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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, 2017
Or
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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.

1

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.

2

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
 
 
Retained
Earnings
 
Treasury
Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.



3

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.

4

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.

5

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.


6

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.

7

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.

8

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.

9

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.

10

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.

11

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)
 
7

 

(c)
Equity and other non-debt securities (b)
36

 

(c)
 
11

 

(c)
 
47

 

(c)
Total temporarily impaired securities
$
5,555

 
$
88

 
 
$
1,195

 
$
32

 
 
$
6,750

 
$
120

 
(a)
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b)
Primarily auction-rate securities.
(c)
Unrealized losses less than $0.5 million.
At September 30, 2017, the Corporation had 240 securities in an unrealized loss position with no credit impairment, including 6 U.S. Treasury securities, 193 residential mortgage-backed securities, 28 equity and other non-debt auction-rate preferred

12

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

securities and 13 state and municipal auction-rate securities. As of September 30, 2017, approximately 96 percent of the aggregate par value of auction-rate securities have been redeemed or sold since acquisition, of which approximately 90 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 September 30, 2017.
Sales, calls and write-downs of investment securities available-for-sale resulted in the following gains and losses recorded in “net securities gains (losses)” on the consolidated statements of comprehensive income, computed based on the adjusted cost of the specific security.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Securities gains
$

 
$

 
$
1

 
$

Securities losses (a)
(1
)
 

 
(4
)
 
(3
)
Net securities losses
$
(1
)
 
$

 
$
(3
)
 
$
(3
)
(a)
Primarily charges related to a derivative contract tied to the conversion rate of Visa Class B shares.
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)
Available-for-sale
 
Held-to-maturity
September 30, 2017
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Contractual maturity
 
 
 
 
 
 
 
Within one year
$
20

 
$
20

 
$

 
$

After one year through five years
2,947

 
2,953

 

 

After five years through ten years
1,744

 
1,770

 
19

 
19

After ten years
6,225

 
6,169

 
1,325

 
1,320

Subtotal
10,936

 
10,912

 
1,344

 
1,339

Equity and other non-debt securities
86

 
86

 

 

Total investment securities
$
11,022

 
$
10,998

 
$
1,344

 
$
1,339

Included in the contractual maturity distribution in the table above were residential mortgage-backed securities available-for-sale with total amortized cost of $8.2 billion and fair value of $8.1 billion, and residential mortgage-backed securities held-to-maturity with a total amortized cost and fair value of $1.3 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 September 30, 2017, investment securities with a carrying value of $950 million were pledged where permitted or required by law to secure $700 million of liabilities, primarily public and other deposits of state and local government agencies and derivative instruments.

13

Table of Contents
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
 
Total 
Loans
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
52

 
$
31

 
$
7

 
$
90

 
$
345

 
$
30,627

 
$
31,062

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)

 

 

 

 

 
2,709

 
2,709

Other business lines (b)
11

 

 

 
11

 

 
298

 
309

Total real estate construction
11

 

 

 
11

 

 
3,007

 
3,018

Commercial mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
20

 

 

 
20

 
9

 
1,702

 
1,731

Other business lines (b)
18

 
10

 
3

 
31

 
26

 
7,197

 
7,254

Total commercial mortgage
38

 
10

 
3

 
51

 
35

 
8,899

 
8,985

Lease financing

 

 

 

 
8

 
467

 
475

International
11

 

 
2

 
13

 
6

 
1,140

 
1,159

Total business loans
112

 
41

 
12

 
165

 
394

 
44,140

 
44,699

Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
14

 
9

 

 
23

 
28

 
1,948

 
1,999

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
5

 
1

 

 
6

 
22

 
1,762

 
1,790

Other consumer
1

 
1

 

 
2

 

 
719

 
721

Total consumer
6

 
2

 

 
8

 
22

 
2,481

 
2,511

Total retail loans
20

 
11

 

 
31

 
50

 
4,429

 
4,510

Total loans
$
132

 
$
52

 
$
12

 
$
196

 
$
444

 
$
48,569

 
$
49,209

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
30

 
$
12

 
$
14

 
$
56

 
$
445

 
$
30,493

 
$
30,994

Real estate construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)

 

 

 

 

 
2,485

 
2,485

Other business lines (b)

 

 

 

 

 
384

 
384

Total real estate construction

 

 

 

 

 
2,869

 
2,869

Commercial mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
5

 

 

 
5

 
9

 
2,004

 
2,018

Other business lines (b)
58

 
5

 
5

 
68

 
37

 
6,808

 
6,913

Total commercial mortgage
63

 
5

 
5

 
73

 
46

 
8,812

 
8,931

Lease financing

 

 

 

 
6

 
566

 
572

International
1

 

 

 
1

 
14

 
1,243

 
1,258

Total business loans
94

 
17

 
19

 
130

 
511

 
43,983

 
44,624

Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
7

 
3

 

 
10

 
39

 
1,893

 
1,942

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
4

 
3

 

 
7

 
28

 
1,765

 
1,800

Other consumer
1

 

 

 
1

 
4

 
717

 
722

Total consumer
5

 
3

 

 
8

 
32

 
2,482

 
2,522

Total retail loans
12

 
6

 

 
18

 
71

 
4,375

 
4,464

Total loans
$
106

 
$
23

 
$
19

 
$
148

 
$
582

 
$
48,358

 
$
49,088

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


14

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table presents loans by credit quality indicator, based on internal risk ratings assigned to each business loan at the time of approval and subjected to subsequent reviews, generally at least annually, and to pools of retail loans with similar risk characteristics.
 
Internally Assigned Rating
 
 
(in millions)
Pass (a)
 
Special
Mention (b)
 
Substandard (c)
 
Nonaccrual (d)
 
Total
September 30, 2017
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial
$
29,187

 
$
617

 
$
913

 
$
345

 
$
31,062

Real estate construction:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (e)
2,658

 
51

 

 

 
2,709

Other business lines (f)
305

 
4

 

 

 
309

Total real estate construction
2,963

 
55

 

 

 
3,018

Commercial mortgage:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (e)
1,660

 
20

 
42

 
9

 
1,731

Other business lines (f)
7,000

 
111

 
117

 
26

 
7,254

Total commercial mortgage
8,660

 
131

 
159

 
35

 
8,985

Lease financing
442

 
24

 
1

 
8

 
475

International
1,082

 
53

 
18

 
6

 
1,159

Total business loans
42,334

 
880

 
1,091

 
394

 
44,699

Retail loans:
 
 
 
 
 
 
 
 
 
Residential mortgage
1,962

 
9

 

 
28

 
1,999

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
1,759

 
1

 
8

 
22

 
1,790

Other consumer
720

 
1

 

 

 
721

Total consumer
2,479

 
2

 
8

 
22

 
2,511

Total retail loans
4,441

 
11

 
8

 
50

 
4,510

Total loans
$
46,775

 
$
891

 
$
1,099

 
$
444

 
$
49,209

December 31, 2016
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial
$
28,616

 
$
944

 
$
989

 
$
445

 
$
30,994

Real estate construction:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (e)
2,485

 

 

 

 
2,485

Other business lines (f)
381

 

 
3

 

 
384

Total real estate construction
2,866

 

 
3

 

 
2,869

Commercial mortgage:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (e)
1,970

 
19

 
20

 
9

 
2,018

Other business lines (f)
6,645

 
109

 
122

 
37

 
6,913

Total commercial mortgage
8,615

 
128

 
142

 
46

 
8,931

Lease financing
550

 
11

 
5

 
6

 
572

International
1,200

 
22

 
22

 
14

 
1,258

Total business loans
41,847

 
1,105

 
1,161

 
511

 
44,624

Retail loans:
 
 
 
 
 
 
 
 
 
Residential mortgage
1,900

 
3

 

 
39

 
1,942

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
1,767

 
1

 
4

 
28

 
1,800

Other consumer
718

 

 

 
4

 
722

Total consumer
2,485

 
1

 
4

 
32

 
2,522

Total retail loans
4,385

 
4

 
4

 
71

 
4,464

Total loans
$
46,232

 
$
1,109

 
$
1,165

 
$
582

 
$
49,088

(a)
Includes all loans not included in the categories of special mention, substandard or nonaccrual.
(b)
Special mention loans are accruing loans that have potential credit weaknesses that deserve management’s close attention, such as loans to borrowers who may be experiencing financial difficulties that may result in deterioration of repayment prospects from the borrower at some future date.
(c)
Substandard loans are accruing loans that have a well-defined weakness, or weaknesses, such as loans to borrowers who may be experiencing losses from operations or inadequate liquidity of a degree and duration that jeopardizes the orderly repayment of the loan. Substandard loans also are distinguished by the distinct possibility of loss in the future if these weaknesses are not corrected. This category is generally consistent with the "substandard" category as defined by regulatory authorities.
(d)
Nonaccrual loans are loans for which the accrual of interest has been discontinued. For further information regarding nonaccrual loans, refer to the Nonperforming Assets subheading in Note 1 - Basis of Presentation and Accounting Policies - on page F-56 in the Corporation's 2016 Annual Report. A significant majority of nonaccrual loans are generally consistent with the "substandard" category and the remainder are generally consistent with the "doubtful" category as defined by regulatory authorities.
(e)
Primarily loans to real estate developers.
(f)
Primarily loans secured by owner-occupied real estate.

15

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table summarizes nonperforming assets.
(in millions)
September 30, 2017
 
December 31, 2016
Nonaccrual loans
$
444

 
$
582

Reduced-rate loans (a)
8

 
8

Total nonperforming loans
452

 
590

Foreclosed property (b)
6

 
17

Total nonperforming assets
$
458

 
$
607

(a)
There were no reduced-rate business loans at both September 30, 2017 and December 31, 2016. Reduced-rate retail loans were $8 million at both September 30, 2017 and December 31, 2016.
(b)
Included $5 million and $3 million of foreclosed residential real estate properties at September 30, 2017 and December 31, 2016, respectively.
There were no retail loans secured by residential real estate properties in process of foreclosure included in nonaccrual loans at both September 30, 2017 and December 31, 2016.
Allowance for Credit Losses
The following table details the changes in the allowance for loan losses and related loan amounts.
 
2017
 
2016
(in millions)
Business Loans
 
Retail Loans
 
Total
 
Business Loans
 
Retail Loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
661

 
$
44

 
$
705

 
$
682

 
$
47

 
$
729

Loan charge-offs
(36
)
 
(1
)
 
(37
)
 
(34
)
 
(1
)
 
(35
)
Recoveries on loans previously charged-off
10

 
2

 
12

 
18

 
1

 
19

Net loan (charge-offs) recoveries
(26
)
 
1

 
(25
)
 
(16
)
 

 
(16
)
Provision for loan losses
21

 
10

 
31

 
12

 
2

 
14

Foreign currency translation adjustment
1

 

 
1

 

 

 

Balance at end of period
$
657

 
$
55

 
$
712

 
$
678

 
$
49

 
$
727

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
682

 
$
48

 
$
730

 
$
579

 
$
55

 
$
634

Loan charge-offs
(115
)
 
(5
)
 
(120
)
 
(161
)
 
(5
)
 
(166
)
Recoveries on loans previously charged-off
39

 
5

 
44

 
53

 
3

 
56

Net loan charge-offs
(76
)
 

 
(76
)
 
(108
)
 
(2
)
 
(110
)
Provision for loan losses
50

 
7

 
57

 
206

 
(4
)
 
202

Foreign currency translation adjustment
1

 

 
1

 
1

 

 
1

Balance at end of period
$
657

 
$
55

 
$
712

 
$
678

 
$
49

 
$
727

 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of total loans
1.47
%
 
1.23
%
 
1.45
%
 
1.51
%
 
1.10
%
 
1.48
%
 
 
 
 
 
 
 
 
 
 
 
 
September 30
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
90

 
$

 
$
90

 
$
115

 
$
1

 
$
116

Collectively evaluated for impairment
567

 
55

 
622

 
563

 
48

 
611

Total allowance for loan losses
$
657

 
$
55

 
$
712

 
$
678

 
$
49

 
$
727

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
501

 
$
37

 
$
538

 
$
677

 
$
29

 
$
706

Collectively evaluated for impairment
44,198

 
4,473

 
48,671

 
44,182

 
4,386

 
48,568

Total loans evaluated for impairment
$
44,699

 
$
4,510

 
$
49,209

 
$
44,859

 
$
4,415

 
$
49,274


16

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Changes in the allowance for credit losses on lending-related commitments, included in "accrued expenses and other liabilities" on the consolidated balance sheets, are summarized in the following table.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
48

 
$
43

 
$
41

 
$
45

Charge-offs on lending-related commitments (a)

 

 

 
(11
)
Provision for credit losses on lending-related commitments
(7
)
 
2

 

 
11

Balance at end of period
$
41

 
$
45

 
$
41

 
$
45

(a)    Charge-offs result from the sale of unfunded lending-related commitments.
Individually Evaluated Impaired Loans
The following table presents additional information regarding individually evaluated impaired loans.
 
Recorded Investment In:
 
 
 
 
(in millions)
Impaired
Loans with
No Related
Allowance
 
Impaired
Loans with
Related
Allowance
 
Total
Impaired
Loans
 
Unpaid
Principal
Balance
 
Related
Allowance
for Loan
Losses
September 30, 2017
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial
$
111

 
$
311

 
$
422

 
$
543

 
$
85

Commercial mortgage:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
36

 
7

 
43

 
52

 
1

Other business lines (b)
3

 
27

 
30

 
36

 
3

Total commercial mortgage
39

 
34

 
73

 
88

 
4

International

 
6

 
6

 
17

 
1

Total business loans
150

 
351

 
501

 
648

 
90

Retail loans:
 
 
 
 
 
 
 
 
 
Residential mortgage
22

 

 
22

 
28

 

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
12

 

 
12

 
12

 

Other consumer
3

 

 
3

 
5

 

Total consumer
15

 

 
15

 
17

 

Total retail loans (c)
37

 

 
37

 
45

 

Total individually evaluated impaired loans
$
187

 
$
351

 
$
538

 
$
693

 
$
90

December 31, 2016
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial
$
90

 
$
423

 
$
513

 
$
608

 
$
80

Commercial mortgage:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)

 
7

 
7

 
15

 
1

Other business lines (b)
2

 
30

 
32

 
40

 
3

Total commercial mortgage
2

 
37

 
39

 
55

 
4

International
3

 
11

 
14

 
20

 
2

Total business loans
95

 
471

 
566

 
683

 
86

Retail loans:
 
 
 
 
 
 
 
 
 
Residential mortgage
19

 
9

 
28

 
30

 
2

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
15

 

 
15

 
19

 

Other consumer
2

 
3

 
5

 
6

 
1

Total consumer
17

 
3

 
20

 
25

 
1

Total retail loans (c)
36

 
12

 
48

 
55

 
3

Total individually evaluated impaired loans
$
131

 
$
483

 
$
614

 
$
738

 
$
89

(a)
Primarily loans to real estate developers.
(b)
Primarily loans secured by owner-occupied real estate.
(c)
Individually evaluated retail loans generally have no related allowance for loan losses, primarily due to policy which results in direct write-downs of most restructured retail loans.

17

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table presents information regarding average individually evaluated impaired loans and the related interest recognized. Interest income recognized for the period primarily related to performing restructured loans.
 
Individually Evaluated Impaired Loans
 
2017
 
2016
(in millions)
Average Balance for the Period
 
Interest Income Recognized for the Period
 
Average Balance for the Period
 
Interest Income Recognized for the Period
Three Months Ended September 30
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
Commercial
$
442

 
$
2

 
$
606

 
$
2

Commercial mortgage:
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
25

 
1

 
7

 

Other business lines (b)
32

 

 
30

 

Total commercial mortgage
57

 
1

 
37

 

International
6

 

 
19

 

Total business loans
505

 
3

 
662

 
2

Retail loans:
 
 
 
 
 
 
 
Residential mortgage
24

 

 
11

 

Consumer loans:
 
 
 
 
 
 
 
Home equity
12

 

 
12

 

Other consumer
3

 

 
4

 

Total consumer
15

 

 
16

 

Total retail loans
39

 

 
27

 

Total individually evaluated impaired loans
$
544

 
$
3

 
$
689

 
$
2

Nine Months Ended September 30
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
Commercial
$
470

 
$
6

 
$
559

 
$
8

Commercial mortgage:
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
16

 
1

 
9

 

Other business lines (b)
33

 

 
31

 

Total commercial mortgage
49

 
1

 
40

 

International
9

 

 
19

 

Total business loans
528

 
7

 
618

 
8

Retail loans:
 
 
 
 
 
 
 
Residential mortgage
26

 

 
12

 

Consumer:
 
 
 
 
 
 
 
Home equity
13

 

 
12

 

Other consumer
3

 

 
4

 

Total consumer
16

 

 
16

 

Total retail loans
42

 

 
28

 

Total individually evaluated impaired loans
$
570

 
$
7

 
$
646

 
$
8

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

18

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Troubled Debt Restructurings
The following tables detail the recorded balance at September 30, 2017 and 2016 of loans considered to be troubled debt restructurings (TDRs) that were restructured during the three- and nine-month periods ended September 30, 2017 and 2016, by type of modification. In cases of loans with more than one type of modification, the loans were categorized based on the most significant modification.
 
2017
 
2016
 
Type of Modification
 
 
Type of Modification
 
(in millions)
Principal Deferrals (a)
Interest Rate Reductions
AB Note Restructures (b)
Total Modifications
 
Principal Deferrals (a)
Interest Rate Reductions
AB Note Restructures (b)
Total Modifications
Three Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
22

 
$

 
$

$
22

 
$
70

 
$

 
$
40

$
110

Commercial mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (c)
36

 

 

36

 

 

 


International
2

 

 

2

 

 

 


Total business loans
60

 

 

60

 
70

 

 
40

110

Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity (d)
1



 

1

 

 

 


Total retail loans
1

 

 

1

 

 

 


Total loans
$
61

 
$

 
$

$
61

 
$
70

 
$

 
$
40

$
110

Nine Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
95

 
$

 
$
31

$
126

 
$
150

 
$

 
$
49

$
199

Commercial mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (c)
36

 

 

36

 

 

 


Other business lines (e)
3

 

 

3

 
2

 

 

2

Total commercial mortgage
39

 

 

39

 
2

 

 

2

International
2

 

 

2

 

 

 
3

3

Total business loans
136

 

 
31

167

 
152

 

 
52

204

Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity (d)
1

 
2

 

3

 
1

 
1

 

2

Total retail loans
1

 
2

 

3


1

 
1

 

2

Total loans
$
137

 
$
2

 
$
31

$
170

 
$
153

 
$
1

 
$
52

$
206

(a)
Primarily represents loan balances where terms were extended 90 days or more at or above contractual interest rates.
(b)
Loan restructurings whereby the original loan is restructured into two notes: an "A" note, which generally reflects the portion of the modified loan which is expected to be collected; and a "B" note, which is generally fully charged off.
(c)
Primarily loans to real estate developers.
(d)
Includes bankruptcy loans for which the court has discharged the borrower's obligation and the borrower has not reaffirmed the debt.
(e)
Primarily loans secured by owner-occupied real estate.
Commitments to lend additional funds to borrowers whose terms have been modified in TDRs were $25 million at September 30, 2017 and $24 million at December 31, 2016.
The majority of the modifications considered to be TDRs that occurred during the nine months ended September 30, 2017 and 2016 were principal deferrals. The Corporation charges interest on principal balances outstanding during deferral periods. Additionally, none of the modifications involved forgiveness of principal. As a result, the current and future financial effects of the recorded balance of loans considered to be TDRs that were restructured during the nine months ended September 30, 2017 and 2016 were insignificant.
On an ongoing basis, the Corporation monitors the performance of modified loans to their restructured terms. In the event of a subsequent default, the allowance for loan losses continues to be reassessed on the basis of an individual evaluation of the loan.

