Edgar Filing: COMERICA INC /NEW/

Document

Table of Contents

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, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 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, 2017: 173,915,038 shares

Table of Contents

COMERICA INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016	1

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	2

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	3

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	4

Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	60

ITEM 4. Controls and Procedures	60

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings	60

ITEM 1A. Risk Factors	60

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	60

ITEM 6. Exhibits	61

Signature	62

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Comerica Incorporated and Subsidiaries



(in millions, except share data)	September 30, 2017			December 31, 2016
	(unaudited)
ASSETS
Cash and due from banks	$	1,351		$	1,249

Interest-bearing deposits with banks	4,853			5,969
Other short-term investments	92			92

Investment securities available-for-sale	10,998			10,787
Investment securities held-to-maturity	1,344			1,582

Commercial loans	31,062			30,994
Real estate construction loans	3,018			2,869
Commercial mortgage loans	8,985			8,931
Lease financing	475			572
International loans	1,159			1,258
Residential mortgage loans	1,999			1,942
Consumer loans	2,511			2,522
Total loans	49,209			49,088
Less allowance for loan losses	(712		)	(730		)
Net loans	48,497			48,358
Premises and equipment	467			501
Accrued income and other assets	4,415			4,440
Total assets	$	72,017		$	72,978

LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits	$	32,391		$	31,540

Money market and interest-bearing checking deposits	20,869			22,556
Savings deposits	2,147			2,064
Customer certificates of deposit	2,342			2,806
Foreign office time deposits	70			19
Total interest-bearing deposits	25,428			27,445
Total deposits	57,819			58,985
Short-term borrowings	509			25
Accrued expenses and other liabilities	1,018			1,012
Medium- and long-term debt	4,637			5,160
Total liabilities	63,983			65,182

Common stock - $5 par value:
Authorized - 325,000,000 shares
Issued - 228,164,824 shares	1,141			1,141
Capital surplus	2,112			2,135
Accumulated other comprehensive loss	(359		)	(383		)
Retained earnings	7,746			7,331
Less cost of common stock in treasury - 53,835,135 shares at 9/30/17 and 52,851,156 shares at 12/31/16	(2,606		)	(2,428		)
Total shareholders’ equity	8,034			7,796
Total liabilities and shareholders’ equity	$	72,017		$	72,978

See notes to consolidated financial statements.

Table of Contents

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)	2017			2016		2017			2016
INTEREST INCOME
Interest and fees on loans	$	500		$	411	$	1,374		$	1,223
Interest on investment securities	62			61		186			185
Interest on short-term investments	17			8		44			17
Total interest income	579			480		1,604			1,425
INTEREST EXPENSE
Interest on deposits	11			10		29			30
Interest on short-term borrowings	3			—		3			—
Interest on medium- and long-term debt	19			20		56			53
Total interest expense	33			30		88			83
Net interest income	546			450		1,516			1,342
Provision for credit losses	24			16		57			213
Net interest income after provision for credit losses	522			434		1,459			1,129
NONINTEREST INCOME
Card fees	85			76		242			224
Service charges on deposit accounts	57			55		172			165
Fiduciary income	48			47		148			142
Commercial lending fees	21			26		63			68
Letter of credit fees	11			12		34			38
Bank-owned life insurance	12			12		31			30
Foreign exchange income	11			10		33			31
Brokerage fees	6			5		17			14
Net securities losses	(1		)	—		(3		)	(3		)
Other noninterest income	25			29		85			75
Total noninterest income	275			272		822			784
NONINTEREST EXPENSES
Salaries and benefits expense	225			247		677			742
Outside processing fee expense	92			86		267			247
Net occupancy expense	38			40		114			117
Equipment expense	12			13		34			40
Restructuring charges	7			20		32			73
Software expense	35			31		95			90
FDIC insurance expense	13			14		38			39
Advertising expense	8			5		19			15
Litigation-related expense	—			—		(2		)	—
Other noninterest expenses	33			37		103			106
Total noninterest expenses	463			493		1,377			1,469
Income before income taxes	334			213		904			444
Provision for income taxes	108			64		273			131
NET INCOME	226			149		631			313
Less income allocated to participating securities	2			1		5			3
Net income attributable to common shares	$	224		$	148	$	626		$	310
Earnings per common share:
Basic	$	1.29		$	0.87	$	3.58		$	1.80
Diluted	1.26			0.84		3.50			1.76

Comprehensive income	228			152		655			450

Cash dividends declared on common stock	53			40		141			115
Cash dividends declared per common share	0.30			0.23		0.79			0.66

See notes to consolidated financial statements.

