UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the fiscal year ended December 31, 20192021
Or
| ☐ | 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) | (IRS Employer Identification Number) | |||||||
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)
Securities registered pursuant to Section 12(b) of
the Exchange Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
| Common Stock, $5 par value | CMA | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 every Interactive Data File required to be submitted 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 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, a 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 | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
At June 28, 201930, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter), the registrant’s common stock, $5$5 par value, held by non-affiliates had an aggregate market value of approximately $10.7$9.4 billion based on the closing price on the New York Stock Exchange on that date of $72.64$71.34 per share. For purposes of this Form 10-K only, it has been assumed that all common shares Comerica’s Trust Department holds for Comerica’s employee plans, and all common shares the registrant’s directors and executive officers hold, are shares held by affiliates.
At February 7, 2020,14, 2022, the registrant had outstanding 141,346,049131,078,743 shares of its common stock, $5$5 par value.
Documents Incorporated by Reference:
Part III: Items 10-14—Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 2020.26, 2022.
TABLE OF CONTENTS
PART I
Item 1. Business.
GENERAL
Comerica Incorporated (“Comerica”) is a financial services company, incorporated under the laws of the State of Delaware in 1973, and headquartered in Dallas, Texas. Based on total assets as reported in the most recently filed Consolidated Financial Statements for Bank Holding Companies (FR Y-9C), it was among the 25 largest commercial United States (“U.S.”) financial holding companies. As of December 31, 2019,2021, Comerica owned directly or indirectly all the outstanding common stock of 2 active banking subsidiaries (Comerica Bank, a Texas banking association, and Comerica Bank & Trust, National Association) and 29 non-banking subsidiaries. At December 31, 2019,2021, Comerica had total assets of approximately $73.4$94.6 billion, total deposits of approximately $57.3$82.3 billion, total loans of approximately $50.4$49.3 billion and shareholders’ equity of approximately $7.3$7.9 billion.
Comerica has strategically aligned its operations into three major business segments: the BusinessCommercial Bank, the Retail Bank, and Wealth Management. In addition to the three major business segments, Finance is also reported as a segment.
Comerica operates in three primary geographic 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.
We provide information about the net interest income and noninterest income we received from our various classes of products and services: (1) under the caption, “Analysis of Net Interest Income” on page F-6F-4 of the Financial Section of this report; (2) under the caption “Rate/Volume Analysis” on page F-7F-5 of the Financial Section of this report; and (3) under the caption “Noninterest Income” on pages F-8F-6 through F-9F-7 of the Financial Section of this report.
COMPETITION
The financial services business is highly competitive. Comerica and its subsidiaries mainly compete in their three primary geographic markets ofcovering the major metropolitan areas in Texas, California, and Michigan, as well as in the states of Arizona and Florida. They alsoIn addition, they compete in broader, national geographic markets, as well as markets inthroughout the continental U.S., Mexico and Canada.Canada as they pursue certain businesses on a national scale that fall outside of the primary markets, such as U.S. Banking, Mortgage Banker, Environmental Services and National Dealer Services. They arehave strategically placed offices in faster growing markets where there is a concentration of customers and industries they serve. In 2021, Comerica also expanded its presence in the Southeastern U.S. by establishing three commercial offices in North Carolina. Comerica is subject to competition with respect to various products and services, including, without limitation, commercial loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services, loan syndication services, consumer lending, consumer deposit gathering, mortgage loan origination, consumer products, fiduciary services, private banking, retirement services, investment management and advisory services, investment banking services, brokerage services, the sale of annuity products, and the sale of life, disability and long-term care insurance products.
Comerica competes in termslargely on the basis of industry expertise, the range of products and services offered, pricing and reputation, customer convenience, quality customer service and responsiveness to customer needs and the overall relationship with our clients. Our competitors are large national and regional financial institutions and withas well as smaller financial institutions. Some of Comerica's larger competitors, including certain nationwide banks that have a significant presence in Comerica's market area, may make available to their customers a broader array of product, pricing and structure alternatives and, due to their asset size, may more easily absorb credit losses in a larger overall portfolio. Some of Comerica's competitors (larger or smaller) may have more liberal lending policies and processes. Increasingly, Comerica competes with other companies based on financial technology and capabilities, such as mobile banking applications and funds transfer. Further, Comerica's banking competitors may be subject to a significantly different or reduced degree of regulation due to their asset size or types of products offered. They may also have the ability to more efficiently utilize resources to comply with regulations or may be able to more effectively absorb the costs of regulations into their existing cost structure. Comerica believes that the level of competition in all geographic markets will continue to increase in the future.
In addition to banks, Comerica's banking subsidiaries also face competition from other financial intermediaries, including savings and loan associations, consumer and commercial finance companies, leasing companies, venture capital funds, credit unions, investment banks, insurance companies and securities firms. Competition among providers of financial products and services continues to increase as technology advances have lowered the barriers to entry for financial technology companies, with customers having the opportunity to select from a growing variety of traditional and nontraditional alternatives, including crowdfunding, digital wallets and money transfer services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to many of the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.
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In addition, the industry continues to consolidate, which affects competition by eliminating some regional and local institutions, while potentially strengthening the franchises of acquirers.
SUPERVISION AND REGULATION
Banks, bank holding companies, and financial institutions are highly regulated at both the state and federal level. Comerica is subject to supervision and regulation at the federal level by the Board of Governors of the Federal Reserve System (“FRB”) under the Bank Holding Company Act of 1956, as amended. Comerica Bank is chartered by the State of Texas and at the state level is supervised and regulated by the Texas Department of Banking under the Texas Finance Code. Comerica Bank has elected to be a member of the Federal Reserve System under the Federal Reserve Act and, consequently, is supervised and regulated by the Federal Reserve Bank of Dallas. Comerica Bank & Trust, National Association is chartered under federal law and is subject to supervision and regulation by the Office of the Comptroller of the Currency (“OCC”) under the National Bank Act. Comerica Bank & Trust, National Association, by virtue of being a national bank, is also a member of the Federal Reserve System. Furthermore, given that Comerica Bank is a bank with assets in excess of $10 billion dollars, it is subject to supervision and regulation by the Consumer Financial Protection Bureau ("CFPB") for purposes of assessing compliance with federal consumer financial laws. The deposits of Comerica Bank and Comerica Bank & Trust, National Association are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law, and therefore Comerica Bank and Comerica Bank & Trust, National Association are each also subject to regulation and examination by the FDIC. Certain transactions executed by Comerica Bank are also subject to regulation by the U.S. Commodity Futures Trading Commission (“CFTC”). The Department of Labor (“DOL”) regulates financial institutions providing services to plans governed by the Employee Retirement Income Security Act of 1974. Comerica Bank’s Canada branch is supervised by the Office of the Superintendent of Financial Institutions and its Mexico representative office is supervised by the Banco de México.
The FRB supervises non-banking activities conducted by companies directly and indirectly owned by Comerica. In addition, Comerica’s non-banking subsidiaries are subject to supervision and regulation by various state, federal and self-regulatory agencies, including, but not limited to, the Financial Industry Regulatory Authority, Inc. (“FINRA”), the Department of Licensing and Regulatory Affairs of the State of Michigan, and the Municipal Securities Rulemaking Board (“MSRB”) and the Securities and Exchange Commission (“SEC”) (in the case of Comerica Securities, Inc.); the Department of Insurance and Financial Services of the State of Michigan (in the case of Comerica Insurance Services, Inc.); and the DOL (in the case of Comerica Securities, Inc. and Comerica Insurance Services, Inc.); and the Securities and Exchange Commission (“SEC”) (in the case of Comerica Securities, Inc. and World Asset Management, Inc.).
Both the scope of the laws and regulations and intensity of supervision to which Comerica’s business is subject have increased over the past decade in response to the financial crisis as well as other factors such as technological and market changes. Many of these changes have occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations, most of which are now in place. In 2018, with the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), as described below, there has been some recalibration of the post-financial crisis framework; however, Comerica’s business remains subject to extensive regulation and supervision.
Comerica is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC, as well as the rules of the New York Stock Exchange.
Described below are material elements of selected laws and regulations applicable to Comerica and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulation, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business of Comerica and its subsidiaries.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 24, 2018, EGRRCPA was signed into law. Among other regulatory changes, EGRRCPA amendsamended various sections of the Dodd-Frank Act, including section 165 of Dodd-Frank Act, which was revised to raise the asset thresholds for determining the application of enhanced prudential standards for bank holding companies. Under EGRRCPA bank holding companies with less than $100 billion of consolidated assets, including Comerica, were immediately exemptedare exempt from all of the Dodd-Frank enhanced prudential standards, except risk committee requirements, which now apply to publicly-traded bank holding companies with $50 billion or more of consolidated assets, including Comerica. requirements. As a result, Comerica currently is no longernot subject to the remaining Dodd-Frank Act supervisoryenhanced prudential standards or certain capital and company-runliquidity rules to large bank holding companies and depository institutions (the “Tailoring Rules”).Should Comerica cross the $100 billion asset threshold, it will be subject to additional and more stringent regulation. Enhanced prudential standards for U.S. banking organizations with $100 to $250 billion of consolidated assets or more include, but are not limited to: supervisory-run stress testing, required to file a resolution plan under Section 165(d) of the Dodd-Frank Act or subject totesting; internal liquidity stress testingtesting; and liquidity buffer requirements. In addition, Comerica is no longerwould be required to pay the supervision and regulation fee assessment under the Dodd-Frank Act.
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Requirements for Approval of Activities and Acquisitions
The Gramm-Leach-Bliley Act expanded the activities in which a bank holding company registered as a financial holding company can engage. Comerica became a financial holding company in 2000. As a financial holding company, Comerica may affiliate with securities firms and insurance companies, and engage in activities that are financial in nature or incidental or complementary to activities that are financial in nature. Activities that are “financial in nature” include, but are not limited to: securities underwriting; securities dealing and market making; sponsoring mutual funds and investment companies (subject to regulatory requirements described below); insurance underwriting and agency; merchant banking; and activities that the FRB determines, in consultation with the Secretary of the United States Treasury, to be financial in nature or incidental to a financial activity. “Complementary activities” are activities that the FRB determines upon application to be complementary to a financial activity and that do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
In order to maintain its status as a financial holding company, Comerica and each of its depository institution subsidiaries must each remain “well capitalized” and “well managed,” and Comerica, Comerica Bank and Comerica Bank & Trust, National Association are each “well capitalized” and “well managed” under FRB standards. If Comerica or any subsidiary bank of Comerica were to cease being “well capitalized” or “well managed” under applicable regulatory standards, the FRB could place limitations on Comerica’s ability to conduct the broader financial activities permissible for financial holding companies or impose limitations or conditions on the conduct or activities of Comerica or its affiliates. If the deficiencies persisted, the FRB could order Comerica to divest any subsidiary bank or to cease engaging in any activities permissible for financial holding companies that are not permissible for bank holding companies, or Comerica could elect to conform its non-banking activities to those permissible for a bank holding company that is not also a financial holding company.
In addition, the Community Reinvestment Act of 1977 (“CRA”) requires U.S. banks to help serve the credit needs of their communities. Comerica Bank’s current rating under the CRA is “satisfactory.“Satisfactory.” If any subsidiary bank of Comerica were to receive a rating under the CRA of less than “satisfactory,“Satisfactory,” Comerica would be prohibited from engaging in certain activities.
Federal and state laws impose notice and approval requirements for mergers and acquisitions of other depository institutions or bank holding companies. In many cases, no FRB approval is required for Comerica to acquire a company engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Prior approval is required before Comerica may acquire the beneficial ownership or control of more than 5% of any class of voting shares or substantially all of the assets of a bank holding company (including a financial holding company) or a bank. In considering applications for approval of acquisitions, the banking regulators may take several factors into account, including whether Comerica and its subsidiaries are well capitalized and well managed, are in compliance with anti-money laundering laws and regulations, or have CRA ratings of less than “satisfactory.“Satisfactory.”
Acquisitions of Ownership of Comerica
Acquisitions of Comerica’s voting stock above certain thresholds are subject to prior regulatory notice or approval under federal banking laws, including the Bank Holding Company Act of 1956 and the Change in Bank Control Act of 1978. Under the Change in Bank Control Act, a person or entity generally must provide prior notice to the FRB before acquiring the power to vote 10% or more of Comerica’s outstanding common stock. On March 2, 2020, the FRB issued a final rule revising regulations related to control determinations under the Bank Holding Company Act. The final rule expands the number of presumptions of control for use in such determinations. Investors should be aware of these requirements when acquiring shares of Comerica’s stock.
Capital and Liquidity
Comerica and its bank subsidiaries are subject to risk-based capital requirements and guidelines imposed by the FRB, FDIC and/or the OCC. In calculating risk-based capital requirements, a depository institution’s or holding company’s assets and certain specified off-balance sheet commitments are assigned to various risk categories defined by the FRB, each weighted differently based on the level of credit risk that is ascribed to such assets or commitments, based on counterparty type, asset class and asset class.maturity. A depository institution’s or holding company’s capital is divided into three tiers: Common Equity Tier 1 (“CET1”), additional Tier 1, and Tier 2. CET1 capital predominantly includes common shareholders’ equity, less certain deductions for goodwill, intangible assets and deferred tax assets that arise from net operating losses and tax credit carry-forwards, if any. Additional Tier 1 capital primarily includes any outstanding noncumulative perpetual preferred stock and related surplus. Comerica has also made the election to permanently exclude accumulated other comprehensive income related to debt and equity securities classified as available-for-sale, cash flow hedges, and defined benefit postretirement plans from CET1 capital. Tier 2 capital primarily includes qualifying subordinated debt and qualifying allowance for credit losses. On July 22, 2019,September 30, 2020, the federal banking agencies issued a final rule that simplifies certain regulatory capital rules, includingprovides banking organizations that implement the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests. In addition, in December 2018, the federal banking regulators adopted rules that would permit bank holding companies and banks to phase in, for regulatory capital purposes, the day-one impact of the new current expected credit loss ("CECL"(“CECL”) accounting rulestandard during the 2020 calendar year the option to delay for two years an estimate of CECL’s effect on retained earnings overregulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a period
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three-year transition period. While Comerica does not anticipate to electelected this deferral, as the transition impact to retained earnings is not expected to be significant. there was no deferral amount at December 31, 2021. More information is set forth in the “Capital” section located on pages F-17F-16 through F-19.
F-17.
Entities that engage in trading activities that exceed specified levels also are required to maintain capital to account for market risk. Market risk includes changes in the market value of trading account, foreign exchange, and commodity positions, whether resulting from broad market movements (such as changes in the general level of interest rates, equity prices, foreign exchange rates, or commodity prices) or from position specific factors. From time to time, Comerica’s trading activities may exceed specified regulatory levels, in which case Comerica adjusts its risk-weighted assets to account for market risk as required.
Comerica and its bank subsidiaries, like other bank holding companies and banks, currently are required to maintain a minimum CET1 capital ratio, minimum Tier 1 capital ratio and minimum total capital ratio equal to at least 4.5 percent, 6 percent and 8 percent of their total risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit), respectively. Comerica and its bank subsidiaries are required to maintain a minimum capital conservation buffer of 2.5 percent in order to avoid restrictions on capital distributions and discretionary bonuses. Comerica and its bank subsidiaries are also required to maintain a minimum “leverage ratio” (Tier 1 capital to non-risk-adjusted average total assets) of 4 percent.
To be well capitalized, Comerica’s bank subsidiaries are required to maintain a totalminimum leverage ratio, minimum CET1 capital ratio, minimum Tier 1 capital ratio CET1and minimum total capital ratio and a leverage ratio equal to at least 10.05.0 percent, 6.5 percent, 8.0 percent 6.5 percent and 5.010.0 percent, respectively. For purposes of the FRB’s Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as Comerica, must maintain a Tier 1 capital ratio of at least 6.0 percent and a total capital ratio of at least 10.0 percent to be well capitalized. The FRB may require bank holding companies, including Comerica, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
Failure to be well capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators, including restrictions on Comerica’s or its bank subsidiaries’ ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications, or other restrictions on growth.
At December 31, 2019,2021, Comerica met all of its minimum risk-based capital ratio and leverage ratio requirements plus the applicable countercyclicalcapital conservation buffer and the applicable well capitalized requirements, as shown in the table below:
| (dollar amounts in millions) | Comerica Incorporated (Consolidated) | Comerica Bank | |||||
| December 31, 2019 | |||||||
| CET1 capital (minimum $3.1 billion (Consolidated)) | $ | 6,919 | $ | 7,199 | |||
| Tier 1 capital (minimum $4.1 billion (Consolidated)) | 6,919 | 7,199 | |||||
| Total capital (minimum $5.5 billion (Consolidated)) | 8,282 | 8,371 | |||||
| Risk-weighted assets | 68,273 | 68,071 | |||||
| Adjusted average assets (fourth quarter) | 72,773 | 72,564 | |||||
| CET1 capital to risk-weighted assets (minimum 4.5%) | 10.13 | % | 10.58 | % | |||
| Tier 1 capital to risk-weighted assets (minimum 6.0%) | 10.13 | 10.58 | |||||
| Total capital to risk-weighted assets (minimum 8.0%) | 12.13 | 12.30 | |||||
| Tier 1 capital to average assets (minimum 4.0%) | 9.51 | 9.92 | |||||
| Capital conservation buffer (minimum 2.5%) | 4.13 | 4.30 | |||||
| December 31, 2018 | |||||||
| CET1 capital (minimum $3.0 billion (Consolidated)) | $ | 7,470 | $ | 7,229 | |||
| Tier 1 capital (minimum $4.0 billion (Consolidated)) | 7,470 | 7,229 | |||||
| Total capital (minimum $5.4 billion (Consolidated)) | 8,855 | 8,433 | |||||
| Risk-weighted assets | 67,047 | 66,857 | |||||
| Adjusted average assets (fourth quarter) | 71,070 | 70,905 | |||||
| CET1 capital to risk-weighted assets (minimum 4.5%) | 11.14 | % | 10.81 | % | |||
| Tier 1 capital to risk-weighted assets (minimum 6.0%) | 11.14 | 10.81 | |||||
| Total capital to risk-weighted assets (minimum 8.0%) | 13.21 | 12.61 | |||||
| Tier 1 capital to average assets (minimum 4.0%) | 10.51 | 10.20 | |||||
| Capital conservation buffer (minimum 2.5%) | 5.14 | 4.61 | |||||
| (dollar amounts in millions) | Comerica Incorporated (Consolidated) | Comerica Bank | |||||||||
| December 31, 2021 | |||||||||||
| CET1 capital (minimum $3.1 billion (Consolidated)) | $ | 7,064 | $ | 7,634 | |||||||
| Tier 1 capital (minimum $4.2 billion (Consolidated)) | 7,458 | 7,634 | |||||||||
| Total capital (minimum $5.6 billion (Consolidated)) | 8,608 | 8,584 | |||||||||
| Risk-weighted assets | 69,708 | 69,542 | |||||||||
| Average assets (fourth quarter) | 96,417 | 96,216 | |||||||||
| CET1 capital to risk-weighted assets (minimum-4.5%) | 10.13 | % | 10.98 | % | |||||||
| Tier 1 capital to risk-weighted assets (minimum-6.0%) | 10.70 | 10.98 | |||||||||
| Total capital to risk-weighted assets (minimum-8.0%) | 12.35 | 12.34 | |||||||||
| Tier 1 capital to average assets (minimum-4.0%) | 7.74 | 7.93 | |||||||||
| Capital conservation buffer (minimum-2.5%) | 4.35 | 4.34 | |||||||||
| December 31, 2020 | |||||||||||
| CET1 capital (minimum $3.0 billion (Consolidated)) | $ | 6,919 | $ | 7,278 | |||||||
| Tier 1 capital (minimum $4.0 billion (Consolidated)) | 7,313 | 7,278 | |||||||||
| Total capital (minimum $5.4 billion (Consolidated)) | 8,833 | 8,547 | |||||||||
| Risk-weighted assets | 66,931 | 66,759 | |||||||||
| Average assets (fourth quarter) | 84,705 | 84,536 | |||||||||
| CET1 capital to risk-weighted assets (minimum-4.5%) | 10.34 | % | 10.90 | % | |||||||
| Tier 1 capital to risk-weighted assets (minimum-6.0%) | 10.93 | 10.90 | |||||||||
| Total capital to risk-weighted assets (minimum-8.0%) | 13.20 | 12.80 | |||||||||
| Tier 1 capital to average assets (minimum-4.0%) | 8.63 | 8.61 | |||||||||
| Capital conservation buffer (minimum-2.5%) | 4.93 | 4.80 | |||||||||
Additional information on the calculation of Comerica’s and its bank subsidiaries’ CET1 capital, Tier 1 capital, total capital and risk-weighted assets is set forth in the “Capital” section located on pages F-17F-16 through F-19F-17 of the Financial Section
of this report and Note 20 of the Notes to Consolidated Financial Statements located on pages F-90F-92 through F-92F-94 of the Financial Section of this report.
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Federal Deposit Insurance Corporation Improvement Act
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, the federal banking agencies to take “prompt corrective action” with respect to depository institutions that do not meet certain minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution that fails to remain well capitalized becomes subject to a series of restrictions that increase in severity as its capital condition weakens. Such restrictions may include a prohibition on capital distributions, restrictions on asset growth or restrictions on the ability to receive regulatory approval of applications. The FDICIA also provides for enhanced supervisory authority over undercapitalized institutions, including authority for the appointment of a conservator or receiver for the institution.
As of December 31, 2019,2021, each of Comerica’s bank subsidiaries’ capital ratios exceeded those required for an institution to be considered “well capitalized” under these regulations.
As an additional means to identify problems in the financial management of depository institutions, FDICIA requires federal bank regulatory agencies to establish certain non-capital-based safety and soundness standards for institutions any such agency supervises. The standards relate generally to, among others, earnings, liquidity, operations and management, asset quality, various risk and management exposures (e.g., credit, operational, market, interest rate, etc.) and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.