19

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table presents information regarding the recorded balance at September 30, 2017 and 2016 of loans modified by principal deferral during the twelve-month periods ended September 30, 2017 and 2016, and those principal deferrals which experienced a subsequent default during the three- and nine-month periods ended September 30, 2017 and 2016. For principal deferrals, incremental deterioration in the credit quality of the loan, represented by a downgrade in the risk rating of the loan, for example, due to missed interest payments or a reduction of collateral value, is considered a subsequent default.
 
2017
 
2016
(in millions)
Balance at September 30
Subsequent Default in the Three Months Ended September 30
Subsequent Default in the Nine Months Ended September 30
 
Balance at September 30
Subsequent Default in the Three Months Ended September 30
Subsequent Default in the Nine Months Ended September 30
Principal deferrals:
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial
$
127

 
$
4

$
4

 
$
229

 
$

$
13

Commercial mortgage:
 
 
 
 
 
 
 
 
 
Commercial Real Estate business line (a)
37

 


 

 


Other business lines (b)
7

 

4

 
4

 

1

Total commercial mortgage
44

 

4

 
4

 

1

International
2

 


 

 


Total business loans
173

 
4

8

 
233

 

14

Retail loans:
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
Home equity (c)
1

 


 
1

 


Total principal deferrals
$
174

 
$
4

$
8

 
$
234

 
$

$
14

(a)
Primarily loans to real estate developers.
(b)
Primarily loans secured by owner-occupied real estate.
(c)
Includes bankruptcy loans for which the court has discharged the borrower's obligation and the borrower has not reaffirmed the debt.
During the twelve-month periods ended September 30, 2017 and 2016, loans with a carrying value of $2 million and $4 million, respectively, were modified by interest rate reduction, and loans with a carrying value of $31 million and $52 million, respectively, were restructured into two notes (AB note restructures). For reduced-rate loans and AB note restructures, a subsequent payment default is defined in terms of delinquency, when a principal or interest payment is 90 days past due. There were no subsequent payment defaults of reduced-rate loans or AB note restructures during the three- and nine-month periods ended September 30, 2017 and 2016.
NOTE 5 - DERIVATIVE AND CREDIT-RELATED FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation enters into various transactions involving derivative and credit-related financial instruments to manage exposure to fluctuations in interest rate, foreign currency and other market risks and to meet the financing needs of customers (customer-initiated derivatives). These financial instruments involve, to varying degrees, elements of market and credit risk. Market and credit risk are included in the determination of fair value.
Market risk is the potential loss that may result from movements in interest rates, foreign currency exchange rates or energy commodity prices that cause an unfavorable change in the value of a financial instrument. The Corporation manages this risk by establishing monetary exposure limits and monitoring compliance with those limits. Market risk inherent in interest rate and energy contracts entered into on behalf of customers is mitigated by taking offsetting positions, except in those circumstances when the amount, tenor and/or contract rate level results in negligible economic risk, whereby the cost of purchasing an offsetting contract is not economically justifiable. The Corporation mitigates most of the inherent market risk in foreign exchange contracts entered into on behalf of customers by taking offsetting positions and manages the remainder through individual foreign currency position limits and aggregate value-at-risk limits. These limits are established annually and positions are monitored quarterly. Market risk inherent in derivative instruments held or issued for risk management purposes is typically offset by changes in the fair value of the assets or liabilities being hedged.
Credit risk is the possible loss that may occur in the event of nonperformance by the counterparty to a financial instrument. The Corporation attempts to minimize credit risk arising from customer-initiated derivatives by evaluating the creditworthiness of each customer, adhering to the same credit approval process used for traditional lending activities and obtaining collateral as deemed necessary. Derivatives with dealer counterparties are either cleared through a clearinghouse or settled directly with a single counterparty. For derivatives settled directly with dealer counterparties, the Corporation utilizes counterparty risk limits and monitoring procedures as well as master netting arrangements and bilateral collateral agreements to facilitate the management of

20

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

credit risk. Master netting arrangements effectively reduce credit risk by permitting settlement of positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Bilateral collateral agreements require daily exchange of cash or highly rated securities issued by the U.S. Treasury or other U.S. government entities to collateralize amounts due to either party. At September 30, 2017, counterparties with bilateral collateral agreements had pledged $4 million of marketable investment securities and deposited $20 million of cash with the Corporation to secure the fair value of contracts in an unrealized gain position, and the Corporation had pledged $26 million of marketable investment securities and posted $8 million of cash as collateral for contracts in an unrealized loss position. For those counterparties not covered under bilateral collateral agreements, collateral is obtained, if deemed necessary, based on the results of management’s credit evaluation of the counterparty. Collateral varies, but may include cash, investment securities, accounts receivable, equipment or real estate. Included in the fair value of derivative instruments are credit valuation adjustments reflecting counterparty credit risk. These adjustments are determined by applying a credit spread for the counterparty or the Corporation, as appropriate, to the total expected exposure of the derivative. There were no derivative instruments with credit-risk-related contingent features that were in a liability position at September 30, 2017.
Derivative Instruments
Derivative instruments utilized by the Corporation are negotiated over-the-counter and primarily include swaps, caps and floors, forward contracts and options, each of which may relate to interest rates, energy commodity prices or foreign currency exchange rates. Swaps are agreements in which two parties periodically exchange cash payments based on specified indices applied to a specified notional amount until a stated maturity. Caps and floors are agreements which entitle the buyer to receive cash payments based on the difference between a specified reference rate or price and an agreed strike rate or price, applied to a specified notional amount until a stated maturity. Forward contracts are over-the-counter agreements to buy or sell an asset at a specified future date and price. Options are similar to forward contracts except the purchaser has the right, but not the obligation, to buy or sell the asset during a specified period or at a specified future date.
Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange-traded contracts, which have standardized terms and readily available price information. The Corporation reduces exposure to market and liquidity risks from over-the-counter derivative instruments entered into for risk management purposes, and transactions entered into to mitigate the market risk associated with customer-initiated transactions, by conducting hedging transactions with investment grade domestic and foreign financial institutions and subjecting counterparties to credit approvals, limits and collateral monitoring procedures similar to those used in making other extensions of credit. In addition, certain derivative contracts executed bilaterally with a dealer counterparty in the over-the-counter market are cleared through a clearinghouse, whereby the clearinghouse becomes the counterparty to the transaction.


21

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table presents the composition of the Corporation’s derivative instruments held or issued for risk management purposes or in connection with customer-initiated and other activities at September 30, 2017 and December 31, 2016. The table excludes commitments and warrants accounted for as derivatives.
 
September 30, 2017
 
December 31, 2016
 
 
 
Fair Value
 
 
 
Fair Value
(in millions)
Notional/
Contract
Amount (a)
 
Gross Derivative Assets
 
Gross Derivative Liabilities
 
Notional/
Contract
Amount (a)
 
Gross Derivative Assets
 
Gross Derivative Liabilities
Risk management purposes
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Swaps - fair value - receive fixed/pay floating (b)
$
1,775

 
$

 
$

 
$
2,275

 
$
92

 
$
4

Derivatives used as economic hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Spot, forwards and swaps
663

 

 
2

 
717

 
2

 
2

Total risk management purposes
2,438

 

 
2

 
2,992

 
94

 
6

Customer-initiated and other activities
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Caps and floors written
590

 

 

 
436

 

 
1

Caps and floors purchased
590

 

 

 
436

 
1

 

Swaps (b)
12,905

 
79

 
45

 
12,451

 
130

 
76

Total interest rate contracts
14,085

 
79

 
45

 
13,323

 
131

 
77

Energy contracts:
 
 
 
 
 
 
 
 
 
 
 
Caps and floors written
222

 

 
12

 
419

 
1

 
31

Caps and floors purchased
222

 
12

 

 
419

 
31

 
1

Swaps
1,352

 
51

 
48

 
1,389

 
114

 
112

Total energy contracts
1,796

 
63

 
60

 
2,227

 
146

 
144

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Spot, forwards, options and swaps
2,147

 
46

 
42

 
1,509

 
36

 
27

Total customer-initiated and other activities
18,028

 
188

 
147

 
17,059

 
313

 
248

Total gross derivatives
$
20,466

 
$
188

 
$
149

 
$
20,051

 
$
407

 
$
254

Amounts offset in the consolidated balance sheets:
 
 
 
 
 
 
 
 
 
 
 
Netting adjustment - Offsetting derivative assets/liabilities
 
 
(49
)
 
(49
)
 
 
 
(84
)
 
(84
)
Netting adjustment - Cash collateral received/posted
 
 
(19
)
 
(6
)
 
 
 
(47
)
 
(45
)
Net derivatives included in the consolidated balance sheets (c)

 
120

 
94

 



276

 
125

Amounts not offset in the consolidated balance sheets:
 
 
 
 
 
 
 
 
 
 
 
Marketable securities pledged under bilateral collateral agreements
 
 
(4
)
 
(24
)
 
 
 
(19
)
 
(8
)
Net derivatives after deducting amounts not offset in the consolidated balance sheets


 
$
116

 
$
70

 


 
$
257

 
$
117

(a)
Notional or contractual amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.
(b)
Due to clearinghouse rule changes, beginning January 1, 2017, variation margin payments are treated as settlements of derivative exposure rather than as collateral. As a result, these payments are now considered in determining the fair value of centrally cleared derivatives, resulting in centrally cleared derivatives having a fair value of approximately zero.
(c)
Net derivative assets are included in “accrued income and other assets” and net derivative liabilities are included in “accrued expenses and other liabilities” on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and credit risk of the Corporation. The fair value of net derivative assets included credit valuation adjustments for counterparty credit risk of $6 million and $5 million at September 30, 2017 and December 31, 2016, respectively.


22

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Risk Management
The Corporation's derivative instruments used for managing interest rate risk currently comprise swaps converting fixed-rate long-term debt to variable rates. These instruments generated net interest income of $7 million and $15 million for the three months ended September 30, 2017 and 2016, respectively, and $27 million and $48 million for the nine months ended September 30, 2017 and 2016, respectively. These hedges have been highly effective, with no ineffectiveness net gains or losses recognized for both the three- and nine-month periods ended September 30, 2017. Ineffectiveness net gains of $1 million and $4 million were included in ''other noninterest income" in the consolidated statements of income for the three- and nine-month periods ended September 30, 2016, respectively.
The following table summarizes the expected weighted average remaining maturity of the notional amount of risk management interest rate swaps and the weighted average interest rates associated with amounts expected to be received or paid on interest rate swap agreements as of September 30, 2017 and December 31, 2016.
 
 
 
Weighted Average
(dollar amounts in millions)
Notional
Amount
 
Remaining
Maturity
(in years)
 
Receive Rate
 
Pay Rate (a)
September 30, 2017
 
 
 
 
 
 
 
Swaps - fair value - receive fixed/pay floating rate
 
 
 
 
 
 
 
Medium- and long-term debt designation
$
1,775

 
4.9
 
3.26
%
 
2.21
%
December 31, 2016
 
 
 
 
 
 
 
Swaps - fair value - receive fixed/pay floating rate
 
 
 
 
 
 
 
Medium- and long-term debt designation
2,275

 
4.5
 
3.69

 
1.80

(a)
Variable rates paid on receive fixed swaps are based on six-month LIBOR rates in effect at September 30, 2017 and December 31, 2016.
Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs spot and forward contracts in addition to swap contracts to manage exposure to these and other risks. These instruments are used as economic hedges and net gains or losses are included in "other noninterest income" in the consolidated statements of comprehensive income.
Customer-Initiated and Other
The Corporation enters into derivative transactions at the request of customers and generally takes offsetting positions with dealer counterparties to mitigate the inherent market risk. Income primarily results from the spread between the customer derivative and the offsetting dealer position.
For customer-initiated foreign exchange contracts where offsetting positions have not been taken, the Corporation manages the remaining inherent market risk through individual foreign currency position limits and aggregate value-at-risk limits. These limits are established annually and reviewed quarterly. For those customer-initiated derivative contracts which were not offset or where the Corporation holds a position within the limits described above, the Corporation recognized no net gains or losses in “other noninterest income” in the consolidated statements of comprehensive income for both the three- and nine-month periods ended September 30, 2017, respectively, and no net gains for the three months ended September 30, 2016, and $1 million of net gains for the nine months ended September 30, 2016.
Fair values of customer-initiated and other derivative instruments represent the net unrealized gains or losses on such contracts and are recorded in the consolidated balance sheets. Changes in fair value are recognized in the consolidated statements of comprehensive income. The net gains recognized in income on customer-initiated derivative instruments, net of the impact of offsetting positions, were as follows.
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
Location of Gain
2017
 
2016
 
2017
 
2016
Interest rate contracts
 
Other noninterest income
$
5

 
$
6

 
$
18

 
$
14

Energy contracts
 
Other noninterest income
1

 

 
2

 
1

Foreign exchange contracts
 
Foreign exchange income
11

 
11

 
33

 
30

Total
 
 
$
17

 
$
17

 
$
53

 
$
45



23

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Credit-Related Financial Instruments
The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. The Corporation’s credit risk associated with these instruments is represented by the contractual amounts indicated in the following table.
(in millions)
September 30, 2017
 
December 31, 2016
Unused commitments to extend credit:
 
 
 
Commercial and other
$
23,542

 
$
24,333

Bankcard, revolving check credit and home equity loan commitments
2,865

 
2,658

Total unused commitments to extend credit
$
26,407

 
$
26,991

Standby letters of credit
$
3,372

 
$
3,623

Commercial letters of credit
43

 
46

The Corporation maintains an allowance to cover probable credit losses inherent in lending-related commitments, including unused commitments to extend credit, letters of credit and financial guarantees. The allowance for credit losses on lending-related commitments, included in “accrued expenses and other liabilities” on the consolidated balance sheets, was $41 million at both September 30, 2017 and December 31, 2016.
Unused Commitments to Extend Credit
Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Corporation. Commercial and other unused commitments are primarily variable rate commitments. The allowance for credit losses on lending-related commitments included $26 million and $29 million at September 30, 2017 and December 31, 2016, respectively, for probable credit losses inherent in the Corporation’s unused commitments to extend credit.
Standby and Commercial Letters of Credit
Standby letters of credit represent conditional obligations of the Corporation which guarantee the performance of a customer to a third party. Standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Commercial letters of credit are issued to finance foreign or domestic trade transactions. These contracts expire in decreasing amounts through the year 2023. The Corporation may enter into participation arrangements with third parties that effectively reduce the maximum amount of future payments which may be required under standby and commercial letters of credit. These risk participations covered $208 million and $255 million, respectively, of the $3.4 billion and $3.7 billion standby and commercial letters of credit outstanding at September 30, 2017 and December 31, 2016, respectively.
The carrying value of the Corporation’s standby and commercial letters of credit, included in “accrued expenses and other liabilities” on the consolidated balance sheets, totaled $44 million at September 30, 2017, including $29 million in deferred fees and $15 million in the allowance for credit losses on lending-related commitments. At December 31, 2016, the comparable amounts were $44 million, $32 million and $12 million, respectively.


24

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table presents a summary of criticized standby and commercial letters of credit at September 30, 2017 and December 31, 2016. The Corporation's criticized list is generally consistent with the Special mention, Substandard and Doubtful categories defined by regulatory authorities. The Corporation manages credit risk through underwriting, periodically reviewing and approving its credit exposures using Board committee approved credit policies and guidelines.
(dollar amounts in millions)
September 30, 2017
 
December 31, 2016
Total criticized standby and commercial letters of credit
$
79

 
$
135

As a percentage of total outstanding standby and commercial letters of credit
2.3
%
 
3.7
%
Other Credit-Related Financial Instruments
The Corporation enters into credit risk participation agreements, under which the Corporation assumes credit exposure associated with a borrower’s performance related to certain interest rate derivative contracts. The Corporation is not a party to the interest rate derivative contracts and only enters into these credit risk participation agreements in instances in which the Corporation is also a party to the related loan participation agreement for such borrowers. The Corporation manages its credit risk on the credit risk participation agreements by monitoring the creditworthiness of the borrowers, which is based on the normal credit review process had it entered into the derivative instruments directly with the borrower. The notional amount of such credit risk participation agreement reflects the pro-rata share of the derivative instrument, consistent with its share of the related participated loan. As of September 30, 2017 and December 31, 2016, the total notional amount of the credit risk participation agreements was approximately $544 million and $458 million, respectively, and the fair value, included in customer-initiated interest rate contracts recorded in "accrued expenses and other liabilities" on the consolidated balance sheets, was insignificant for both periods. The maximum estimated exposure to these agreements, as measured by projecting a maximum value of the guaranteed derivative instruments, assuming 100 percent default by all obligors on the maximum values, was approximately $1 million and $3 million at September 30, 2017 and December 31, 2016, respectively. In the event of default, the lead bank has the ability to liquidate the assets of the borrower, in which case the lead bank would be required to return a percentage of the recouped assets to the participating banks. As of September 30, 2017, the weighted average remaining maturity of outstanding credit risk participation agreements was 2.3 years.
NOTE 6 - VARIABLE INTEREST ENTITIES (VIEs)
The Corporation evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Corporation is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration.
The Corporation holds ownership interests in funds in the form of limited partnerships or limited liability companies (LLCs) investing in affordable housing projects that qualify for the low-income housing tax credit (LIHTC). The Corporation also directly invests in limited partnerships and LLCs which invest in community development projects which generate similar tax credits to investors. As an investor, the Corporation obtains income tax credits and deductions from the operating losses of these tax credit entities. These tax credit entities meet the definition of a VIE; however, the Corporation is not the primary beneficiary of the entities, as the general partner or the managing member has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses or the right to receive benefits that could be significant to the entities.
The Corporation accounts for its interests in LIHTC entities using the proportional amortization method. Exposure to loss as a result of the Corporation’s involvement with LIHTC entities at September 30, 2017 was limited to approximately $421 million. Ownership interests in other community development projects which generate similar tax credits to investors (other tax credit entities) are accounted for under either the cost or equity method. Exposure to loss as a result of the Corporation's involvement in other tax credit entities at September 30, 2017 was limited to approximately $7 million.
Investment balances, including all legally binding commitments to fund future investments, are included in “accrued income and other assets” on the consolidated balance sheets. A liability is recognized in “accrued expenses and other liabilities” on the consolidated balance sheets for all legally binding unfunded commitments to fund tax credit entities ($170 million at September 30, 2017). Amortization and other write-downs of LIHTC investments are presented on a net basis as a component of the "provision for income taxes" on the consolidated statements of comprehensive income, while amortization and write-downs of other tax credit investments are recorded in “other noninterest income." The income tax credits and deductions are recorded as a reduction of income tax expense and a reduction of federal income taxes payable.
The Corporation provided no financial or other support that was not contractually required to any of the above VIEs during the nine months ended September 30, 2017 and 2016.