Table of Contents

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, 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

BALANCE AT DECEMBER 31, 2016	175.3		$	1,141	$	2,135		$	(383	)	$	7,331		$	(2,428	)	$	7,796
Cumulative effect of change in accounting principle	—		—		3			—			(2		)	—			1
Net income	—		—		—			—			631			—			631
Other comprehensive income, net of tax	—		—		—			24			—			—			24
Cash dividends declared on common stock ($0.79 per share)	—		—		—			—			(141		)	—			(141		)
Purchase of common stock	(5.7	)	—		—			—			—			(396		)	(396		)
Net issuance of common stock under employee stock plans	3.0		—		(26		)	—			(22		)	138			90
Net issuance of common stock for warrants	1.7		—		(28		)	—			(51		)	79			—
Share-based compensation	—		—		29			—			—			—			29
Other	—		—		(1		)	—			—			1			—
BALANCE AT SEPTEMBER 30, 2017	174.3		$	1,141	$	2,112		$	(359	)	$	7,746		$	(2,606	)	$	8,034

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Comerica Incorporated and Subsidiaries



	Nine Months Ended September 30,
(in millions)	2017			2016
OPERATING ACTIVITIES
Net income	$	631		$	313
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	57			213
Benefit for deferred income taxes	(48		)	(74		)
Depreciation and amortization	91			91
Net periodic defined benefit (credit) cost	(14		)	11
Share-based compensation expense	29			30
Net amortization of securities	5			7
Accretion of loan purchase discount	(3		)	(4		)
Net gains on sales of foreclosed property	(2		)	(3		)
Net change in:
Accrued income receivable	(21		)	(8		)
Accrued expenses payable	28			71
Other, net	105			(245		)
Net cash provided by operating activities	858			402
INVESTING ACTIVITIES
Investment securities available-for-sale:
Maturities and redemptions	1,198			1,259
Sales	1,259			—
Purchases	(2,655		)	(1,396		)
Investment securities held-to-maturity:
Maturities and redemptions	241			288
Net change in loans	(193		)	(290		)
Proceeds from sales of foreclosed property	18			15
Net increase in premises and equipment	(43		)	(71		)
Federal Home Loan Bank stock:
Purchases	(42		)	(115		)
Redemptions	21			—
Other, net	2			3
Net cash used in investing activities	(194		)	(307		)
FINANCING ACTIVITIES
Net change in:
Deposits	(1,208		)	(686		)
Short-term borrowings	484			(11		)
Medium- and long-term debt:
Maturities	(500		)	—
Issuances	—			2,800
Terminations	(16		)	—
Common stock:
Repurchases	(404		)	(215		)
Cash dividends paid	(128		)	(112		)
Issuances under employee stock plans	98			25
Other, net	(4		)	(3		)
Net cash (used in) provided by financing activities	(1,678		)	1,798
Net (decrease) increase in cash and cash equivalents	(1,014		)	1,893
Cash and cash equivalents at beginning of period	7,218			6,147
Cash and cash equivalents at end of period	$	6,204		$	8,040
Interest paid	$	89		$	75
Income tax paid	247			111
Noncash investing and financing activities:
Loans transferred to other real estate	6			21
Loans transferred from held-for-sale to portfolio	—			17

See notes to consolidated financial statements.

Table of Contents

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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016.

Share-Based Compensation

Effective January 1, 2016, the Corporation adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting” (ASU 2016-09). ASU 2016-09 provides for the election of an accounting policy as to the timing of when stock award forfeitures are recognized in compensation expense. The Corporation elected to account for forfeitures as they occur, rather than account for compensation cost based on an estimate of the number of awards that are expected to vest. The prior period effect of this policy election as of the beginning of the year was reported as "cumulative effect of change in accounting principle" in the accompanying Consolidated Statements of Changes in Shareholders’ Equity (unaudited). In addition, ASU 2016-09 requires excess tax benefits and deficiencies resulting from employee stock awards to be prospectively recognized as a component of income taxes. Previously, excess tax benefits and deficiencies were recognized in "capital surplus" in the Consolidated Statements of Changes in Shareholders' Equity. Net excess tax benefits for awards that vested, were exercised or expired included in the "provision for income taxes" totaled $2 million and $31 million for the three- and nine-month periods ended September 30, 2017, respectively.