FDICIA also contains a variety of other provisions that may affect the operations of depository institutions including reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch, and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC.
Dividends
Comerica Incorporated is a legal entity separate and distinct from its banking and other subsidiaries. Since Comerica’s consolidated net income and liquidity consists largely of net income of and dividends received from Comerica’s bank subsidiaries, Comerica’s ability to pay dividends and repurchase shares depends upon its receipt of dividends from these subsidiaries. There are statutory and regulatory requirements applicable to the payment of dividends by subsidiary banks to Comerica, as well as by Comerica to its shareholders. Certain, but not all, of these requirements are discussed below. No assurances can be given that Comerica’s bank subsidiaries will, in any circumstances, pay dividends to Comerica.
Comerica Bank and Comerica Bank & Trust, National Association are required by federal law to obtain the prior approval of the FRB and/or the OCC, as the case may be, for the declaration and payment of dividends, if the total of all dividends declared by the board of directors of such bank in any calendar year will exceed the total of (i) such bank's net income (as defined and interpreted by regulation) for that year plus (ii) the retained net income (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock. At January 1, 2020,2022, Comerica's subsidiary banks could declare aggregate dividends of approximately $98$347 million from retained net profits of the preceding two years. Comerica's subsidiary banks declared dividends of $852 million in 2021, $498 million in 2020 and $1.2 billion in 2019, $1.1 billion in 2018 and $907 million in 2017.2019.
Comerica and its bank subsidiaries must maintain a CET1 capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions, including dividends.
Furthermore, federal regulatory agencies can prohibit a bank or bank holding company from paying dividends under circumstances in which such payment could be deemed an unsafe and unsound banking practice. Under the FDICIA “prompt corrective action” regime discussed above, which applies to each of Comerica Bank and Comerica Bank & Trust, National Association, a bank is specifically prohibited from paying dividends to its parent company if payment would result in the bank becoming “undercapitalized.” In addition, Comerica Bank is also subject to limitations under Texas state law regarding the amount
of earnings that may be paid out as dividends to Comerica, and requires prior approval for payments of dividends that exceed certain levels.
FRB policysupervisory guidance generally provides that a bank holding company should not pay dividends unless (1) the bank holding company’s net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. The policysupervisory guidance also provides that a bank holding company should inform the FRB reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Bank holding companies also are required to consult with the FRB before redeeming or repurchasing capital instruments (including common stock), or materially increasing dividends.
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Transactions with Affiliates
Federal banking laws and regulations impose qualitative standards and quantitative limitations upon certain transactions between a bank and its affiliates, including between Comerica and its nonbank subsidiaries, on the one hand, and Comerica’s affiliate insured depository institutions, on the other. For example, Section 23A of the Federal Reserve Act limits the aggregate outstanding amount of any insured depository institution’s loans and other “covered transactions” with any particular nonbank affiliate (including financial subsidiaries) to no more than 10% of the institution’s total capital and limits the aggregate outstanding amount of any insured depository institution’s covered transactions with all of its nonbank affiliates to no more than 20% of its total capital. “Covered transactions” are defined by statute to include (i) a loan or extension of credit to an affiliate, (ii) a purchase of securities issued by an affiliate, (iii) a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, (iv) the acceptance of securities issued by the affiliate as collateral for a loan, (v) the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate and (vi) securities borrowing or lending transactions and derivative transactions with an affiliate, to the extent that either causes a bank or its affiliate to have credit exposure to the securities borrowing/lending or derivative counterparty. Section 23A of the Federal Reserve Act also generally requires that an insured depository institution’s loans to its nonbank affiliates be, at a minimum, 100% secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution’s transactions with its nonbank affiliates be on terms and under circumstances that are substantially the same or at least as favorable as those prevailing for comparable transactions with nonaffiliates. Federal banking laws also place similar restrictions on loans and other extensions of credit by FDIC-insured banks, such as Comerica Bank and Comerica Bank & Trust, National Association, and their subsidiaries to their directors, executive officers and principal shareholders.
Data Privacy and Cybersecurity Regulation
Comerica is subject to many U.S. federal, U.S. state and international laws and regulations governing consumer data privacy protection, which require, among other things, maintaining policies and procedures to protect the non-public confidential information of customers and employees. The privacy provisions of the Gramm-Leach-Bliley Act generally prohibit financial institutions, including Comerica and its subsidiaries, from disclosing nonpublic personal financial information of consumer customers to third parties for certain purposes (primarily marketing) unless customers have the opportunity to “opt out” of the disclosure. Other laws and regulations, at the international, federal and state levels, limit Comerica’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires banks to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information. Because we have a limited presence in New York, we are subject to certain requirements of the New York Department of Financial Service’s Cybersecurity Requirements for Financial Services Companies, which include maintaining a cybersecurity program and policies and breach notification requirements.
In October 2016, the federal banking regulators issued an advance notice of proposed rulemaking regarding enhanced cyber risk management standards, which would apply to a wide range of large financial institutions, including Comerica, and their third-party service providers. The proposed standards would expand existing cybersecurity regulations and guidance to focus on cyber risk governance and management; management of internal and external dependencies; and incident response, cyber resilience and situational awareness. In addition, the proposal contemplates more stringent standards for institutions with systems that are critical to the financial sector. Comerica continues to monitor the development of this rule.
Data privacy and data protection are areas of increasing state legislative focus. For example, in June of 2018, the Governor of California signed into law the California Consumer Privacy Act of 2018 (the “CCPA”). The CCPA, which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will givegives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to information that is collected, processed, sold or disclosed pursuant to the Gramm-Leach-Bliley Act. The California Attorney General has proposed, but not yet adopted
regulations implementing the CCPA and the California State Legislature has amended the Act since its passage.on August 14, 2020. Comerica has a physical footprint in California and will beis required to comply with the CCPA. In addition, similar laws may be adopted by other states where Comerica does business. The federal government may also pass data privacy or data protection legislation.
Like other lenders, Comerica Bank and other of Comerica’s subsidiaries use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act (“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on Comerica and its subsidiaries.
FDIC Insurance Assessments
The DIF provides deposit insurance coverage for certain deposits up to $250,000 per depositor in each deposit account category. Comerica's subsidiary banks are subject to FDIC deposit insurance assessments to maintain the DIF. The FDIC imposes a risk-based deposit premium assessment system, where the assessment rates for an insured depository institution are
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determined by an assessment rate calculator, which is based on a number of elements to measure the risk each institution poses to the DIF. The assessment rate is applied to total average assets less tangible equity. Under the current system, premiums are assessed quarterly and could increase if, for example, criticized loans and/or other higher risk assets increase or balance sheet liquidity decreases. For 2019,2021, Comerica’s FDIC insurance expense totaled $23$22 million.
Anti-Money Laundering Regulations
Comerica is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities ("AML laws"). This category of laws includes the Bank Secrecy Act, the Money Laundering Control Act, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or USA PATRIOT Act.
The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, Comerica and its various operating units have implemented appropriate internal practices, procedures, and controls.
Office of Foreign Assets Control Regulation
The Office of Foreign Assets Control (“OFAC”) is responsible for administering economic sanctions that affect transactions with designated foreign countries, nationals and others, as defined by various Executive Orders and Acts of Congress. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or “specially designated nationals” of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). OFAC also publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Interstate Banking and Branching
The Interstate Banking and Branching Efficiency Act (the “Interstate Act”), as amended by the Dodd-Frank Act, permits a bank holding company, with FRB approval, to acquire banking institutions located in states other than the bank holding company's home state without regard to whether the transaction is prohibited under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to and following the proposed acquisition, control no more than 10 percent of the total amount of deposits of insured depository institutions in the U.S. and no more than 30 percent of such deposits in that state (or such amount as established by state law if such amount is lower than 30 percent). The Interstate Act, as amended, also authorizes banks to operate branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and by establishing de novo branches in other states, subject to various conditions. In the case of purchasing branches in a state in which it does not already have banking operations, de novo interstate branching is permissible if under the law of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch. A bank holding company or bank must be well capitalized and well managed in order to take advantage of these interstate banking and branching provisions.
Comerica has consolidated the majority of its banking business into one bank, Comerica Bank, with banking centers in Texas, Arizona, California, Florida and Michigan, as well as Canada.
Source of Strength and Cross-Guarantee Requirements
Federal law and FRB regulations require that bank holding companies serve as a source of strength to each subsidiary bank and commit resources to support each subsidiary bank. This support may be required at times when a bank holding company may not be able to provide such support without adversely affecting its ability to meet other obligations. The FRB may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to commit resources to such a subsidiary bank or if it undertakes actions that the FRB believes might jeopardize the bank holding company’s ability to commit resources to such subsidiary bank. Under these requirements, Comerica may in the future be required to provide
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financial assistance to its subsidiary banks should they experience financial distress. Capital loans by Comerica to its subsidiary banks would be subordinate in right of payment to deposits and certain other debts of the subsidiary banks. In the event of Comerica’s bankruptcy, any commitment by Comerica to a federal bank regulatory agency to maintain the capital of its subsidiary banks would be assumed by the bankruptcy trustee and entitled to a priority of payment.
Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC (either as a result of the failure of a banking subsidiary or related to FDIC assistance provided to such a subsidiary in danger of failure), the other banking subsidiaries may be assessed for the FDIC’s loss, subject to certain exceptions. An FDIC cross-guarantee claim against a depository institution is superior in right of payment to claims of the holding company and its affiliates against such depository institution.
Supervisory and Enforcement Powers of Federal and State Banking Agencies
The FRB and other federal and state banking agencies have broad supervisory and enforcement powers, including, without limitation, and as prescribed to each agency by applicable law, the power to conduct examinations and investigations, impose nonpublic supervisory agreements, issue cease and desist orders, terminate deposit insurance, impose substantial fines and other civil penalties and appoint a conservator or receiver. Failure to comply with applicable laws or regulations could subject Comerica or its banking subsidiaries, as well as officers and directors of these organizations, to administrative sanctions and potentially substantial civil and criminal penalties. Bank regulators regularly examine the operations of bank holding companies and banks, and the results of these examinations, as well as certain supervisory and enforcement actions, are confidential and may not be made public.
Resolution Plans
On June 25, 2021, the FDIC lifted the moratorium on resolution plan submissions for institutions with $100 billion or more in total assets. Under the FDIC’s Statement on Resolution Plans for IDIs, an institution will be required to submit resolution plans when it has $100 billion or more in total assets as determined based upon the average of the institution’s four most recent Reports of Condition and Income.
Incentive-Based Compensation
Comerica is subject to guidance issued by the FRB, OCC and FDIC intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers senior executives as well as other employees who, either individually or as part of a group, have the ability to expose the banking organization to material amounts of risk, is based upon the key principles that a banking organization's incentive compensation arrangements (i) should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) should be compatible with effective controls and risk-management; and (iii) should be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. Banking organizations are expected to review regularly their incentive compensation arrangements based on these three principles. Where there are deficiencies in the incentive compensation arrangements, they should be promptly addressed. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness, particularly if the organization is not taking prompt and effective measures to correct the deficiencies. Similar to other large banking organizations, Comerica has been subject to a continuing review of incentive compensation policies and practices by representatives of the FRB, the Federal Reserve Bank of Dallas and the Texas Department of Banking since 2011. As part of that review, Comerica has undertaken a thorough analysis of all the incentive compensation programs throughout the organization, the individuals covered by each plan and the risks inherent in each plan’s design and implementation. Comerica has determined that risks arising from employee compensation plans are not reasonably likely to have a material adverse effect on Comerica. It is Comerica’s intent to continue monitoring regulations and best practices for sound incentive compensation practices.
In 2016, the FRB, OCC and several other federal financial regulators revised and re-proposed rules to implement Section 956 of the Dodd-Frank Act. Section 956 directed regulators to jointly prescribe regulations or guidelines prohibiting incentive-based payment arrangements, or any feature of any such arrangement, at covered financial institutions that encourage
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inappropriate risks by providing excessive compensation or that could lead to a material financial loss. This proposal supplements the final guidance issued by the banking agencies in June 2010. Consistent with the Dodd-Frank Act, the proposed rule would impose heightened standards for institutions with $50 billion or more in total consolidated assets, which includes Comerica. For these larger institutions, the proposed rule would require the deferral of at least 40 percent of incentive-based payments for designated executives and significant risk-takers who individually have the ability to expose the institution to possible losses that are substantial in relation to the institution's size, capital or overall risk tolerance. Moreover, incentive-based compensation of these individuals would be subject to potential clawback for seven years following vesting. Further, the rule imposes enhanced risk management controls and governance and internal policy and procedure requirements with respect to incentive compensation. Comerica is monitoring the development of this rule.
The Volcker Rule
Comerica is prohibited under the Volcker Rule from (1) engaging in short-term proprietary trading for its own account and (2) having certain ownership interests in and relationships with hedge funds or private equity funds ("Covered Funds"). The Volcker Rule regulations contain exemptions for market-making, hedging, underwriting and trading in U.S. government and agency obligations, and permit certain ownership interests in certain types of Covered Funds to be retained. They also permit the offering and sponsoring of Covered Funds under certain conditions. The Volcker Rule regulations impose significant compliance and reporting obligations on banking entities.
Comerica has compliance programs required by the Volcker Rule and has either divested or received extensions for any holdings in Covered Funds. Additional information on Comerica's portfolio of indirect (through funds) private equity and venture capital investments, which includes the Covered Funds, is set forth in Note 1 of the Notes to Consolidated Financial Statements located on page F-48F-49 of the Financial Section of this report.
In October 2019, the five federal agencies with rulemaking authority with respect to the Volcker Rule finalized changes designed to simplify compliance with the Volcker Rule. The final rule formalized a three-tiered approach to compliance program requirements for banking entities based on their level of trading activity. As a banking entity with “moderate” trading assets and liabilities (less than $20 billion), Comerica is now subject to simplified compliance requirements. Additionally, in JanuaryIn June 2020, regulators proposed changes to modifyfinalized a rule further modifying the Volcker Rule’s restrictionsprohibition on banking entities investing in or sponsoring Covered Funds. The final rule modifies three areas of the rule by: streamlining the covered funds portion of the rule; addressing the extraterritorial treatment of certain foreign funds; and permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. Comerica continues to follow Volcker Rule developments.
Derivative Transactions
As a state member bank, Comerica Bank may engage in derivative transactions, as permitted by applicable Texas and federal law. Title VII of the Dodd-Frank Act contains a comprehensive framework for over-the-counter (“OTC”) derivatives transactions. Even though many of the requirements do not impact Comerica directly, since Comerica Bank does not meet the definition of swap dealer or “majormajor swap participant,” Comerica continues to review and evaluate the extent to which such requirements impact its business indirectly. On November 5, 2018, the CFTC issued a final rule that sets the permanent aggregate
gross notional amount threshold for the de minimis exception from the definition of swap dealer at $8 billion in swap dealing activity entered into by a person over the preceding 12 months. Comerica's swap dealing activities for purposes of the de minimis exception are currently below this threshold.
The initial margin requirements for non-centrally cleared swaps and security-based swaps will be effective for Comerica’s swap and security-based swap counterparties that are swap dealers or major swap participants on September 1, 2021,2022, at which time such counterparties will be required to collect initial margin from Comerica. The initial margin requirements were issued for the purpose of ensuring safety and soundness of swap trading in light of the risk to the financial system associated with non-cleared swaps activity. Comerica is currently working toward meeting compliance with the initial margin requirements.
Consumer Financial Protection Bureau and Certain Recent Consumer Finance Regulations
Comerica is subject to regulation by the CFPB, which has a broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions and possesses examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, including Comerica Bank, and their depositary affiliates.
Comerica is also subject to certain state consumer protection laws, and under the Dodd-Frank Act, state attorneys general and other state officials are empowered to enforce certain federal consumer protection laws and regulations. In recent years, state authorities have increased their focus on and enforcement of consumer protection rules. These federal and state consumer protection laws apply to a broad range of Comerica’s activities and to various aspects of its business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use of and the provision of information to consumer reporting agencies, and the prohibition of unfair,
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deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products and services.
UNDERWRITING APPROACH
The loan portfolio is a primary source of profitability and risk, so proper loan underwriting is critical to Comerica's long-term financial success. Comerica extends credit to businesses, individuals and public entities based on sound lending principles and consistent with prudent banking practice. During the loan underwriting process, a qualitative and quantitative analysis of potential credit facilities is performed, and the credit risks associated with each relationship are evaluated. Important factors considered as part of the underwriting process for new loans and loan renewals include:
•People: Including the competence, integrity and succession planning of customers.
•Purpose: The legal, logical and productive purposes of the credit facility.
•Payment: Including the source, timing and probability of payment.
•Protection: Including obtaining alternative sources of repayment, securing the loan, as appropriate, with collateral and/or third-party guarantees and ensuring appropriate legal documentation is obtained.
•Perspective: The risk/reward relationship and pricing elements (cost of funds; servicing costs; time value of money; credit risk).
Comerica prices credit facilities to reflect risk, the related costs and the expected return, while maintaining competitiveness with other financial institutions. Loans with variable and fixed rates are underwritten to achieve expected risk-adjusted returns on the credit facilities and for the full relationship including the borrower's ability to repay the principal and interest based on such rates.
Credit Approval and Monitoring
Approval of new loan exposure and oversight and monitoring of Comerica's loan portfolio is the joint responsibility of the Credit Risk Management and Decisioning department and the Credit Underwriting department (collectively referred to as “Credit”), plus the business units (“Line”). Credit assists the Line with underwriting by providing objective financial analysis, including an assessment of the borrower's business model, balance sheet, cash flow and collateral. The approval of new loan exposure is the joint responsibility of Credit Risk Management and Decisioning and the Line. Each commercial borrower relationship is assigned an internal risk rating by Credit Risk Management and Decisioning. Further, Credit updates the assigned internal risk rating as new information becomes available as a result of periodic reviews of credit quality, a change in borrower performance or approval of new loan exposure. The goal of the internal risk rating framework is to support Comerica's risk management capability, including its ability to identify and manage changes in the credit risk profile of its portfolio, predict future
losses and price the loans appropriately for risk. Finally, the Line and Credit (including its Portfolio Risk Analytics department) work together to insure the overall credit risk within the loan portfolio is consistent with the bank’s Credit Risk Appetite.
Credit Policy
Comerica maintains a comprehensive set of credit policies. Comerica's credit policies provide Line and Credit Personnel with a framework of sound underwriting practices and potential loan structures. These credit policies also provide the framework for loan committee approval authorities based on its internal risk-rating system and establish maximum exposure limits based on risk ratings and Comerica's legal lending limit. Credit, in conjunction with the Line, monitors compliance with the credit policies and modifies the existing policies as necessary. New or modified policies/guidelines require approval by the Strategic Credit Committee, chaired by Comerica's Chief Credit Officer and comprised of senior credit, market and risk management executives.
Commercial Loan Portfolio
Commercial loans are underwritten using a comprehensive analysis of the borrower's operations. The underwriting process includes an analysis of some or all of the factors listed below:
•The borrower's business model and industry characteristics.
•Periodic review of financial statements including financial statements audited by an independent certified public accountant when appropriate.
•The proforma financial condition including financial projections.
•The borrower's sources and uses of funds.
•The borrower's debt service capacity.
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•The guarantor's financial strength.
•A comprehensive review of the quality and value of collateral, including independent third-party appraisals of machinery and equipment and commercial real estate, as appropriate, to determine the advance rates.
•Physical inspection of collateral and audits of receivables, as appropriate.
For additional information specific to our Energy loan portfolio and certain leveraged transactions inbusinesses within our commercial portfolio, please see the captions “Energy Lending” and "Leveraged Loans"caption “Concentrations of Credit Risk" starting on page F-27F-23 of the Financial Section of this report.
Commercial Real Estate (CRE) Loan Portfolio
Comerica's CRE loan portfolio consists of real estate construction and commercial mortgage loans and includes loans to real estate developers and investors and loans secured by owner-occupied real estate. Comerica's CRE loan underwriting policies are consistent with the approach described above and provide maximum loan-to-value ratios that limit the size of a loan to a maximum percentage of the value of the real estate collateral securing the loan. The loan-to-value percentage varies by the type of collateral and is limited by advance rates established by our regulators. Our loan-to-value limitations are, in certain cases, more restrictive than those required by regulators and are influenced by other risk factors such as the financial strength of the borrower or guarantor, the equity provided to the project and the viability of the project itself. CRE loans generally require cash equity. CRE loans are normally originated with full recourse or limited recourse to all principals and owners. There are limitations to the size of a single project loan and to the aggregate dollar exposure to a single guarantor. For additional information specific to our CRE loan portfolio, please see the caption “Commercial Real Estate Lending” on page F-26F-23 of the Financial Section of this report.
Consumer and Residential Mortgage Loan Portfolios
Comerica's consumer and residential mortgage loan underwriting includes an assessment of each borrower's personal financial condition, including a review of credit reports and related FICO scores (a type of credit score used to assess an applicant's credit risk) and verification of income and assets, as applicable. After origination, internal risk ratings are assigned based on payment status and product type.
Comerica does not originate subprime loans. Although a standard industry definition for subprime loans (including subprime mortgage loans) does not exist, Comerica defines subprime loans as specific product offerings for higher risk borrowers, including individuals with one or a combination of high credit risk factors. These credit factors include low FICO scores, poor patterns of payment history, high debt-to-income ratios and elevated loan-to-value. Comerica generally considers subprime FICO scores to be those below 620 on a secured basis (excluding loans with cash or near-cash collateral and adequate income to make payments) and below 660 for unsecured loans. Residential mortgage loans retained in the portfolio are largely relationship based. The remaining loans are typically eligible to be sold on the secondary market. Adjustable-rate loans are limited to standard conventional loan programs. For additional information specific to our residential real estate loan portfolio, please see the caption “Residential Real Estate Lending” on pages F-26F-24 through F-27F-25 of the Financial Section of this report.