25

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

The following table summarizes the impact of these tax credit entities on line items on the Corporation’s consolidated statements of comprehensive income.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Other noninterest income:
 
 
 
 
 
 
 
Amortization of other tax credit investments
$

 
$
(1
)
 
$
1

 
$
(1
)
Provision for income taxes:
 
 
 
 
 
 
 
Amortization of LIHTC investments
17

 
17

 
49

 
49

Low income housing tax credits
(16
)
 
(16
)
 
(47
)
 
(47
)
Other tax benefits related to tax credit entities
(6
)
 
(7
)
 
(18
)
 
(19
)
Total provision for income taxes
$
(5
)
 
$
(6
)
 
$
(16
)
 
$
(17
)
For further information on the Corporation’s consolidation policy, see note 1 to the consolidated financial statements in the Corporation's 2016 Annual Report.
NOTE 7 - MEDIUM- AND LONG-TERM DEBT
Medium- and long-term debt is summarized as follows:
(in millions)
September 30, 2017
 
December 31, 2016
Parent company
 
 
 
Subordinated notes:
 
 
 
3.80% subordinated notes due 2026 (a)
$
257

 
$
256

Medium-term notes:
 
 
 
2.125% notes due 2019 (a)
349

 
348

Total parent company
606

 
604

Subsidiaries
 
 
 
Subordinated notes:
 
 
 
5.20% subordinated notes due 2017 (a)

 
511

4.00% subordinated notes due 2025 (a)
350

 
347

7.875% subordinated notes due 2026 (a)
211

 
215

Total subordinated notes
561

 
1,073

Medium-term notes:
 
 
 
2.50% notes due 2020 (a)
670

 
667

Federal Home Loan Bank (FHLB) advances:
 
 
 
Floating-rate based on FHLB auction rate due 2026
2,800

 
2,800

Other notes:
 
 
 
6.0% - 6.4% fixed-rate notes due 2018 to 2020

 
16

Total subsidiaries
4,031

 
4,556

Total medium- and long-term debt
$
4,637

 
$
5,160

(a)
The fixed interest rates on these notes have been swapped to a variable rate and designated in a hedging relationship. Accordingly, carrying value has been adjusted to reflect the change in the fair value of the debt as a result of changes in the benchmark rate.
Subordinated notes with remaining maturities greater than one year qualify as Tier 2 capital.
Comerica Bank (the Bank), a wholly-owned subsidiary of the Corporation, is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets. The interest rate on each FHLB advance resets every four weeks, based on the FHLB auction rate, with the reset date of each note scheduled at one-week intervals. At September 30, 2017, the weighted-average rate on these advances was 1.17%. Each note may be prepaid in full, without penalty, at each scheduled reset date. Borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. At September 30, 2017, $15.5 billion of real estate-related loans were pledged to the FHLB as blanket collateral for current and potential future borrowings of approximately $4.5 billion.
Unamortized debt issuance costs deducted from the carrying amount of medium- and long-term debt totaled $5 million at September 30, 2017 and $7 million at December 31, 2016.

26

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents a reconciliation of the changes in the components of accumulated other comprehensive loss and details the components of other comprehensive income (loss) for the nine months ended September 30, 2017 and 2016, including the amount of income tax expense (benefit) allocated to each component of other comprehensive income (loss).
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
Accumulated net unrealized (losses) gains on investment securities:
 
 
 
Balance at beginning of period, net of tax
$
(33
)
 
$
9

 
 
 
 
Net unrealized holding gains arising during the period
18

 
140

Less: Provision for income taxes
7

 
51

Net unrealized holding gains arising during the period, net of tax
11

 
89

Less:
 
 
 
Net losses realized as a yield adjustment in interest on investment securities
(3
)
 
(2
)
Less: Benefit for income taxes
(1
)
 
(1
)
  Reclassification adjustment for net losses realized as a yield adjustment included in net income, net of tax
(2
)
 
(1
)
Change in net unrealized gains on investment securities, net of tax
13

 
90

Balance at end of period, net of tax
$
(20
)
 
$
99

 
 
 
 
Accumulated defined benefit pension and other postretirement plans adjustment:
 
 
 
Balance at beginning of period, net of tax
$
(350
)
 
$
(438
)
 
 
 
 
Actuarial loss arising during the period

 
(191
)
Prior service credit arising during the period

 
235

Net defined benefit pension and other postretirement adjustment arising during the period

 
44

Less: Provision for income taxes

 
16

Net defined benefit pension and other postretirement plans adjustment arising during the period, net of tax

 
28

 
 
 
 
Amortization of actuarial net loss
38

 
29

Amortization of prior service credit
(20
)
 

Amounts recognized in salaries and benefits expense
18

 
29

   Less: Provision for income taxes
7

 
10

Adjustment for amounts recognized as components of net periodic benefit cost during the period, net of tax
11

 
19

Change in defined benefit pension and other postretirement plans adjustment, net of tax
11

 
47

Balance at end of period, net of tax
$
(339
)
 
$
(391
)
Total accumulated other comprehensive loss at end of period, net of tax
$
(359
)
 
$
(292
)

27

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

NOTE 9 - NET INCOME PER COMMON SHARE
Basic and diluted net income per common share are presented in the following table.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
2017
 
2016
 
2017
 
2016
Basic and diluted
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
Basic average common shares
174

 
171

 
175

 
173

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.29

 
$
0.87

 
$
3.58

 
$
1.80

 
 
 
 
 
 
 
 
Basic average common shares
174

 
171

 
175

 
173

Dilutive common stock equivalents:
 
 
 
 
 
 
 
Net effect of the assumed exercise of stock options
2

 
2

 
3

 
1

Net effect of the assumed exercise of warrants
1

 
3

 
1

 
2

Diluted average common shares
177

 
176

 
179

 
176

 
 
 
 
 
 
 
 
Diluted net income per common share
$
1.26

 
$
0.84

 
$
3.50

 
$
1.76

The following average shares related to outstanding options to purchase shares of common stock were not included in the computation of diluted net income per common share because the options were anti-dilutive for the period. There were no anti-dilutive options for both the three- and nine-month periods ended September 30, 2017.
(shares in millions)
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Average outstanding options
 
2.6
 
4.0
Range of exercise prices
 
$46.68 - $59.86
 
$37.26 - $59.86

NOTE 10 - EMPLOYEE BENEFIT PLANS
Net periodic benefit costs are charged to "employee benefits expense" on the consolidated statements of comprehensive income. The components of net periodic benefit cost for the Corporation's qualified pension plan, non-qualified pension plan and postretirement benefit plan are as follows.
Qualified Defined Benefit Pension Plan
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
7

 
$
8

 
$
21

 
$
24

Interest cost
19

 
23

 
58

 
69

Expected return on plan assets
(39
)
 
(39
)
 
(118
)
 
(120
)
Amortization of prior service (credit) cost
(5
)
 
1

 
(14
)
 
3

Amortization of net loss
11

 
7

 
32

 
23

Net periodic defined benefit credit
$
(7
)
 
$

 
$
(21
)
 
$
(1
)
Non-Qualified Defined Benefit Pension Plan
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Service cost
$

 
$

 
$
1

 
$
2

Interest cost
2

 
3

 
6

 
8

Amortization of prior service credit
(2
)
 
(1
)
 
(6
)
 
(3
)
Amortization of net loss
2

 
2

 
6

 
5

Net periodic defined benefit cost
$
2

 
$
4

 
$
7

 
$
12


28

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Postretirement Benefit Plan
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Interest cost
$
1

 
$

 
$
2

 
$
2

Expected return on plan assets
(1
)
 
(1
)
 
(2
)
 
(3
)
Amortization of net loss

 
1

 

 
1

Net periodic postretirement benefit cost
$

 
$

 
$

 
$

For further information on the Corporation's employee benefit plans, refer to note 17 to the consolidated financial statements in the Corporation's 2016 Annual Report.
NOTE 11 - INCOME TAXES AND TAX-RELATED ITEMS
Net unrecognized tax benefits were $11 million at September 30, 2017, compared to $15 million at December 31, 2016. The decrease in unrecognized tax benefits of $4 million was primarily due to the recognition of federal settlements partially offset by an increase to established reserves. The Corporation anticipates it is reasonably possible the final settlement of state tax issues will result in a decrease in net unrecognized tax benefits of $1 million within the next twelve months. Included in "accrued expense and other liabilities" on the consolidated balance sheets was a $9 million liability for tax-related interest and penalties at September 30, 2017 compared to $7 million at December 31, 2016.
Net deferred tax assets were $252 million at September 30, 2017, compared to $217 million at December 31, 2016. The increase of $35 million in net deferred tax assets resulted primarily from a decrease in deferred tax liabilities related to lease financing transactions, partially offset by decreases in unrealized losses on investment securities available-for-sale and deferred compensation. Included in deferred tax assets at both September 30, 2017 and December 31, 2016 were $4 million of state net operating loss carryforwards, which expire between 2017 and 2026. The Corporation believes it is more likely than not the benefit from certain of these state net operating loss carryforwards will not be realized and, accordingly, maintained a valuation allowance of $3 million at both September 30, 2017 and December 31, 2016. The determination regarding valuation allowance was based on evidence of loss carryback capacity, projected future reversals of existing taxable temporary differences to absorb the deferred tax assets and assumptions made regarding future events.
In the ordinary course of business, the Corporation enters into certain transactions that have tax consequences. From time to time, the Internal Revenue Service (IRS) or other tax jurisdictions may review and/or challenge specific interpretive tax positions taken by the Corporation with respect to those transactions. The Corporation believes its tax returns were filed based upon applicable statutes, regulations and case law in effect at the time of the transactions. The IRS or other tax jurisdictions, an administrative authority or a court, if presented with the transactions, could disagree with the Corporation’s interpretation of the tax law.
Based on current knowledge and probability assessment of various potential outcomes, the Corporation believes the current tax reserves are adequate, and the amount of any potential incremental liability arising is not expected to have a material adverse effect on the Corporation’s consolidated financial condition or results of operations. Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary.
NOTE 12 - CONTINGENT LIABILITIES
Legal Proceedings
As previously reported in the Corporation's Form 10-K for the year ended December 31, 2016 and Forms 10-Q for the quarters ended March 31, 2017 and June 30, 2017, Comerica Bank, a wholly owned subsidiary of the Corporation, was named in November 2011 as a third-party defendant in Butte Local Development v. Masters Group v. Comerica Bank (“the case”), for lender liability. The case was tried in January 2014, in the Montana Second District Judicial Court for Silver Bow County in Butte, Montana. On January 17, 2014, a jury awarded Masters $52 million against the Bank. On July 1, 2015, after an appeal filed by the Corporation, the Montana Supreme Court reversed the judgment against the Corporation and remanded the case for a new trial with instructions that Michigan contract law should apply and dismissing all other claims. The case was retried in the same district court, without a jury, in January 2017. A ruling is not expected for some time. Management believes that current reserves related to this case are adequate in the event of a negative outcome.
The Corporation and certain of its subsidiaries are subject to various other pending or threatened legal proceedings arising out of the normal course of business or operations. The Corporation believes it has meritorious defenses to the claims asserted against it in its other currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Corporation and its shareholders. Settlement may result from the Corporation's determination that it may be more prudent financially to settle, rather than litigate, and should not be regarded as an admission of liability. On at least a quarterly basis, the Corporation assesses its potential liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information

29

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

available. On a case-by-case basis, reserves are established for those legal claims for which it is probable that a loss will be incurred either as a result of a settlement or judgment, and the amount of such loss can be reasonably estimated. The actual costs of resolving these claims may be substantially higher or lower than the amounts reserved. Based on current knowledge, and after consultation with legal counsel, management believes that current reserves are adequate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the Corporation’s consolidated financial condition, consolidated results of operations or consolidated cash flows. Legal fees of $4 million were included in "other noninterest expenses" on the consolidated statements of income for each of the three-month periods ended September 30, 2017 and 2016, and $14 million for each of the nine-month periods ended September 30, 2017 and 2016.
For matters where a loss is not probable, the Corporation has not established legal reserves. The Corporation believes the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for all legal proceedings in which it is involved is from zero to approximately $28 million at September 30, 2017. This estimated aggregate range of reasonably possible losses is based upon currently available information for those proceedings in which the Corporation is involved, taking into account the Corporation’s best estimate of such losses for those cases for which such estimate can be made. For certain cases, the Corporation does not believe that an estimate can currently be made. The Corporation’s estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many are currently in preliminary stages), the existence in certain proceedings of multiple defendants (including the Corporation) whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims) and the attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time to time, and actual losses may be more or less than the current estimate.
In the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation's consolidated financial condition, consolidated results of operations or consolidated cash flows.
For information regarding income tax contingencies, refer to note 11.
NOTE 13 - RESTRUCTURING CHARGES
The Corporation approved and launched an initiative in the second quarter 2016 designed to reduce overhead and increase revenue (the GEAR Up initiative). The actions in the initiative include, but are not limited to, a reduction in workforce, a new retirement program, streamlining operational processes, real estate optimization including consolidating 38 banking centers as well as reducing office and operations space, selective outsourcing of technology functions, reduction of technology system applications, enhanced sales tools and training, expanded product offerings and improved customer analytics to drive opportunities.
Certain actions associated with the GEAR Up initiative result in restructuring charges. Generally, costs associated with or incurred to generate revenue as part of the initiative are recorded according to the nature of the cost and are not included in restructuring charges. The Corporation considers the following costs associated with the initiative to be restructuring charges:
Employee costs: Primarily severance costs in accordance with the Corporation’s severance plan.
Facilities costs: Costs pertaining to consolidating banking centers and other facilities, such as lease termination costs and decommissioning costs. Also includes accelerated depreciation and impairment of owned property to be sold.
Technology costs: Impairment and other costs associated with optimizing technology infrastructure and reducing the number of applications.
Other costs: Includes primarily professional fees, as well as other contract termination fees and legal fees incurred in the execution of the initiative.

30

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Restructuring charges are recorded as a component of noninterest expenses on the consolidated statements of comprehensive income. The following table presents changes in restructuring reserves, cumulative charges incurred to date and total expected restructuring charges:
(in millions)
Employee Costs
 
Facilities Costs
 
Technology Costs
 
Other Costs
 
Total
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
6

 
$

 
$
3

 
$
2

 
$
11

Restructuring charges
1

 

 
5

 
1

 
7

Payments
(1
)
 

 
(4
)
 
(1
)
 
(6
)
Balance at end of period
$
6

 
$

 
$
4

 
$
2

 
$
12

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
46

 
$

 
$

 
$
4

 
$
50

Restructuring charges
4

 
5

 

 
11

 
20

Payments
(12
)
 
(1
)
 

 
(8
)
 
(21
)
Adjustments for non-cash charges (a)
2

 
(4
)
 

 

 
(2
)
Balance at end of period
$
40

 
$

 
$

 
$
7

 
$
47

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
10

 
$
4

 
$

 
$
4

 
$
18

Restructuring charges
5

 
5

 
17

 
5

 
32

Payments
(9
)
 
(9
)
 
(8
)
 
(7
)
 
(33
)
Adjustments for non-cash charges (a)

 

 
(5
)
 

 
(5
)
Balance at end of period
$
6

 
$

 
$
4

 
$
2

 
$
12

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$

 
$

 
$

 
$

 
$

Restructuring charges
50

 
5

 

 
18

 
73

Payments
(12
)
 
(1
)
 

 
(11
)
 
(24
)
Adjustments for non-cash charges (a)
2

 
(4
)
 

 

 
(2
)
Balance at end of period
$
40

 
$

 
$

 
$
7

 
$
47

 
 
 
 
 
 
 
 
 
 
Total restructuring charges incurred to date
$
57

 
$
20

 
$
17

 
$
31

 
$
125

Total expected restructuring charges (b)
65 - 70

 
30

 
55 - 60

 
35

 
185 - 195

(a)
Adjustments for non-cash charges primarily include the benefit from forfeitures of nonvested stock compensation in Employee Costs, accelerated depreciation expense in Facilities Costs and impairments of previously capitalized software costs in Technology Costs.
(b)
Restructuring activities are expected to be substantially completed by 12/31/2018.
Restructuring charges directly attributable to a business segment are assigned to that business segment. Restructuring charges incurred by areas whose services support the overall Corporation are allocated based on the methodology described in note 23 to the consolidated financial statements in the Corporation's 2016 Annual Report. Total restructuring charges assigned to the Business Bank, Retail Bank and Wealth Management were $4 million, $2 million and $1 million, respectively, for the three months ended September 30, 2017 and $17 million, $10 million and $5 million, respectively, for the nine months ended September 30, 2017. Total restructuring charges assigned to the Business Bank, Retail Bank and Wealth Management were $10 million, $8 million and $2 million, respectively, for the three months ended September 30, 2016 and $36 million, $27 million, and $10 million, respectively, for the nine months ended September 30, 2016. Remaining expected restructuring charges will be assigned to the business segments using the same methodology. Facilities costs pertaining to the consolidation of banking centers primarily impacted the Retail Bank.
NOTE 14 - BUSINESS SEGMENT INFORMATION
The Corporation has strategically aligned its operations into three major business segments: the Business Bank, the Retail Bank and Wealth Management. These business segments are differentiated based on the type of customer and the related products and services provided. In addition to the three major business segments, the Finance Division is also reported as a segment. Business segment results are produced by the Corporation’s internal management accounting system. This system measures financial results based on the internal business unit structure of the Corporation. The performance of the business segments is not comparable with the Corporation's consolidated results and is not necessarily comparable with similar information for any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. The management accounting system assigns balance sheet and

31

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

income statement items to each business segment using certain methodologies, which are regularly reviewed and refined. From time to time, the Corporation may make reclassifications among the segments to more appropriately reflect management's current view of the segments, and methodologies may be modified as the management accounting system is enhanced and changes occur in the organizational structure and/or product lines. For comparability purposes, amounts in all periods are based on business unit structure and methodologies in effect at September 30, 2017.
The following discussion provides information about the activities of each business segment. A discussion of the financial results and the factors impacting performance can be found in the section entitled "Business Segments" in the financial review.
The Business Bank meets the needs of middle market businesses, multinational corporations and governmental entities by offering various products and services, including commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services.
The Retail Bank includes small business banking and personal financial services, consisting of consumer lending, consumer deposit gathering and mortgage loan origination. In addition to a full range of financial services provided to small business customers, this business segment offers a variety of consumer products, including deposit accounts, installment loans, credit cards, student loans, home equity lines of credit and residential mortgage loans.
Wealth Management offers products and services consisting of fiduciary services, private banking, retirement services, investment management and advisory services, investment banking and brokerage services. This business segment also offers the sale of annuity products, as well as life, disability and long-term care insurance products.
The Finance segment includes the Corporation’s securities portfolio and asset and liability management activities. This segment is responsible for managing the Corporation’s funding, liquidity and capital needs, performing interest sensitivity analysis and executing various strategies to manage the Corporation’s exposure to liquidity, interest rate risk and foreign exchange risk.
The Other category includes discontinued operations, the income and expense impact of equity and cash, tax benefits not assigned to specific business segments, charges of an unusual or infrequent nature that are not reflective of the normal operations of the business segments and miscellaneous other expenses of a corporate nature.
For further information on the methodologies which form the basis for these results refer to note 23 to the consolidated financial statements in the Corporation's 2016 Annual Report.

