportable forecasts of future events. The update also requires additional qualitative and quantitative information to allow users to better understand the credit risk within the portfolio and the methodologies for determining allowance. ASU 2016-13 is effective for the Corporation on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted. The Corporation is currently evaluating the impact of adopting ASU 2016-13.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” (ASU 2016-15), which reduces diversity in the presentation of several categories of transactions in the cash flow statement. Among other things, the update clarifies the appropriate classification for proceeds from settlement of bank owned life insurance (BOLI) policies. Based on preliminary assessments, the Corporation expects to change the classification of proceeds from settlement of BOLI policies from operating activities to investing activities. Proceeds from settlement of BOLI policies totaled $10 million and $6 million for the nine-month periods ended September 30, 2016 and 2015, respectively, and $12 million for the year ended December 31, 2015. Other changes in classification resulting from this update are not expected to be significant. ASU 2016-15 is effective for the Corporation on January 1, 2018 and must be applied using the retrospective approach. Early adoption is permitted.

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.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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.

Refer to Note 1 to the consolidated financial statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2015 for further information about the fair value hierarchy, descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis.

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 September 30, 2016 and December 31, 2015.



(in millions)	Total		Level 1		Level 2		Level 3
September 30, 2016
Trading securities:
Deferred compensation plan assets	$	88	$	88	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,826		2,826		—		—
Residential mortgage-backed securities (a)	7,828		—		7,828		—
State and municipal securities	8		—		—		8		(b)
Equity and other non-debt securities	127		81		—		46		(b)
Total investment securities available-for-sale	10,789		2,907		7,828		54
Derivative assets:
Interest rate contracts	389		—		362		27
Energy derivative contracts	192		—		192		—
Foreign exchange contracts	39		—		39		—
Warrants	2		—		—		2
Total derivative assets	622		—		593		29
Total assets at fair value	$	11,499	$	2,995	$	8,421	$	83
Derivative liabilities:
Interest rate contracts	$	170	$	—	$	170	$	—
Energy derivative contracts	190		—		190		—
Foreign exchange contracts	30		—		30		—
Total derivative liabilities	390		—		390		—
Deferred compensation plan liabilities	88		88		—		—
Total liabilities at fair value	$	478	$	88	$	390	$	—


(a)	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, 2015
Trading securities:
Deferred compensation plan assets	$	89	$	89	$	—	$	—
Equity and other non-debt securities	3		3		$	—	$	—
Total trading securities	92		92		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,763		2,763		—		—
Residential mortgage-backed securities (a)	7,545		—		7,545		—
State and municipal securities	9		—		—		9		(b)
Corporate debt securities	1		—		—		1		(b)
Equity and other non-debt securities	201		134		—		67		(b)
Total investment securities available-for-sale	10,519		2,897		7,545		77
Derivative assets:
Interest rate contracts	286		—		277		9
Energy derivative contracts	475		—		475		—
Foreign exchange contracts	57		—		57		—
Warrants	2		—		—		2
Total derivative assets	820		—		809		11
Total assets at fair value	$	11,431	$	2,989	$	8,354	$	88
Derivative liabilities:
Interest rate contracts	$	92	$	—	$	92	$	—
Energy derivative contracts	472		—		472		—
Foreign exchange contracts	46		—		46		—
Total derivative liabilities	610		—		610		—
Deferred compensation plan liabilities	89		89		—		—
Total liabilities at fair value	$	699	$	89	$	610	$	—


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


(b)	Auction-rate securities.

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1, Level 2 and Level 3 fair value measurements during each of the three- and nine-month periods ended September 30, 2016 and 2015.

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Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three- and nine-month periods ended September 30, 2016 and 2015.