HUMAN CAPITAL RESOURCES
Structure. As of December 31, 2019,2021, Comerica and its subsidiaries had 7,4677,223 full-time and 481388 part-time employees, primarily located in Comerica’s core markets of Michigan, Texas, California, Arizona and Florida. Comerica’s Chief Human Resources Officer reports directly to the Chairman, President and CEO and manages all aspects of the employee experience, including talent acquisition, diversity and inclusion, learning and development, talent management, compensation and benefits.
The Governance, Compensation and Nominating Committee of the Board is tasked with reviewing Comerica’s human capital management strategy and talent development program, including recruitment, evaluations and development activities. This Committee also reviews the Corporation’s employee diversity, equity and inclusion initiatives, as well as the results of those initiatives. The Chief Diversity Officer provides annual updates to the full Board, focusing on strategic framework, progress made in corporate governance, workforce diversity, education and social impact over the past year, and the diversity and inclusion action plan for the upcoming year. To enhance the Board’s understanding of Comerica's talent pipeline, the Board routinely meets with high-potential employees in formal and informal settings.
Productivity. Comerica carefully manages the size of its workforce and reallocates resources, as needed. As of December 31, 2021, Comerica’s total employee headcount, on a full-time equivalent basis, was 16 percent lower than as of December 31, 2015. Additionally, for 2021, Comerica managed an average of $17 million of loans and deposits per employee.
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Diversity. Comerica has an organization-wide focus to improve recruitment and retention of women and ethnic minorities especially in leadership positions through its diversity outreach, diversity awareness and learning program and leadership development programs. As of December 31, 2021, Comerica’s U.S. colleagues had the following attributes:
| Female (%) | Minority (%) | |||||||
| Employees | 65 | 41 | ||||||
Officials and Managers(1) | 52 | 29 | ||||||
Executive Officers(2) | 43 | 21 | ||||||
(1) Based on EEO-1 job classifications.
(2) Using Securities and Exchange Commission definition.
Comerica was recognized in 2021 as a 2021 Best Employer for Women by Forbes and one of LATINA Style's Top 50 Best Company for Latinas to Work in the U.S., as well as receiving five stars – the highest marking – in the category of governance as part of the 2021 Hispanic Association on Corporate Responsibility Corporate Inclusion Index. Additionally, Comerica received a perfect score of 100% on the Human Rights Campaign's Corporate Equality Index (for LGBTQ equality).
Additionally, Comerica has Employee Resource Groups (ERGs), consisting of employees with common interests organized to promote professional development, social networking, awareness and inclusion, social impact and talent attraction and retention. The ERGs help support and sustain Comerica's diversity and inclusion model. In 2021, Comerica launched its tenth ERG, the national Asian & Pacific Islander Employee Resource Group.
Compensation and Benefits. Comerica strives to provide pay, benefits, and services that help meet the varying needs of its employees. Compensation and benefits include market-competitive pay, retirement programs, broad-based bonuses, an employee stock purchase plan, health and welfare benefits, an employee assistance program, financial counseling, paid time off, family leave and flexible work schedules. In 2021, Comerica increased its minimum wage to $17 per hour, from $16.50. Comerica periodically reviews compensation and benefits by grade level and position to ensure similar positions are paid comparatively and to ensure that Comerica has a competitive and valuable offering to meet the well-being and needs of its employees.
Attraction, Development and Retention. Comerica measures the success of its talent acquisition strategy on speed and quality of acquisition, diversity of applicant pool, and new colleagues' retention and overall performance metrics. Each of these metrics is tracked for each of the key business lines. Sourcing strategies and support structures are modified to ensure that performance targets are met consistently.
Comerica has also created internal programs to support the development and retention of its colleagues, including Comerica University, internal Leadership Development and Emerging Leaders programs designed to train high potential employees, Com-Tech college courses to help re-skill Technology colleagues, a Managing Essentials Certificate series for managers, and organizational change management learning for all colleagues. In 2021, over 7,600 skills-based courses were offered to Comerica colleagues and an average of 28 hours of training per employee were completed. Comerica also supports its employees’ involvement in external development programs and volunteerism. Beginning in 2022, all full-time colleagues will be granted up to 8 hours of PTO annually and all part-time colleagues will be granted up to 4 hours of PTO annually to use for volunteer events. This includes volunteer opportunities related and unrelated to Comerica.
Comerica’s investment in its employees has resulted in a long-tenured workforce, with average tenure of more than 12 years of service. Of the approximately 2,200 open employee positions filled in 2021, 54% were filled by external hires and 46% positions were filled by internal hires. Employee turnover for 2021 was 19%. In 2021, Comerica conducted its second enterprise-wide employee engagement survey, with approximately 80% of colleagues participating.
AVAILABLE INFORMATION
Comerica maintains an Internet website at www.comerica.com where the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable after those reports are filed with or furnished to the SEC. The Code of Business Conduct and Ethics for Employees, the Code of Business Conduct and Ethics for Members of the Board of Directors and the Senior Financial Officer Code of Ethics adopted by Comerica are also available on the Internet website and are available in print to any shareholder who requests them. Such requests should be made in writing to the Corporate Secretary at Comerica Incorporated, Comerica Bank Tower, 1717 Main Street, MC 6404, Dallas, Texas 75201.
In addition, pursuant to regulations adopted by the FRB, Comerica makes additional regulatory capital-related disclosures. Under these regulations, Comerica satisfies a portion of these requirements through postings on its website, and Comerica has done so and expects to continue to do so without also providing disclosure of this information through filings with the SEC.
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Where we have included web addresses in this report, such as our web address and the web address of the SEC, we have included those web addresses as inactive textual references only. Except as specifically incorporated by reference into this report, information on those websites is not part hereof.
Item 1A. Risk Factors.
This report includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, Comerica may make other written and oral communications from time to time that contain such statements. All statements regarding Comerica's expected financial position, strategies and growth prospects and general economic conditions Comerica expects 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 Comerica or its management, are intended to identify forward-looking statements.
Comerica cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date the statement is made, and Comerica 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. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to factors mentioned elsewhere in this report or previously disclosed in Comerica's SEC reports (accessible on the SEC's website at www.sec.gov or on Comerica's website at www.comerica.com), the factors contained below, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance.
CREDIT RISK
•Unfavorable developments concerning credit quality could adversely affect Comerica's financial results.
Although Comerica regularly reviews credit exposure related to its customers and various industry sectors in which it has business relationships, default risk may arise from events or circumstances that are difficult to detect or foresee. Under such circumstances, as occurred during the COVID-19 pandemic, Comerica could experience an increase in the level of provision for credit losses, nonperforming assets, net charge-offs and reserve for credit losses, which could adversely affect Comerica's financial results.
•Declines in the businesses or industries of Comerica's customers could cause increased credit losses or decreased loan balances, which could adversely affect Comerica.
Comerica's business customer base consists, in part, of customers in volatile businesses and industries such as the automotive, commercial real estate, residential real estate and energy industries. These industries are sensitive to global economic conditions, supply chain factors and/or commodities prices. In particular, in 2021, decreased balances in Dealer Services occurred due to an imbalance in supply and demand impacted by a shortage in microchips used in automotive production. Additionally, as companies implement policies to extend work-from-home arrangements, the commercial real estate industry has been under more scrutiny. Finally, while energy prices recovered in 2021, they are unlikely to remain stable, and energy companies are expected to experience environmental pressure over the long-term. Any decline in one of these businesses or industries could cause increased credit losses, which in turn could adversely affect Comerica. Further, any decline in these businesses or industries could cause decreased borrowings, either due to reduced demand or reductions in the borrowing base available for each customer loan.
For more information regarding certain of Comerica's lines of business, please see "Concentration"Concentrations of Credit Risk," "Automotive Lending," "Commercial Real Estate Lending," "Automotive Lending - Dealer," "Automotive Lending - Production," "Residential Real Estate Lending" Lending,"and “Energy Lending” on pages F-23 through F-25 through F-27of the Financial Section of this report.
Additionally, certain industries have been particularly susceptible to the effects of the pandemic, such as retail commercial real estate, retail goods and services, hotels, arts/recreation, airlines, restaurants and bars, childcare, coffee shops, cruise lines, education, gasoline and convenience stores, religious organizations, senior living, freight and travel arrangements, and Comerica has outstanding loans to clients in these industries, as described below under "Other Sectors Most at Risk due to Economic Stress Resulting from COVID-19 Impacts" on page F-26 of the Financial Section of this report.
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•Changes in customer behavior due to outside factors may adversely impact Comerica's business, financial condition and results of operations.
Individual, economic, political, industry-specific conditions and other factors outside of Comerica's control, such as pandemics, inflation, fuel prices, energy costs, tariffs, real estate values or other factors that affect customer income levels, could alter predicted customer borrowing, repayment, investment and deposit practices. Such a change in these practices could materially adversely affect Comerica's ability to anticipate business needs and meet regulatory requirements.
Further, difficult economic conditions may negatively affect consumer confidence levels. A decrease in consumer confidence levels would likely aggravate the adverse effects of these difficult market conditions on Comerica, Comerica's customers and others in the financial institutions industry.
MARKET RISK
•Governmental monetary and fiscal policies may adversely affect the financial services industry, and therefore impact Comerica's financial condition and results of operations.
Monetary and fiscal policies of various governmental and regulatory agencies, in particular the FRB, affect the financial services industry, directly and indirectly. The FRB regulates the supply of money and credit in the U.S., and its monetary policies determine in a large part Comerica's cost of funds for lending and investing and the return that can be earned on such loans and investments. Changes in such policies, including changes in interest rates such as recent decreases in the federal funds rate, or changes in the FRB's balance sheet, will influence the origination of loans, the value of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits. Changes in monetary and fiscal policies are beyond Comerica's control and difficult to predict. Comerica's financial condition and results of operations could be materially adversely impacted by changes in governmental monetary and fiscal policies.
•Fluctuations in interest rates and their impact on deposit pricing could adversely affect Comerica's net interest income and balance sheet.
The operations of financial institutions such as Comerica are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Prevailing economic conditions and the trade, fiscal and monetary policies of the federal government and various regulatory agencies all affect market rates of interest and the availability and cost of credit, which in turn significantly affect financial institutions' net interest income and the market value of its investment securities. The Federal Reserve lowered interest rates three times in 2019. A continued low interest rate environment couldwill adversely affect the interest income Comerica earns on loans and investments. For a discussion of Comerica's interest rate sensitivity, please see “Market and Liquidity Risk” beginning on page F-28F-27 of the Financial Section of this report.
Deposits make up a large portion of Comerica’s funding portfolio. Comerica's funding costs may continue to increase if it raises deposit rates to avoid losing customer deposits, or if it loses customer deposits and must rely on more expensive sources of funding. Higher funding costs will reduce Comerica's net interest margin and net interest income.
Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal government and corporate securities and other investment vehicles, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. Comerica's financial results could be materially adversely impacted by changes in financial market conditions.
•Interest rates on Comerica's outstanding financial instruments might be subject to change based on developments related to LIBOR, which could adversely affect its revenue, expenses, and the value of those financial instruments.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority ("FCA"), which regulates LIBOR, publicly announced that it intendsintended to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that a transition away from the widespread useCertain LIBOR tenors are no longer supported as of LIBOR to alternative rates will occur over the course of the next two years. The Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selectedDecember 31, 2021, and the Federal Reserve BankFCA has announced that the remaining tenors, including those most commonly used by Comerica, will cease to be supported after June 30, 2023. While Comerica stopped originating LIBOR-based products in the fourth quarter of New York started in May 20182021, it still has substantial exposure to publishoutstanding LIBOR-based products, including loans and derivatives. Approximately 71 percent of Comerica's loans at December 31, 2021 were tied to LIBOR, which excludes the impact of interest rate swaps converting floating-rate loans to fixed.
Comerica is currently issuing new Secured Overnight FinanceFinancing Rate (“SOFR”)(SOFR)-based and Bloomberg Short-Term Bank Yield Index (BSBY)-based cash and derivative products. Comerica continues to monitor market developments and regulatory updates, as an alternative to LIBOR. SOFR is a broad measurewell as collaborate with regulators and industry groups on the transition.
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The market transition away from LIBOR to an alternative reference rate including SOFR, is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:
•adversely affect the interest rates paid or received on, and the revenues and expenses associated with, Comerica’s floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s historical role in determining market interest rates globally;
•adversely affect the value of Comerica’s floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s historical role in determining market interest rates globally;
•prompt inquiries or other actions from regulators in respect to Comerica’s preparation and readiness for the replacementselection of LIBOR with an alternative reference rate;rates other than SOFR; and
•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities; andinstruments.
The manner and impact of this transition, as well as the effect of these developments on Comerica’s funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.
LIQUIDITY RISK
•Comerica must maintain adequate sources of funding and liquidity to meet regulatory expectations, support its operations and fund outstanding liabilities.
Comerica’s liquidity and ability to fund and run its business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility, a lack of market or customer confidence in financial markets in general, or deposit competition based on interest rates, which may result in a loss of customer deposits or outflows of cash or collateral and/or adversely affect Comerica's ability to access capital markets on favorable terms.
Other conditions and factors that could materially adversely affect Comerica’s liquidity and funding include a lack of market or customer confidence in, or negative news about, Comerica or the financial services industry generally which also may result in a loss of deposits and/or negatively affect Comerica's ability to access the capital markets; the loss of customer deposits to alternative investments; counterparty availability; interest rate fluctuations; general economic conditions; and the legal, regulatory, accounting and tax environments governing Comerica's funding transactions. Many of the above conditions and factors may be caused by events over which Comerica has little or no control. There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Further, Comerica's customers may be adversely impacted by such conditions, which could have a negative impact on Comerica's business, financial condition and results of operations.
•Reduction in our credit ratings could adversely affect Comerica and/or the holders of its securities.
Rating agencies regularly evaluate Comerica, and their ratings are based on a number of factors, including Comerica's financial strength as well as factors not entirely within its control, includingsuch as conditions affecting the financial services industry generally. There can be no assurance that Comerica will maintain its current ratings. In December 2019, Fitch Ratings revised each of Comerica Incorporated and Comerica Bank's outlook from "Stable" to “Negative.” While recent credit rating actions have had little to no detrimental impact on Comerica's profitability, borrowing costs, or ability to access the capital markets, future downgrades to Comerica's or its subsidiaries' credit ratings could adversely affect Comerica's profitability, borrowing costs, or ability to access the capital markets or otherwise have a negative effect on Comerica's results of operations or financial condition. If such a reduction placed Comerica's or its subsidiaries' credit ratings below investment grade, it could also create obligations or liabilities under the terms of existing arrangements that could increase Comerica's costs under such arrangements. Additionally, a downgrade of the credit rating of any particular security issued by Comerica or its subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
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•The soundness of other financial institutions could adversely affect Comerica.
Comerica's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Comerica has exposure to many different industries and counterparties, and it routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led, and may further lead, to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions could expose Comerica to credit risk in the event of default of its counterparty or client. In addition, Comerica's credit risk may be impacted when the collateral held by it cannot be realizedmonetized or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to Comerica. There is no assurance that any such losses would not adversely affect, possibly materially, Comerica.
TECHNOLOGY RISK
•Comerica faces security risks, including denial of service attacks, hacking, social engineering attacks targeting Comerica’s colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect its business or reputation, and create significant legal and financial exposure.
Comerica’s computer systems and network infrastructure and those of third parties, on which Comerica is highly dependent, are subject to security risks and could be susceptible to cyber attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Comerica’s business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access Comerica’s network, products and services, its customers and other third parties may use personal mobile devices or computing devices that are outside of its network environment and are subject to their own cybersecurity risks.
Cyber attacks could include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in Comerica's systems or the systems of third parties, or other security breaches, and could result in the destruction or exfiltration of data and systems. As cyber threats continue to evolve, Comerica may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of Comerica’s systems and implement controls, processes, policies and other protective measures, Comerica may not be able to anticipate all security breaches, nor may it be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving and Comerica may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Although Comerica has programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity, and availability of its systems, business applications and customer information, such disruptions may still give rise to interruptions in service to customers and loss or liability to Comerica, including loss of customer data. Like other financial services firms, Comerica and its third party providers continue to be the subject of cyber attacks. Although to this date Comerica has not experienced any material losses or other material consequences related to cyber attacks, future cyber attacks could be more disruptive and damaging, and Comerica may not be able to anticipate or prevent all such attacks. Further, cyber attacks may not be detected in a timely manner.
Cyber attacks or other information or security breaches, whether directed at Comerica or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber attack on Comerica’s systems has been successful, whether or not this perception is correct, may damage its reputation with customers and third parties with whom it does business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause Comerica serious negative consequences, including loss of customers and business opportunities, costs associated with maintaining business relationships after an attack or breach; significant business disruption to Comerica’s operations and business, misappropriation, exposure, or destruction of its confidential information, intellectual property, funds, and/or those of its customers; or damage to Comerica’s or Comerica’s customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in Comerica’s security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact its results of operations, liquidity and financial condition. In addition, although Comerica maintains insurance coverage that may cover certain cyber
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losses (subject to policy terms and conditions), we may not have adequate insurance coverage to compensate for losses from a cybersecurity event.
•Cybersecurity and data privacy are areas of heightened legislative and regulatory focus.
As cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal bank regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including Comerica and its bank subsidiaries, and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience and situational awareness. Several states have also proposed or adopted cybersecurity legislation and regulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data. For more information regarding cybersecurity regulation, refer to the “Supervision and Regulation” section of this report.
Comerica receives, maintains and stores non-public personal information of Comerica’s customers and counterparties, including, but not limited to, personally identifiable information and personal financial information. The sharing, use, disclosure and protection of this information are governed by federal and state law. Both personally identifiable information and personal financial information is increasingly subject to legislation and regulation, the intent of which is to protect the privacy of personal information that is collected and handled. For example, in June of 2018, the Governor of California signed into law the CCPA. The CCPA, which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds, including Comerica. For more information regarding data privacy regulation, refer to the “Supervision and Regulation” section of this report.
Comerica may become subject to new legislation or regulation concerning cybersecurity or the privacy of personally identifiable information and personal financial information or of any other information Comerica may store or maintain. Comerica could be adversely affected if new legislation or regulations are adopted or if existing legislation or regulations are modified such that Comerica is required to alter its systems or require changes to its business practices or privacy policies. If cybersecurity, data privacy, data protection, data transfer or data retention laws are implemented, interpreted or applied in a manner inconsistent with Comerica’s current practices, it may be subject to fines, litigation or regulatory enforcement actions or ordered to change its business practices, policies or systems in a manner that adversely impacts Comerica’s operating results.
OPERATIONAL RISK
•Comerica’s operational or security systems or infrastructure, or those of third parties, could fail or be breached, which could disrupt Comerica’s business and adversely impact Comerica’s results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
The potential for operational risk exposure exists throughout Comerica’s business and, as a result of its interactions with, and reliance on, third parties, is not limited to Comerica’s own internal operational functions. Comerica's operations rely on the secure processing, storage and transmission of confidential and other information on its technology systems and networks. These networks are subject to infrastructure failures, ongoing system maintenance and upgrades and planned network outages. The increasedComerica's use of mobile and cloud technologies, as well as its hybrid work options permitting remote work, can heighten these and other operational risks. Any failure, interruption or breach in security of these systems could result in failures or disruptions in Comerica's customer relationship management, general ledger, deposit, loan and other systems.
Comerica relies on its employees and third parties in its day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of Comerica’s or of third-party systems or infrastructure, expose Comerica to risk. For example, Comerica’s ability to conduct business may be adversely affected by any significant disruptions to Comerica or to third parties with whom Comerica interacts or upon whom it relies. Although Comerica
has programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of its systems, business applications and customer information, such disruptions may still give rise to interruptions in service to customers and loss or liability to Comerica, including loss of customer data. In addition, Comerica’s ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to its own systems.
Comerica’s financial, accounting, data processing, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond its control, which could adversely affect its ability to process transactions or provide services. Such events may include sudden increases in customer transaction volume and/or customer activity;
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electrical, telecommunications or other major physical infrastructure outages; natural disasters such as earthquakes, tornadoes, hurricanes and floods; disease pandemics; cyber attacks; and events arising from local or larger scale political or social matters, including wars and terrorist acts.
The occurrence of any failure or interruption in Comerica's operations or information systems, or any security breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject Comerica to regulatory intervention or expose it to civil litigation and financial loss or liability, any of which could have a material adverse effect on Comerica.
•Comerica relies on other companies to provide certain key components of its delivery systems, and certain failures could materially adversely affect operations.
Comerica faces the risk of operational disruption, failure or capacity constraints due to its dependency on third party vendors for components of its delivery systems. Third party vendors provide certain key components of Comerica's delivery systems, such as cloud-based computing, networking and storage services, payment processing services, recording and monitoring services, internet connections and network access, clearing agency services, card processing services and trust processing services. While Comerica conducts due diligence prior to engaging with third party vendors and performs ongoing monitoring of vendor controls, it does not control their operations. Further, while Comerica's vendor management policies and practices are designed to comply with current regulations, these policies and practices cannot eliminate this risk. In this context, any vendor failure to properly deliver these services could adversely affect Comerica’s business operations, and result in financial loss, reputational harm, and/or regulatory action.
•Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving Comerica and its subsidiaries, could adversely affect Comerica or the financial services industry in general.
Comerica has been, and may in the future be, subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these matters, and there can be no assurance that Comerica will prevail in any proceeding or litigation. Any such matter could result in substantial cost and diversion of Comerica's efforts, which by itself could have a material adverse effect on Comerica's financial condition and operating results. Further, adverse determinations in such matters could result in fines or actions by Comerica's regulators that could materially adversely affect Comerica's business, financial condition or results of operations.