32

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Business segment financial results are as follows:
(dollar amounts in millions)
Business
Bank
 
Retail
Bank
 
Wealth Management
 
Finance
 
Other
 
Total
Three Months Ended September 30, 2017
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
356

 
$
165

 
$
45

 
$
(30
)
 
$
10

 
$
546

Provision for credit losses
16

 
(1
)
 
10

 

 
(1
)
 
24

Noninterest income
148

 
49

 
63

 
13

 
2

 
275

Noninterest expenses
199

 
184

 
70

 
(1
)
 
11

 
463

Provision (benefit) for income taxes
99

 
10

 
10

 
(10
)
 
(1
)
(a)
108

Net income (loss)
$
190

 
$
21

 
$
18

 
$
(6
)
 
$
3

 
$
226

Net credit-related charge-offs (recoveries)
$
28

 
$
(1
)
 
$
(2
)
 
$

 
$

 
$
25

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
38,917

 
$
6,455

 
$
5,416

 
$
13,996

 
$
6,467

 
$
71,251

Loans
37,559

 
5,834

 
5,270

 

 

 
48,663

Deposits
28,115

 
23,918

 
4,054

 
270

 
136

 
56,493

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.94
%
 
0.33
%
 
1.28
%
 
N/M

 
N/M

 
1.25
%
Efficiency ratio (c)
39.32

 
85.51

 
65.23

 
N/M

 
N/M

 
56.24

(dollar amounts in millions)
Business
Bank
 
Retail
Bank
 
Wealth Management
 
Finance
 
Other
 
Total
Three Months Ended September 30, 2016
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
356

 
$
156

 
$
41

 
$
(109
)
 
$
6

 
$
450

Provision for credit losses
2

 
10

 
(1
)
 

 
5

 
16

Noninterest income
145

 
50

 
61

 
13

 
3

 
272

Noninterest expenses
215

 
195

 
75

 
(1
)
 
9

 
493

Provision (benefit) for income taxes
95

 

 
10

 
(37
)
 
(4
)
 
64

Net income (loss)
$
189

 
$
1

 
$
18

 
$
(58
)
 
$
(1
)
 
$
149

Net credit-related charge-offs (recoveries)
$
14

 
$
3

 
$
(1
)
 
$

 
$

 
$
16

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
39,618

 
$
6,544

 
$
5,283

 
$
14,144

 
$
7,320

 
$
72,909

Loans
38,243

 
5,871

 
5,092

 

 

 
49,206

Deposits
30,019

 
23,654

 
4,030

 
98

 
264

 
58,065

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.90
%
 
%
 
1.35
%
 
N/M

 
N/M

 
0.82
%
Efficiency ratio (c)
42.77

 
95.08

 
73.64

 
N/M

 
N/M

 
68.15

(a)
Includes tax benefit of $2 million from employee stock transactions.
(b)
Return on average assets is calculated based on the greater of average assets or average liabilities and attributed equity.
(c)
Noninterest expenses as a percentage of the sum of net interest income (fully taxable equivalent basis) and noninterest income excluding net securities gains (losses).
N/M – not meaningful

33

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

(dollar amounts in millions)
Business
Bank
 
Retail
Bank
 
Wealth Management
 
Finance
 
Other
 
Total
Nine Months Ended September 30, 2017
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
1,025

 
$
487

 
$
127

 
$
(150
)
 
$
27

 
$
1,516

Provision for credit losses
39

 
16

 
6

 

 
(4
)
 
57

Noninterest income
445

 
144

 
191

 
34

 
8

 
822

Noninterest expenses
592

 
543

 
211

 
(3
)
 
34

 
1,377

Provision (benefit) for income taxes
291

 
25

 
37

 
(51
)
 
(29
)
(a)
273

Net income (loss)
$
548

 
$
47

 
$
64

 
$
(62
)
 
$
34

 
$
631

Net credit-related charge-offs (recoveries)
$
67

 
$
13

 
$
(4
)
 
$

 
$

 
$
76

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
38,632

 
$
6,489

 
$
5,418

 
$
13,959

 
$
6,972

 
$
71,470

Loans
37,301

 
5,864

 
5,266

 

 

 
48,431

Deposits
28,831

 
23,883

 
4,046

 
190

 
178

 
57,128

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.89
%
 
0.26
%
 
1.58
%
 
N/M

 
N/M

 
1.18
%
Efficiency ratio (c)
40.26

 
85.43

 
66.28

 
N/M

 
N/M

 
58.74


(dollar amounts in millions)
Business
Bank
 
Retail
Bank
 
Wealth Management
 
Finance
 
Other
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
1,064

 
$
462

 
$
125

 
$
(326
)
 
$
17

 
$
1,342

Provision for credit losses
200

 
13

 
(3
)
 

 
3

 
213

Noninterest income
426

 
141

 
182

 
33

 
2

 
784

Noninterest expenses
643

 
579

 
229

 
(2
)
 
20

 
1,469

Provision (benefit) for income taxes
214

 
3

 
29

 
(112
)
 
(3
)
 
131

Net income (loss)
$
433

 
$
8

 
$
52

 
$
(179
)
 
$
(1
)
 
$
313

Net credit-related charge-offs
$
113

 
$
6

 
$
2

 
$

 
$

 
$
121

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
39,589

 
$
6,548

 
$
5,220

 
$
13,955

 
$
5,630

 
$
70,942

Loans
38,126

 
5,872

 
5,025

 

 

 
49,023

Deposits
29,195

 
23,438

 
4,137

 
81

 
251

 
57,102

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.46
%
 
0.05
%
 
1.33
%
 
N/M

 
N/M

 
0.59
%
Efficiency ratio (c)
43.11

 
95.30

 
74.64

 
N/M

 
N/M

 
68.88

(a)
Includes tax benefit of $31 million from employee stock transactions.
(b)
Return on average assets is calculated based on the greater of average assets or average liabilities and attributed equity.
(c)
Noninterest expenses as a percentage of the sum of net interest income (fully taxable equivalent basis) and noninterest income excluding net securities gains (losses).
N/M – not meaningful
The Corporation operates in three primary markets - Texas, California, and Michigan, as well as in Arizona and Florida, with select businesses operating in several other states, and in Canada and Mexico. The Corporation produces market segment results for the Corporation’s three primary geographic markets as well as Other Markets. Other Markets includes Florida, Arizona, the International Finance division and businesses with a national perspective. The Finance & Other category includes the Finance segment and the Other category as previously described. Market segment results are provided as supplemental information to the business segment results and may not meet all operating segment criteria as set forth in GAAP. For comparability purposes, amounts in all periods are based on market segments and methodologies in effect at September 30, 2017.
A discussion of the financial results and the factors impacting performance can be found in the section entitled "Market Segments" in the financial review.

34

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

Market segment financial results are as follows:
(dollar amounts in millions)
Michigan
 
California
 
Texas
 
Other
Markets
 
Finance
& Other
 
Total
Three Months Ended September 30, 2017
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
172

 
$
184

 
$
123

 
$
87

 
$
(20
)
 
$
546

Provision for credit losses
8

 
24

 
(22
)
 
15

 
(1
)
 
24

Noninterest income
79

 
41

 
33

 
107

 
15

 
275

Noninterest expenses
144

 
103

 
92

 
114

 
10

 
463

Provision (benefit) for income taxes
34

 
37

 
31

 
17

 
(11
)
(a)
108

Net income (loss)
$
65

 
$
61

 
$
55

 
$
48

 
$
(3
)
 
$
226

Net credit-related charge-offs
$
2

 
$
10

 
$
9

 
$
4

 
$

 
$
25

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
13,367

 
$
18,170

 
$
10,435

 
$
8,816

 
$
20,463

 
$
71,251

Loans
12,612

 
17,916

 
9,959

 
8,176

 

 
48,663

Deposits
21,641

 
17,316

 
9,400

 
7,730

 
406

 
56,493

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.14
%
 
1.32
%
 
2.05
%
 
2.15
%
 
N/M

 
1.25
%
Efficiency ratio (c)
57.15

 
45.59

 
58.74

 
58.79

 
N/M

 
56.24

(dollar amounts in millions)
Michigan
 
California
 
Texas
 
Other
Markets
 
Finance
& Other
 
Total
Three Months Ended September 30, 2016
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
168

 
$
179

 
$
117

 
$
89

 
$
(103
)
 
$
450

Provision for credit losses
13

 
(4
)
 
(3
)
 
5

 
5

 
16

Noninterest income
82

 
44

 
33

 
97

 
16

 
272

Noninterest expenses
161

 
110

 
102

 
112

 
8

 
493

Provision (benefit) for income taxes
26

 
43

 
18

 
18

 
(41
)
 
64

Net income (loss)
$
50

 
$
74

 
$
33

 
$
51

 
$
(59
)
 
$
149

Net credit-related charge-offs
$
1

 
$

 
$
10

 
$
5

 
$

 
$
16

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
13,019

 
$
18,088

 
$
11,014

 
$
9,324

 
$
21,464

 
$
72,909

Loans
12,332

 
17,793

 
10,566

 
8,515

 

 
49,206

Deposits
21,907

 
17,711

 
9,860

 
8,225

 
362

 
58,065

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
0.87
%
 
1.58
%
 
1.13
%
 
2.19
%
 
N/M

 
0.82
%
Efficiency ratio (c)
64.64

 
48.93

 
68.12

 
60.18

 
N/M

 
68.15

(a)
Includes tax benefit of $2 million from employee stock transactions.
(b)
Return on average assets is calculated based on the greater of average assets or average liabilities and attributed equity.
(c)
Noninterest expenses as a percentage of the sum of net interest income (fully taxable equivalent basis) and noninterest income excluding net securities gains (losses).
N/M – not meaningful

35

Table of Contents
Notes to Consolidated Financial Statements (unaudited)
Comerica Incorporated and Subsidiaries

(dollar amounts in millions)
Michigan
 
California
 
Texas
 
Other
Markets
 
Finance
& Other
 
Total
Nine Months Ended September 30, 2017
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
510

 
$
531

 
$
350

 
$
248

 
$
(123
)
 
$
1,516

Provision for credit losses
3

 
70

 
(45
)
 
33

 
(4
)
 
57

Noninterest income
242

 
128

 
98

 
312

 
42

 
822

Noninterest expenses
439

 
297

 
280

 
330

 
31

 
1,377

Provision (benefit) for income taxes
110

 
111

 
78

 
54

 
(80
)
(a)
273

Net income (loss)
$
200

 
$
181

 
$
135

 
$
143

 
$
(28
)
 
$
631

Net credit-related charge-offs (recoveries)
$
(2
)
 
$
28

 
$
36

 
$
14

 
$

 
$
76

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
13,331

 
$
18,201

 
$
10,490

 
$
8,517

 
$
20,931

 
$
71,470

Loans
12,637

 
17,930

 
10,028

 
7,836

 

 
48,431

Deposits
21,827

 
17,301

 
9,712

 
7,920

 
368

 
57,128

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.18
%
 
1.33
%
 
1.64
%
 
2.20
%
 
N/M

 
1.18
%
Efficiency ratio (c)
58.22

 
44.87

 
62.54

 
58.86

 
N/M

 
58.74

(dollar amounts in millions)
Michigan
 
California
 
Texas
 
Other
Markets
 
Finance
& Other
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
Earnings summary:
 
 
 
 
 
 
 
 
 
 
 
Net interest income (expense)
$
503

 
$
532

 
$
355

 
$
261

 
$
(309
)
 
$
1,342

Provision for credit losses
10

 
8

 
199

 
(7
)
 
3

 
213

Noninterest income
239

 
121

 
96

 
293

 
35

 
784

Noninterest expenses
470

 
334

 
316

 
331

 
18

 
1,469

Provision (benefit) for income taxes
88

 
115

 
(21
)
 
64

 
(115
)
 
131

Net income (loss)
$
174

 
$
196

 
$
(43
)
 
$
166

 
$
(180
)
 
$
313

Net credit-related charge-offs
$
6

 
$
25

 
$
88

 
$
2

 
$

 
$
121

 
 
 
 
 
 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
 
 
 
 
 
Assets
$
13,135

 
$
17,980

 
$
11,198

 
$
9,044

 
$
19,585

 
$
70,942

Loans
12,484

 
17,700

 
10,722

 
8,117

 

 
49,023

Deposits
21,699

 
17,121

 
10,096

 
7,854

 
332

 
57,102

 
 
 
 
 
 
 
 
 
 
 
 
Statistical data:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (b)
1.03
%
 
1.44
%
 
(0.49
)%
 
2.46
%
 
N/M
 
0.59
%
Efficiency ratio (c)
63.09

 
51.02

 
70.00

 
59.70

 
N/M
 
68.88

(a)
Includes tax benefit of $31 million from employee stock transactions.
(b)
Return on average assets is calculated based on the greater of average assets or average liabilities and attributed equity.
(c)
Noninterest expenses as a percentage of the sum of net interest income (fully taxable equivalent basis) and noninterest income excluding net securities gains (losses).
N/M – not meaningful


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ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, the Corporation may make other written and oral communications from time to time that contain such statements. All statements regarding the Corporation's expected financial position, strategies and growth prospects and general economic conditions expected to exist in the future are forward-looking statements. The words, "anticipates," "believes," "contemplates," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "opportunity," "initiative," "outcome," "continue," "remain," "maintain," "on track," "trend," "objective," "looks forward," "projects," "models," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to the Corporation or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of the Corporation's management based on information known to the Corporation's management as of the date of this report and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of the Corporation's management for future or past operations, products or services, including the GEAR Up initiative, and forecasts of the Corporation's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries as well as estimates of the economic benefits of the GEAR Up initiative, estimates of credit trends and global stability. Such statements reflect the view of the Corporation's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Corporation's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in general economic, political or industry conditions; changes in monetary and fiscal policies, including changes in interest rates; whether the Corporation may achieve opportunities for revenue enhancements and efficiency improvements under the GEAR Up initiative, or changes in the scope or assumptions underlying the GEAR Up initiative; the Corporation's ability to maintain adequate sources of funding and liquidity; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of the Corporation's customers, in particular the energy industry; unfavorable developments concerning credit quality; operational difficulties, failure of technology infrastructure or information security incidents; changes in regulation or oversight; reliance on other companies to provide certain key components of business infrastructure; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; reductions in the Corporation's credit rating; the interdependence of financial service companies; the implementation of the Corporation's strategies and business initiatives; damage to the Corporation's reputation; the Corporation's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; competitive product and pricing pressures among financial institutions within the Corporation's markets; changes in customer behavior; any future strategic acquisitions or divestitures; management's ability to maintain and expand customer relationships; management's ability to retain key officers and employees; the impact of legal and regulatory proceedings or determinations; the effectiveness of methods of reducing risk exposures; the effects of terrorist activities and other hostilities; the effects of catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, droughts and floods; potential legislative, administrative or judicial changes or interpretations related to the tax treatment of corporations; changes in accounting standards and the critical nature of the Corporation's accounting policies. The Corporation cautions that the foregoing list of factors is not all-inclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to “Item 1A. Risk Factors” beginning on page 12 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016. Forward-looking statements speak only as of the date they are made. The Corporation does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this report or in any documents, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2017 was $226 million, an increase of $77 million from $149 million reported for the three months ended September 30, 2016. Net income per diluted common share was $1.26 for the third quarter 2017 compared to $0.84 for the third quarter 2016. The increase in net income primarily reflected an increase in net interest income, primarily due to a net benefit from higher short-term rates and elevated interest recoveries, as well as a decrease in noninterest expenses, largely driven by the GEAR Up initiative. Net income included after-tax interest recoveries of $11 million (+6 cents per share) and $1 million (less than +1 cent per share) for the three-months ended September 30, 2017 and 2016, respectively. Additionally, net income included the after-tax impact of restructuring charges of $4 million (-2 cents per share) and $13 million (-7 cents per share) for the three-months ended September 30, 2017 and 2016, respectively.
Net income for the nine months ended September 30, 2017 was $631 million, an increase of $318 million from $313 million reported for the nine months ended September 30, 2016. Net income per diluted common share was $3.50 for the nine months ended September 30, 2017 compared to $1.76 for the nine months ended September 30, 2016. The increase in net income primarily reflected an increase in net interest income due to a net benefit from higher short-term rates and elevated interest recoveries as well as improved credit quality, an increase in noninterest income and a decrease in noninterest expenses. The increase in noninterest income and decrease in noninterest expense was largely driven by the GEAR Up initiative. Net income included after-tax interest recoveries of $15 million (+8 cents per share) and $7 million (+4 cents per share) for the nine-month periods ended September 30, 2017 and 2016, respectively. Net income included the after-tax impact of restructuring charges of $21 million (-11 cents per share) and $46 million (-26 cents per share) for the nine-month periods ended September 30, 2017 and 2016, respectively. Additionally, net income for the nine months ended September 30, 2017 included $31 million of tax benefits from employee stock transactions (+17 cents per share).
Growth in Efficiency and Revenue Initiative
The Corporation launched the GEAR Up initiative in 2016 in order to meaningfully enhance profitability. Full year 2017, 2018 and 2019 pre-tax income, before restructuring charges, is expected to include benefits from actions identified under this initiative of approximately $180 million, $270 million and $305 million, respectively. Additional financial targets expected from GEAR Up include a consistent double-digit return on equity and an efficiency ratio at or below 60 percent.
Expense reductions are expected to save approximately $150 million, $200 million and $215 million in full-year 2017, 2018 and 2019, respectively. This is being achieved from a reduction in workforce, a new retirement program, streamlining operational processes, real estate optimization including consolidating banking centers as well as reducing office and operations space, selective outsourcing of technology functions and reduction of technology system applications.
Revenue enhancements are expected to be approximately $30 million in full-year 2017, increasing to approximately $70 million in full-year 2018, and approximately $90 million in full-year 2019, through expanded product offerings, enhanced sales tools and training and improved customer analytics to drive opportunities.
Pre-tax restructuring charges of $185 million to $195 million in total are expected to be incurred from inception through 2018, including about $47 million in 2017. Cumulative pre-tax restructuring charges of $125 million have been incurred through September 30, 2017. For additional information regarding restructuring charges, refer to note 13 to the consolidated financial statements.
The impact of increases in short-term rates and the execution of certain GEAR Up initiatives helped lower the efficiency ratio to 56.2 percent for the three months ended September 30, 2017, compared to 68.2 percent for the three months ended September 30, 2016. Since the initiative began in June 2016, the Corporation has closed 38 banking centers and reduced the amount of full time equivalent employees by over 800, largely attributable to the GEAR Up initiatives. These actions also contributed to an increase in return on equity to 11.2 percent for the three months ended September 30, 2017 compared to 7.8 percent for the three months ended September 30, 2016.
Fourth Quarter 2017 Outlook Compared to Third Quarter 2017
For fourth quarter 2017 compared to third quarter 2017, management expects the following, assuming a continuation of the current economic and low rate environment as well as contributions from the GEAR Up initiative:
Growth in average loans of approximately 1 percent, reflecting a seasonal increase in National Dealer Services and increases in general Middle Market, Corporate Banking and Technology and Life Sciences, partially offset by a seasonal decrease in Mortgage Banker Finance.
Net interest income to reflect lower nonaccrual interest recoveries, partially offset by loan growth.
Provision for credit losses to reflect continued solid performance of the overall portfolio.
Provision of 20-25 basis points and net charge-offs to remain low.
Noninterest income to benefit from the execution of GEAR Up opportunities driving increases in treasury management income, card fees and fiduciary income, offset by lower noncustomer-driven income such as bank-owned life insurance.