			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								Redemptions			Sales
Three Months Ended September 30, 2016
Investment securities available-for-sale:
State and municipal securities (a)	$	8	$	—			$	—			$	—			$	—		$	—		$	8
Corporate debt securities (a)	1		—				—				—				(1		)	—			—
Equity and other non-debt securities (a)	48		—				—				1			(c)	(3		)	—			46
Total investment securities available-for-sale	57		—				—				1			(c)	(4		)	—			54
Derivative assets:
Interest rate contracts	27		—				—				—				—			—			27
Warrants	2		3			(b)	—				—				—			(3		)	2
Three Months Ended September 30, 2015
Investment securities available-for-sale:
State and municipal securities (a)	$	23	$	—			$	—			$	—			$	(14	)	$	—		$	9
Corporate debt securities (a)	1		—				—				—				—			—			1
Equity and other non-debt securities (a)	71		—				—				(1		)	(c)	(1		)	—			69
Total investment securities available-for-sale	95		—				—				(1		)	(c)	(15		)	—			79
Derivative assets:
Interest rate contracts	2		—				9			(b)	—				—			—			11
Warrants	3		5			(b)	—				—				—			(5		)	3
Nine Months Ended September 30, 2016
Investment securities available-for-sale:
State and municipal securities (a)	$	9	$	—			$	—			$	—			$	(1	)	$	—		$	8
Corporate debt securities (a)	1		—				—				—				(1		)	—			—
Equity and other non-debt securities (a)	67		—				—				(3		)	(c)	(18		)	—			46
Total investment securities available-for-sale	77		—				—				(3		)	(c)	(20		)	—			54
Derivative assets:
Interest rate contracts	9		—				18			(b)	—				—			—			27
Warrants	2		4			(b)	—				—				—			(4		)	2
Nine Months Ended September 30, 2015
Investment securities available-for-sale:
State and municipal securities (a)	$	23	$	—			$	—			$	—			$	(14	)	$	—		$	9
Corporate debt securities (a)	1		—				—				—				—			—			1
Equity and other non-debt securities (a)	112		(2		)	(d)	—				—				(41		)	—			69
Total investment securities available-for-sale	136		(2		)	(d)	—				—				(55		)	—			79
Derivative assets:
Interest rate contracts	—		—				11			(b)	—				—			—			11
Warrants	4		6			(b)	(1		)	(b)	—				—			(6		)	3


(a)	Auction-rate securities.


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


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


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

Table of Contents

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. The following table presents assets recorded at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015. No liabilities were recorded at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015.



(in millions)	Total		Level 2		Level 3
September 30, 2016
Loans:
Commercial	313		7		306
Commercial mortgage	7		—		7
International	15		—		15
Total assets at fair value	$	335	$	7	$	328
December 31, 2015
Loans held-for-sale:
Commercial	$	8	$	8	$	—
Loans:
Commercial	134		—		134
Commercial mortgage	11		—		11
International	8		—		8
Total loans	153		—		153
Other real estate	2		—		2
Total assets at fair value excluding investments recorded at net asset value	163		8		155
Other investments recorded at net asset value:
Nonmarketable equity securities (a)	1
Total assets at fair value	$	164


(a)	Certain investments that are measured at fair value using the net asset value have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015 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 Corporation's Level 3 recurring fair value measurements primarily include auction-rate securities where fair value is determined using an income approach based on a discounted cash flow model and certain interest rate derivative contracts where credit valuation adjustments are significant to the overall fair value of the derivative. 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 a continuing low interest rate environment. The September 30, 2016 workout periods reflect the view that short-term interest rates could rise at a slower pace in 2016 than was expected at December 31, 2015.



			Discounted Cash Flow Model
			Unobservable Input
	Fair Value (in millions)		Discount Rate	Workout Period (in years)
September 30, 2016
State and municipal securities (a)	$	8	4% - 5%	1 - 3
Equity and other non-debt securities (a)	46		6% - 9%	1 - 2
December 31, 2015
State and municipal securities (a)	$	9	3% - 8%	1 - 2
Equity and other non-debt securities (a)	67		4% - 9%	1


(a)	Auction-rate securities.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS NOT RECORDED AT FAIR VALUE ON A RECURRING BASIS