Comerica establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. Comerica may still incur legal costs for a matter even if it has not established a reserve. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could adversely affect Comerica's results of operations and financial condition.
•Comerica may incur losses due to fraud.
Fraudulent activity can take many forms and has escalated as more tools for accessing financial services emerge, such as real-time payments. Fraud schemes are broad and continuously evolving. Examples include but are not limited to: debit card/credit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, impersonation of our clients through the use of falsified or stolen credentials, employee fraud, information theft and other malfeasance. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information in order to impersonate the consumer to commit fraud. Many of these data compromises have been widely reported in the media. Further, as a result of the increased sophistication of fraud activity, Comerica continues to invest in systems, resources, and controls to detect and prevent fraud. This will result in continued ongoing investments in the future.
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•Controls and procedures may not prevent or detect all errors or acts of fraud.
Controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports Comerica files or submits under the Exchange Act is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, due to certain inherent limitations. These limitations include the realities that judgments in decision making can be faulty, that alternative reasoned judgments can be drawn, that breakdowns can occur because of an error or mistake, or that controls may be fraudulently circumvented. Accordingly, because of the inherent limitations in control systems, misstatements due to error or fraud may occur and not be detected.
COMPLIANCE RISK
•Changes in regulation or oversight, or changes in Comerica’s status with respect to existing regulations or oversight, may have a material adverse impact on Comerica's operations.
Comerica is subject to extensive regulation, supervision and examination by the U.S. Treasury, the Texas Department of Banking, the FDIC, the FRB, the OCC, the CFPB, the CFTC, the SEC, FINRA, DOL, MSRB and other regulatory bodies. Such regulation and supervision governs and limits the activities in which Comerica may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on Comerica's operations and ability to make acquisitions, investigations and limitations related to Comerica's securities, the classification of Comerica's assets and determination of the level of Comerica's allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on Comerica's business, financial condition or results of operations. The impact of any future legislation or regulatory actions may adversely affect Comerica's businesses or operations.
Further, even if such regulations or oversight do not change, Comerica's business may develop such that it may be subject to increased regulatory requirements. In 2021, Comerica’s asset size increased and began to approach $100 billion. Certain enhanced prudential standards and related requirements will apply to Comerica if it exceeds $100 billion in average total consolidated assets calculated over four consecutive financial quarters, which could happen in the future. Category IV institutions ($100 to $250 billion in assets) under the Tailoring Rules are subject to additional requirements, such as certain enhanced prudential standards and monitoring and reporting certain risk-based indicators. Under the Tailoring Rules, Category IV firms are, among other things, subject to (1) supervisory capital stress testing on a biennial basis, (2) requirements to develop and maintain a capital plan on an annual basis and (3) certain liquidity risk management and risk committee requirements, including liquidity buffer and liquidity stress testing requirements. Comerica would also incur additional assessments under Regulation TT. If Comerica becomes subject to enhanced prudential standards, it will face more stringent requirements or limitations on its business, as well as increased compliance costs, and, depending on its levels of capital and liquidity, stress test results and other factors, may be limited in the types of activities it may conduct and be limited as to how it utilizes capital. Further, Comerica may be subject to heightened expectations, which could result in additional regulatory scrutiny, higher penalties, and more severe consequences if it is unable to meet those expectations.
•Compliance with stringent capital requirements may adversely affect Comerica.
Comerica is required to satisfy stringent regulatory capital standards, as set forth in the “Supervision and Regulation” section of this report. These requirements, and any other new laws or regulations related to capital and liquidity, or any existing requirements that Comerica becomes subject to as a result of its increased asset size, could adversely affect Comerica's ability to pay dividends or make share repurchases, or could require Comerica to reduce business levels or to raise capital, including in ways that may adversely affect its results of operations or financial condition and/or existing shareholders. Maintaining higher levels of capital may reduce Comerica's profitability and otherwise adversely affect its business, financial condition, or results of operations.
•Tax regulations could be subject to potential legislative, administrative or judicial changes or interpretations.
Federal income tax treatment of corporations may be clarified and/or modified by legislative, administrative or judicial changes or interpretations at any time. Any such changes could adversely affect Comerica, either directly, or indirectly as a result of effects on Comerica's customers. For example, the tax reform bill enacted on December 22, 2017 has had, and is expected to continue to have, far-reaching and significant effects on Comerica, its customers and the U.S. economy.
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STRATEGIC RISK
•Damage to Comerica’s reputation could damage its businesses.
Reputational risk is an increasing concern for businesses as customers are interested in doing business with companies they admire and trust. Such risks include compliance issues, operational challenges, or a strategic, high profile event. Comerica's business is based on the trust of its customers, communities, and entire value chain, which makes managing reputational risk extremely important. News or other publicity that impairs Comerica's reputation, or the reputation of the financial services industry generally, can therefore cause significant harm to Comerica’s business and prospects. Further, adverse publicity or negative information posted on social media websites regarding Comerica, whether or not true, may result in harm to Comerica’s prospects.
•Comerica may not be able to utilize technology to efficiently and effectively develop, market, and deliver new products and services to its customers.
The financial services industry experiences rapid technological change with regular introductions of new technology-driven products and services. The ability to access and use technology is an increasingly important competitive factor in the financial services industry, and having the right technology is a critically important component to customer satisfaction. As well, the efficient and effective utilization of technology enables financial institutions to reduce costs. Comerica's future success depends, in part, upon its ability to address the needs of its customers by using technology to market and deliver products and services that will satisfy customer demands, meet regulatory requirements, and create additional efficiencies in Comerica's operations. Comerica may not be able to effectively develop new technology-driven products and services or be successful in marketing or supporting these products and services to its customers, which could have a material adverse impact on Comerica's financial condition and results of operations.
•Competitive product and pricing pressures within Comerica's markets may change.
Comerica operates in a very competitive environment, which is characterized by competition from a number of other financial institutions in each market in which it operates. Comerica competes in termslargely on the basis of industry expertise, the range of products and services offered, pricing and reputation, customer convenience, quality customer service and responsiveness to customer needs and the overall relationship with our clients. Our competitors are large national and regional financial institutions and withas well as smaller financial institutions. Some of Comerica's larger competitors, including certain nationwide banks that have a significant presence in Comerica's market area, may make available to their customers a broader array of product, pricing and structure alternatives and, due to their asset size, may more easily absorb credit losses in a larger overall portfolio. Some of Comerica's competitors (larger or smaller) may have more liberal lending policies and processes. Increasingly, Comerica competes with other companies based on financial technology and capabilities, such as mobile banking applications and funds transfer.
Additionally, the financial services industry is subject to extensive regulation. For more information, see the “Supervision and Regulation” section of this report. Such regulations may require significant additional investments in technology, personnel or other resources or place limitations on the ability of financial institutions, including Comerica, to engage in certain activities. Comerica's competitors may be subject to a significantly different or reduced degree of regulation due to their asset size or types of products offered. They may also have the ability to more efficiently utilize resources to comply with regulations or may be able to more effectively absorb the costs of regulations into their existing cost structure.
In addition to banks, Comerica's banking subsidiaries also face competition from other financial intermediaries, including savings and loan associations, consumer and commercial finance companies, leasing companies, venture capital funds, credit unions, investment banks, insurance companies and securities firms. Competition among providers of financial products and services continues to increase as technology advances have lowered the barriers to entry for financial technology companies, with customers having the opportunity to select from a growing variety of traditional and nontraditional alternatives, including crowdfunding, digital wallets and money transfer services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to many of the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures.
If Comerica is unable to compete effectively in products and pricing in its markets, business could decline, which could have a material adverse effect on Comerica's business, financial condition or results of operations.
•The introduction, implementation, withdrawal, success and timing of business initiatives and strategies may be less successful or may be different than anticipated, which could adversely affect Comerica's business.
Comerica makes certain projections and develops plans and strategies for its banking and financial products. If Comerica does not accurately determine demand for its banking and financial product needs, it could result in
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Comerica incurring significant expenses without the anticipated increases in revenue, which could result in a material adverse effect on its business. Recently Comerica expanded its presence in the Southeastern U.S. by establishing commercial offices in North Carolina. If Comerica's expansion is not successful, it could adversely impact Comerica's expenses.
•Management's ability to maintain and expand customer relationships may differ from expectations.
The financial services industry is very competitive. Comerica not only vies for business opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers. While management believes that it can continue to grow many of these relationships, Comerica will continue to experience pressures to maintain these relationships as its competitors attempt to capture its customers. These pressures may be exacerbated by the continued disruption to in-person activities due to COVID-19. Failure to create new customer relationships and to maintain and expand existing customer relationships to the extent anticipated may adversely impact Comerica's earnings.
•Management's ability to retain key officers and employees may change.
Comerica's future operating results depend substantially upon the continued service of its executive officers and key personnel. Comerica's future operating results also depend in significant part upon its ability to attract and retain qualified management, financial, technical, marketing, sales and support personnel. Competition for qualified personnel is intense, and Comerica cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for Comerica to hire personnel over time.
Further, Comerica's ability to retain key officers and employees may be impacted by legislation and regulation affecting the financial services industry. In 2016, the FRB, OCC and several other federal financial regulators revised and re-proposed rules to implement Section 956 of the Dodd-Frank Act. Section 956 directed regulators to jointly prescribe regulations or guidelines prohibiting incentive-based payment arrangements, or any feature of any such arrangement, at covered financial institutions that encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss. Consistent with the Dodd-Frank Act, the proposed rule would impose heightened standards for institutions with $50 billion or more in total consolidated assets, which includes Comerica. For these larger institutions, the proposed rule would require the deferral of at least 40 percent of incentive-based payments for designated executives and significant risk-takers who individually have the ability to expose the institution to possible losses that are substantial in relation to the institution's size, capital or overall risk tolerance. Moreover, incentive-based compensation of these individuals would be subject to potential clawback for seven years following vesting. Further, the rule imposes enhanced risk management controls and governance and internal policy and procedure requirements with respect to incentive compensation. Accordingly, Comerica may be at a disadvantage to offer competitive compensation compared to other financial institutions (as referenced above) or companies in other industries, which may not be subject to the same requirements.
Comerica's business, financial condition or results of operations could be materially adversely affected by the loss of any of its key employees, or Comerica's inability to attract and retain skilled employees.
•Any future strategic acquisitions or divestitures may present certain risks to Comerica's business and operations.
Difficulties in capitalizing on the opportunities presented by a future acquisition may prevent Comerica from fully achieving the expected benefits from the acquisition, or may cause the achievement of such expectations to take longer to realize than expected.
Further, the assimilation of any acquired entity's customers and markets could result in higher than expected deposit attrition, loss of key employees, disruption of Comerica's businesses or the businesses of the acquired entity or otherwise adversely affect Comerica's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. These matters could have an adverse effect on Comerica for an undetermined period. Comerica would be subject to similar risks and difficulties in connection with any future decisions to downsize, sell or close units or otherwise change the business mix of Comerica.
21
GENERAL RISK
•The COVID-19 pandemic has and will likely continue to adversely impact our business, and the ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. As a result of the continued uncertainty related to the pandemic and its variants, the demand for our products and services has been, and is expected to continue to be, significantly impacted. Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan portfolios and has increased and could further increase our allowance for credit losses, as long as some businesses' operations are impacted, and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. In response to the pandemic, we granted hardship relief assistance for customers experiencing financial difficulty as a result of COVID-19, including loan deferrals. As of December 31, 2021, pandemic-related payment deferrals totaled $22 million, representing approximately 10 obligors and consisting entirely of retail loans, primarily residential mortgages. Certain industries have been particularly susceptible to the effects of the pandemic, such as retail commercial real estate, retail goods and services, hotels, arts/recreation, airlines, restaurants and bars, childcare, coffee shops, cruise lines, education, gasoline and convenience stores, religious organizations, senior living, freight and travel arrangements, and Comerica has outstanding loans to clients in these industries, as described below under "Other Sectors Most at Risk due to Economic Stress Resulting from COVID-19 Impacts" on page F-26. Comerica's business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
•General political, economic or industry conditions, either domestically or internationally, may be less favorable than expected.
Local, domestic, and international events including economic, financial market, political and industry specific conditions affect the financial services industry, directly and indirectly. The economic environment and market conditions in which Comerica operates continue to be uncertain. While many U.S.stimulus packages, the rollout of the COVID vaccine, strong business spending and improved labor markets contributed to an overall improved economic indicators at the end of 2019 were positive and consistent with an ongoing economic expansion, activityoutlook in the U.S. manufacturing sector slowed and trade policy and weak global demand remained major sources of2021, there continues to be uncertainty for businesses and markets. Conditions related to the impact of emerging COVID-19 variants and vaccine efficacy, supply chain constraints, future monetary and fiscal support and inflationary pressures. Conditions related to the COVID-19 pandemic, inflation, recession, unemployment, volatile interest rates, international conflicts, changes in trade policies and other factors, such as real estate values, energy prices, state and local municipal budget deficits, government spending and the U.S. national debt, outside of our control may, directly and indirectly, adversely affect Comerica.
•Methods of reducing risk exposures might not be effective.
Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, market, liquidity, technology, operational, compliance, financial reporting and strategic risks could be less effective than anticipated. As a result, Comerica may not be able to effectively mitigate its risk exposures in particular market environments or against particular types of risk, which could have a material adverse impact on Comerica's business, financial condition or results of operations.
For more information regarding risk management, please see "Risk Management" starting on pages F-20 through F-33page F-17 of the Financial Section of this report.
•Catastrophic events may adversely affect the general economy, financial and capital markets, specific industries, and Comerica.
Acts of terrorism, cyber-terrorism, political unrest, war, civil disturbance, armed regional and international hostilities and international responses to these hostilities, natural disasters (including tornadoes, hurricanes, earthquakes, fires, droughts and floods), global health risks or pandemics, or the threat of or perceived potential for these events could have a negative impact on us. Comerica’s business continuity and disaster recovery plans may not be successful upon the occurrence of one of these scenarios, and a significant catastrophic event anywhere in the world could materially adversely affect Comerica's operating results.
22
In particular, certain of the regions where Comerica operates, including California, Texas, and Florida, are known for being vulnerable to natural disasters, the nature and severity of which may be impacted by climate change. These types of natural catastrophic events have at times disrupted the local economies, Comerica's business and customers, and have caused physical damage to Comerica's property in these regions.
Further, catastrophic events may have an impact on Comerica's customers and in turn, on Comerica.
In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm Comerica's operations. Any of these events could increase volatility in the U.S. and world financial markets, which could harm Comerica's stock price and may limit the capital resources available to Comerica and its customers. This could have a material adverse impact on Comerica's operating results, revenues and costs and may result in increased volatility in the market price of Comerica's common stock.
•Changes in accounting standards could materially impact Comerica's financial statements.
From time to time accounting standards setters change the financial accounting and reporting standards that govern the preparation of Comerica’s financial statements. These changes can be difficult to predict and can materially impact how Comerica records and reports its financial condition and results of operations. In some cases, Comerica could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.
•Comerica's accounting estimates and processes are critical to the reporting of financial condition and results of operations. They require management to make estimates about matters that are uncertain.
Accounting estimates and processes are fundamental to how Comerica records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting estimates and processes so they comply with U.S. Generally Accepted Accounting Principles ("GAAP"). In some cases, management must select an accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in the Company reporting materially different results than would have been reported under a different alternative.
Management has identified certain accounting estimates as being critical because they require management's judgment to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. Comerica has established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding management's judgments and the estimates pertaining to these matters, Comerica cannot guarantee that it will not be required to adjust accounting policies or restate prior period financial statements. See “Critical Accounting Estimates” starting on page F-34 of the Financial Section of this report and Note 1 of the Notes to Consolidated Financial Statements starting on page F-46 of the Financial Section of this report.
•Comerica's stock price can be volatile.
Stock price volatility may make it more difficult for shareholders to resell their common stock when they want and at prices they find attractive. Comerica's stock price can fluctuate significantly in response to a variety of factors including, among other things:
•Actual or anticipated variations in quarterly results of operations.
•Recommendations or projections by securities analysts.
•Operating and stock price performance of other companies that investors deem comparable to Comerica.
•News reports relating to trends, concerns and other issues in the financial services industry.
•Perceptions in the marketplace regarding Comerica and/or its competitors.
•New technology used, or services offered, by competitors.
•Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving Comerica or its competitors.
•Changes in dividends and capital returns.
•Changes in government regulations.
•Cyclical fluctuations.
•Geopolitical conditions such as acts or threats of terrorism or military conflicts.
•Activity by short sellers and changing government restrictions on such activity.
23
General market fluctuations, including real or anticipated changes in the strength of the economy; industry factors and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes, oil price volatility or credit loss trends, among other factors, could also cause Comerica's stock price to decrease regardless of operating results.
For the above and other reasons, the market price of Comerica's securities may not accurately reflect the underlying value of the securities, and investors should consider this before relying on the market prices of Comerica's securities when making an investment decision.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The executive offices of Comerica are located in the Comerica Bank Tower, 1717 Main Street, Dallas, Texas 75201. Comerica Bank occupies six floors of the building, plus additional space on the building's lower level. Comerica does not own the Comerica Bank Tower space, but has naming rights to the building and leases the space from an unaffiliated third party. The lease for such space used by Comerica and its subsidiaries extends through September 2028. Comerica's Michigan headquarters are located in a 10-story building in the central business district of Detroit, Michigan at 411 W. Lafayette, Detroit, Michigan 48226. Such building is owned by Comerica Bank. As of December 31, 2019,2021, Comerica, through its banking affiliates, operated at a total of 550557 locations. This includes banking centers, trust services locations, and/or loan production or other financial services offices, primarily in the States of Texas, Michigan, California, Florida and Arizona. Of the 550557 locations, 221217 were owned and 329340 were leased. As of December 31, 2019,2021, affiliates also operated from leased spaces in Denver, Colorado; Wilmington, Delaware; Oakbrook Terrace, Illinois; Boston, Massachusetts; Minneapolis, Minnesota; Morristown, New Jersey; New York, New York; Charlotte, North Carolina; Raleigh, North Carolina; Winston-Salem, North Carolina; Memphis, Tennessee; McLean, Virginia; Bellevue, Washington; Monterrey, Mexico; Toronto, Ontario, Canada and Windsor, Ontario, Canada. Comerica and its subsidiaries own, among other properties, a check processing center in Livonia, Michigan, and three buildings in Auburn Hills, Michigan, used mainly for lending functions and operations.
Item 3. Legal Proceedings.
Please see Note 21 of the Notes to Consolidated Financial Statements locatedstarting on pages F-92 through F-93page F-94 of the Financial Section of this report.
Item 4. Mine Safety Disclosures.
Not applicable.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information, Holders of Common Stock and Dividends
The common stock of Comerica Incorporated is traded on the New York Stock Exchange (NYSE Trading Symbol: CMA). At February 7, 2020,14, 2022, there were approximately 8,695 8,203 record holders of Comerica's common stock.
Performance Graph
Our performance graph is available under the caption "Performance Graph" on page F-2 of the Financial Section of this report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes Comerica's share repurchase activity for the year ended December 31, 20192021.
| (shares in thousands) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Remaining Repurchase Authorization (a) | Total Number of Shares Purchased (b) | Average Price Paid Per Share | |||||||||||||||||||
| Total first quarter 2021 | — | 4,870 | 55 | $ | 61.39 | ||||||||||||||||||
| Total second quarter 2021 | 5,882 | 8,988 | 5,884 | 76.51 | |||||||||||||||||||
| Total third quarter 2021 | 3,050 | 5,938 | 3,052 | 72.12 | |||||||||||||||||||
| October 2021 | — | 5,938 | 1 | 80.79 | |||||||||||||||||||
| November 2021 | 564 | 5,374 | 564 | 88.63 | |||||||||||||||||||
| December 2021 | — | 5,374 | — | — | |||||||||||||||||||
| Total fourth quarter 2021 | 564 | 5,374 | 565 | 88.61 | |||||||||||||||||||
| Total 2021 | 9,496 | 5,374 | 9,556 | $ | 75.73 | ||||||||||||||||||
(a).Maximum number of shares that may yet be purchased under the publicly announced plans or programs.
(b)Includes approximately 60,000 shares (including 1,000 shares in the quarter ended December 31, 2021) 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 year ended December 31, 2021. These transactions are not considered part of Comerica's repurchase program.
| (shares in thousands) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Remaining Repurchase Authorization (a) | Total Number of Shares Purchased (b) | Average Price Paid Per Share | ||||||||
| Total first quarter 2019 | 5,094 | 14,613 | (c) | 5,216 | $ | 83.48 | ||||||
| Total second quarter 2019 | 5,656 | 8,957 | 5,658 | 75.13 | ||||||||
| Total third quarter 2019 | 5,734 | 3,223 | 5,739 | 64.53 | ||||||||
| October 2019 | — | 3,223 | 3 | 65.47 | ||||||||
| November 2019 | 901 | 9,322 | (d) | 903 | 69.90 | |||||||
| December 2019 | 1,225 | 8,097 | 1,231 | 70.84 | ||||||||
| Total fourth quarter 2019 | 2,126 | 8,097 | 2,137 | 70.44 | ||||||||
| Total 2019 | 18,610 | 8,097 | 18,750 | $ | 73.67 | |||||||
Item 6. Selected Financial Data.[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Reference is made to the sections entitled “2019“2021 Overview, and 2020 Outlook,” “Results of Operations," "Strategic Lines of Business," "Balance Sheet and Capital Funds Analysis," "Risk Management," "Critical Accounting Policies,Estimates," "Supplemental Financial Data" and "Forward-Looking Statements" on pages F-4F-3 through F-39F-40 of the Financial Section of this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Reference is made to the subheadings entitled “Market and Liquidity Risk,” “Operational Risk,” "Technology Risk," “Compliance Risk” and “Strategic Risk” on pages F-28F-27 through F-33 of the Financial Section of this report.
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Item 8. Financial Statements and Supplementary Data.