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Noninterest expenses impacted by restructuring expenses of about $15 million and expenses tied to revenue growth, such as outside processing expenses and advertising.
Income tax expense to approximate 33 percent of pre-tax income, assuming no further tax impact from employee stock transactions.
Net Interest Income
The "Quarterly Analysis of Net Interest Income & Rate/Volume" table that follows provides an analysis of net interest income for the three months ended September 30, 2017 and 2016 and details the components of the change in net interest income for the three months ended September 30, 2017 compared to the same period in the prior year.
Quarterly Analysis of Net Interest Income & Rate/Volume
 
Three Months Ended
 
September 30, 2017
 
September 30, 2016
(dollar amounts in millions)
Average
Balance
Interest
Average
Rate (a)
 
Average
Balance
Interest
Average
Rate (a)
Commercial loans
$
30,603

$
312

4.07
%
 
$
31,132

$
253

3.25
%
Real estate construction loans
2,933

33

4.36

 
2,646

24

3.57

Commercial mortgage loans
8,977

95

4.20

 
9,012

78

3.43

Lease financing
470

3

3.36

 
662

5

3.30

International loans
1,156

12

4.13

 
1,349

12

3.56

Residential mortgage loans
2,005

20

3.95

 
1,883

18

3.74

Consumer loans
2,519

25

3.84

 
2,522

21

3.31

Total loans
48,663

500

4.09

 
49,206

411

3.33

 
 
 
 
 
 
 
 
Mortgage-backed securities (b)
9,361

50

2.17

 
9,359

50

2.17

Other investment securities
2,883

12

1.69

 
3,014

11

1.51

Total investment securities (b)
12,244

62

2.06

 
12,373

61

2.01

 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
5,086

17

1.26

 
5,967

8

0.51

Other short-term investments
91


0.72

 
102


0.43

Total earning assets
66,084

579

3.49

 
67,648

480

2.84

 
 
 
 
 
 
 
 
Cash and due from banks
1,234

 
 
 
1,152

 
 
Allowance for loan losses
(718
)
 
 
 
(749
)
 
 
Accrued income and other assets
4,651

 
 
 
4,858

 
 
Total assets
$
71,251

 
 
 
$
72,909

 
 
 
 
 
 
 
 
 
 
Money market and interest-bearing checking deposits
$
20,819

9

0.15

 
$
22,415

7

0.12

Savings deposits
2,152


0.02

 
2,042


0.03

Customer certificates of deposit
2,390

2

0.36

 
3,129

3

0.40

Foreign office time deposits
75


0.66

 
25


0.37

Total interest-bearing deposits
25,436

11

0.16

 
27,611

10

0.14

 
 
 
 
 
 
 
 
Short-term borrowings
815

3

1.15

 
17


0.47

Medium- and long-term debt
4,936

19

1.61

 
5,907

20

1.36

Total interest-bearing sources
31,187

33

0.42

 
33,535

30

0.36

 
 
 
 
 
 
 
 
Noninterest-bearing deposits
31,057

 
 
 
30,454

 
 
Accrued expenses and other liabilities
999

 
 
 
1,243

 
 
Total shareholders’ equity
8,008

 
 
 
7,677

 
 
Total liabilities and shareholders’ equity
$
71,251

 
 
 
$
72,909

 
 
 
 
 
 
 
 
 
 
Net interest income/rate spread
 
$
546

3.07

 
 
$
450

2.48

 
 
 
 
 
 
 
 
Impact of net noninterest-bearing sources of funds
 
 
0.22

 
 
 
0.18

Net interest margin (as a percentage of average earning assets)
 
 
3.29
%
 
 
 
2.66
%
(a)
Average rate is calculated on a fully taxable equivalent (FTE) basis using a federal tax rate of 35%. The FTE adjustments included in the rate calculations totaled $1 million in each period presented.
(b)
Includes investment securities available-for-sale and investment securities held-to-maturity.

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Table of Contents

Quarterly Analysis of Net Interest Income & Rate/Volume (continued)
 
Three Months Ended
 
September 30, 2017/September 30, 2016
(in millions)
Increase
(Decrease)
Due to Rate
Increase
(Decrease)
Due to 
Volume (a)
Net
Increase
(Decrease)
Interest Income:
 
 
 
 
 
 
Loans
$
93

 
$
(4
)
 
$
89

 
Investment securities (b)
1

 

 
1

 
Interest-bearing deposits with banks
12

 
(3
)
 
9

 
         Total interest income
106

 
(7
)
 
99

 
Interest Expense:
 
 
 
 
 
 
Interest-bearing deposits
2

 
(1
)
 
1

 
Short-term borrowings

 
3

 
3

 
Medium- and long-term debt
5

 
(6
)
 
(1
)
 
Total interest expense
7

 
(4
)
 
3

 
         Net interest income
$
99

 
$
(3
)
 
$
96

 
(a)
Rate/volume variances are allocated to variances due to volume.
(b)
Includes investment securities available-for-sale and investment securities held-to-maturity.
Net interest income was $546 million for the three months ended September 30, 2017, an increase of $96 million, compared to $450 million for the three months ended September 30, 2016. The increase in net interest income primarily reflected the benefit from higher short-term rates and a $15 million increase in loan interest recoveries. The net interest margin (FTE) for the three months ended September 30, 2017 increased 63 basis points to 3.29 percent, from 2.66 percent for the comparable period in 2016, primarily from higher yields on loans and FRB deposits, reflecting the benefit from higher short-term rates (+54 basis points), and elevated loan interest recoveries (+9 basis points).

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Table of Contents

Year-to-Date Analysis of Net Interest Income & Rate/Volume
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
(dollar amounts in millions)
Average
Balance
Interest
Average
Rate (a)
 
Average
Balance
Interest
Average
Rate (a)
Commercial loans
$
30,313

$
851

3.77
%
 
$
31,152

$
753

3.24
%
Real estate construction loans
2,934

90

4.09

 
2,397

65

3.61

Commercial mortgage loans
8,988

265

3.94

 
9,002

236

3.50

Lease financing
522

9

2.42

 
706

15

2.86

International loans
1,168

35

3.96

 
1,388

38

3.61

Residential mortgage loans
1,981

55

3.71

 
1,885

54

3.81

Consumer loans
2,525

69

3.63

 
2,493

62

3.34

Total loans
48,431

1,374

3.80

 
49,023

1,223

3.34

 
 
 
 
 
 
 
 
Mortgage-backed securities (b)
9,335

150

2.16

 
9,347

152

2.20

Other investment securities
2,890

36

1.66

 
3,008

33

1.50

Total investment securities (b)
12,225

186

2.04

 
12,355

185

2.03

 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
5,598

44

1.03

 
4,313

17

0.50

Other short-term investments
92


0.66

 
105


0.65

Total earning assets
66,346

1,604

3.24

 
65,796

1,425

2.90

 
 
 
 
 
 
 
 
Cash and due from banks
1,187

 
 
 
1,098

 
 
Allowance for loan losses
(728
)
 
 
 
(726
)
 
 
Accrued income and other assets
4,665

 
 
 
4,774

 
 
Total assets
$
71,470

 
 
 
$
70,942

 
 
 
 
 
 
 
 
 
 
Money market and interest-bearing checking deposits
$
21,645

23

0.14

 
$
22,797

20

0.11

Savings deposits
2,127


0.02

 
1,996


0.02

Customer certificates of deposit
2,543

6

0.37

 
3,308

10

0.40

Foreign office time deposits
59


0.60

 
35


0.34

Total interest-bearing deposits
26,374

29

0.15

 
28,136

30

0.14

 
 
 
 
 
 
 
 
Short-term borrowings
331

3

1.14

 
180


0.45

Medium- and long-term debt
5,084

56

1.46

 
4,695

53

1.51

Total interest-bearing sources
31,789

88

0.37

 
33,011

83

0.33

 
 
 
 
 
 
 
 
Noninterest-bearing deposits
30,754

 
 
 
28,966

 
 
Accrued expenses and other liabilities
988

 
 
 
1,311

 
 
Total shareholders’ equity
7,939

 
 
 
7,654

 
 
Total liabilities and shareholders’ equity
$
71,470

 
 
 
$
70,942

 
 
 
 
 
 
 
 
 
 
Net interest income/rate spread
 
$
1,516

2.87

 
 
$
1,342

2.57

 
 
 
 
 
 
 
 
Impact of net noninterest-bearing sources of funds
 
 
0.19

 
 
 
0.17

Net interest margin (as a percentage of average earning assets)
 
 
3.06
%
 
 
 
2.74
%
(a)
Average rate is calculated on an FTE basis using a federal tax rate of 35%. The FTE adjustments included in the rate calculations totaled$3 million in each period presented.
(b)
Includes investment securities available-for-sale and investment securities held-to-maturity.

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Table of Contents

Quarterly Analysis of Net Interest Income & Rate/Volume (continued)
 
Nine Months Ended
 
September 30, 2017/September 30, 2016
(in millions)
Increase
(Decrease)
Due to Rate
Increase
(Decrease)
Due to 
Volume (a)
Net
Increase
(Decrease)
Interest Income:
 
 
 
 
 
 
Loans
$
165

 
$
(14
)
 
$
151

 
Investment securities (b)

 
1

 
1

 
Interest-bearing deposits with banks
17

 
10

 
27

 
Total interest income
182

 
(3
)
 
179

 
Interest Expense:
 
 
 
 
 
 
Interest-bearing deposits
2

 
(3
)
 
(1
)
 
Short-term borrowings
1

 
2

 
3

 
Medium- and long-term debt
7

 
(4
)
 
3

 
Total interest expense
10

 
(5
)
 
5

 
Net interest income
$
172

 
$
2

 
$
174

 
(a)
Rate/volume variances are allocated to variances due to volume.
(b)
Includes investment securities available-for-sale and investment securities held-to-maturity.
Net interest income was $1.5 billion for the nine months ended September 30, 2017, an increase of $174 million, compared to $1.3 billion for the nine months ended September 30, 2016. The increase in net interest income primarily reflected the benefit from higher short-term rates and a $12 million increase in loan interest recoveries, partially offset by the impact of one fewer day in 2017. The net interest margin (FTE) for the nine months ended September 30, 2017 increased 32 basis points to 3.06 percent, from 2.74 percent for the comparable period in 2016, primarily from higher yields on loans and FRB deposits, reflecting the benefit from the increase in short-term rates and elevated loan interest recoveries, partially offset by the impact of the increase in lower-yielding average balances deposited with the FRB.
For further discussion of the effects of market rates on net interest income, refer to the "Market and Liquidity Risk" section of this financial review.
Provision for Credit Losses
The provision for credit losses was $24 million and $16 million for the three-month periods ended September 30, 2017 and 2016, respectively, and $57 million and $213 million for the nine-month periods ended September 30, 2017 and 2016, respectively. The provision for credit losses includes both the provision for loan losses and the provision for credit losses on lending-related commitments. The provision for loan losses is recorded to maintain the allowance for loan losses at the level deemed appropriate by the Corporation to cover probable credit losses inherent in the portfolio.

The provision for loan losses was $31 million for the three months ended September 30, 2017, compared to $14 million for the three months ended September 30, 2016. The $17 million increase in the provision primarily reflected an increase in qualitative reserves for potential losses, including loans impacted by hurricanes in the third quarter 2017. Gross charge-offs increased $2 million to $37 million, and recoveries decreased $7 million to $12 million, resulting in net loan charge-offs of $25 million, or 0.21 percent of average total loans, in the three months ended September 30, 2017 compared to $16 million, or 0.13 percent, for the three months ended September 30, 2016. The decrease in recoveries primarily reflected high recoveries in third quarter 2016.

The provision for loan losses was $57 million for the nine months ended September 30, 2017, compared to $202 million for the same period in the prior year. The $145 million decrease in the provision primarily reflected the improvement in the credit quality of the Energy and energy-related portfolio. Net loan charge-offs in the nine months ended September 30, 2017 decreased $34 million to $76 million, or 0.21 percent of average total loans, compared to $110 million, or 0.30 percent, for the nine months ended September 30, 2016. The decrease in net loan charge-offs primarily reflected lower Energy charge-offs.
The provision for credit losses on lending-related commitments is recorded to maintain the allowance for credit losses on lending-related commitments at the level deemed appropriate by the Corporation to cover probable credit losses inherent in lending-related commitments. The provision for credit losses on lending-related commitments was a benefit of $7 million and a provision of $2 million for the three months ended September 30, 2017 and 2016, respectively. The $9 million decrease in the provision for credit losses on lending-related commitments in the three months ended September 30, 2017 compared to the same period in 2016 primarily reflected improved credit quality in the letters of credit portfolio. There was no provision for credit losses on lending-related commitments for the nine months ended September 30, 2017 compared to $11 million for the same period in 2016. There were no lending–related commitment charge–offs for both the three-month periods ended September 30, 2017 and

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Table of Contents

2016 as well as the nine months ended September 30, 2017. Lending–related commitment charge–offs of $11 million during the nine months ended September 30, 2016 were the result of credit deterioration in certain Corporate Banking and Energy unfunded commitments.
For further information regarding Energy and energy-related loans, refer to the "Energy Lending" subheading in the "Risk Management" section of this financial review. An analysis of the allowance for credit losses and nonperforming assets is presented under the "Credit Risk" subheading in the "Risk Management" section of this financial review.
Noninterest Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
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 (a)
25

 
29

 
85

 
75

Total noninterest income
$
275

 
$
272

 
$
822

 
$
784

(a)
The table below provides further details on certain categories included in other noninterest income.
Noninterest income increased $3 million to $275 million for the three months ended September 30, 2017, compared to $272 million for the same period in 2016, primarily due to an increase of $9 million in card fees, partially offset by a decrease of $5 million in commercial lending fees primarily due to lower syndication agent fees.
Noninterest income increased $38 million to $822 million for the nine months ended September 30, 2017, compared to $784 million for the same period in the prior year, in part due to the impact of GEAR Up initiatives, partially offset by decreases of $5 million in commercial lending fees, largely due to lower syndication agent fees, and $4 million in letter of credit fees.
The following table illustrates certain categories included in "other noninterest income" on the consolidated statements of comprehensive income.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Customer derivative income
$
6

 
$
6

 
$
20

 
$
15

Investment banking fees
2

 
3

 
7

 
6

Deferred compensation asset returns (a)
1

 
2

 
6

 
2

Insurance commissions
2

 
3

 
6

 
8

Securities trading income
2

 

 
6

 
4

Risk management hedge income

 

 
1

 
4

Income from principal investing and warrants
1

 
3

 
5

 
5

All other noninterest income
11

 
12

 
34

 
31

Other noninterest income
$
25

 
$
29

 
$
85

 
$
75

(a)
Compensation deferred by the Corporation's officers and directors is invested based on investment selections of the officers and directors. Income earned on these assets is reported in noninterest income and the resulting change in deferred compensation plan liabilities is reported in salaries and benefits expense. Changes in income earned on deferred compensation assets are substantially offset by changes in deferred compensation plan expense.

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Noninterest Expenses
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
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

Noninterest expenses decreased $30 million to $463 million for the three months ended September 30, 2017, compared to $493 million for the same period in 2016, primarily reflecting decreases in salaries and benefits expense of $22 million, largely driven by the GEAR Up initiative, $13 million in restructuring charges and $4 million in consultant fees, partially offset by increases of $6 million in outside processing fees primarily tied to revenue-generating activities and $4 million in technology costs.
Noninterest expenses decreased $92 million to $1.4 billion for the nine months ended September 30, 2017, compared to $1.5 billion for the same period in 2016, primarily reflecting decreases of $61 million in salaries and benefits expense, largely driven by the GEAR Up initiative, and $41 million in restructuring charges, partially offset by a $20 million increase in outside processing fees primarily tied to revenue-generating activities.
For further information about restructuring charges associated with the GEAR Up initiative, see note 13 to the consolidated financial statements.
Provision for Income Taxes
The provision for income taxes increased $44 million to $108 million for the three months ended September 30, 2017, compared to $64 million for the same period in 2016, and increased $142 million to $273 million for the nine months ended September 30, 2017, compared to $131 million for the same period in 2016. The increases were primarily due to increases in pretax income, partially offset by tax benefits from employee stock transactions as a result of new accounting guidance for stock compensation effective January 1, 2017. Income tax benefits from employee stock transactions were $2 million and $31 million for the three- and nine-month periods ended September 30, 2017, respectively.
For further information about the new accounting guidance for stock compensation, see note 1 to the consolidated financial statements.
STRATEGIC LINES OF BUSINESS
The Corporation has strategically aligned its operations into three major business segments: the Business Bank, the Retail Bank and Wealth Management. These business segments are differentiated based on the type of customer and the related products and services provided. In addition to the three major business segments, the Finance division is also reported as a segment. The Other category includes items not directly associated with these business segments or the Finance segment. The performance of the business segments is not comparable with the Corporation's consolidated results and is not necessarily comparable with similar information for any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Market segment results are also provided for the Corporation's three primary geographic markets: Michigan, California and Texas. In addition to the three primary geographic markets, Other Markets is also reported as a market segment. Note 14 to the consolidated financial statements describes the business activities of each business segment and presents financial results of these business and market segments for the three- and nine-month periods ended September 30, 2017 and 2016.
The Corporation's management accounting system assigns balance sheet and income statement items to each segment using certain methodologies, which are regularly reviewed and refined. These methodologies may be modified as the management accounting system is enhanced and changes occur in the organizational structure and/or product lines. Note 23 to the consolidated financial statements in the Corporation's 2016 Annual Report describes the Corporation's segment reporting methodology.
Net interest income for each segment reflects the interest income generated by earning assets less interest expense on interest-bearing liabilities plus the net impact from associated internal funds transfer pricing (FTP). Funds transfer pricing credit rates for deposits reflect the long-term value of deposits, based on their implied maturities, and FTP charge rates for funding assets reflect a matched cost of funds based on the pricing and duration characteristics of the assets. Therefore, net interest income for each s

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egment primarily reflects the volume and associated FTP impacts of loan and deposit levels as well as one fewer day in the nine months ended September 30, 2017, compared to the same period in the prior year. FTP crediting rates on deposits were generally higher in the nine months ended September 30, 2017 than in the same period in the prior year, and, as a result, net interest income for deposit-providing business segments has been positively impacted during the current year. As overall market rates increased, FTP charges for funding loans increased for asset-generating business segments in the nine months ended September 30, 2017, compared to the same period in the prior year.
Business Segments
The following table presents net income (loss) by business segment.
 