The Corporation also retrospectively adopted certain changes to the statement of cash flows in accordance with ASU 2016-09. Excess tax benefits must be classified as an operating activity, and cash paid to a tax authority by the Corporation when withholding shares from an employee’s award for tax-withholding purposes must be classified as a financing activity. Accordingly, in the Consolidated Statements of Cash Flows (unaudited), net cash provided by operating activities increased $5 million and net cash provided by financing activities decreased by a corresponding amount for the nine months ended September 30, 2016.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (ASU 2014-09), which is intended to improve and converge the financial reporting requirements for revenue contracts with customers. Previous GAAP comprised broad revenue recognition concepts along with numerous industry-specific requirements. The new guidance establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies in existing guidance. The guidance under ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017 and must be retrospectively applied. The Corporation expects to adopt ASU 2014-09 in the first quarter 2018 using the modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. The identification of revenue streams within the scope of Topic 606 is complete, resulting in less than 30 percent of total revenues in scope of the new guidance. The accounting analysis to determine potential changes to identified performance obligations, timing of revenue recognition and presentation as a result of implementing the new guidance is in its final stages.

Under the new guidance, card fee revenue from certain products will generally be presented net of network costs (including interchange costs, surcharge fees and assessment fees), as opposed to the current presentation of associated network costs in "outside processing fees." Network costs impacted by the new guidance were approximately $97 million for the year ended December 31, 2016.

The Corporation currently defers recognition of certain treasury management fees in "service charges on deposit accounts" in the consolidated statements of comprehensive income until the amount of compensation is considered fixed and determinable. Under the new guidance, a portion of these fees will be recognized as services are rendered. As a result of this earlier recognition, the Corporation expects to record a receivable of approximately $15 million to $18 million with a corresponding adjustment to retained earnings and deferred tax liability upon adoption of ASU 2014-09. The annual amount of treasury management fees reflected in the Corporation’s results of operations is not expected to significantly change.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

While no other material changes to the financial condition or results of operations have been identified to date, conclusions are preliminary as the Corporation finalizes its evaluation of the guidance. The Corporation continues to evaluate changes that may be required to applicable disclosures.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities," (ASU 2016-01), which makes targeted amendments to the guidance for recognition, measurement, presentation and disclosure of financial instruments. The guidance under ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017. ASU 2016-01 requires equity investments, other than equity method investments, to be measured at fair value with changes in fair value recognized in net income. As of September 30, 2017, the Corporation classified approximately $45 million of auction-rate securities as available for sale equity securities. At adoption, any cumulative change in the fair value of these auction-rate securities previously recognized in accumulated other comprehensive income will be recorded as an adjustment to the opening balance of retained earnings, and any further changes to their fair value will be recorded in net income. The Corporation does not expect the new guidance to have a material impact on its financial condition or results of operation. ASU 2016-01 also emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, the Corporation will refine the calculation used to determine the disclosed fair value of its held-for-investment loan portfolio as part of adopting the standard.

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. 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 $8 million and $16 million for the nine-month period ended September 30, 2017 and year ended December 31, 2016, respectively. 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.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07), which requires employers to report service cost as part of compensation expense and the other components of net benefit cost separately from service cost on the statement of income. Further, only the service cost component will be eligible for capitalization in deferred loan costs.

The Corporation currently includes all components of net benefit cost in "salaries and benefits expense" in the consolidated statements of comprehensive income. Upon adoption of ASU 2017-07, only service cost will remain in salaries and benefits expense, and the other components (interest cost, expected return on assets, amortization of prior service cost or credit and amortization of net actuarial gains or losses) will be included in "other noninterest expenses." The other components of net benefit cost were a benefit of $36 million and $28 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. ASU 2017-07 is effective for the Corporation on January 1, 2018. The Corporation does not expect the new guidance to have a material impact on its financial condition or results of operations.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12), which better aligns the accounting and reporting of hedging relationships with the economics of risk management activities. ASU 2017-12 provides administrative reliefs to simplify the application of hedge accounting. The amendment is effective for the Corporation on January 1, 2019 and early adoption is permitted. The Corporation is considering early adoption of the guidance on January 1, 2018. ASU 2017-12 requires an adjustment to opening retained earnings for the cumulative effect of changes to the measurement methodology on the basis of hedged items at transition.

The Corporation’s derivative instruments used for risk management predominately comprise swaps converting fixed-rate long-term debt to variable rates. These hedges have been highly effective, with no ineffectiveness net gains or losses recognized for the three- and nine-month periods ended September 30, 2017. An ineffectiveness net loss of $2 million was included in “other noninterest income” in the consolidated statements of income for the year ended December 31, 2016. Under the amendment, gains or losses relating to hedge ineffectiveness will prospectively be included in “net interest income” rather than “other noninterest income." The Corporation does not expect the new guidance to have a material impact on its financial condition or results of operations.

Table of Contents

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.

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, 2016 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, 2017 and December 31, 2016.