Reference is made to the sections entitled “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Comprehensive Income,” “Consolidated Statements of Changes in Shareholders' Equity,” “Consolidated Statements of Cash Flows,” “Notes to Consolidated Financial Statements,” “Report of Management,” and “Reports of Independent Registered Public Accounting Firm,” and “Historical Review”Firm” (PCAOB ID: 42) on pages F-40F-41 through F-109 of the Financial Section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, management, including the Chief Executive Officer and Interim Chief Financial Officer, conducted an evaluation as of the end of the period covered by this Annual Report on Form 10-K, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that Comerica's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Internal Control over Financial Reporting
Management's annual report on internal control over financial reporting and the related attestation report of Comerica's registered public accounting firm are included on pages F-103F-106 and F-104F-107 in the Financial Section of this report.
As required by Rule 13a-15(d) of the Exchange Act, management, including the Chief Executive Officer and Interim Chief Financial Officer, conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the last quarter of the fiscal year covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, Comerica's internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that there has been no such change during the last quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, Comerica's internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Comerica has a Senior Financial Officer Code of Ethics that applies to the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer and the Treasurer. The Senior Financial Officer Code of Ethics is available on Comerica's website at www.comerica.com. If any substantive amendments are made to the Senior Financial Officer Code of Ethics or if Comerica grants any waiver, including any implicit waiver, from a provision of the Senior Financial Officer Code of Ethics to the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer or the Treasurer, we will disclose the nature of such amendment or waiver on our website.
The remainder of the response to this item will be included under the sections captioned “Information About Nominees,” “Board and Committee Governance,” “Committees and Meetings of Directors,” and “Executive Officers” of Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 2020,26, 2022, which sections are hereby incorporated by reference.
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Item 11. Executive Compensation.
The response to this item will be included under the sections captioned “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation of Directors,” “Governance, Compensation and Nominating Committee Report,” “2019“2021 Summary Compensation Table,” “2019“2021 Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End 2019,2021,” “2019“2021 Option Exercises and Stock Vested,” “Pension Benefits at Fiscal Year-End 2019,2021,” “2019“2021 Nonqualified Deferred Compensation,” “Potential Payments upon Termination or Change of Control at Fiscal Year-End 2019”2021” and "Pay Ratio Disclosure" of Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 2020,26, 2022, which sections are hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The response to this item will be included under the sections captioned “Security Ownership of Certain Beneficial Owners,” “Security Ownership of Management” and "Securities Authorized for Issuance Under Equity Compensation Plans" of
Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 2020,26, 2022, which sections are hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The response to this item will be included under the sections captioned “Director Independence,” “Transactions with Related Persons,” and “Information about Nominees” of Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 2020,26, 2022, which sections are hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services.
The response to this item will be included under the section captioned “Independent Registered Public Accounting Firm” of Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 2020,26, 2022, which section is hereby incorporated by reference.
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PART IV
Item 15. Exhibits and Financial Statement SchedulesSchedules.
The following documents are filed as a part of this report:
| 1. | Financial Statements: The financial statements that are filed as part of this report are included in the Financial Section on pages | |||||||
| 2. | All of the schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instruction, the required information is contained elsewhere in the Form 10-K, or the schedules are inapplicable and therefore have been omitted. | |||||||
| Exhibits: |
| 2 | (not applicable) | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4 | [Reference is made to Exhibits 3.1, 3.2, 3.3 and | |||||||
| 4.2 | ||||||||
| 9 | (not applicable) | |||||||
| 10.1† | ||||||||
| A† | ||||||||
| B† | ||||||||
| C† | ||||||||
| D† | ||||||||
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29
| 10.4† | ||||||||
| A† | ||||||||
| B† | ||||||||
| C† | ||||||||
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| D† | ||||||||
| E† | ||||||||
| A† | ||||||||
| 10.15† | ||||||||
| A† | ||||||||
| A† | ||||||||
| A† | ||||||||
| (not applicable) | ||||||||
| 14 | (not applicable) | |||||||
| 16 | (not applicable) | |||||||
| 18 | (not applicable) | |||||||
| 21 | ||||||||
| 22 | (not applicable) | |||||||
| 23.1 | ||||||||
| 24 | (not applicable) | |||||||
| 31.1 | ||||||||
31
| 31.2 | ||||||||
| 32 | ||||||||
| 33 | (not applicable) | |||||||
| 34 | (not applicable) | |||||||
| 35 | (not applicable) | |||||||
| 95 | (not applicable) | |||||||
| (not applicable) | ||||||||
| (not applicable) | ||||||||
| 101 | Financial statements from the Registrant's Annual Report on Form 10-K for the year ended December 31, | |||||||
| 104 | The cover page from the Registrant's Annual Report on Form 10-K for the year ended December 31, | |||||||
| † | Management contract or compensatory plan or arrangement. | |||||||
| File No. for all filings under Exchange Act, unless otherwise noted: 1-10706. | ||||||||
Item 16. Form 10-K SummarySummary.
Not applicable.
32
FINANCIAL REVIEW AND REPORTS
Comerica Incorporated and Subsidiaries
F-1
PERFORMANCE GRAPH
The graph shown below compares the total returns (assuming reinvestment of dividends) of Comerica Incorporated common stock, the S&P 500 Index and the KBW Bank Index. The graph assumes $100 invested in Comerica Incorporated common stock (returns based on stock prices per the NYSE) and each of the indices on December 31, 20142016 and the reinvestment of all dividends during the periods presented.
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
| Comerica Incorporated | 100 | 129 | 105 | 113 | 94 | 152 | ||||||||||||||
| KBW Bank Index | 100 | 119 | 98 | 133 | 119 | 165 | ||||||||||||||
| S&P 500 Index | 100 | 122 | 116 | 153 | 181 | 233 | ||||||||||||||
The performance shown on the graph is not necessarily indicative of future performance.
F-2
| (dollar amounts in millions, except per share data) | ||||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| EARNINGS SUMMARY | ||||||||||||||||||||
| Net interest income | $ | 2,339 | $ | 2,352 | $ | 2,061 | $ | 1,797 | $ | 1,689 | ||||||||||
| Provision for credit losses | 74 | (1 | ) | 74 | 248 | 147 | ||||||||||||||
| Noninterest income | 1,010 | 976 | (a) | 1,107 | 1,051 | 1,035 | ||||||||||||||
| Noninterest expenses | 1,743 | 1,794 | (a), (b) | 1,860 | (b) | 1,930 | (b) | 1,827 | ||||||||||||
| Provision for income taxes | 334 | 300 | 491 | (c) | 193 | 229 | ||||||||||||||
| Net income | 1,198 | 1,235 | 743 | 477 | 521 | |||||||||||||||
| Net income attributable to common shares | 1,191 | 1,227 | 738 | 473 | 515 | |||||||||||||||
| PER SHARE OF COMMON STOCK | ||||||||||||||||||||
| Diluted earnings per common share | $ | 7.87 | $ | 7.20 | $ | 4.14 | $ | 2.68 | $ | 2.84 | ||||||||||
| Cash dividends declared | 2.68 | 1.84 | 1.09 | 0.89 | 0.83 | |||||||||||||||
| Common shareholders’ equity | 51.57 | 46.89 | 46.07 | 44.47 | 43.03 | |||||||||||||||
| Tangible common equity (d) | 47.07 | 42.89 | 42.34 | 40.79 | 39.33 | |||||||||||||||
| Market value | 71.75 | 68.69 | 86.81 | 68.11 | 41.83 | |||||||||||||||
| Average diluted shares (in millions) | 151 | 171 | 178 | 177 | 181 | |||||||||||||||
| YEAR-END BALANCES | ||||||||||||||||||||
| Total assets | $ | 73,402 | $ | 70,818 | $ | 71,567 | $ | 72,978 | $ | 71,877 | ||||||||||
| Total earning assets | 67,767 | 65,513 | 65,880 | 67,518 | 66,687 | |||||||||||||||
| Total loans | 50,369 | 50,163 | 49,173 | 49,088 | 49,084 | |||||||||||||||
| Total deposits | 57,295 | 55,561 | 57,903 | 58,985 | 59,853 | |||||||||||||||
| Total medium- and long-term debt | 7,269 | 6,463 | 4,622 | 5,160 | 3,058 | |||||||||||||||
| Total common shareholders’ equity | 7,327 | 7,507 | 7,963 | 7,796 | 7,560 | |||||||||||||||
| AVERAGE BALANCES | ||||||||||||||||||||
| Total assets | $ | 71,488 | $ | 70,724 | $ | 71,452 | $ | 71,743 | $ | 70,247 | ||||||||||
| Total earning assets | 66,134 | 65,410 | 66,300 | 66,545 | 65,129 | |||||||||||||||
| Total loans | 50,511 | 48,766 | 48,558 | 48,996 | 48,628 | |||||||||||||||
| Total deposits | 55,481 | 55,935 | 57,258 | 57,741 | 58,326 | |||||||||||||||
| Total medium- and long-term debt | 6,955 | 5,842 | 4,969 | 4,917 | 2,905 | |||||||||||||||
| Total common shareholders’ equity | 7,308 | 7,809 | 7,952 | 7,674 | 7,534 | |||||||||||||||
| CREDIT QUALITY | ||||||||||||||||||||
| Total allowance for credit losses | $ | 668 | $ | 701 | $ | 754 | $ | 771 | $ | 679 | ||||||||||
| Total nonperforming loans | 204 | 229 | 410 | 590 | 379 | |||||||||||||||
| Foreclosed property | 11 | 1 | 5 | 17 | 12 | |||||||||||||||
| Total nonperforming assets | 215 | 230 | 415 | 607 | 391 | |||||||||||||||
| Net credit-related charge-offs | 107 | 51 | 92 | 157 | 101 | |||||||||||||||
| Net credit-related charge-offs as a percentage of average total loans | 0.21 | % | 0.11 | % | 0.19 | % | 0.32 | % | 0.21 | % | ||||||||||
| Allowance for loan losses as a percentage of total period-end loans | 1.27 | 1.34 | 1.45 | 1.49 | 1.29 | |||||||||||||||
| Allowance for loan losses as a multiple of total nonperforming loans | 3.1x | 2.9x | 1.7x | 1.2x | 1.7x | |||||||||||||||
| RATIOS | ||||||||||||||||||||
| Net interest margin | 3.54 | % | 3.58 | % | 3.11 | % | 2.71 | % | 2.60 | % | ||||||||||
| Return on average assets | 1.68 | 1.75 | 1.04 | 0.67 | 0.74 | |||||||||||||||
| Return on average common shareholders’ equity | 16.39 | 15.82 | 9.34 | 6.22 | 6.91 | |||||||||||||||
| Dividend payout ratio | 33.71 | 25.17 | 25.77 | 32.48 | 28.33 | |||||||||||||||
| Average common shareholders’ equity as a percentage of average assets | 10.22 | 11.04 | 11.13 | 10.70 | 10.73 | |||||||||||||||
| Common equity tier 1 capital as a percentage of risk-weighted assets | 10.13 | 11.14 | 11.68 | 11.09 | 10.54 | |||||||||||||||
| Tier 1 capital as a percentage of risk-weighted assets | 10.13 | 11.14 | 11.68 | 11.09 | 10.54 | |||||||||||||||
| Common equity ratio | 9.98 | 10.60 | 11.13 | 10.68 | 10.52 | |||||||||||||||
| Tangible common equity as a percentage of tangible assets (d) | 9.19 | 9.78 | 10.32 | 9.89 | 9.70 | |||||||||||||||
Comerica Incorporated (the Corporation) is a financial holding company headquartered in Dallas, Texas. The Corporation's major business segments are the BusinessCommercial Bank, the Retail Bank and Wealth Management. The core businesses are tailored to each of the Corporation's three primary geographic markets: Michigan, California and Texas. Information about the activities of the Corporation's business segments is provided in Note 22 to the consolidated financial statements.
As a financial institution, the Corporation's principal activity is lending to and accepting deposits from businesses and individuals. The primary source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and investment securities and interest paid on deposits and other funding sources. The Corporation also provides other products and services that meet the financial needs of customers which generate noninterest income, the Corporation's secondary source of revenue. Growth in loans, deposits and noninterest income is affected by many factors, including economic conditions in the markets the Corporation serves, the financial requirements and economic health of customers, and the ability to add new customers and/or increase the number of products used by current customers. Success in providing products and services depends on the financial needs of customers and the types of products desired.
The accounting and reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles (GAAP) in the United States (U.S.). 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. When necessary, the Corporation uses reasonable assumptions to develop estimates that affect the consolidated results of operations. The most critical of these significant accounting policiesestimates are discussed in the “Critical Accounting Policies”Estimates” section of this financial review.
Full-Year 20192021 compared to Full-Year 20182020
•
Net income decreased $37increased $671 million or 3 percent, to $1.2 billion.billion, driven by a benefit in the provision for credit losses as credit metrics and the economic outlook improved from the height of the pandemic in 2020. Net income was also impacted by record noninterest income, partially offset by higher noninterest expenses driven by increased performance-related compensation and lower net interest income related to the continued low rate environment. Diluted net income per diluted common share was a record $7.87$8.35 in 20192021 compared to $7.20$3.43 in 2018, an increase of 9 percent.2020.
•Average loans increased $1.7decreased $2.5 billion, or 45 percent, to $50.5 billion. The increase primarily reflected increases$49.1 billion, reflecting declines in National Dealer Services, Energy, Technology and Life Sciences, Mortgage Banker Finance National Dealer Services,and general Middle Market, partially offset by increases in Equity Fund Services, Entertainment and Commercial Real Estate.Environmental Services. Average Paycheck Protection Program (PPP) loans, which are reported within lines of business, decreased $200 million to $2.3 billion. Period-end PPP loans were $459 million at December 31, 2021, a decrease of $3.0 billion compared to $3.5 billion at December 31, 2020.
•Average securities increased $2.3 billion, or 17 percent, to $15.7 billion, reflecting investment of a portion of excess liquidity into mortgage-backed securities.
•Average deposits decreased $454 millionincreased $12.6 billion, or 19 percent, to $55.5 billion. a record $77.7 billion, driven by customer profitability and capital markets activity, as well as the liquidity injected into the economy through fiscal and monetary actions.
•Average noninterest-bearing deposits decreased $2.6increased $8.4 billion, or 925 percent, driven by customers shifting balances to interest-bearing deposits and utilizing their deposits to fund growth, acquisitions and capital expenditures as well as choosing other investment options. Averagewhile average interest-bearing deposits increased $2.1$4.3 billion, or 8 percent, driven by increases of $1.3 billion in relationship-based deposits and $703 million in other time deposits.13 percent.
•Net interest income decreased $13$67 million to $2.3$1.8 billion, and the net interest margin decreased 433 basis points to 3.54 percent. Both decreases were2.21 percent, primarily driven by the impact of higher interest-bearing deposit and debt balances,reflecting lower interest rates, partially offset by the benefit from higher loan balances and the net impact of higher short-term rates.an increase in PPP income.
•The provision for credit losses increased $75 million to $74 million in 2019 fromwas a benefit of $1$384 million, compared to an expense of $537 million in 2018, primarily due to a decline2020, reflecting strong credit quality and the economy re-opening as well as improvements in valuationsthe economic forecast and in the Energy portfolio since the onset of select liquidating Energy credits.the pandemic in 2020.
•Noninterest income increased $34$122 million to $1.0$1.1 billion, including growthreflecting increases in derivative income, card fees, a decrease in losses related to securities repositioningcommercial lending fees, fiduciary income and higher deferred compensation asset returns, partially offset by lower service charges on deposit accounts.
•Noninterest expenses increased technology-related expenses$107 million to $1.9 billion, primarily due to increases in salaries and benefits expense, outside processing fees.fee expense, consulting fees and litigation-related expenses, partially offset by decreases in non-salary pension expense, operational losses and FDIC insurance expense.
•The provision for income taxes increased $34$198 million to $334$322 million, primarily due to a $31 million decrease inhigher pre-tax income, partially offset by higher discrete tax benefits.
•The Corporation repurchased approximately 18.69.5 million shares of common stock under the equity repurchase program and issued cashdeclared common dividends of $2.68$2.72 per share, a 46 percent increase.share. Altogether, $1.8$1.1 billion was returned to shareholders, an increasecommon shareholders. Additionally, the Corporation declared $23 million in preferred dividends.
F-3
RESULTS OF OPERATIONS
The following provides a comparative discussion of the Corporation's consolidated results of operations for 20192021 compared to 2018.2020. A comparative discussion of results for 20182020 compared to 20172019 is provided in the "Results of Operations" section beginning on page F-6F-5 of the Corporation's 20182020 Annual Report. For a discussion of the Critical Accounting Policies that affect the consolidated results of operations, see the "Critical Accounting Policies" section of this financial review.
Analysis of Net Interest Income
| (dollar amounts in millions) | |||||||||||||||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||
| Commercial loans (a) | $ | 29,283 | $ | 1,009 | 3.45 | % | $ | 32,144 | $ | 1,099 | 3.42 | % | $ | 32,053 | $ | 1,544 | 4.81 | % | |||||||||||||||||
| Real estate construction loans | 3,609 | 123 | 3.40 | 3,912 | 147 | 3.76 | 3,325 | 184 | 5.54 | ||||||||||||||||||||||||||
| Commercial mortgage loans | 10,610 | 305 | 2.88 | 9,839 | 320 | 3.25 | 9,170 | 447 | 4.88 | ||||||||||||||||||||||||||
| Lease financing (b) | 596 | (2) | (0.37) | 594 | 20 | 3.37 | 557 | 19 | 3.44 | ||||||||||||||||||||||||||
| International loans | 1,063 | 33 | 3.14 | 1,028 | 37 | 3.61 | 1,019 | 52 | 5.13 | ||||||||||||||||||||||||||
| Residential mortgage loans | 1,813 | 55 | 3.04 | 1,905 | 66 | 3.45 | 1,929 | 74 | 3.85 | ||||||||||||||||||||||||||
| Consumer loans | 2,109 | 71 | 3.34 | 2,209 | 84 | 3.80 | 2,458 | 119 | 4.85 | ||||||||||||||||||||||||||
| Total loans (c) | 49,083 | 1,594 | 3.25 | 51,631 | 1,773 | 3.44 | 50,511 | 2,439 | 4.83 | ||||||||||||||||||||||||||
| Mortgage-backed securities (d) | 11,747 | 224 | 1.92 | 9,820 | 221 | 2.30 | 9,348 | 230 | 2.44 | ||||||||||||||||||||||||||
| U.S. Treasury securities (e) | 3,977 | 56 | 1.42 | 3,612 | 70 | 1.98 | 2,772 | 67 | 2.43 | ||||||||||||||||||||||||||
| Total investment securities | 15,724 | 280 | 1.79 | 13,432 | 291 | 2.21 | 12,120 | 297 | 2.44 | ||||||||||||||||||||||||||
| Interest-bearing deposits with banks | 18,729 | 27 | 0.14 | 10,203 | 28 | 0.27 | 3,360 | 69 | 2.05 | ||||||||||||||||||||||||||
| Other short-term investments | 183 | — | 0.22 | 153 | 1 | 0.72 | 143 | 2 | 1.26 | ||||||||||||||||||||||||||
| Total earning assets | 83,719 | 1,901 | 2.27 | 75,419 | 2,093 | 2.79 | 66,134 | 2,807 | 4.24 | ||||||||||||||||||||||||||
| Cash and due from banks | 1,006 | 878 | 887 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses | (729) | (900) | (667) | ||||||||||||||||||||||||||||||||
| Accrued income and other assets | 6,156 | 5,749 | 5,134 | ||||||||||||||||||||||||||||||||
| Total assets | $ | 90,152 | $ | 81,146 | $ | 71,488 | |||||||||||||||||||||||||||||
| Money market and interest-bearing checking deposits | $ | 31,063 | 18 | 0.06 | $ | 26,798 | 72 | 0.27 | $ | 23,417 | 214 | 0.91 | |||||||||||||||||||||||
| Savings deposits | 3,018 | — | 0.01 | 2,454 | 1 | 0.03 | 2,166 | 1 | 0.05 | ||||||||||||||||||||||||||
| Customer certificates of deposit | 2,110 | 4 | 0.21 | 2,626 | 27 | 1.02 | 2,522 | 30 | 1.18 | ||||||||||||||||||||||||||
| Other time deposits | — | — | — | 17 | — | 2.00 | 705 | 17 | 2.44 | ||||||||||||||||||||||||||
| Foreign office time deposits | 49 | — | 0.08 | 90 | 1 | 0.42 | 27 | — | 1.39 | ||||||||||||||||||||||||||
| Total interest-bearing deposits | 36,240 | 22 | 0.06 | 31,985 | 101 | 0.31 | 28,837 | 262 | 0.91 | ||||||||||||||||||||||||||
| Short-term borrowings | 2 | — | — | 314 | 1 | 0.32 | 369 | 9 | 2.39 | ||||||||||||||||||||||||||
| Medium- and long-term debt | 3,035 | 35 | 1.11 | 6,549 | 80 | 1.23 | 6,955 | 197 | 2.82 | ||||||||||||||||||||||||||
| Total interest-bearing sources | 39,277 | 57 | 0.14 | 38,848 | 182 | 0.47 | 36,161 | 468 | 1.29 | ||||||||||||||||||||||||||
| Noninterest-bearing deposits | 41,441 | 33,053 | 26,644 | ||||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 1,481 | 1,554 | 1,375 | ||||||||||||||||||||||||||||||||
| Shareholders’ equity | 7,953 | 7,691 | 7,308 | ||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 90,152 | $ | 81,146 | $ | 71,488 | |||||||||||||||||||||||||||||
| Net interest income/rate spread | $ | 1,844 | 2.13 | $ | 1,911 | 2.32 | $ | 2,339 | 2.95 | ||||||||||||||||||||||||||
| Impact of net noninterest-bearing sources of funds | 0.08 | 0.22 | 0.59 | ||||||||||||||||||||||||||||||||
| Net interest margin (as a percentage of average earning assets) | 2.21 | % | 2.54 | % | 3.54 | % | |||||||||||||||||||||||||||||
(a)Included Paycheck Protection Program (PPP) loans with average balances of $2.3 billion and $2.5 billion, interest income of $111 million and $63 million and average yields of 4.77% and 2.49% for the years ended December 31, 2021 and December 31, 2020, respectively. Period-end net unamortized deferred fees totaled $10 million and $55 million at December 31, 2021 and December 31, 2020, respectively.