Nine Months Ended September 30,
(dollar amounts in millions)
2017
 
2016
Business Bank
$
548

 
83
%
 
$
433

 
87
%
Retail Bank
47

 
7

 
8

 
2

Wealth Management
64

 
10

 
52

 
11

 
659

 
100
%
 
493

 
100
%
Finance
(62
)
 
 
 
(179
)
 
 
Other (a)
34

 
 
 
(1
)
 
 
Total
$
631

 
 
 
$
313

 
 
(a)    Includes a tax benefit of $31 million from employee stock transactions for the nine months ended September 30, 2017 and items not directly associated with the three major business segments or the Finance Division.
The Business Bank's net income of $548 million for the nine months ended September 30, 2017 increased $115 million compared to the nine months ended September 30, 2016. Net interest income of $1.0 billion for the nine months ended September 30, 2017 decreased $39 million compared to the same period in the prior year, primarily reflecting the FTP impacts described above and the impacts of an $825 million decrease in average loans and a $364 million decrease in average deposits. The provision for credit losses decreased $161 million to $39 million for the nine months ended September 30, 2017, compared to the same period in the prior year, primarily reflecting improved credit quality in Energy and energy-related, partially offset by an increase in Technology and Life Sciences. Net credit-related charge-offs of $67 million decreased $46 million in the nine months ended September 30, 2017, compared to the same period in the prior year, primarily reflecting a decrease in Energy. Noninterest income for the nine months ended September 30, 2017 increased $19 million from the comparable period in the prior year, primarily reflecting increases of $14 million in card fees, $4 million in service charges on deposit accounts and smaller increases in several other categories of noninterest income, partially offset by decrease of $5 million in commercial lending fees. Noninterest expenses for the nine months ended September 30, 2017 decreased $51 million compared to the same period in the prior year, primarily reflecting decreases of $20 million in corporate overhead and $11 million in salaries and benefits expense, largely attributed to GEAR Up savings, as well as a decrease of $18 million in restructuring charges, partially offset by a $9 million increase in outside processing expenses tied to revenue-generating activities.
Net income for the Retail Bank of $47 million for the nine months ended September 30, 2017 increased $39 million compared to the nine months ended September 30, 2016. Net interest income of $487 million for the nine months ended September 30, 2017 increased $25 million from the comparable period in the prior year, primarily reflecting the FTP impacts described above and the impact of a $445 million increase in average deposits. The provision for credit losses increased $3 million from the comparable period in the prior year. Net credit-related charge-offs of $13 million for the nine months ended September 30, 2017 increased $7 million compared to the same period for the prior year, primarily due to an increase in Small Business. Noninterest income of $144 million for the nine months ended September 30, 2017 increased $3 million compared to the comparable period in the prior year, primarily due to increases of $2 million each in service charges on deposit accounts and card fees. Noninterest expenses of $543 million for the nine months ended September 30, 2017 decreased $36 million from the comparable period in the prior year, primarily reflecting decreases of $21 million in salaries and benefits expense and smaller decreases in other categories, largely attributed to GEAR Up savings, as well as a decrease of $16 million in restructuring charges, partially offset by a $5 million increase in outside processing fees tied to revenue-generating activities.
Wealth Management's net income of $64 million for the nine months ended September 30, 2017 increased $12 million compared to the nine months ended September 30, 2016. Net interest income of $127 million for the nine months ended September 30, 2017 increased $2 million compared to the same period in the prior year, primarily reflecting the FTP impacts described above and the impact of a $241 million increase in average loans. The provision for credit losses increased $9 million to a provision of $6 million for the nine months ended September 30, 2017, compared to a benefit of $3 million for the nine months ended September 30, 2016, primarily due to the addition of qualitative reserves for potential losses, including loans impacted by hurricanes. Net credit-related recoveries were $4 million for the nine months ended September 30, 2017, compared to net credit-related charge-offs of $2 million in the same period for the prior year. Noninterest income of $191 million for the nine months ended September 30, 2017 increased $9 million compared to the same period in the prior year, primarily reflecting increases in fiduciary income of $6 million and brokerage fees of $2 million. Noninterest expenses of $211 million for the nine months ended September 30, 2017 decreased $18 million from the

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same period in the prior year, primarily reflecting decreases of $5 million in salaries and benefits expense and $2 million in corporate overhead, largely attributed to GEAR Up savings, as well as a decrease of $6 million in restructuring charges.
The net loss in the Finance segment was $62 million for the nine months ended September 30, 2017, compared to a net loss of $179 million for the nine months ended September 30, 2016. Net interest expense of $150 million for the nine months ended September 30, 2017 decreased $176 million, compared to the nine months ended September 30, 2016, primarily reflecting a decrease in net FTP expense as a result of higher rates charged to the business segments under the Corporation's internal FTP methodology.
Market Segments
The following table presents net income (loss) by market segment.
 
Nine Months Ended September 30,
(dollar amounts in millions)
2017
 
2016
Michigan
$
200

 
30
%
 
$
174

 
35
 %
California
181

 
28

 
196

 
40

Texas
135

 
20

 
(43
)
 
(9
)
Other Markets
143

 
22

 
166

 
34

 
659

 
100
%
 
493

 
100
 %
Finance & Other (a)
(28
)
 
 
 
(180
)
 
 
Total
$
631

 
 
 
$
313

 
 
(a)    Includes a tax benefit of $31 million from employee stock transactions for the nine months ended September 30, 2017 and items not directly associated with the market segments.
The Michigan market's net income of $200 million for the nine months ended September 30, 2017 increased $26 million, compared to the nine months ended September 30, 2016. Net interest income of $510 million for the nine months ended September 30, 2017 increased $7 million compared to the same period in the prior year, primarily reflecting the FTP impacts described above and the impacts of a $153 million increase in average loans and a $128 million increase in average deposits. The provision for credit losses decreased $7 million to $3 million for the nine months ended September 30, 2017, compared to a provision of $10 million for the comparable period in the prior year. Net credit-related charge-offs decreased $8 million to net recoveries of $2 million for the nine months ended September 30, 2017, compared to net charge-offs of $6 million for the comparable period in the prior year, primarily reflecting a decrease in charge-offs in Corporate Banking, partially offset by an increase in net charge-offs in Commercial Real Estate. Noninterest income of $242 million for the nine months ended September 30, 2017 increased $3 million from the comparable period in the prior year, primarily reflecting increases of $2 million each in customer derivative income, fiduciary income and card fees, partially offset by a decrease of $3 million in commercial lending fees. Noninterest expenses of $439 million for the nine months ended September 30, 2017 decreased $31 million from the comparable period in the prior year, primarily reflecting decreases of $11 million in salaries and benefits expense and $7 million in corporate overhead, largely attributed to GEAR Up savings, as well as a decrease of $11 million in restructuring charges, partially offset by a $4 million increase in outside processing fees.
The California market's net income of $181 million for the nine months ended September 30, 2017 decreased $15 million, compared to $196 million for the nine months ended September 30, 2016. Net interest income of $531 million for the nine months ended September 30, 2017 decreased $1 million from the comparable period in the prior year, primarily reflecting the FTP impacts described above and the impacts of a $230 million increase in average loans and a $180 million increase in average deposits. The provision for credit losses increased $62 million to $70 million for the nine months ended September 30, 2017, compared to $8 million for the comparable period in the prior year, primarily due to a historically low provision for credit losses recognized for the nine months ended September 30, 2016, as well as an increase in reserves for certain portfolios, primarily in Technology and Life Sciences, Corporate Banking, National Dealer Services and general Middle Market. Net credit-related charge-offs of $28 million in the nine months ended September 30, 2017 increased $3 million compared to the nine months ended September 30, 2016, primarily reflecting an increase in Technology and Life Sciences, partially offset by a decrease in Private Banking. Noninterest income of $128 million for the nine months ended September 30, 2017 increased $7 million compared to the nine months ended September 30, 2016, primarily reflecting increases of $3 million each in card fees and service charges on deposit accounts. Noninterest expenses of $297 million for the nine months ended September 30, 2017 decreased $37 million from the comparable period in the prior year, primarily reflecting decreases of $11 million in salaries and benefits expense and $6 million in corporate overhead, largely attributed to GEAR Up savings, as well as a decrease of $15 million in restructuring charges and the impact of a $3 million favorable litigation-related settlement in the first quarter 2017.
The Texas market's net income increased $178 million to $135 million for the nine months ended September 30, 2017, compared to a net loss of $43 million for the nine months ended September 30, 2016. Net interest income of $350 million for the

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nine months ended September 30, 2017 decreased $5 million from the comparable period in the prior year, primarily reflecting the FTP impacts described above and the impacts of a $694 million decrease in average loans and a $384 million decrease in average deposits. The provision for credit losses decreased $244 million to a benefit of $45 million for the nine months ended September 30, 2017, compared to a provision of $199 million for the comparable period in the prior year, primarily reflecting improved credit quality and lower balances in Energy and energy-related loans. Net credit-related charge-offs of $36 million for the nine months ended September 30, 2017 decreased $52 million compared to the nine months ended September 30, 2016, primarily reflecting a decrease in Energy. Noninterest income of $98 million for the nine months ended September 30, 2017 increased $2 million compared to the comparable period in the prior year, primarily reflecting increases of $2 million each in card fees and service charges on deposit accounts, and smaller increases in several other noninterest income categories, partially offset by a $3 million decrease in commercial lending fees. Noninterest expenses of $280 million for the nine months ended September 30, 2017 decreased $36 million compared to the nine months ended September 30, 2016, primarily reflecting decreases of $12 million in corporate overhead, $10 million in salaries and benefits expense, largely attributed to GEAR Up savings, and $8 million in restructuring charges.
Net income in Other Markets of $143 million for the nine months ended September 30, 2017 decreased $23 million compared to $166 million for the nine months ended September 30, 2016. Net interest income of $248 million for the nine months ended September 30, 2017 decreased $13 million from the comparable period in the prior year, primarily reflecting the FTP impacts described above and the impact of a $281 million decrease in average loans. The provision for credit losses was $33 million for the nine months ended September 30, 2017, compared to a $7 million benefit for the comparable period in the prior year, primarily reflecting an increase in reserves for Environmental Services, Private Banking and Small Business. Net credit-related charge-offs were $14 million for the nine months ended September 30, 2017, compared to $2 million for the comparable period in the prior year, primarily reflecting an increase in Small Business. Noninterest income of $312 million for the nine months ended September 30, 2017 increased $19 million from the comparable period in the prior year, primarily reflecting increases of $11 million in card fees and $4 million in fiduciary income. Noninterest expenses of $330 million for the nine months ended September 30, 2017 decreased $1 million compared to the same period in the prior year, primarily reflecting decreases of $5 million in salaries and benefits expense, largely attributed to GEAR Up savings, and $5 million in restructuring charges, partially offset by an $11 million increase in outside processing expense tied to revenue-generating activities.
The net loss for the Finance & Other category of $28 million in the nine months ended September 30, 2017 decreased $152 million compared to the nine months ended September 30, 2016, primarily reflecting a decrease in net FTP expense as a result of higher rates charged to the market segments under the Corporation's internal FTP methodology and a $31 million tax benefit from employee stock transactions for the nine months ended September 30, 2017.
The following table lists the Corporation's banking centers by geographic market segment.
 
September 30,
 
2017
 
2016
Michigan
195

 
213

Texas
122

 
131

California
97

 
102

Other Markets:
 
 
 
Arizona
17

 
19

Florida
7

 
7

Canada
1

 
1

Total
439

 
473


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FINANCIAL CONDITION
Total assets were $72.0 billion at September 30, 2017 and $73.0 billion at December 31, 2016, primarily reflecting a decrease of $1.1 billion in interest-bearing deposits with banks, partially offset by an increase of $121 million in total loans. On an average basis, total assets decreased $2.8 billion to $71.3 billion in the third quarter 2017, compared to $74.1 billion in the fourth quarter 2016, resulting primarily from decreases of $2.4 billion in average interest-bearing deposits with banks and average total loans of $252 million. The decrease in average interest-bearing deposits with banks was primarily driven by a decrease in average deposits, as discussed further below.
The following tables provide information about the change in the Corporation's average loan portfolio in the third quarter 2017, compared to the fourth quarter 2016.
 
Three Months Ended
 
 
 
Percent
Change
(dollar amounts in millions)
September 30, 2017
 
December 31, 2016
 
Change
 
Average Loans:
 
 
 
 
 
 
 
Commercial loans by business line:
 
 
 
 
 
 
 
General Middle Market
$
9,347

 
$
9,635

 
$
(288
)
 
(3
)%
National Dealer Services
5,007

 
4,908

 
99

 
2

Energy
2,101

 
2,413

 
(312
)
 
(13
)
Technology and Life Sciences
3,156

 
3,019

 
137

 
5

Environmental Services
961

 
784

 
177

 
23

Entertainment
632

 
706

 
(74
)
 
(11
)
Total Middle Market
21,204

 
21,465

 
(261
)
 
(1
)
Corporate Banking
3,439

 
2,827

 
612

 
22

Mortgage Banker Finance
1,974

 
2,352

 
(378
)
 
(16
)
Commercial Real Estate
718

 
812

 
(94
)
 
(12
)
Total Business Bank commercial loans
27,335


27,456

 
(121
)
 

Total Retail Bank commercial loans
1,851

 
1,891

 
(40
)
 
(2
)
Total Wealth Management commercial loans
1,417

 
1,445

 
(28
)
 
(2
)
Total commercial loans
30,603

 
30,792

 
(189
)
 
(1
)
Real estate construction loans
2,933

 
2,837

 
96

 
3

Commercial mortgage loans
8,977

 
8,918

 
59

 
1

Lease financing
470

 
619

 
(149
)
 
(24
)
International loans
1,156

 
1,303

 
(147
)
 
(11
)
Residential mortgage loans
2,005

 
1,923

 
82

 
4

Consumer loans
2,519

 
2,523

 
(4
)
 

Total loans
$
48,663

 
$
48,915

 
$
(252
)
 
(1
)%
Average Loans By Geographic Market:
 
 
 
 
 
 
 
Michigan
$
12,612

 
$
12,538

 
$
74

 
1
 %
California
17,916

 
17,666

 
250

 
1

Texas
9,959

 
10,381

 
(422
)
 
(4
)
Other Markets
8,176

 
8,330

 
(154
)
 
(2
)
Total loans
$
48,663

 
$
48,915

 
$
(252
)
 
(1
)%
In general, Middle Market serves customers with annual revenue between $20 million and $500 million, while Corporate serves customers with revenue over $500 million. Changes in average total loans by geographic market are provided in the table above.
Total liabilities decreased $1.2 billion to $64.0 billion at September 30, 2017, compared to $65.2 billion at December 31, 2016, primarily reflecting a decrease of $1.2 billion in total deposits. Additionally, a $523 million decrease in medium- and long-term debt primarily reflected the maturity of $500 million of subordinated notes in the third quarter 2017 and was mostly offset by a $484 million increase in short-term borrowings from the FHLB. The decrease in total deposits primarily reflected a seasonal decrease of $1.7 billion in money market and interest-bearing checking deposits and a $464 million decrease in customer certificates of deposits, partially offset by an increase of $851 million in noninterest-bearing deposits. On an average basis, total liabilities decreased $3.1 billion in the third quarter 2017, compared to the fourth quarter 2016, primarily due to decreases of $3.2 billion in total deposits and $642 million in medium- and long-term debt, partially offset by an increase of $802 million in short-term borrowings. The decrease in average total deposits primarily reflected seasonality and customers using funds within their businesses, with the largest decreases in general Middle Market ($1.1 billion), Corporate Banking ($881 million), Technology and Life Sciences ($492 million) and Energy ($411 million).

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Capital
Total shareholders' equity increased $238 million to $8.0 billion at September 30, 2017, compared to December 31, 2016. The following table presents a summary of changes in total shareholders' equity in the nine months ended September 30, 2017.
(in millions)
  
 
 
Balance at January 1, 2017
 
 
$
7,796

Cumulative effect of change in accounting principle
 
 
1

Net income
 
 
631

Cash dividends declared on common stock
 
 
(141
)
Purchase of common stock
 
 
(396
)
Other comprehensive income:
 
 
 
Investment securities
$
13

 
 
Defined benefit and other postretirement plans
11

 
 
Total other comprehensive income
 
 
24

Issuance of common stock under employee stock plans
 
 
90

Share-based compensation
 
 
29

Balance at September 30, 2017
 
 
$
8,034

The Corporation periodically conducts stress tests to evaluate potential impacts to the Corporation's forecasted financial condition under various economic scenarios and business conditions. These stress tests are a normal part of the Corporation's overall risk management and capital planning process and are part of the forecasting process used by the Corporation to conduct the enterprise-wide stress test that was part of the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR). For additional information about risk management processes, refer to the "Risk Management" sections of this financial review and the Corporation's 2016 Annual Report.
The Federal Reserve completed its 2017 CCAR review in June 2017 and did not object to the Corporation's 2017 capital plan and capital distributions contemplated in the plan for the period ending June 30, 2018. The plan includes equity repurchases of up to $605 million for the four quarters commencing in the third quarter 2017 and ending in the second quarter 2018. The timing and ultimate amount of future equity repurchases will be subject to various factors, including the Corporation's financial performance and market conditions. In the third quarter 2017, the Corporation's repurchases under the equity repurchase program totaled $139 million.
On April 25, 2017 the Board of Directors of the Corporation (the Board) approved a 3-cent increase in the quarterly dividend to $0.26 per share, and on July 25, 2017, the Board further increased the quarterly dividend to $0.30 per share, effective for the dividend paid on October 1, 2017. Also on July 25, 2017, the Board authorized the repurchase of up to an additional 5.0 million shares of Comerica Incorporated outstanding common stock, in addition to the 8.3 million shares remaining at June 30, 2017 under the Board's prior authorizations for the equity repurchase program initially approved in November 2010. Including the July 25, 2017 authorization, a total of 55.2 million shares and 14.1 million warrants (12.1 million share-equivalents) have been authorized for repurchase under the equity repurchase program since its inception in 2010. There is no expiration date for the Corporation's equity repurchase program.