(in millions)	Total		Level 1		Level 2		Level 3
September 30, 2017
Trading securities:
Deferred compensation plan assets	$	89	$	89	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,770		2,770		—		—
Residential mortgage-backed securities (a)	8,137		—		8,137		—
State and municipal securities	5		—		—		5		(b)
Equity and other non-debt securities	86		41		—		45		(b)
Total investment securities available-for-sale	10,998		2,811		8,137		50
Derivative assets:
Interest rate contracts	79		—		65		14
Energy derivative contracts	63		—		63		—
Foreign exchange contracts	46		—		46		—
Warrants	2		—		—		2
Total derivative assets	190		—		174		16
Total assets at fair value	$	11,277	$	2,900	$	8,311	$	66
Derivative liabilities:
Interest rate contracts	$	45	$	—	$	45
Energy derivative contracts	60		—		60		—
Foreign exchange contracts	44		—		44		—
Total derivative liabilities	149		—		149		—
Deferred compensation plan liabilities	89		89		—		—
Total liabilities at fair value	$	238	$	89	$	149	$	—


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


(b)	Auction-rate securities.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries



(in millions)	Total		Level 1		Level 2		Level 3
December 31, 2016
Trading securities:
Deferred compensation plan assets	$	87	$	87	$	—	$	—
Equity and other non-debt securities	1		1		—		—
Total trading securities	88		88		—		—
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	2,779		2,779		—		—
Residential mortgage-backed securities (a)	7,872		—		7,872		—
State and municipal securities	7		—		—		7		(b)
Equity and other non-debt securities	129		82		—		47		(b)
Total investment securities available-for-sale	10,787		2,861		7,872		54
Derivative assets:
Interest rate contracts	223		—		212		11
Energy derivative contracts	146		—		146		—
Foreign exchange contracts	38		—		38		—
Warrants	3		—		—		3
Total derivative assets	410		—		396		14
Total assets at fair value	$	11,285	$	2,949	$	8,268	$	68
Derivative liabilities:
Interest rate contracts	$	81	$	—	$	81	$	—
Energy derivative contracts	144		—		144		—
Foreign exchange contracts	29		—		29		—
Total derivative liabilities	254		—		254		—
Deferred compensation plan liabilities	87		87		—		—
Total liabilities at fair value	$	341	$	87	$	254	$	—


(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, 2017 and 2016.

Table of Contents

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, 2017 and 2016.



			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, 2017
Investment securities available-for-sale:
State and municipal securities (a)	$	5	$	—		$	—			$	—		$	—		$	—		$	5
Equity and other non-debt securities (a)	46		—							(1		)	—			—			45
Total investment securities available-for-sale	51		—			—				(1		)	—			—			50
Derivative assets:
Interest rate contracts	13		—			1			(b)				—			—			14
Warrants	2		—			—				—			—			—			2
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			(3		)	—			46
Total investment securities available-for-sale	57		—			—				1			(4		)	—			54
Derivative assets:
Interest rate contracts	27		—			—				—			—			—			27
Warrants	2		3		(b)	—				—			—			(3		)	2
Nine Months Ended September 30, 2017
Investment securities available-for-sale:
State and municipal securities (a)	$	7	$	—		$	—			$	—		$	(2	)	$	—		$	5
Equity and other non-debt securities (a)	47		—			—				(1		)	(1		)	—			45
Total investment securities available-for-sale	54		—			—				(1		)	(3		)	—			50
Derivative assets:
Interest rate contracts	11		—			3			(b)	—			—			—			14
Warrants	3		5		(b)	(1		)	(b)	—			—			(5		)	2
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		)	(18		)	—			46
Total investment securities available-for-sale	77		—			—				(3		)	(20		)	—			54
Derivative assets:
Interest rate contracts	9		—			18			(b)	—			—			—			27
Warrants	2		4		(b)	—				—			—			(4		)	2


(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.

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, 2017 and December 31, 2016. No liabilities were recorded at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries



(in millions)	Level 3
September 30, 2017
Loans:
Commercial	$	131
Commercial mortgage	9
International	2
Total assets at fair value	$	142
December 31, 2016
Loans:
Commercial	$	256
Commercial mortgage	15
International	11
Total loans	282
Other real estate	1
Total assets at fair value	$	283

Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016 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 September 30, 2017 and December 31, 2016. 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 workout periods reflect management's expectation of the pace at which short-term interest rates could rise at each respective period.



			Discounted Cash Flow Model
			Unobservable Input
	Fair Value (in millions)		Discount Rate	Workout Period (in years)
September 30, 2017
State and municipal securities (a)	$	5	5% - 7%	1 - 3
Equity and other non-debt securities (a)	45		7% - 10%	1 - 2
December 31, 2016
State and municipal securities (a)	$	7	4% - 6%	1 - 2
Equity and other non-debt securities (a)	47		7% - 9%	1 - 2


(a)	Auction-rate securities.