(b)The year ended December 31, 2021 included residual value adjustments totaling $20 million, which impacted the average yield on loans by 4 basis points.
(c)Nonaccrual loans are included in average balances reported and in the calculation of average rates.
(d)Average balances included $61 million, $213 million and $(36) million of unrealized gains and losses for the years ended December 31, 2021, 2020 and 2019, respectively; yields calculated gross of these unrealized gains and losses.
(e)Average balances included $27 million, $90 million and $30 million of unrealized gains for the years ended December 31, 2021, 2020 and 2019, respectively; yields calculated gross of these unrealized gains.
F-4
| (dollar amounts in millions) | ||||||||||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | |||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||
| Commercial loans | $ | 32,053 | $ | 1,544 | 4.82 | % | $ | 30,534 | $ | 1,416 | 4.64 | % | $ | 30,415 | $ | 1,162 | 3.82 | % | ||||||||
| Real estate construction loans | 3,325 | 184 | 5.54 | 3,155 | 164 | 5.21 | 2,958 | 124 | 4.18 | |||||||||||||||||
| Commercial mortgage loans | 9,170 | 447 | 4.88 | 9,131 | 429 | 4.69 | 9,005 | 358 | 3.97 | |||||||||||||||||
| Lease financing | 557 | 19 | 3.44 | 470 | 18 | 3.82 | 509 | 13 | 2.63 | |||||||||||||||||
| International loans | 1,019 | 52 | 5.13 | 1,021 | 51 | 4.97 | 1,157 | 47 | 4.07 | |||||||||||||||||
| Residential mortgage loans | 1,929 | 74 | 3.85 | 1,983 | 75 | 3.77 | 1,989 | 74 | 3.70 | |||||||||||||||||
| Consumer loans | 2,458 | 119 | 4.85 | 2,472 | 109 | 4.41 | 2,525 | 94 | 3.70 | |||||||||||||||||
| Total loans (a) | 50,511 | 2,439 | 4.83 | 48,766 | 2,262 | 4.64 | 48,558 | 1,872 | 3.85 | |||||||||||||||||
| Mortgage-backed securities | 9,348 | 230 | 2.44 | 9,099 | 214 | 2.28 | 9,330 | 202 | 2.17 | |||||||||||||||||
| Other investment securities | 2,772 | 67 | 2.43 | 2,711 | 51 | 1.86 | 2,877 | 48 | 1.66 | |||||||||||||||||
| Total investment securities | 12,120 | 297 | 2.44 | 11,810 | 265 | 2.19 | 12,207 | 250 | 2.05 | |||||||||||||||||
| Interest-bearing deposits with banks | 3,360 | 69 | 2.05 | 4,700 | 91 | 1.94 | 5,443 | 60 | 1.09 | |||||||||||||||||
| Other short-term investments | 143 | 2 | 1.26 | 134 | 1 | 0.96 | 92 | — | 0.64 | |||||||||||||||||
| Total earning assets | 66,134 | 2,807 | 4.24 | 65,410 | 2,619 | 3.99 | 66,300 | 2,182 | 3.29 | |||||||||||||||||
| Cash and due from banks | 887 | 1,135 | 1,209 | |||||||||||||||||||||||
| Allowance for loan losses | (667 | ) | (695 | ) | (728 | ) | ||||||||||||||||||||
| Accrued income and other assets | 5,134 | 4,874 | 4,671 | |||||||||||||||||||||||
| Total assets | $ | 71,488 | $ | 70,724 | $ | 71,452 | ||||||||||||||||||||
| Money market and interest-bearing checking deposits | $ | 23,417 | 214 | 0.91 | $ | 22,378 | 111 | 0.50 | $ | 21,585 | 33 | 0.15 | ||||||||||||||
| Savings deposits | 2,166 | 1 | 0.05 | 2,199 | 1 | 0.04 | 2,133 | — | 0.02 | |||||||||||||||||
| Customer certificates of deposit | 2,522 | 30 | 1.18 | 2,090 | 10 | 0.46 | 2,470 | 9 | 0.36 | |||||||||||||||||
| Other time deposits | 705 | 17 | 2.44 | 2 | — | 1.86 | 1 | — | 1.10 | |||||||||||||||||
| Foreign office time deposits (b) | 27 | — | 1.39 | 25 | — | 1.19 | 56 | — | 0.64 | |||||||||||||||||
| Total interest-bearing deposits | 28,837 | 262 | 0.91 | 26,694 | 122 | 0.46 | 26,245 | 42 | 0.16 | |||||||||||||||||
| Short-term borrowings | 369 | 9 | 2.39 | 62 | 1 | 1.93 | 277 | 3 | 1.14 | |||||||||||||||||
| Medium- and long-term debt | 6,955 | 197 | 2.82 | 5,842 | 144 | 2.47 | 4,969 | 76 | 1.51 | |||||||||||||||||
| Total interest-bearing sources | 36,161 | 468 | 1.29 | 32,598 | 267 | 0.82 | 31,491 | 121 | 0.38 | |||||||||||||||||
| Noninterest-bearing deposits | 26,644 | 29,241 | 31,013 | |||||||||||||||||||||||
| Accrued expenses and other liabilities | 1,375 | 1,076 | 996 | |||||||||||||||||||||||
| Total shareholders’ equity | 7,308 | 7,809 | 7,952 | |||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 71,488 | $ | 70,724 | $ | 71,452 | ||||||||||||||||||||
| Net interest income/rate spread | $ | 2,339 | 2.95 | $ | 2,352 | 3.17 | $ | 2,061 | 2.91 | |||||||||||||||||
| Impact of net noninterest-bearing sources of funds | 0.59 | 0.41 | 0.20 | |||||||||||||||||||||||
| Net interest margin (as a percentage of average earning assets) | 3.54 | % | 3.58 | % | 3.11 | % | ||||||||||||||||||||
Rate/Volume Analysis
| (in millions) | |||||||||||||||||||||||||||||||||||||||||
| Years Ended December 31 | 2021/2020 | 2020/2019 | |||||||||||||||||||||||||||||||||||||||
| Decrease Due to Rate | Increase (Decrease) Due to Volume (a) | Net (Decrease) Increase | Decrease Due to Rate | Increase (Decrease) Due to Volume (a) | Net Increase (Decrease) | ||||||||||||||||||||||||||||||||||||
| Interest Income: | |||||||||||||||||||||||||||||||||||||||||
| Commercial loans | $ | (1) | $ | (89) | $ | (90) | $ | (447) | $ | 2 | $ | (445) | |||||||||||||||||||||||||||||
| Real estate construction loans | (14) | (10) | (24) | (59) | 22 | (37) | |||||||||||||||||||||||||||||||||||
| Commercial mortgage loans | (37) | 22 | (15) | (149) | 22 | (127) | |||||||||||||||||||||||||||||||||||
| Lease financing | (22) | — | (22) | — | 1 | 1 | |||||||||||||||||||||||||||||||||||
| International loans | (5) | 1 | (4) | (15) | — | (15) | |||||||||||||||||||||||||||||||||||
| Residential mortgage loans | (8) | (3) | (11) | (7) | (1) | (8) | |||||||||||||||||||||||||||||||||||
| Consumer loans | (10) | (3) | (13) | (26) | (9) | (35) | |||||||||||||||||||||||||||||||||||
| Total loans | (97) | (82) | (179) | (703) | 37 | (666) | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | (37) | 40 | 3 | (14) | 5 | (9) | |||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | (20) | 6 | (14) | (12) | 15 | 3 | |||||||||||||||||||||||||||||||||||
| Total investment securities | (57) | 46 | (11) | (26) | 20 | (6) | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with banks | (13) | 12 | (1) | (59) | 18 | (41) | |||||||||||||||||||||||||||||||||||
| Other short-term investments | (1) | — | (1) | (1) | — | (1) | |||||||||||||||||||||||||||||||||||
| Total interest income | (168) | (24) | (192) | (789) | 75 | (714) | |||||||||||||||||||||||||||||||||||
| Interest Expense: | |||||||||||||||||||||||||||||||||||||||||
| Money market and interest-bearing checking deposits | (56) | 2 | (54) | (151) | 9 | (142) | |||||||||||||||||||||||||||||||||||
| Savings deposits | (1) | — | (1) | — | — | — | |||||||||||||||||||||||||||||||||||
| Customer certificates of deposit | (22) | (1) | (23) | (4) | 1 | (3) | |||||||||||||||||||||||||||||||||||
| Other time deposits | — | — | — | (16) | (1) | (17) | |||||||||||||||||||||||||||||||||||
| Foreign office time deposits | (1) | — | (1) | — | 1 | 1 | |||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | (80) | 1 | (79) | (171) | 10 | (161) | |||||||||||||||||||||||||||||||||||
| Short-term borrowings | — | (1) | (1) | (8) | — | (8) | |||||||||||||||||||||||||||||||||||
| Medium- and long-term debt | (7) | (38) | (45) | (110) | (7) | (117) | |||||||||||||||||||||||||||||||||||
| Total interest expense | (87) | (38) | (125) | (289) | 3 | (286) | |||||||||||||||||||||||||||||||||||
| Net interest income | $ | (81) | $ | 14 | $ | (67) | $ | (500) | $ | 72 | $ | (428) | |||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Years Ended December 31 | 2019/2018 | 2018/2017 | |||||||||||||||||||||||
Increase (Decrease) Due to Rate | Increase (Decrease) Due to Volume (a) | Net Increase (Decrease) | Increase Due to Rate | Increase (Decrease) Due to Volume (a) | Net Increase (Decrease) | ||||||||||||||||||||
| Interest Income: | |||||||||||||||||||||||||
| Commercial loans | $ | 54 | $ | 74 | $ | 128 | $ | 248 | $ | 6 | $ | 254 | |||||||||||||
| Real estate construction loans | 11 | 9 | 20 | 30 | 10 | 40 | |||||||||||||||||||
| Commercial mortgage loans | 16 | 2 | 18 | 65 | 6 | 71 | |||||||||||||||||||
| Lease financing | (2 | ) | 3 | 1 | 6 | (1 | ) | 5 | |||||||||||||||||
| International loans | 1 | — | 1 | 11 | (7 | ) | 4 | ||||||||||||||||||
| Residential mortgage loans | 1 | (2 | ) | (1 | ) | 1 | — | 1 | |||||||||||||||||
| Consumer loans | 11 | (1 | ) | 10 | 17 | (2 | ) | 15 | |||||||||||||||||
| Total loans | 92 | 85 | 177 | 378 | 12 | 390 | |||||||||||||||||||
| Mortgage-backed securities | 15 | 1 | 16 | 12 | — | 12 | |||||||||||||||||||
| Other investment securities | 17 | (1 | ) | 16 | 5 | (2 | ) | 3 | |||||||||||||||||
| Total investment securities | 32 | — | 32 | 17 | (2 | ) | 15 | ||||||||||||||||||
| Interest-bearing deposits with banks | 5 | (27 | ) | (22 | ) | 46 | (15 | ) | 31 | ||||||||||||||||
| Other short-term investments | — | 1 | 1 | 1 | — | 1 | |||||||||||||||||||
| Total interest income | 129 | 59 | 188 | 442 | (5 | ) | 437 | ||||||||||||||||||
| Interest Expense: | |||||||||||||||||||||||||
| Money market and interest-bearing checking deposits | 96 | 7 | 103 | 74 | 4 | 78 | |||||||||||||||||||
| Savings deposits | — | — | — | 1 | — | 1 | |||||||||||||||||||
| Customer certificates of deposit | 10 | 10 | 20 | 3 | (2 | ) | 1 | ||||||||||||||||||
| Other time deposits | — | 17 | 17 | — | — | — | |||||||||||||||||||
| Total interest-bearing deposits | 106 | 34 | 140 | 78 | 2 | 80 | |||||||||||||||||||
| Short-term borrowings | — | 8 | 8 | 2 | (4 | ) | (2 | ) | |||||||||||||||||
| Medium- and long-term debt | 16 | 37 | 53 | 50 | 18 | 68 | |||||||||||||||||||
| Total interest expense | 122 | 79 | 201 | 130 | 16 | 146 | |||||||||||||||||||
| Net interest income | $ | 7 | $ | (20 | ) | $ | (13 | ) | $ | 312 | $ | (21 | ) | $ | 291 | ||||||||||
Net interest income is the difference between interest earned on assets and interest paid on liabilities. Gains and losses related to risk management interest rate swaps that convert fixed rate debt to a floating rate and qualify as fair value hedges are included in interest expense on medium- and long-term debt. Additionally, the portion of gains and losses on risk management interest rate swaps that convert variable-rate loans to fixed rates through cash flow hedges that relate to the earnings effect of the hedged loans during the period are included in loan interest income. Refer to the Analysis of Net Interest Income and the Rate/Volume Analysis tables above for an analysis of net interest income for the years ended December 31, 2019, 20182021, 2020 and 20172019 and details of the components of the change in net interest income for 20192021 compared to 20182020 as well as 20182020 compared to 2017.2019.
Net interest income was $2.3$1.8 billion for the year ended December 31, 2021, a decrease of $13 million.$67 million compared to the year ended December 31, 2020. The impact todecrease in net interest income from higherreflected lower yields on earning assets and a decrease in loan balances, of interest-bearing sources of fundspartially offset by an increase in PPP income and lower balances withrates paid on deposits and debt. Net interest margin was 2.21 percent for the Federal Reserve Bank (FRB) (includedyear ended December 31, 2021, a decrease of 33 basis points compared to 2.54 percent for the comparable period in 2020. The decrease in net interest margin reflected the decline in the average 30-day LIBOR, from 0.52 percent for the year ended December 31, 2020 to 0.10 percent for the year ended December 31, 2021.
Average earning assets increased $8.3 billion, due to increases of $8.5 billion in interest-bearing deposits with banks) was mostly offset by higher loan balancesbanks and the net impact of higher short-term rates. Earning assets increased $724 million, primarily reflecting increases of $1.7$2.3 billion in loans and $310 million in investment securities, partially offset by a $1.3$2.5 billion decrease in loans. Average interest-bearing deposits with banks. Interest-bearingfunding sources increased $3.6 billion,$429 million, primarily reflecting a $2.1$4.3 billion increase in interest-bearing deposits, andpartially offset by a $1.1$3.5 billion increasedecrease in medium- and long-term debt.
The Corporation utilizes various asset and liability management strategies to manage net interest income exposure to interest rate risk. Refer to the “Market and Liquidity Risk” section of this financial review for additional information regarding the Corporation's asset and liability management policies and the “Balance Sheet and Capital Funds Analysis” section for further discussion on changes in earning assets and interest-bearing liabilities.
F-5
Provision for Credit Losses
The provision for credit losses was $74 million, compared to a benefit of $1 million.$384 million for the year ended December 31, 2021, compared to an expense of $537 million for the year ended December 31, 2020. The change in provision for credit losses includes both the provision for loan lossesreflected strong credit quality and the provision for credit losses on lending-related commitments.
Noninterest Income
| (in millions) | ||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | 2019 | |||||||||||||||||
| Card fees | $ | 298 | $ | 270 | $ | 257 | ||||||||||||||
| Fiduciary income | 231 | 209 | 206 | |||||||||||||||||
| Service charges on deposit accounts | 195 | 185 | 203 | |||||||||||||||||
| Commercial lending fees | 104 | 77 | 91 | |||||||||||||||||
| Derivative income (a) | 99 | 67 | 76 | |||||||||||||||||
| Bank-owned life insurance | 43 | 44 | 41 | |||||||||||||||||
| Letter of credit fees | 40 | 37 | 38 | |||||||||||||||||
| Brokerage fees | 14 | 21 | 28 | |||||||||||||||||
| Net securities losses | — | — | (7) | |||||||||||||||||
| Other noninterest income (a), (b) | 99 | 91 | 77 | |||||||||||||||||
| Total noninterest income | $ | 1,123 | $ | 1,001 | $ | 1,010 | ||||||||||||||
(a)Beginning in first quarter 2021, the Corporation reported customer derivative income, previously a component of other noninterest income, and foreign exchange income as a combined item captioned by derivative income on the Consolidated Statements of Income. Prior periods have been adjusted to conform to this presentation, and the "Credit Risk" section of this financial review.changes in presentation do not impact total noninterest income.
The table below provides further details on certain categories included in other noninterest income.
| (in millions) | ||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 (a) | |||||||||
| Card fees | $ | 257 | $ | 244 | $ | 333 | ||||||
| Fiduciary income | 206 | 206 | 198 | |||||||||
| Service charges on deposit accounts | 203 | 211 | 227 | |||||||||
| Commercial lending fees | 91 | 85 | 85 | |||||||||
| Foreign exchange income | 44 | 47 | 45 | |||||||||
| Bank-owned life insurance | 41 | 39 | 43 | |||||||||
| Letter of credit fees | 38 | 40 | 45 | |||||||||
| Brokerage fees | 28 | 27 | 23 | |||||||||
| Net securities losses | (7 | ) | (19 | ) | — | |||||||
| Other noninterest income (b) | 109 | 96 | 108 | |||||||||
| Total noninterest income | $ | 1,010 | $ | 976 | $ | 1,107 | ||||||
Noninterest income increased $34$122 million to $1.0 billion, compared to $976 million. The change$1.1 billion. Increases in noninterestderivative income, included losses of $8 million and $20 million related to repositioning of the securities portfolio in 2019 and 2018, respectively, and an $11 million increase in deferred compensation asset returns (offset in noninterest expenses). The remaining $11 million increase was primarily due to increases in card fees, commercial lending fees, fiduciary income and customer derivative income,service charges on deposit accounts were partially offset by a decrease in service charges on deposit accounts.brokerage fees. Noninterest income was also impacted by an increase in other noninterest income, driven by higher income from principal investing and warrants, partially offset by market valuation adjustments recorded in securities trading income.
Card fees consist primarily of interchange and other fee income earned on government prepaid card, commercial card, debit/Automated Teller Machine (ATM) card and merchant payment processing services. Card fees increased $13$28 million, or 5 percent. The increase was primarily due to volume-driven10 percent, driven by volume increases in both merchant payment processing services and government cards mostly related to additional stimulus payments resulting in higher interchange revenue. Additionally, both commercial and consumer card programs.volumes increased as social distancing restrictions were relaxed.
Fiduciary income, consisting of fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided primarily to personal and institutional trust customers, increased $22 million, or 11 percent. The increase was driven by new sales and higher market-based fees as well as increased investment advisory fees, partially offset by decreased institutional trust fees related to lower rates.
Service charges on deposit accounts consist primarily of charges on retail and business accounts, including fees for treasury management services. Service charges on deposit accounts decreased $8increased $10 million, or 3 percent. The decrease primarily reflected higher earnings credit allowances provided on6 percent, as volume returned to pre-pandemic levels, leading to increased commercial customer deposit balances due to the increase in short-term interest rates.activity.
Commercial lending fees include the assessmentsfees assessed on the unused portion of lines of credit (unused commitment fees), syndication agent fees and loan servicing fees. These fees increased $6$27 million, or 735 percent, reflecting higher syndication agent fees due to growth in the average size and number of deals, as well as increased loan commitment fees related to lower utilization rates on lines of credit.
Derivative income consists of net gains and losses recognized on customer-initiated derivative instruments, net of the impact of offsetting positions. Derivative income increased $32 million, or 47 percent, primarily reflecting an increasedue to favorable credit valuation adjustments, partially offset by a decrease in syndication agent fees.interest rate swap activity.
F-6
Brokerage fees are commissions earned for facilitating securities transactions for customers as well as other brokerage services provided. Brokerage fees decreased $7 million, or 33 percent, primarily due to lower money market funds fee revenue as spreads remained compressed resulting from a decline in the federal funds rate since 2020.
Other noninterest income increased $13$8 million, or 138 percent, as detailed below, driven by increaseshigher income from principal investing and warrants related to warrant exercises, partially offset by lower securities trading income due to fair value adjustments on previously converted warrants.
| (in millions) | |||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Income from principal investing and warrants | $ | 34 | $ | 3 | $ | 7 | |||||||||||||||||
| Deferred compensation asset returns (a) | 14 | 16 | 9 | ||||||||||||||||||||
| Investment banking fees | 11 | 11 | 6 | ||||||||||||||||||||
| Net gain on sale of business (b) | — | — | 6 | ||||||||||||||||||||
| Securities trading income (c) | (1) | 23 | 9 | ||||||||||||||||||||
| All other noninterest income | 41 | 38 | 40 | ||||||||||||||||||||
| Other noninterest income | $ | 99 | $ | 91 | $ | 77 | |||||||||||||||||
(a) Compensation deferred by the Corporation's officers and directors is invested based on investment selections of $11 millionthe officers and directors. Income earned on these assets is reported in noninterest income and the offsetting change in deferred compensation asset returns (offsetplan liabilities is reported in noninterest expenses)salaries and $6 million in customer derivative income as well as a $6 million gainbenefits expense.
(b) Gain on the sale of the Corporation's Health Savings Account business as illustratedbusiness.
(c) Includes changes in value of shares obtained through exercise of warrants.