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Table of Contents

The following table summarizes the Corporation's repurchase activity during the nine months ended September 30, 2017.
(shares in thousands)
Total Number of Shares and Warrants Purchased as 
Part of Publicly Announced Repurchase Plans or Programs (a)
 
Remaining
Repurchase
Authorization (b)
Total Number
of Shares and Warrants
Purchased (c)
 
Average Price
Paid Per 
Share
Total first quarter 2017
1,498

 
11,756

 
1,694

 
$
69.75

Total second quarter 2017
2,011

 
9,634

 
2,015

 
69.09

July 2017
451

 
14,183

(d)
452

 
72.78

August 2017
1,310

 
12,841

 
1,310

 
70.99

September 2017
194

 
12,395

 
194

 
67.97

Total third quarter 2017
1,955

 
12,395

 
1,956

 
71.11

Total 2017 year-to-date
5,464

 
12,395

 
5,665

 
$
69.99

(a)
The Corporation made no repurchases of warrants under the repurchase program during the nine months ended September 30, 2017. Upon exercise of a warrant, the number of shares with a value equal to the aggregate exercise price is withheld from an exercising warrant holder as payment (known as a "net exercise provision"). During the nine months ended September 30, 2017, Comerica withheld the equivalent of approximately 1,159,000 shares to cover an aggregate $34.2 million in exercise price and issued approximately 1,677,000 shares to the exercising warrant holders. Shares withheld in connection with the net exercise provision are not included in the total number of shares or warrants purchased in the above table.
(b)
Maximum number of shares and warrants that may yet be purchased under the publicly announced plans or programs.
(c)
Includes approximately 201,000 shares purchased pursuant to deferred compensation plans and shares purchased from employees to pay for taxes related to restricted stock vesting under the terms of an employee share-based compensation plan during the nine months ended September 30, 2017. These transactions are not considered part of the Corporation's repurchase program.
(d)
Includes July 25, 2017 equity repurchase authorization for an additional 5 million shares.
The following table presents the minimum ratios required to be considered "adequately capitalized" as of September 30, 2017 and December 31, 2016.
 
September 30, 2017
December 31, 2016
Common equity tier 1 capital to risk-weighted assets (a)
 
4.50
%
 
 
4.50
%
 
Tier 1 capital to risk-weighted assets (a)
 
6.00

 
 
6.00

 
Total capital to risk-weighted assets (a)
 
8.00

 
 
8.00

 
Capital conservation buffer (a)
 
1.250

 
 
0.625

 
Tier 1 capital to adjusted average assets (leverage ratio)
 
4.00

 
 
4.00

 
(a)
In addition to the minimum risk-based capital requirements, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer is being phased in beginning at 0.625% on January 1, 2016 and ultimately increases to 2.5% on January 1, 2019.
The Corporation's capital ratios exceeded minimum regulatory requirements as follows:
 
September 30, 2017
 
December 31, 2016
(dollar amounts in millions)
Capital/Assets
 
Ratio
 
Capital/Assets
 
Ratio
Common equity tier 1 and tier 1 risk based (a)
$
7,752

 
11.51
%
 
$
7,540

 
11.09
%
Total risk-based (a)
9,192

 
13.65

 
9,018

 
13.27

Leverage (a)
7,752

 
10.87

 
7,540

 
10.18

Common equity
8,034

 
11.16

 
7,796

 
10.68
%
Tangible common equity (b)
7,391

 
10.35

 
7,151

 
9.89

Risk-weighted assets (a)
67,355

 
 
 
67,966

 
 
(a)
September 30, 2017 capital, risk-weighted assets and ratios are estimated.
(b)
See Supplemental Financial Data section for reconcilements of non-GAAP financial measures.

RISK MANAGEMENT
The following updated information should be read in conjunction with the "Risk Management" section on pages F-23 through F-37 in the Corporation's 2016 Annual Report.

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Credit Risk
Allowance for Credit Losses
The allowance for credit losses includes both the allowance for loan losses and the allowance for credit losses on lending-related commitments. The allowance for loan losses represents management's assessment of probable, estimable losses inherent in the Corporation's loan portfolio. The allowance for credit losses on lending-related commitments, included in "accrued expenses and other liabilities" on the consolidated balance sheets, provides for probable losses inherent in lending-related commitments, including unused commitments to extend credit and standby letters of credit.
The allowance for loan losses was $712 million at September 30, 2017, compared to $730 million at December 31, 2016, a decrease of $18 million, or 2 percent. The decrease in the allowance for loan losses primarily reflected improvement in the Energy and energy-related loans, partially offset by qualitative reserves for potential losses, including reserves for loans in the areas impacted by hurricanes in the third quarter 2017. At September 30, 2017, the Corporation had approximately $2.9 billion of loans outstanding in areas impacted by hurricanes, including approximately $400 million of residential real estate loans.
The allowance for credit losses on lending-related commitments includes specific allowances, based on individual evaluations of certain letters of credit in a manner consistent with business loans, and allowances based on the pool of the remaining letters of credit and all unused commitments to extend credit within each internal risk rating. The allowance for credit losses on lending-related commitments was $41 million at both September 30, 2017 and December 31, 2016.
For additional information regarding the allowance for credit losses, refer to page F-38 in the "Critical Accounting Policies" section and pages F-54 through F-56 in note 1 to the consolidated financial statements of the Corporation's 2016 Annual Report. For additional information regarding Energy and energy-related exposures, refer to "Energy Lending" subheading later in this section.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, troubled debt restructured loans (TDRs) which have been renegotiated to less than the original contractual rates (reduced-rate loans) and foreclosed property. TDRs include performing and nonperforming loans. Nonperforming TDRs are either on nonaccrual or reduced-rate status.
The following table presents a summary of nonperforming assets and past due loans.
(dollar amounts in millions)
September 30, 2017
 
December 31, 2016
Nonaccrual loans:
 
 
 
Business loans:
 
 
 
Commercial
$
345

 
$
445

Commercial mortgage
35

 
46

Lease financing
8

 
6

International
6

 
14

Total nonaccrual business loans
394

 
511

Retail loans:
 
 
 
Residential mortgage
28

 
39

Consumer:
 
 
 
Home equity
22

 
28

Other consumer

 
4

Total consumer
22

 
32

Total nonaccrual retail loans
50

 
71

Total nonaccrual loans
444

 
582

Reduced-rate loans
8

 
8

Total nonperforming loans
452

 
590

Foreclosed property
6

 
17

Total nonperforming assets
$
458

 
$
607

Nonperforming loans as a percentage of total loans
0.92
%
 
1.20
%
Nonperforming assets as a percentage of total loans and foreclosed property
0.93

 
1.24

Allowance for loan losses as a percentage of total nonperforming loans
157

 
124

Loans past due 90 days or more and still accruing
$
12

 
$
19

Loans past due 90 days or more and still accruing as a percentage of total loans
0.02
%
 
0.04
%
Nonperforming assets decreased $149 million to $458 million at September 30, 2017, from $607 million at December 31, 2016. The decrease in nonperforming assets primarily reflected a decrease of $171 million in nonaccrual Energy and energy-related loans.

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The following table presents a summary of TDRs at September 30, 2017 and December 31, 2016.
(in millions)
September 30, 2017
 
December 31, 2016
Nonperforming TDRs:
 
 
 
Nonaccrual TDRs
$
251

 
$
225

Reduced-rate TDRs
8

 
8

Total nonperforming TDRs
259

 
233

Performing TDRs (a)
124

 
94

Total TDRs
$
383

 
$
327

(a)
TDRs that do not include a reduction in the original contractual interest rate which are performing in accordance with their modified terms.
At September 30, 2017, nonaccrual TDRs and performing TDRs included $119 million and $67 million of Energy and energy-related loans, respectively, compared to $141 million and $60 million, respectively, at December 31, 2016.
The following table presents a summary of changes in nonaccrual loans.
 
Three Months Ended
(in millions)
September 30, 2017
 
June 30, 2017
 
March 31, 2017
Balance at beginning of period
$
493

 
$
521

 
$
582

Loans transferred to nonaccrual (a)
66

 
54

 
104

Nonaccrual business loan gross charge-offs (b)
(36
)
 
(37
)
 
(42
)
Nonaccrual business loans sold
(10
)
 

 
(8
)
Payments/other (c)
(69
)
 
(45
)
 
(115
)
Balance at end of period
$
444

 
$
493

 
$
521

(a) Based on an analysis of nonaccrual loans with book balances greater than $2 million.
(b) Analysis of gross loan charge-offs:
 
 
 
 
 
Nonaccrual business loans
$
36

 
$
37

 
$
42

Retail loans
1

 
2

 
2

Total gross loan charge-offs
$
37

 
$
39

 
$
44

(c) Includes net changes related to nonaccrual loans with balances less than $2 million, payments on nonaccrual loans with book balances greater than $2 million and transfers of nonaccrual loans to foreclosed property. Excludes business loan gross charge-offs and business nonaccrual loans sold.
There were eight borrowers with balances greater than $2 million, totaling $66 million, transferred to nonaccrual status in the third quarter 2017, an increase of $12 million when compared to $54 million in the second quarter 2017.
The following table presents the composition of nonaccrual loans by balance and the related number of borrowers at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
(dollar amounts in millions)
Number of
Borrowers
 
Balance
 
Number of
Borrowers
 
Balance
Under $2 million
981

 
$
85

 
1,152

 
$
95

$2 million - $5 million
18

 
58

 
18

 
57

$5 million - $10 million
14

 
104

 
9

 
60

$10 million - $25 million
12

 
197

 
14

 
234

Greater than $25 million

 

 
4

 
136

Total
1,025

 
$
444

 
1,197

 
$
582


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The following table presents a summary of nonaccrual loans at September 30, 2017 and loans transferred to nonaccrual and net loan charge-offs for the three months ended September 30, 2017, based primarily on North American Industry Classification System (NAICS) categories.
 
September 30, 2017
 
Three Months Ended September 30, 2017
(dollar amounts in millions)
Nonaccrual Loans
 
Loans Transferred to
Nonaccrual (a)
 
Net Loan Charge-Offs
Industry Category
 
 
Mining, Quarrying and Oil & Gas Extraction (b)
$
179

 
40
%
 
$

 
%
 
$
9

 
38
 %
Manufacturing (b)
70

 
16

 
17

 
26

 

 

Health Care & Social Assistance
41

 
9

 
21

 
31

 

 

Residential Mortgage
28

 
6

 
9

 
14

 

 

Services (b)
21

 
5

 

 

 
1

 
3

Real Estate & Home Builders
21

 
5

 

 

 
(2
)
 
(7
)
Wholesale Trade
18

 
4

 
13

 
19

 
6

 
24

Contractors
17

 
4

 

 

 

 

Information & Communication
5

 
1

 
2

 
4

 
4

 
14

Other (c)
44

 
10

 
4

 
6

 
7

 
28

Total
$
444

 
100
%
 
$
66

 
100
%
 
$
25

 
100
 %
(a)
Based on an analysis of nonaccrual loans with book balances greater than $2 million.
(b)
Included nonaccrual Energy and energy-related loans of approximately $179 million in Mining, Quarrying and Oil & Gas Extraction, $12 million in Manufacturing and $11 million in Services at September 30, 2017.
(c)
Consumer, excluding residential mortgage and certain personal purpose nonaccrual loans and net charge-offs, are included in the “Other” category.
Loans past due 90 days or more and still accruing interest generally represent loans that are well collateralized and in a continuing process of collection. Loans past due 90 days or more and still accruing interest were $12 million at September 30, 2017 compared to $19 million at December 31, 2016. Loans past due 30-89 days increased $55 million to $184 million at September 30, 2017, compared to $129 million at December 31, 2016. An aging analysis of loans included in note 4 to the consolidated financial statements provides further information about the balances comprising past due loans.
The following table presents a summary of total criticized loans. The Corporation's criticized list is consistent with the Special Mention, Substandard and Doubtful categories defined by regulatory authorities. Criticized loans with balances of $2 million or more on nonaccrual status or whose terms have been modified in a TDR are individually subjected to quarterly credit quality reviews, and the Corporation may establish specific allowances for such loans. A table of loans by credit quality indicator included in note 4 to the consolidated financial statements provides further information about the balances comprising total criticized loans and reflect results of the recent Shared National Credit (SNC) exam.
(dollar amounts in millions)
September 30, 2017
 
June 30, 2017
 
December 31, 2016
Total criticized loans
$
2,434

 
$
2,492

 
$
2,856

As a percentage of total loans
4.9
%
 
5.0
%
 
5.8
%
The $422 million decrease in criticized loans in the nine months ended September 30, 2017 included a decrease of $594 million of Energy and energy-related loans. The decrease in criticized Energy and energy-related loans was partially offset by increases in other business lines, primarily an increase of $80 million in Commercial Real Estate. For further information about criticized Energy and energy-related loans, refer to the "Energy Lending" subheading later in this section.
The following table presents a summary of changes in foreclosed property.
 
Three Months Ended
(in millions)
September 30, 2017
 
June 30, 2017
 
December 31, 2016
Balance at beginning of period
$
18

 
$
16

 
$
21

Acquired in foreclosure
2

 
3

 

Write-downs
(1
)
 

 

Foreclosed property sold (a)
(13
)
 
(1
)
 
(4
)
Balance at end of period
$
6

 
$
18

 
$
17

(a) Net gain on foreclosed property sold
$
1

 
$

 
$
1


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Commercial Real Estate Lending
The following table summarizes the Corporation's commercial real estate loan portfolio by loan category.
(in millions)
September 30, 2017
 
December 31, 2016
Real estate construction loans:
 
 
 
Commercial Real Estate business line (a)
$
2,709

 
$
2,485

Other business lines (b)
309

 
384

Total real estate construction loans
$
3,018

 
$
2,869

Commercial mortgage loans:
 
 
 
Commercial Real Estate business line (a)
$
1,731

 
$
2,018

Other business lines (b)
7,254

 
6,913

Total commercial mortgage loans
$
8,985

 
$
8,931

(a)
Primarily loans to real estate developers.
(b)
Primarily loans secured by owner-occupied real estate.
The Corporation limits risk inherent in its commercial real estate lending activities by monitoring borrowers directly involved in the commercial real estate markets and adhering to conservative policies on loan-to-value ratios for such loans. Commercial real estate loans, consisting of real estate construction and commercial mortgage loans, totaled $12.0 billion at September 30, 2017, of which $4.4 billion, or 37 percent, were to borrowers in the Commercial Real Estate business line, which includes loans to real estate developers, a decrease of $63 million compared to December 31, 2016. The remaining $7.6 billion, or 63 percent, of commercial real estate loans in other business lines consisted primarily of owner-occupied commercial mortgages, which bear credit characteristics similar to non-commercial real estate business loans. In the Texas market, commercial real estate loans totaled $3.2 billion at September 30, 2017, of which $1.7 billion were to borrowers in the Commercial Real Estate business line. Substantially all of the remaining $1.5 billion were owner-occupied commercial mortgages. Loans in the Commercial Real Estate business line secured by properties located in Texas totaled $1.4 billion at September 30, 2017, primarily including $889 million for multifamily projects. No loans in the Commercial Real Estate business line that were secured by properties located in Texas were on nonaccrual status at September 30, 2017.
The real estate construction loan portfolio primarily contains loans made to long-tenured customers with satisfactory completion experience. Credit quality in the real estate construction loan portfolio was strong, with criticized loans of $55 million and $3 million at September 30, 2017 and December 31, 2016, respectively, and no real estate construction loan charge-offs in either of the nine-month periods ended September 30, 2017 and 2016.
Loans in the commercial mortgage portfolio generally mature within three to five years. Of the $1.7 billion of commercial mortgage loans in the Commercial Real Estate business line, $9 million were on nonaccrual status at September 30, 2017, compared to $2.0 billion with $9 million on nonaccrual status at December 31, 2016. Commercial mortgage loan net recoveries in the Commercial Real Estate business line were $2 million and $10 million for the nine months ended September 30, 2017 and 2016, respectively. In other business lines, $26 million and $37 million of commercial mortgage loans were on nonaccrual status at September 30, 2017 and December 31, 2016, respectively. Commercial mortgage loan net recoveries in other business lines were $3 million and $5 million for the nine-month periods ended September 30, 2017 and 2016, respectively.
Residential Real Estate Lending
The following table summarizes the Corporation's residential mortgage and home equity loan portfolios by geographic market.
 
September 30, 2017
 
December 31, 2016
(dollar amounts in millions)
Residential
Mortgage
Loans
 
% of
Total
 
Home
Equity
Loans
 
% of
Total
 
Residential
Mortgage
Loans
 
% of
Total
 
Home
Equity
Loans
 
% of
Total
Geographic market:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Michigan
$
375

 
19
%
 
$
715

 
40
%
 
$
386

 
20
%
 
$
748

 
42
%
California
1,021

 
51

 
708

 
40

 
948

 
49

 
687

 
38

Texas
325

 
16

 
312

 
17

 
337

 
17

 
305

 
17

Other Markets
278

 
14

 
55

 
3

 
271

 
14

 
60

 
3

Total
$
1,999

 
100
%
 
$
1,790

 
100
%
 
$
1,942

 
100
%
 
$
1,800

 
100
%
Residential real estate loans, which consist of residential mortgages and home equity loans and lines of credit, totaled $3.8 billion at September 30, 2017. Residential mortgages totaled $2.0 billion at September 30, 2017, and were primarily larger, variable-rate mortgages originated and retained for certain private banking relationship customers. Of the $2.0 billion of residential mortgage loans outstanding, $28 million were on nonaccrual status at September 30, 2017. The home equity portfolio totaled $1.8 billion at September 30, 2017, of which $1.6 billion was outstanding under primarily variable-rate, interest-only home equity lines

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of credit, $119 million were on amortizing status and $31 million were closed-end home equity loans. Of the $1.8 billion of home equity loans outstanding, $22 million were on nonaccrual status at September 30, 2017. A majority of the home equity portfolio was secured by junior liens at September 30, 2017. The residential real estate portfolio is principally located within the Corporation's primary geographic markets. Substantially all residential real estate loans past due 90 days or more are placed on nonaccrual status, and substantially all junior lien home equity loans that are current or less than 90 days past due are placed on nonaccrual status if full collection of the senior position is in doubt. At no later than 180 days past due, such loans are charged off to current appraised values less costs to sell. As of September 30, 2017, approximately $400 million of residential real estate loans were in areas impacted by hurricanes and losses had not yet emerged. As a result, the Corporation incorporated a qualitative reserve component for their impact in the allowance for loan losses.  
Energy Lending
The Corporation has a portfolio of Energy and energy-related loans that are included primarily in "commercial loans" in the consolidated balance sheets. The Corporation has over 30 years of experience in energy lending, with a focus on middle market companies in the oil and gas business. Customers in the Corporation's Energy business line (approximately 180 relationships) are engaged in three segments of the oil and gas business: exploration and production (E&P) (73 percent), midstream (15 percent) and energy services (12 percent). E&P generally includes such activities as searching for potential oil and gas fields, drilling exploratory wells and operating active wells. Commitments to E&P borrowers are typically subject to semi-annual borrowing base re-determinations based on a variety of factors including updated pricing (reflecting market and competitive conditions), energy reserve levels and the impact of hedging. The midstream sector is generally involved in the transportation, storage and marketing of crude and/or refined oil and gas products. The Corporation's energy services customers provide products and services primarily to the E&P segment. About 92 percent of the loans in the Energy business line are SNC loans, which are facilities greater than $20 million shared by three or more federally supervised institutions, reflecting the Corporation's focus on larger middle market companies that have financing needs that generally exceed internal individual borrower credit risk limits. The Corporation seeks to develop full relationships with SNC borrowers.
In addition to oil and gas loans in the Energy business line, the Corporation is monitoring a portfolio of loans in other lines of business to companies that have a sizable portion of their revenue related to oil and gas or could be otherwise negatively impacted by prolonged lower oil and gas prices ("energy-related"), primarily in general Middle Market, Corporate Banking, Small Business, and Technology and Life Sciences. These companies include downstream businesses such as refineries and petrochemical companies, companies that sell products to E&P, midstream and energy services companies, companies involved in developing new technologies for the oil and gas industry, and other similar businesses.
The following table summarizes information about the Corporation's portfolio of Energy and energy-related loans.
 