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

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



	Carrying Amount			Estimated Fair Value
(in millions)				Total			Level 1		Level 2		Level 3
September 30, 2016
Assets
Cash and due from banks	$	1,292		$	1,292		$	1,292	$	—	$	—
Interest-bearing deposits with banks	6,748			6,748			6,748		—		—
Investment securities held-to-maturity	1,695			1,713			—		1,713		—
Loans held-for-sale	4			4			—		4		—
Total loans, net of allowance for loan losses (a)	48,547			48,483			—		7		48,476
Customers’ liability on acceptances outstanding	2			2			2		—		—
Restricted equity investments	207			207			207		—		—
Nonmarketable equity securities (b)	9			17
Liabilities
Demand deposits (noninterest-bearing)	31,776			31,776			—		31,776		—
Interest-bearing deposits	24,518			24,518			—		24,518		—
Customer certificates of deposit	2,967			2,952			—		2,952		—
Total deposits	59,261			59,246			—		59,246		—
Short-term borrowings	12			12			12		—		—
Acceptances outstanding	2			2			2		—		—
Medium- and long-term debt	5,890			5,857			—		5,857		—
Credit-related financial instruments	(80		)	(80		)	—		—		(80		)
December 31, 2015
Assets
Cash and due from banks	$	1,157		$	1,157		$	1,157	$	—	$	—
Interest-bearing deposits with banks	4,990			4,990			4,990		—		—
Investment securities held-to-maturity	1,981			1,973			—		1,973		—
Loans held-for-sale (c)	21			21			—		21		—
Total loans, net of allowance for loan losses (a)	48,450			48,269			—		—		48,269
Customers’ liability on acceptances outstanding	5			5			5		—		—
Restricted equity investments	92			92			92		—		—
Nonmarketable equity securities (b) (d)	10			18
Liabilities
Demand deposits (noninterest-bearing)	30,839			30,839			—		30,839		—
Interest-bearing deposits	25,462			25,462			—		25,462		—
Customer certificates of deposit	3,552			3,536			—		3,536		—
Total deposits	59,853			59,837			—		59,837		—
Short-term borrowings	23			23			23		—		—
Acceptances outstanding	5			5			5		—		—
Medium- and long-term debt	3,058			3,032			—		3,032		—
Credit-related financial instruments	(83		)	(83		)	—		—		(83		)


(a)	Included $335 million and $153 million of impaired loans recorded at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015, respectively.


(b)	Certain investments that are measured at fair value using the net asset value have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.


(c)	Included $8 million impaired loans held-for-sale recorded at fair value on a nonrecurring basis at December 31, 2015.


(d)	Included $1 million of nonmarketable equity securities recorded at fair value on a nonrecurring basis at December 31, 2015.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 - INVESTMENT SECURITIES

A summary of the Corporation’s investment securities follows:



(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2016
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,771	$	55	$	—	$	2,826
Residential mortgage-backed securities (a)	7,714		121		7		7,828
State and municipal securities	8		—		—		8
Equity and other non-debt securities	128		1		2		127
Total investment securities available-for-sale (b)	$	10,621	$	177	$	9	$	10,789
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,695	$	18	$	—	$	1,713

December 31, 2015
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,769	$	1	$	7	$	2,763
Residential mortgage-backed securities (a)	7,513		76		44		7,545
State and municipal securities	9		—		—		9
Corporate debt securities	1		—		—		1
Equity and other non-debt securities	199		2		—		201
Total investment securities available-for-sale (b)	$	10,491	$	79	$	51	$	10,519
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,981	$	2	$	10	$	1,973


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


(b)	Included auction-rate securities at amortized cost and fair value of $56 million and $54 million, respectively as of September 30, 2016 and $76 million and $77 million, respectively, as of December 31, 2015.


(c)	The amortized cost of investment securities held-to-maturity included net unrealized losses of $13 million at September 30, 2016 and $15 million at December 31, 2015 related to securities transferred from available-for-sale, which are included in accumulated other comprehensive loss.

A summary of the Corporation’s investment securities in an unrealized loss position as of September 30, 2016 and December 31, 2015 follows:



	Temporarily Impaired
	Less than 12 Months				12 Months or more					Total
(in millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2016
Residential mortgage-backed securities (a)	$	573	$	1	$	1,244	$	15		$	1,817	$	16
State and municipal securities (b)	—		—		7		—		(c)