Noninterest Expenses
| (in millions) | |||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | 2019 | ||||||||||||||
| Salaries and benefits expense | $ | 1,133 | $ | 1,019 | $ | 1,020 | |||||||||||
| Outside processing fee expense | 266 | 242 | 264 | ||||||||||||||
| Occupancy expense | 161 | 156 | 154 | ||||||||||||||
| Software expense | 155 | 154 | 117 | ||||||||||||||
| Equipment expense | 50 | 49 | 50 | ||||||||||||||
| Advertising expense | 35 | 35 | 34 | ||||||||||||||
| FDIC insurance expense | 22 | 33 | 23 | ||||||||||||||
| Other noninterest expenses (a) | 39 | 66 | 75 | ||||||||||||||
| Total noninterest expenses (a) | $ | 1,861 | $ | 1,754 | $ | 1,737 | |||||||||||
(a)The years ended December 31, 2020 and 2019 have been recast to reflect the following table. These increases were partially offset
| (in millions) | |||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | ||||||||||
| Customer derivative income | $ | 32 | $ | 26 | $ | 26 | |||||||
| Investment banking fees | 6 | 9 | 9 | ||||||||||
| Securities trading income | 9 | 8 | 8 | ||||||||||
| Income from principal investing and warrants | 7 | 4 | 6 | ||||||||||
| Deferred compensation asset returns (a) | 9 | (2 | ) | 8 | |||||||||
| Net gain on sale of business (b) | 6 | — | — | ||||||||||
| All other noninterest income | 40 | 51 | 51 | ||||||||||
| Other noninterest income | $ | 109 | $ | 96 | $ | 108 | |||||||
| (in millions) | ||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 (a) | |||||||||
| Salaries and benefits expense | $ | 1,020 | $ | 1,009 | $ | 961 | ||||||
| Outside processing fee expense | 264 | 255 | 366 | |||||||||
| Occupancy expense | 154 | 152 | 154 | |||||||||
| Software expense | 117 | 125 | 126 | |||||||||
| Equipment expense | 50 | 48 | 45 | |||||||||
| Advertising expense | 34 | 30 | 28 | |||||||||
| FDIC insurance expense | 23 | 42 | 51 | |||||||||
| Restructuring charges | — | 53 | 45 | |||||||||
| Other noninterest expenses | 81 | 80 | 84 | |||||||||
| Total noninterest expenses | $ | 1,743 | $ | 1,794 | $ | 1,860 | ||||||
Noninterest expenses decreased $51increased $107 million to $1.7 billion. Excluding $53 million in restructuring charges completed in 2018, noninterest expenses increased $2 million,$1.9 billion, primarily due to increases inhigher salaries and benefits expense, outside processing fee expense, consulting fees advertising expense and smaller increases in various other categories, mostlylitigation-related expenses, partially offset by decreases in FDIC insurance expense,non-salary pension expense, operational losses and softwareFDIC insurance expense.
Salaries and benefits expense increased $11$114 million, or 1 percent. The increase in salaries and benefits expense was11 percent, reflecting higher performance-based incentive compensation (including share-based compensation) driven by higherstrong financial results, staff insurance expense and technology-related labor costs, deferred compensation expense (offset in noninterest income) and merit increases, partially offset by lower incentive compensation tied to financial performance.contract labor.
Outside processing fee expense increased $9$24 million, or 310 percent, compared to $255 million in 2018, primarily due to volume-drivendata processing support for PPP loans and volume-related increases in merchant payment and government card processing expenses, which are tied to card fee revenues, increased hosting expenses associated with migrating to cloud-based platforms and a $4 million vendor transition fee incurred in 2019, partially offset by a $7 million reduction in processing expenses related to the end of a retirement savings program in 2018.
FDIC insurance expense decreased $19$11 million, or 4533 percent, primarily due to the completion of FDIC surcharges in 2018.
Other noninterest expenses included a decreasedecreased $27 million, or 41 percent, driven by declines of $34 million in non-salary pension expense and $18 million in operational losses related to several one-time events in 2020, partially offset by increases of $14 million in other pensionconsulting fees and postretirement benefit costs, mostly offset by increases of $5$10 million due to a state business tax refund in 2018 and $3 million each in operational losses and consulting fees.litigation-related expenses.
Income Taxes and Related Items
The provision for income taxes was $334$322 million in 2019,2021, compared to $300$124 million in 2018.2020. The $34$198 million increase in the provision for income taxes primarily reflected higher pre-tax income partially offset by a $31$7 million decreaseincrease in discrete tax benefits to $17 million in 2019 from $48 million in 2018. The discrete tax benefit in 2018 primarily resulted from a review of certain tax capitalization and recovery positions related to software and fixed assets included in the 2017 tax return and tax benefits of $22 million from employee stock transactions. The discrete benefit in 2019 included $5 millionresulting from adjustments to annual federal filings, resolution of certain state tax filings in third quarter of 2019matters and tax benefits of $12 million from employee stock transactions.
F-7
Net deferred tax assets were $42$9 million at December 31, 2019,2021, compared to $166$3 million at December 31, 2018.2020. Refer to Note 18 to the consolidated financial statements for information about the components of net deferred tax assets. Deferred tax assets of $329$344 million were evaluated for realization and it was determined that a valuation allowance of $3$5 million related tofor federal foreign tax credits and certain state net operating loss (NOL) carryforwards was needed at both December 31, 2019 and 2018. These conclusions were based2021, compared to a valuation allowance of $3 million for certain state NOL carryforwards at December 31, 2020. For further information on available evidencethe Corporation’s valuation policy for deferred tax assets, refer to Note 1.
F-8
STRATEGIC LINES OF BUSINESS
The Corporation has strategically aligned its operations into three major business segments: the BusinessCommercial 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 the 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 22 to the consolidated financial statements describes the Corporation's segment reporting methodology as well as the business activities of each business segment and presents financial results of the business and market segments for the years ended December 31, 2019, 20182021, 2020 and 2017.2019.
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.
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). The FTP methodology allocates credits to each business segment for deposits and other funds provided as well as charges for loans and other assets being funded. FTP crediting rates on deposits and other funds provided reflect the long-term value of deposits and other funding sources based on their implied maturities. Due to the longer-term nature of implied maturities, FTP crediting rates are generally less volatile than changes in interest rates observed in the market. FTP charge rates for funding loans and other assets reflect a matched cost of funds based on the pricing and duration characteristics of the assets. As a result of applying matched funding, interest revenue for each segment resulting from loans and other assets is generally not impacted by changes in interest rates. Therefore, net interest income for each segment primarily reflects the volume of loans and other earning assets at the spread over the matched cost of funds, as well as the volume of deposits at the associated FTP impactscrediting rates. Due to the impact of loan and deposit levels. As overall marketlower interest rates, were higher in 2019, business segments, particularly those focused on generating deposits, benefited from higherwere impacted by lower FTP crediting rates on deposits compared to the prior year. Similarly, FTP charges for funding loans were higherdecreased in 2019. Effective January 1, 2019, the Corporation prospectively discontinued allocating an additional FTP charge for the cost2021.
The following table presents net income (loss) by business segment.
| (dollar amounts in millions) | |||||||||||||||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Commercial Bank | $ | 1,329 | 89 | % | $ | 668 | 90 | % | $ | 1,022 | 82 | % | |||||||||||||||||||||||
| Retail Bank | 43 | 3 | 2 | — | 85 | 7 | |||||||||||||||||||||||||||||
| Wealth Management | 124 | 8 | 78 | 10 | 141 | 11 | |||||||||||||||||||||||||||||
| 1,496 | 100 | % | 748 | 100 | % | 1,248 | 100 | % | |||||||||||||||||||||||||||
| Finance | (331) | (253) | (57) | ||||||||||||||||||||||||||||||||
| Other | 3 | 2 | 11 | ||||||||||||||||||||||||||||||||
| Total | $ | 1,168 | $ | 497 | $ | 1,202 | |||||||||||||||||||||||||||||
F-9
The following sections present a summary of the performance of each of the Corporation's business and market segments for 20192021 compared to 2018.2020.
| Years Ended December 31, | Percent Change | ||||||||||||||||||||||
| (dollar amounts in millions) | 2021 | 2020 | Change | ||||||||||||||||||||
| Earnings summary: | |||||||||||||||||||||||
| Net interest income | $ | 1,577 | $ | 1,607 | $ | (30) | (2)% | ||||||||||||||||
| Provision for credit losses | (346) | 495 | (841) | n/m | |||||||||||||||||||
| Noninterest income | 663 | 555 | 108 | 19 | |||||||||||||||||||
| Noninterest expenses | 873 | 815 | 58 | 7 | |||||||||||||||||||
| Provision for income taxes | 384 | 184 | 200 | n/m | |||||||||||||||||||
| Net income | $ | 1,329 | $ | 668 | $ | 661 | 99 | ||||||||||||||||
| Net credit-related (recoveries) charge-offs | $ | (12) | $ | 192 | $ | (204) | n/m | ||||||||||||||||
| Selected average balances: | |||||||||||||||||||||||
| Loans (a) | $ | 41,804 | $ | 44,123 | $ | (2,319) | (5)% | ||||||||||||||||
| Deposits | 45,587 | 36,603 | 8,984 | 25 | |||||||||||||||||||
(a) Included PPP loans with average balances of $1.8 billion and $2.0 billion for the years ended December 31, 2021 and 2020, respectively.
n/m - not meaningful
Average loans decreased $2.3 billion, reflecting decreases in National Dealer Services related to supply chain issues resulting in lower inventory levels and in Energy related to reduced production activity, as well as declines in Technology and Life Sciences, Mortgage Banker Finance and general Middle Market, partially offset by growth in Equity Fund Services, Entertainment and Environmental Services. Average deposits increased $9.0 billion, reflecting increases in all deposit categories due to customers' solid profitability and capital markets activity. The following table presents net income (loss) by business segment.
| (dollar amounts in millions) | ||||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | |||||||||||||||||
| Business Bank | $ | 1,021 | 82 | % | $ | 1,024 | 85 | % | $ | 755 | 90 | % | ||||||||
| Retail Bank | 83 | 7 | 65 | 5 | (6 | ) | (1 | ) | ||||||||||||
| Wealth Management | 140 | 11 | 121 | 10 | 87 | 11 | ||||||||||||||
| 1,244 | 100 | % | 1,210 | 100 | % | 836 | 100 | % | ||||||||||||
| Finance (a) | (56 | ) | (1 | ) | (23 | ) | ||||||||||||||
| Other (b) | 10 | 26 | (70 | ) | ||||||||||||||||
| Total | $ | 1,198 | $ | 1,235 | $ | 743 | ||||||||||||||
Retail Bank
| Years Ended December 31, | Percent Change | ||||||||||||||||||||||
| (dollar amounts in millions) | 2021 | 2020 | Change | ||||||||||||||||||||
| Earnings summary: | |||||||||||||||||||||||
| Net interest income | $ | 565 | $ | 503 | $ | 62 | 13% | ||||||||||||||||
| Provision for credit losses | (5) | 7 | (12) | n/m | |||||||||||||||||||
| Noninterest income | 123 | 110 | 13 | 12 | |||||||||||||||||||
| Noninterest expenses | 645 | 607 | 38 | 6 | |||||||||||||||||||
| Provision (benefit) for income taxes | 5 | (3) | 8 | n/m | |||||||||||||||||||
| Net income | $ | 43 | $ | 2 | $ | 41 | n/m | ||||||||||||||||
| Net credit-related charge-offs | $ | 2 | $ | 1 | $ | 1 | 66% | ||||||||||||||||
| Selected average balances: | |||||||||||||||||||||||
| Loans (a) | $ | 2,382 | $ | 2,468 | $ | (86) | (3%) | ||||||||||||||||
| Deposits | 25,682 | 22,832 | 2,850 | 12 | |||||||||||||||||||
(a) Included PPP loans with average balances of $428 million and $401 million for the years ended December 31, 2021 and 2020, respectively.
n/m - not meaningful
F-10
Average loans decreased $86 million while average deposits increased $2.9 billion, reflecting increases in all deposit categories with the exception of time deposits. The Retail Bank's net income increased $41 million to $43 million. Net interest income increased $62 million to $565 million, primarily due to higher deposit volumes earning FTP charges and a $61 million increase in deposit costs.crediting rates. The provision for credit losses increased $82decreased $12 million to $88a benefit of $5 million. Noninterest income increased $13 million, mostly driven by higher card fees. Noninterest expenses increased $38 million, primarily due to increases in corporate overhead and litigation-related expenses, partially offset by a decrease in operational losses.
Wealth Management
| Years Ended December 31, | Percent Change | ||||||||||||||||||||||
| (dollar amounts in millions) | 2021 | 2020 | Change | ||||||||||||||||||||
| Earnings summary: | |||||||||||||||||||||||
| Net interest income | $ | 166 | $ | 167 | $ | (1) | —% | ||||||||||||||||
| Provision for credit losses | (32) | 35 | (67) | n/m | |||||||||||||||||||
| Noninterest income | 279 | 263 | 16 | 6 | |||||||||||||||||||
| Noninterest expenses | 317 | 295 | 22 | 8 | |||||||||||||||||||
| Provision for income taxes | 36 | 22 | 14 | 64 | |||||||||||||||||||
| Net income | $ | 124 | $ | 78 | $ | 46 | 60% | ||||||||||||||||
| Net credit-related charge-offs | $ | — | $ | 3 | $ | (3) | (93)% | ||||||||||||||||
| Selected average balances: | |||||||||||||||||||||||
| Loans (a) | $ | 4,903 | $ | 5,045 | $ | (142) | (3%) | ||||||||||||||||
| Deposits | 5,218 | 4,402 | 816 | 19 | |||||||||||||||||||
(a) Included PPP loans with average balances of $127 million and $134 million for the years ended December 31, 2021 and 2020, respectively.
n/m - not meaningful
Average loans remained relatively stable, while average deposits increased $816 million, reflecting increases in all deposit categories with the exception of time deposits. Wealth Management's net income increased $46 million to $124 million. Net interest income was relatively stable, while provision for credit losses decreased $67 million to a benefit of $32 million due to the improving economic outlook. Noninterest income increased $16 million to $279 million, primarily reflecting an increase in Energy reserves. Net credit-related charge-offs increased $59 million to $111 million, primarily due to a decline in valuations of select liquidating Energy credits, partially offset by decreases in general Middle Market and Technology and Life Sciences. Noninterestfiduciary income, increased $8 million, primarily reflecting increases of $12 million in card fees and $6 million in commercial lending fees, partially offset by a $4 million decrease in income from tax credit investments, as well as smaller decreases in other categories. Excluding restructuring charges of $30 million in 2018, noninterest expenses decreased $22 million, primarily reflecting decreases of $15 million in corporate overhead and $14 million in FDIC insurance expense, partially offset by an increase of $7 million in outside processing fee expense.
| (dollar amounts in millions) | ||||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | |||||||||||||||||
| Michigan | $ | 369 | 30 | % | $ | 326 | 27 | % | $ | 247 | 30 | % | ||||||||
| California | 456 | 36 | 379 | 31 | 232 | 27 | ||||||||||||||
| Texas | 119 | 10 | 228 | 19 | 175 | 21 | ||||||||||||||
| Other Markets | 300 | 24 | 277 | 23 | 182 | 22 | ||||||||||||||
| 1,244 | 100 | % | 1,210 | 100 | % | 836 | 100 | % | ||||||||||||
| Finance & Other (a) | (46 | ) | 25 | (93 | ) | |||||||||||||||
| Total | $ | 1,198 | $ | 1,235 | $ | 743 | ||||||||||||||
partially offset by a decrease in Technology and Life Sciences. Net credit-related charge-offsbrokerage fees. Noninterest expenses increased $81 million to $93$22 million, primarily reflecting higher corporate overhead and salaries and benefits expenses.
Finance & Other
| Years Ended December 31, | Percent Change | ||||||||||||||||||||||
| (dollar amounts in millions) | 2021 | 2020 | Change | ||||||||||||||||||||
| Earnings summary: | |||||||||||||||||||||||
| Net interest expense | $ | (464) | $ | (366) | $ | (98) | 27% | ||||||||||||||||
| Provision for credit losses | (1) | — | (1) | n/m | |||||||||||||||||||
| Noninterest income | 58 | 73 | (15) | (21) | |||||||||||||||||||
| Noninterest expenses | 26 | 37 | (11) | (30) | |||||||||||||||||||
| Benefit for income taxes | (103) | (79) | (24) | 30 | |||||||||||||||||||
| Net loss | $ | (328) | $ | (251) | $ | (77) | 31% | ||||||||||||||||
| Selected average balances: | |||||||||||||||||||||||
| Deposits | 1,194 | 1,201 | (7) | (1) | |||||||||||||||||||
Average deposits, which primarily consist of brokered and reciprocal deposits, decreased $7 million, reflecting decreases in all interest-bearing deposit categories, partially offset by an increase in Energy. Noninterest income was stable. Excluding restructuring charges of $15noninterest-bearing deposits. Net loss for the Finance and Other category increased $77 million in 2018, noninterest expenses decreased $5to $328 million. Net interest expense increased $98 million to $464 million, primarily reflecting decreasesa decrease in net FTP revenue as a result of $3 million each in salaries and benefits expense and FDIC insurance expense.
F-11
The following table lists the Corporation's banking centers by geographic market segment.market.
| December 31 | 2021 | 2020 | 2019 | ||||||||||||||
| Michigan | 188 | 189 | 192 | ||||||||||||||
| Texas | 124 | 123 | 123 | ||||||||||||||
| California | 95 | 96 | 96 | ||||||||||||||
| Other Markets: | |||||||||||||||||
| Arizona | 17 | 17 | 17 | ||||||||||||||
| Florida | 8 | 7 | 7 | ||||||||||||||
| Canada | 1 | 1 | 1 | ||||||||||||||
| Total Other Markets | 26 | 25 | 25 | ||||||||||||||
| Total | 433 | 433 | 436 | ||||||||||||||
F-12
| December 31 | 2019 | 2018 | 2017 | |||||
| Michigan | 192 | 193 | 194 | |||||
| Texas | 123 | 122 | 122 | |||||
| California | 96 | 96 | 97 | |||||
| Other Markets: | ||||||||
| Arizona | 17 | 17 | 17 | |||||
| Florida | 7 | 7 | 7 | |||||
| Canada | 1 | 1 | 1 | |||||
| Total Other Markets | 25 | 25 | 25 | |||||
| Total | 436 | 436 | 438 | |||||
BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
| (in millions) | |||||||||||||||||||
| December 31 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Investment securities available-for-sale: | |||||||||||||||||||
| U.S. Treasury and other U.S. government agency securities | $ | 2,792 | $ | 2,727 | $ | 2,727 | $ | 2,779 | $ | 2,763 | |||||||||
| Residential mortgage-backed securities (a) | 9,606 | 9,318 | (b) | 8,124 | 7,872 | 7,545 | |||||||||||||
| State and municipal securities | — | — | 5 | 7 | 9 | ||||||||||||||
| Corporate debt securities | — | — | — | — | 1 | ||||||||||||||
| Equity and other non-debt securities | — | — | 82 | 129 | 201 | ||||||||||||||
| Total investment securities available-for-sale | 12,398 | 12,045 | 10,938 | 10,787 | 10,519 | ||||||||||||||
| Investment securities held to maturity: | |||||||||||||||||||
| Residential mortgage-backed securities (a) | — | — | (b) | 1,266 | 1,582 | 1,981 | |||||||||||||
| Total investment securities | $ | 12,398 | $ | 12,045 | $ | 12,204 | $ | 12,369 | $ | 12,500 | |||||||||
| Commercial loans | $ | 31,473 | $ | 31,976 | $ | 31,060 | $ | 30,994 | $ | 31,659 | |||||||||
| Real estate construction loans | 3,455 | 3,077 | 2,961 | 2,869 | 2,001 | ||||||||||||||
| Commercial mortgage loans | 9,559 | 9,106 | 9,159 | 8,931 | 8,977 | ||||||||||||||
| Lease financing | 588 | 507 | 468 | 572 | 724 | ||||||||||||||
| International loans: | |||||||||||||||||||
| Banks and other financial institutions | — | — | 4 | 2 | — | ||||||||||||||
| Commercial and industrial | 1,009 | 1,013 | 979 | 1,256 | 1,368 | ||||||||||||||
| Total international loans | 1,009 | 1,013 | 983 | 1,258 | 1,368 | ||||||||||||||
| Residential mortgage loans | 1,845 | 1,970 | 1,988 | 1,942 | 1,870 | ||||||||||||||
| Consumer loans: | |||||||||||||||||||
| Home equity | 1,711 | 1,765 | 1,816 | 1,800 | 1,720 | ||||||||||||||
| Other consumer | 729 | 749 | 738 | 722 | 765 | ||||||||||||||
| Total consumer loans | 2,440 | 2,514 | 2,554 | 2,522 | 2,485 | ||||||||||||||
| Total loans | $ | 50,369 | $ | 50,163 | $ | 49,173 | $ | 49,088 | $ | 49,084 | |||||||||
Earning Assets
Period-End Loans
| (in millions) | Percent Change | |||||||||||||||||||||||||||||||||||||||||||
| December 31 | 2021 | 2020 | Change | |||||||||||||||||||||||||||||||||||||||||
| Commercial loans | $ | 29,366 | $ | 32,753 | $ | (3,387) | (10) | % | ||||||||||||||||||||||||||||||||||||
| Real estate construction loans | 2,948 | 4,082 | (1,134) | (28) | ||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage loans | 11,255 | 9,912 | 1,343 | 14 | ||||||||||||||||||||||||||||||||||||||||
| Lease financing | 640 | 594 | 46 | 8 | ||||||||||||||||||||||||||||||||||||||||
| International loans | 1,208 | 926 | 282 | 30 | ||||||||||||||||||||||||||||||||||||||||
| Residential mortgage loans | 1,771 | 1,830 | (59) | (3) | ||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 1,533 | 1,588 | (55) | (3) | ||||||||||||||||||||||||||||||||||||||||
| Other consumer | 564 | 606 | (42) | (7) | ||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | 2,097 | 2,194 | (97) | (4) | ||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 49,285 | $ | 52,291 | $ | (3,006) | (6) | % | ||||||||||||||||||||||||||||||||||||
On a period-end basis, total loans increased $206 milliondecreased $3.0 billion to $50.4$49.3 billion at December 31, 2019,2021, compared to $50.2$52.3 billion at December 31, 2018. 2020, which reflected a $3.0 billion decrease in PPP loans.