September 30, 2017
 
December 31, 2016
(dollar amounts in millions)
Outstandings
Nonaccrual
Criticized (a)
 
Outstandings
Nonaccrual
Criticized (a)
Exploration and production (E&P)
$
1,530

73
%
152

$
441

 
$
1,587

70
%
$
294

$
910

Midstream
308

15


39

 
374

17

7

45

Services
239

12

15

147

 
289

13

27

200

Total Energy business line
2,077

100
%
167

627

 
2,250

100
%
328

1,155

Energy-related
329

 
35

105

 
397

 
45

171

Total Energy and energy-related
$
2,406

 
$
202

$
732

 
$
2,647

 
$
373

$
1,326

As a percentage of total Energy and energy-related loans
8
%
30
%
 


 
14
%
50
%
(a)
Includes nonaccrual loans.
Loans in the Energy business line totaled $2.1 billion, or approximately 4 percent of total loans, at September 30, 2017 and $2.3 billion, or approximately 5 percent of total loans, at December 31, 2016, a decrease of $173 million, or 8 percent. Total exposure, including unused commitments to extend credit and letters of credit, was $4.3 billion and $4.7 billion at September 30, 2017 and December 31, 2016, respectively. The decrease in total exposure in the Energy business line primarily reflected energy customers taking actions to adjust their cash flow and reduce their bank debt, including selling assets to pay down debt and raising capital in the equity markets, as well as improved operations. Energy-related outstandings were approximately $329 million at September 30, 2017 (approximately 70 relationships), a decrease of $68 million, or 17 percent, compared to December 31, 2016.
The Corporation's allowance methodology carefully considers the various risk elements within the loan portfolio. The Corporation continued to incorporate a qualitative reserve component for Energy and energy-related loans at September 30, 2017. Energy and energy-related net credit-related charge-offs totaled $10 million and $35 million for the three- and nine-month periods ended September 30, 2017 compared to net credit-related charge-offs of $13 million and $91 million for the same periods in 2016.

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Automotive Lending
Substantially all dealer loans are in the National Dealer Services business line. Loans in the National Dealer Services business line include floor plan financing and other loans to automotive dealerships. Floor plan loans, included in “commercial loans” in the consolidated balance sheets, totaled $4.0 billion at September 30, 2017, a decrease of $309 million compared to $4.3 billion at December 31, 2016. At September 30, 2017 and December 31, 2016, other loans to automotive dealers in the National Dealer Services business line totaled $2.9 billion and $2.6 billion, respectively, including $1.8 billion and $1.6 billion of owner-occupied commercial real estate mortgage loans at September 30, 2017 and December 31, 2016, respectively. Automotive lending also includes loans to borrowers involved with automotive production, primarily Tier 1 and Tier 2 suppliers. Loans to borrowers involved with automotive production totaled approximately $1.4 billion and $1.3 billion at September 30, 2017 and December 31, 2016, respectively.
For further discussion of credit risk, see the "Credit Risk" section of pages F-23 through F-32 in the Corporation's 2016 Annual Report.
Market and Liquidity Risk
Market risk represents the risk of loss due to adverse movements in market rates or prices, including interest rates, foreign exchange rates, commodity prices and equity prices. Liquidity risk represents the failure to meet financial obligations coming due, resulting from an inability to liquidate assets or obtain adequate funding, and the inability to easily unwind or offset specific exposures without significant changes in pricing, due to inadequate market depth or market disruptions.
The Asset and Liability Policy Committee (ALCO) of the Corporation establishes and monitors compliance with the policies and risk limits pertaining to market and liquidity risk management activities. ALCO meets regularly to discuss and review market and liquidity risk management strategies, and consists of executive and senior management from various areas of the Corporation, including treasury, finance, economics, lending, deposit gathering and risk management. The Treasury Department mitigates market and liquidity risk under the direction of ALCO through the actions it takes to manage the Corporation's market, liquidity and capital positions.
Market Risk Analytics, within the Office of Enterprise Risk, supports ALCO in measuring, monitoring and managing interest rate risk and coordinating all other market risks. Key activities encompass: (i) providing information and analysis of the Corporation's balance sheet structure and measurement of interest rate and all other market risks; (ii) monitoring and reporting of the Corporation's positions relative to established policy limits and guidelines; (iii) developing and presenting analyses and strategies to adjust risk positions; (iv) reviewing and presenting policies and authorizations for approval; (v) monitoring of industry trends and analytical tools to be used in the management of interest rate and all other market risks; and (vi) developing and monitoring the interest rate risk economic capital estimate.
Interest Rate Risk
Net interest income is the primary source of revenue for the Corporation. Interest rate risk arises in the normal course of business due to differences in the repricing and cash flow characteristics of assets and liabilities, primarily through the Corporation's core business activities of extending loans and acquiring deposits. The Corporation's balance sheet is predominantly characterized by floating-rate loans funded by core deposits. Approximately 90 percent of the Corporation's loans were floating at September 30, 2017, of which approximately 80 percent were based on LIBOR and 20 percent were based on Prime. This creates sensitivity to interest rate movements due to the imbalance between the floating-rate loan portfolio and the more slowly repricing deposit products. In addition, the growth and/or contraction in the Corporation's loans and deposits may lead to changes in sensitivity to interest rate movements in the absence of mitigating actions. Examples of such actions are purchasing investment securities, primarily fixed-rate, which provide liquidity to the balance sheet and act to mitigate the inherent interest sensitivity, and hedging the sensitivity with interest rate swaps. The Corporation actively manages its exposure to interest rate risk, with the principal objective of optimizing net interest income and the economic value of equity while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
Since no single measurement system satisfies all management objectives, a combination of techniques is used to manage interest rate risk. These techniques examine the impact of interest rate risk on net interest income and the economic value of equity under a variety of alternative scenarios, including changes in the level, slope and shape of the yield curve, utilizing multiple simulation analyses. Simulation analyses produce only estimates of net interest income, as the assumptions used are inherently uncertain. Actual results may differ from simulated results due to many factors, including, but not limited to, the timing, magnitude and frequency of changes in interest rates, market conditions, regulatory impacts and management strategies.
Sensitivity of Net Interest Income to Changes in Interest Rates
The analysis of the impact of changes in interest rates on net interest income under various interest rate scenarios is management's principal risk management technique. Management models a base case net interest income under an unchanged interest rate environment. Existing derivative instruments entered into for risk management purposes are included in the analysis,

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but no additional hedging is currently forecasted. These derivative instruments currently comprise interest rate swaps that convert fixed-rate long-term debt to variable rates. This base case net interest income is then compared against interest rate scenarios in which rates rise or decline in a linear, non-parallel fashion from the base case over 12 months. In the scenarios presented, short-term interest rates increase 200 basis points, resulting in an average increase in short-term interest rates of 100 basis points over the period (+200 scenario). Due to the current low level of interest rates, the analysis reflects declining interest rate scenarios of -125 basis points and -75 basis points at September 30, 2017 and December 31, 2016, respectively.
Each scenario includes assumptions such as loan growth, investment security prepayment levels, depositor behavior, yield curve changes, loan and deposit pricing, and overall balance sheet mix and growth. In this low rate environment, depositors have maintained a higher level of liquidity and their historical behavior may be less indicative of future trends. As a result, the +200 scenario reflects a greater decrease in deposits than we have experienced historically as rates begin to rise. Changes in actual economic activity may result in a materially different interest rate environment as well as a balance sheet structure that is different from the changes management included in its simulation analysis.
The table below, as of September 30, 2017 and December 31, 2016, displays the estimated impact on net interest income during the next 12 months by relating the base case scenario results to those from the rising and declining rate scenarios described above.
 
Estimated Annual Change
 
September 30, 2017
 
December 31, 2016
(in millions)
Amount
 
%
 
Amount
 
%
Change in Interest Rates:
 
 
 
 
 
 
 
Rising 200 basis points
$
212

 
10
 %
 
$
212

 
11
 %
Declining to zero percent
(231
)
 
(11
)
 
(138
)
 
(7
)
Sensitivity to rising rates remained nearly unchanged from December 31, 2016 to September 30, 2017, while the risk to declining interest rates is limited by an assumed floor on interest rates of zero percent, and therefore reflects recent rises in short-term interest rates, allowing for a decline of 125 basis points at September 30, 2017, relative to a 75 basis point decline at December 31, 2016.
Sensitivity of Economic Value of Equity to Changes in Interest Rates
In addition to the simulation analysis on net interest income, an economic value of equity analysis provides an alternative view of the interest rate risk position. The economic value of equity is the difference between the estimate of the economic value of the Corporation's financial assets, liabilities and off-balance sheet instruments, derived through discounting cash flows based on actual rates at the end of the period and the estimated economic value after applying the estimated impact of rate movements. The economic value of equity analysis is based on an immediate parallel 200 basis point increase. The declining interest rate scenarios are based on decreases of 125 basis points and 75 basis points in interest rates at September 30, 2017 and December 31, 2016, respectively.
The table below, as of September 30, 2017 and December 31, 2016, displays the estimated impact on the economic value of equity from the interest rate scenario described above.
 
September 30, 2017
 
December 31, 2016
(in millions)
Amount
 
%
 
Amount
 
%
Change in Interest Rates:
 
 
 
 
 
 
 
Rising 200 basis points
$
1,010

 
8
 %
 
$
1,133

 
10
 %
Declining to zero percent
(2,095
)
 
(16
)
 
(891
)
 
(7
)
The change in the sensitivity of the economic value of equity to a 200 basis point parallel increase in rates between December 31, 2016 and September 30, 2017 was primarily driven by changes in funding mix between deposits and floating-rate borrowed funds. The change in the sensitivity of the economic value of equity to a parallel decrease in rates to zero during the same period was primarily driven by the increase in short-term rates between the periods, allowing for an additional 50 basis point decrease from December 31, 2016 to the September 30, 2017 scenario.
Wholesale Funding
The Corporation may access the purchased funds market when necessary, which includes a variety of funding sources. Capacity for incremental purchased funds at September 30, 2017 included FHLB advances, the ability to purchase federal funds, sell securities under agreements to repurchase, as well as issue deposits through brokers. Purchased funds increased to $579 million at September 30, 2017, compared to $44 million at December 31, 2016. At September 30, 2017, the Bank had pledged loans totaling $21.6 billion which provided for up to $17.4 billion of available collateralized borrowing with the FRB.

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The Bank is a member of the FHLB of Dallas, Texas, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. At September 30, 2017, $15.5 billion of real estate-related loans were pledged to the FHLB as blanket collateral for current and potential future borrowings and the Corporation had $2.8 billion of outstanding borrowings maturing in 2026, $500 million of short-term advances and capacity for potential future borrowings of approximately $4.5 billion.
Additionally, as of September 30, 2017 the Bank had the ability to issue up to $14 billion of debt under an existing $15 billion note program which allows the issuance of debt with maturities between three months and 30 years. The Corporation also maintains a shelf registration statement with the Securities and Exchange Commission from which it may issue debt and/or equity securities.
The ability of the Corporation and the Bank to raise funds at competitive rates is impacted by rating agencies' views of the credit quality, liquidity, capital and earnings of the Corporation and the Bank. As of September 30, 2017, the three major rating agencies had assigned the following ratings to long-term senior unsecured obligations of the Corporation and the Bank. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
 
Comerica Incorporated
 
Comerica Bank
September 30, 2017
Rating
Outlook
 
Rating
Outlook
Standard and Poor’s
BBB+
Stable
 
A-
Stable
Moody’s Investors Service
A3
Stable
 
A3
Stable
Fitch Ratings
A
Stable
 
A
Stable
The Corporation satisfies liquidity requirements with either liquid assets or various funding sources. Liquid assets totaled $17.7 billion at September 30, 2017, compared to $18.2 billion at December 31, 2016. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks, other short-term investments and unencumbered investment securities.
Under the Basel III liquidity framework, the Corporation is subject to a modified LCR standard, which requires a financial institution to hold a minimum level of high-quality liquid assets to fully cover modified net cash outflows under a 30-day systematic liquidity stress scenario and was fully effective for the Corporation on January 1, 2017. The Corporation is in compliance with the fully phased-in LCR requirement, plus a buffer.
In 2016, U.S. banking regulators issued a notice of proposed rulemaking (the proposed rule) implementing a second quantitative liquidity requirement in the U.S. generally consistent with the Net Stable Funding Ratio (NSFR) minimum liquidity measure established under the Basel III liquidity framework. Under the proposed rule, the Corporation will be subject to a modified NSFR standard effective January 1, 2018, which requires a financial institution to hold a minimum level of available longer-term, stable sources of funding to fully cover a modified amount of required longer-term stable funding, over a one-year period. The Corporation does not currently expect the proposed rule to have a material impact on its liquidity needs.
The Corporation performs monthly liquidity stress testing to evaluate its ability to meet funding needs in hypothetical stressed environments. Such environments cover a series of broad events, distinguished in terms of duration and severity. The evaluation as of September 30, 2017 projected sufficient sources of liquidity were available under each series of events.

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CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in note 1 to the consolidated financial statements included in the Corporation's 2016 Annual Report. These policies require numerous estimates and strategic or economic assumptions, which may prove inaccurate or subject to variations. Changes in underlying factors, assumptions or estimates could have a material impact on the Corporation’s future financial condition and results of operations. At December 31, 2016, the most critical of these significant accounting policies were the policies related to the allowance for credit losses, fair value measurement, goodwill, pension plan accounting and income taxes. These policies were reviewed with the Audit Committee of the Corporation’s Board of Directors and are discussed more fully on pages F-38 through F-41 in the Corporation's 2016 Annual Report. As of the date of this report, there have been no significant changes to the Corporation's critical accounting policies or estimates, except as discussed below.
Goodwill
Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination and is subsequently evaluated at least annually for impairment. Goodwill impairment testing is performed at the reporting unit level, equivalent to a business segment or one level below. The Corporation has three reporting units: the Business Bank, the Retail Bank and Wealth Management. At September 30, 2017 and December 31, 2016, goodwill totaled $635 million, including $380 million allocated to the Business Bank, $194 million allocated to the Retail Bank and $61 million allocated to Wealth Management.
The annual test of goodwill impairment was performed as of the beginning of the third quarter 2017. The Corporation's assumptions included modest increases to the Federal funds target rate until eventually reaching a normal interest rate environment, as well as credit costs and the impact of the Corporation’s GEAR Up initiative. At the conclusion of the first step of the annual goodwill impairment tests performed in the third quarter 2017, the estimated fair values of all reporting units substantially exceeded their carrying amounts, including goodwill. The results of the annual test of the goodwill impairment test for each reporting unit were subjected to stress testing as appropriate.
Economic conditions impact the assumptions related to interest and growth rates, loss rates and imputed cost of equity capital. The fair value estimates for each reporting unit incorporated current economic and market conditions, including the recent Federal Reserve announcements and the impact of legislative and regulatory changes, to the extent known and as described above. However, further weakening in the economic environment, such as adverse changes in interest rates, a decline in the performance of the reporting units or other factors could cause the fair value of one or more of the reporting units to fall below their carrying value, resulting in a goodwill impairment charge. Additionally, new legislative or regulatory changes not anticipated in management's expectations may cause the fair value of one or more of the reporting units to fall below the carrying value, resulting in a goodwill impairment charge. Any impairment charge would not affect the Corporation's regulatory capital ratios, tangible common equity ratio or liquidity position.
SUPPLEMENTAL FINANCIAL DATA
The following table provides a reconciliation of non-GAAP financial measures used in this financial review with financial measures defined by GAAP.
(dollar amounts in millions)
September 30, 2017
 
December 31, 2016
Tangible Common Equity Ratio:
 
 
 
Common shareholders' equity
$
8,034

 
$
7,796

Less:
 
 
 
Goodwill
635

 
635

Other intangible assets
8

 
10

Tangible common equity
$
7,391

 
$
7,151

Total assets
$
72,017

 
$
72,978

Less:
 
 
 
Goodwill
635

 
635

Other intangible assets
8

 
10

Tangible assets
$
71,374

 
$
72,333

Common equity ratio
11.16
%
 
10.68
%
Tangible common equity ratio
10.35

 
9.89

Tangible Common Equity per Share of Common Stock:
 
 
 
Common shareholders' equity
$
8,034

 
$
7,796

Tangible common equity
7,391

 
7,151

Shares of common stock outstanding (in millions)
174

 
175

Common shareholders' equity per share of common stock
$
46.09

 
$
44.47

Tangible common equity per share of common stock
42.39

 
40.79

The tangible common equity ratio removes the effect of intangible assets from capital and total assets. Tangible common equity per share of common stock removes the effect of intangible assets from common shareholders' equity per share of common stock. The Corporation believes these are meaningful measures because they reflect the adjustments commonly made by management, investors, regulators, and analysts to evaluate the adequacy of common equity. Tangible common equity is used by the Corporation to measure the quality of capital and the return relative to balance sheet risks.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the "Market and Liquidity Risk" section of "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures. The Corporation maintains a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management has evaluated, with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on the evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Corporation's disclosure controls and procedures are effective.
(b)
Changes in Internal Control Over Financial Reporting. During the period to which this report relates, there have not been any changes in the Corporation's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For information regarding the Corporation's legal proceedings, see "Part I. Item 1. Note 12 – Contingent Liabilities," which is incorporated herein by reference.
ITEM 1A. Risk Factors
There has been no material change in the Corporation’s risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 31, 2016 in response to Part I, Item 1A. of such Form 10-K. Such risk factors are incorporated herein by reference.     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
For information regarding the Corporation's purchase of equity securities, see "Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital," which is incorporated herein by reference.

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ITEM 6. Exhibits
Exhibit No.
 
Description
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4
 
[In accordance with Regulation S-K Item No. 601(b)(4)(iii), the Registrant is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request.]
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32
 
 
 
 
101
 
Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Shareholders' Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.
 
 
 
 
 
 

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
COMERICA INCORPORATED
 
(Registrant)
 
 
 
/s/ Muneera S. Carr
 
Muneera S. Carr
 
Executive Vice President and
 
Chief Accounting Officer and
 
Duly Authorized Officer
Date: October 30, 2017

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