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.

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

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, 2017
Assets
Cash and due from banks	$	1,351		$	1,351		$	1,351	$	—	$	—
Interest-bearing deposits with banks	4,853			4,853			4,853		—		—
Investment securities held-to-maturity	1,344			1,339			—		1,339		—
Loans held-for-sale	3			3			—		3		—
Total loans, net of allowance for loan losses (a)	48,497			48,296			—		—		48,296
Customers’ liability on acceptances outstanding	2			2			2		—		—
Restricted equity investments	228			228			228		—		—
Nonmarketable equity securities (b)	6			9
Liabilities
Demand deposits (noninterest-bearing)	32,391			32,391			—		32,391		—
Interest-bearing deposits	23,086			23,086			—		23,086		—
Customer certificates of deposit	2,342			2,309			—		2,309		—
Total deposits	57,819			57,786			—		57,786		—
Short-term borrowings	509			509			509		—		—
Acceptances outstanding	2			2			2		—		—
Medium- and long-term debt	4,637			4,642			—		4,642		—
Credit-related financial instruments	(70		)	(70		)	—		—		(70		)
December 31, 2016
Assets
Cash and due from banks	$	1,249		$	1,249		$	1,249	$	—	$	—
Interest-bearing deposits with banks	5,969			5,969			5,969		—		—
Investment securities held-to-maturity	1,582			1,576			—		1,576		—
Loans held-for-sale	4			4			—		4		—
Total loans, net of allowance for loan losses (a)	48,358			48,250			—		—		48,250
Customers’ liability on acceptances outstanding	5			5			5		—		—
Restricted equity investments	207			207			207		—		—
Nonmarketable equity securities (b)	11			16
Liabilities
Demand deposits (noninterest-bearing)	31,540			31,540			—		31,540		—
Interest-bearing deposits	24,639			24,639			—		24,639		—
Customer certificates of deposit	2,806			2,731			—		2,731		—
Total deposits	58,985			58,910			—		58,910		—
Short-term borrowings	25			25			25		—		—
Acceptances outstanding	5			5			5		—		—
Medium- and long-term debt	5,160			5,132			—		5,132		—
Credit-related financial instruments	(73		)	(73		)	—		—		(73		)


(a)	Included $142 million and $282 million of impaired loans recorded at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016, respectively.


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

Table of Contents

Notes to Consolidated Financial Statements (unaudited)

Comerica Incorporated and Subsidiaries

NOTE 3 - INVESTMENT SECURITIES

A summary of the Corporation’s investment securities follows:



(in millions)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,763	$	8	$	1	$	2,770
Residential mortgage-backed securities (a)	8,168		44		75		8,137
State and municipal securities	5		—		—		5
Equity and other non-debt securities	86		2		2		86
Total investment securities available-for-sale (b)	$	11,022	$	54	$	78	$	10,998
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,344	$	1	$	6	$	1,339

December 31, 2016
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities	$	2,772	$	8	$	1	$	2,779
Residential mortgage-backed securities (a)	7,921		48		97		7,872
State and municipal securities	7		—		—		7
Equity and other non-debt securities	129		1		1		129
Total investment securities available-for-sale (b)	$	10,829	$	57	$	99	$	10,787
Investment securities held-to-maturity (c):
Residential mortgage-backed securities (a)	$	1,582	$	1	$	7	$	1,576


(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 $52 million and $50 million, respectively as of September 30, 2017 and $55 million and $54 million, respectively, as of December 31, 2016.


(c)	The amortized cost of investment securities held-to-maturity included net unrealized losses of $9 million at September 30, 2017 and $12 million at December 31, 2016 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, 2017 and December 31, 2016 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, 2017
U.S. Treasury and other U.S. government agency securities	$	486	$	1	$	—	$	—		$	486	$	1
Residential mortgage-backed securities (a)	4,111		55		1,446		36			5,557		91
State and municipal securities (b)	—		—		5		—		(c)	5		—		(c)
Equity and other non-debt securities (b)	—		—		45		2			45		2
Total temporarily impaired securities	$	4,597	$	56	$	1,496	$	38		$	6,093	$	94
December 31, 2016
U.S. Treasury and other U.S. government agency securities	$	527	$	1	$	—	$	—		$	527	$	1
Residential mortgage-backed securities (a)	4,992		87		1,177		32			6,169		119
State and municipal securities (b)	—		—		7		—		(c)