Average Loans
| (in millions) | Percent Change | ||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | Change | ||||||||||||||||||||
| Average Loans By Business Line: | |||||||||||||||||||||||
| General Middle Market | $ | 11,937 | $ | 12,227 | $ | (290) | (2) | % | |||||||||||||||
| National Dealer Services | 4,349 | 5,967 | (1,618) | (27) | |||||||||||||||||||
| Equity Fund Services | 2,781 | 2,367 | 414 | 18 | |||||||||||||||||||
| Environmental Services | 1,711 | 1,406 | 305 | 22 | |||||||||||||||||||
| Energy | 1,376 | 2,021 | (645) | (32) | |||||||||||||||||||
| Entertainment | 983 | 657 | 326 | 50 | |||||||||||||||||||
| Technology and Life Sciences | 920 | 1,298 | (378) | (29) | |||||||||||||||||||
| Total Middle Market | 24,057 | 25,943 | (1,886) | (7) | |||||||||||||||||||
| Commercial Real Estate | 6,737 | 6,564 | 173 | 3 | |||||||||||||||||||
| Corporate Banking | 4,445 | 4,492 | (47) | (1) | |||||||||||||||||||
| Small Business | 3,732 | 3,948 | (216) | (5) | |||||||||||||||||||
| Mortgage Banker Finance | 2,833 | 3,176 | (343) | (11) | |||||||||||||||||||
| Total Commercial Bank | 41,804 | 44,123 | (2,319) | (5) | |||||||||||||||||||
| Total Retail Bank | 2,382 | 2,468 | (86) | (3) | |||||||||||||||||||
| Total Wealth Management | 4,903 | 5,045 | (142) | (3) | |||||||||||||||||||
| Total Finance and Other | (6) | (5) | (1) | 23 | |||||||||||||||||||
| Total loans | $ | 49,083 | $ | 51,631 | $ | (2,548) | (5) | % | |||||||||||||||
Average total loans increased $1.7decreased $2.5 billion to $50.5$49.1 billion in 2019,2021, compared to $48.8$51.6 billion in 2018. The following tables provide information about the changes in the Corporation's average loan portfolio in 2019, compared to 2018.
| (dollar amounts in millions) | Percent Change | |||||||||||||
| Years Ended December 31 | 2019 | 2018 | Change | |||||||||||
| By Business Line: | ||||||||||||||
| General Middle Market | $ | 12,134 | $ | 11,800 | $ | 334 | 3 | % | ||||||
| National Dealer Services | 7,652 | 7,294 | 358 | 5 | ||||||||||
| Energy | 2,449 | 1,868 | 581 | 31 | ||||||||||
| Equity Fund Services | 2,570 | 2,408 | 162 | 7 | ||||||||||
| Technology and Life Sciences | 1,265 | 1,400 | (135 | ) | (10 | ) | ||||||||
| Environmental Services | 1,200 | 1,099 | 101 | 9 | ||||||||||
| Entertainment | 739 | 731 | 8 | 1 | ||||||||||
| Total Middle Market | 28,009 | 26,600 | 1,409 | 5 | ||||||||||
| Corporate Banking | 4,231 | 4,337 | (106 | ) | (2 | ) | ||||||||
| Mortgage Banker Finance | 2,150 | 1,716 | 434 | 25 | ||||||||||
| Commercial Real Estate | 5,595 | 5,287 | 308 | 6 | ||||||||||
| Small Business | 3,487 | 3,678 | (191 | ) | (5 | ) | ||||||||
| Total Business Bank | 43,472 | 41,618 | 1,854 | 4 | ||||||||||
| Total Retail Bank | 2,104 | 2,067 | 37 | 2 | ||||||||||
| Total Wealth Management | 4,935 | 5,081 | (146 | ) | (3 | ) | ||||||||
| Total loans | $ | 50,511 | $ | 48,766 | $ | 1,745 | 4 | % | ||||||
| By Loan Type: | ||||||||||||||
| Commercial | $ | 32,053 | $ | 30,534 | $ | 1,519 | 5 | % | ||||||
| Real estate construction loans | 3,325 | 3,155 | 170 | 5 | ||||||||||
| Commercial mortgage loans | 9,170 | 9,131 | 39 | — | ||||||||||
| Lease financing | 557 | 470 | 87 | 19 | ||||||||||
| International loans | 1,019 | 1,021 | (2 | ) | — | |||||||||
| Residential mortgage loans | 1,929 | 1,983 | (54 | ) | (3 | ) | ||||||||
| Consumer loans: | ||||||||||||||
| Home equity | 1,769 | 1,749 | 20 | 1 | ||||||||||
| Other consumer | 689 | 723 | (34 | ) | (5 | ) | ||||||||
| Total consumer loans | 2,458 | 2,472 | (14 | ) | (1 | ) | ||||||||
| Total loans | $ | 50,511 | $ | 48,766 | $ | 1,745 | 4 | % | ||||||
| By Geographic Market: | ||||||||||||||
| Michigan | $ | 12,553 | $ | 12,531 | $ | 22 | — | % | ||||||
| California | 18,540 | 18,283 | 257 | 1 | ||||||||||
| Texas | 10,616 | 9,812 | 804 | 8 | ||||||||||
| Other Markets | 8,802 | 8,140 | 662 | 8 | ||||||||||
| Total loans | $ | 50,511 | $ | 48,766 | $ | 1,745 | 4 | % | ||||||
2020. Middle Market business lines generally serve customers with annual revenue between $30 million and $500 million. Within the Middle Market business lines, the largest changes were increasesdecreases in Energy, National Dealer Services and General Middle Market.Energy. National Dealer Services provides floor plan inventory financing and commercial mortgages to auto dealerships. The $1.6 billion decrease in National Dealer Services loans reflected the impact of supply chain issues resulting in lower inventory levels. Customers in the Energy business line are primarily engaged in the oil and gas businesses. The $581$645 million increasedecrease in average Energy loans primarily reflected reduced capital market activity, which drove higher utilization.production activity. For more information on Energy loans, refer to "Energy Lending" in the "Risk Management" section of this financial review. National Dealer Services provides floor plan inventory financing
F-13
| (in millions) | Percent Change | ||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | Change | ||||||||||||||||||||
| Average Loans By Loan Type: | |||||||||||||||||||||||
| Commercial loans (a) | $ | 29,283 | $ | 32,144 | $ | (2,861) | (9) | % | |||||||||||||||
| Real estate construction loans | 3,609 | 3,912 | (303) | (8) | |||||||||||||||||||
| Commercial mortgage loans | 10,610 | 9,839 | 771 | 8 | |||||||||||||||||||
| Lease financing | 596 | 594 | 2 | — | |||||||||||||||||||
| International loans | 1,063 | 1,028 | 35 | 3 | |||||||||||||||||||
| Residential mortgage loans | 1,813 | 1,905 | (92) | (5) | |||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||
| Home equity | 1,554 | 1,667 | (113) | (7) | |||||||||||||||||||
| Other consumer | 555 | 542 | 13 | 2 | |||||||||||||||||||
| Total consumer loans | 2,109 | 2,209 | (100) | (5) | |||||||||||||||||||
| Total loans | $ | 49,083 | $ | 51,631 | $ | (2,548) | (5) | % | |||||||||||||||
Investment Securities
| Maturity (a) | Weighted Average Maturity | ||||||||||||||||||||||||||
| (dollar amounts in millions) | Within 1 Year | 1 - 5 Years | 5 - 10 Years | After 10 Years | Total | ||||||||||||||||||||||
| December 31, 2019 | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Years | ||||||||||||||||
| U.S. Treasury and other U.S. government agency securities | $ | 30 | 1.68 | % | $ | 2,762 | 2.48 | % | $ | — | — | % | $ | — | — | % | $ | 2,792 | 2.47 | % | 2.2 | ||||||
| Residential mortgage-backed securities (b) | — | — | 132 | 3.62 | 1,013 | 2.26 | 8,461 | 2.42 | 9,606 | 2.42 | 22.3 | ||||||||||||||||
| Total investment securities | $ | 30 | 1.68 | % | $ | 2,894 | 2.53 | % | $ | 1,013 | 2.26 | % | $ | 8,461 | 2.42 | % | $ | 12,398 | 2.43 | % | 17.9 | ||||||
| (in millions) | Percent Change | ||||||||||||||||||||||||||||||||||||||||
| December 31 | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 2,993 | $ | 4,658 | $ | (1,665) | (36) | % | |||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities (a) | 13,288 | 10,370 | 2,918 | 28 | |||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities (a) | 705 | — | 705 | n/m | |||||||||||||||||||||||||||||||||||||
| Total investment securities | $ | 16,986 | $ | 15,028 | $ | 1,958 | 13 | % | |||||||||||||||||||||||||||||||||
(a)BasedIssued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
n/m - not meaningful
On a period-end basis, investment securities were $17.0 billion at December 31, 2021, compared to $15.0 billion at December 31, 2020. Mortgage-backed securities increased $3.6 billion due to continued deployment of excess liquidity, partially offset by a $1.7 billion decrease in Treasury securities related to maturities. At December 31, 2021, the effective duration of the Corporation's residential mortgage-backed securities portfolio was approximately 4.2 years. On an average basis, investment securities increased $2.3 billion to $15.7 billion in 2021, compared to $13.4 billion in 2020 as excess liquidity was invested in mortgage-backed securities.
| (weighted average yield) (a) | U.S. Treasury securities | Residential mortgage-backed securities (b) | Commercial mortgage-backed securities (b) | Total investment securities | ||||||||||
| December 31, 2021 | ||||||||||||||
| Maturity (c) | ||||||||||||||
| Within 1 year | 2.48 | % | 2.27 | % | — | % | 2.41 | % | ||||||
| 1-5 Years | 0.93 | 2.42 | — | 1.58 | ||||||||||
| 5-10 Years | — | 2.03 | 1.74 | 1.89 | ||||||||||
| After 10 Years | — | 1.68 | 1.68 | 1.68 | ||||||||||
| Total | 1.02 | % | 1.82 | % | 1.74 | % | 1.68 | % | ||||||
| Weighted Average Maturity (years) | 2.3 | 26.4 | 9.6 | 21.5 | ||||||||||
(a)Weighted average yields are calculated on final contractual maturity.the basis of yield to maturity based on the carrying value of each debt security, aggregated by type and agency.
(b)Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Interest-Bearing Deposits with Banks and Other Short-Term Investments
Interest-bearing deposits with banks primarily include deposits with the Federal Reserve Bank (FRB) and also include deposits with banks in developed countries or international banking facilities of foreign banks located in the United States. Interest-bearing deposits with banks are mostly used to manage liquidity requirements of the Corporation. Interest-bearingOn a period-end basis, interest-bearing deposits with banks increased $1.7$6.7 billion to $4.8$21.4 billion at December 31, 2019.2021, resulting from growth in relationship-based deposits due to continued customer profitability and capital markets activity. On an average basis, interest-bearing deposits with banks decreased $1.3increased $8.5 billion to $3.4$18.7 billion in 2019.2021.
Other short-term investments include federal funds sold, trading securities, money market investments and loans held-for-sale. Substantially all trading securities are deferred compensation plan assets. Loans held-for-sale typically represent residential mortgage loans originated with management's intention to sell and, from time to time, other loans that are transferred
F-14
to held-for-sale. OtherOn a period-end basis, other short-term investments increased $21$25 million to $155$197 million at December 31, 2019.2021. On an average basis, other short-term investments increased $9$30 million to $143$183 million in 2019.2021.
Deposits and Borrowed Funds
| (dollar amounts in millions) | Percent Change | |||||||||||||
| Years Ended December 31 | 2019 | 2018 | Change | |||||||||||
| Noninterest-bearing deposits | $ | 26,644 | $ | 29,241 | $ | (2,597 | ) | (9 | )% | |||||
| Money market and interest-bearing checking deposits | 23,417 | 22,378 | 1,039 | 5 | ||||||||||
| Savings deposits | 2,166 | 2,199 | (33 | ) | (2 | ) | ||||||||
| Customer certificates of deposit | 2,522 | 2,090 | 432 | 21 | ||||||||||
| Other time deposits | 705 | 2 | 703 | n/m | ||||||||||
| Foreign office time deposits | 27 | 25 | 2 | 10 | ||||||||||
| Total deposits | $ | 55,481 | $ | 55,935 | $ | (454 | ) | (1 | )% | |||||
| Short-term borrowings | $ | 369 | $ | 62 | $ | 307 | n/m | |||||||
| Medium- and long-term debt | 6,955 | 5,842 | 1,113 | 19 | ||||||||||
| Total borrowed funds | $ | 7,324 | $ | 5,904 | $ | 1,420 | 24 | % | ||||||
| (dollar amounts in millions) | Percent Change | ||||||||||||||||||||||
| Years Ended December 31 | 2021 | 2020 | Change | ||||||||||||||||||||
| Noninterest-bearing deposits | $ | 41,441 | $ | 33,053 | $ | 8,388 | 25 | % | |||||||||||||||
| Money market and interest-bearing checking deposits | 31,063 | 26,798 | 4,265 | 16 | |||||||||||||||||||
| Savings deposits | 3,018 | 2,454 | 564 | 23 | |||||||||||||||||||
| Customer certificates of deposit | 2,110 | 2,626 | (516) | (20) | |||||||||||||||||||
| Other time deposits | — | 17 | (17) | (100) | |||||||||||||||||||
| Foreign office time deposits | 49 | 90 | (41) | (46) | |||||||||||||||||||
| Total deposits | $ | 77,681 | $ | 65,038 | $ | 12,643 | 19 | % | |||||||||||||||
| Short-term borrowings | $ | 2 | $ | 314 | $ | (312) | (99) | % | |||||||||||||||
| Medium- and long-term debt | 3,035 | 6,549 | (3,514) | (54) | |||||||||||||||||||
| Total borrowed funds | $ | 3,037 | $ | 6,863 | $ | (3,826) | (56) | % | |||||||||||||||
Average deposits decreased $454 millionincreased $12.6 billion to $55.5$77.7 billion in 2019,2021, compared to $55.9$65.0 billion in 2018,2020, reflecting a decreaseincreases of $2.6$8.4 billion in noninterest-bearing deposits, partially offset by an increase of $2.1and $4.3 billion in interest-bearing deposits. The decline in noninterest-bearing deposits wasincreases were primarily the result of customers shifting balances to interest-bearing deposits and utilizing their deposits to fund growth, acquisitionscustomers' solid profitability and capital expendituresmarkets activity as well as choosingliquidity injected into the economy through fiscal and monetary actions.
Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit and amounts in any other uninsured investment options. The increase in
On a period-end basis, there were no short-term borrowings at both December 31, 2021, and 2020. Short-term borrowings primarily include federal funds purchased, short-term FHLBFederal Home Loan Bank (FHLB) advances and securities sold under agreements to repurchase. Average short-term borrowings increased $307 million, to $369were $314 million in 2019, compared to $62 million2020, which primarily consisted of short-term FHLB advances, which the Corporation settled in 2018.full during the first half of 2020.
Further information on medium- and long-term debt is provided in Note 12 to the consolidated financial statements.
F-15
Capital
Total shareholders' equity decreased $180$153 million to $7.3$7.9 billion at December 31, 2019,2021, compared to $7.5$8.1 billion at December 31, 2018.2020. The following table presents a summary of changes in total shareholders' equity in 2019.2021.
| (in millions) | |||||||
| Balance at January 1, 2019 | $ | 7,507 | |||||
| Cumulative effect of change in accounting principles | (14 | ) | |||||
| Net income | 1,198 | ||||||
| Cash dividends declared on common stock | (398 | ) | |||||
| Purchase of common stock | (1,380 | ) | |||||
| Other comprehensive income: | |||||||
| Investment securities | $ | 203 | |||||
| Cash flow hedges | 34 | ||||||
| Defined benefit and other postretirement plans | 137 | ||||||
| Total other comprehensive income | 374 | ||||||
| Issuance of common stock under employee stock plans | 1 | ||||||
| Share-based compensation | 39 | ||||||
| Balance at December 31, 2019 | $ | 7,327 | |||||
| (in millions) | |||||||||||
| Balance at January 1, 2021 | $ | 8,050 | |||||||||
| Net income | 1,168 | ||||||||||
| Cash dividends declared on common stock | (365) | ||||||||||
| Cash dividends declared on preferred stock | (23) | ||||||||||
| Purchase of common stock | (723) | ||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Investment securities | $ | (310) | |||||||||
| Cash flow hedges | (100) | ||||||||||
| Defined benefit and other postretirement plans | 134 | ||||||||||
| Total other comprehensive loss, net of tax | (276) | ||||||||||
| Net issuance of common stock under employee stock plans | 25 | ||||||||||
| Share-based compensation | 41 | ||||||||||
| Balance at December 31, 2021 | $ | 7,897 | |||||||||
The following table summarizes the Corporation’s share repurchase activity for the year ended December 31, 2019.2021.
| (shares in thousands) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Remaining Repurchase Authorization (a) | Total Number of Shares Purchased (b) | Average Price Paid Per Share | ||||||||
| First quarter 2019 | 5,094 | 14,613 | (c) | 5,216 | $ | 83.48 | ||||||
| Second quarter 2019 | 5,656 | 8,957 | 5,658 | 75.13 | ||||||||
| Third quarter 2019 | 5,734 | 3,223 | 5,739 | 64.53 | ||||||||
| Fourth quarter 2019 | 2,126 | 8,097 | (d) | 2,137 | 70.44 | |||||||
| Total 2019 | 18,610 | 8,097 | 18,750 | $ | 73.67 | |||||||
| (shares in thousands) | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs | Remaining Repurchase Authorization (a) | Total Number of Shares Purchased (b) | Average Price Paid Per Share | |||||||||||||||||||
| First Quarter 2021 | — | 4,870 | 55 | $ | 61.39 | ||||||||||||||||||
| Second Quarter 2021 | 5,882 | 8,988 | 5,884 | 76.51 | |||||||||||||||||||
| Third Quarter 2021 | 3,050 | 5,938 | 3,052 | 72.12 | |||||||||||||||||||
| Fourth Quarter 2021 | 564 | 5,374 | 565 | 88.61 | |||||||||||||||||||
| Total 2021 | 9,496 | 5,374 | 9,556 | 75.73 | |||||||||||||||||||
(a) Maximum number of shares that may yet be purchased under the publicly announced plans or programs.
(b) Includes approximately 140,00060,000 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 year ended December 31, 2019.2021. These transactions are not considered part of the Corporation's repurchase program.
The Corporation is subject to the capital adequacy standards under the Basel III regulatory framework (Basel III). This regulatory framework establishes comprehensive methodologies for calculating regulatory capital and risk-weighted assets (RWA). Basel III also set minimum capital ratios as well as overall capital adequacy standards.
Under Basel III, regulatory capital comprises common equity Tier 1 (CET1)CET1 capital, additional Tier 1 capital and Tier II2 capital. CET1 capital predominantly includes common shareholders' equity, less certain deductions for goodwill, intangible assets and deferred tax assets that arise from net operating losses and tax credit carry-forwards. Additionally, the Corporation has elected to permanently exclude capital in accumulated other comprehensive income (AOCI) related to debt and equity securities classified as available-for-sale as well as for cash flow hedges and defined benefit postretirement plans from CET1, an option available to standardized approach entities under Basel III. Tier 1 capital incrementally includes noncumulative perpetual preferred stock. Tier 2 capital includes Tier 1 capital as well as subordinated debt qualifying as Tier 2 and qualifying allowance for credit losses. In December 2018, the federal banking regulators adopted rules that would permit bank holding companies and banks to phase in, for regulatory capital purposes, the transition impact on retained earnings of the new current expected credit loss accounting standard (CECL), effective for2020, the Corporation elected regulatory relief to defer the impact of adopting the CECL model for measuring credit losses on January 1, 2020, over a period of three years.regulatory capital. The Corporation does not anticipate to elect this deferral. The transition impact to retained earnings is not expected to be significant.deferred amounts were zero at December 31, 2021 and $72 million at December 31, 2020. For further information about the adoption of CECL, refer to Note 1 to the consolidated financial statement.statements.
F-16
The Corporation computes RWA using the standardized approach. Under the standardized approach, RWA is generally based on supervisory risk-weightings which vary by counterparty type and asset class. Under the Basel III standardized approach, capital is required for credit risk RWA, to cover the risk of unexpected losses due to failure of a customer or counterparty to meet its financial obligations in accordance with contractual terms; and if trading assets and liabilities exceed certain thresholds, capital is also required for market risk RWA, to cover the risk of losses due to adverse market movements or from position-specific factors.
The following table presents the minimum ratios required to be considered "adequately capitalized."
required.
| Common equity tier 1 capital to risk-weighted assets | 4.5 | % | |||
| Tier 1 capital to risk-weighted assets | 6.0 | ||||
| Total capital to risk-weighted assets | 8.0 | ||||
| Capital conservation buffer (a) | 2.5 | ||||
| Tier 1 capital to adjusted average assets (leverage ratio) | 4.0 | ||||
(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 tier 1 capital, in order to avoid restrictions on capital distributions and discretionary bonuses.
The Corporation's capital ratios exceeded minimum regulatory requirements as follows:
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (dollar amounts in millions) | Capital/Assets | Ratio | Capital/Assets | Ratio | |||||||||||||||||||
| Common equity tier 1 (a), (b) | $ | 7,064 | 10.13 | % | $ | 6,919 | 10.34 | % | |||||||||||||||
| Tier 1 risk-based (a), (b) | 7,458 | 10.70 | 7,313 | 10.93 | |||||||||||||||||||
| Total risk-based (a) | 8,608 | 12.35 | 8,833 | 13.20 | |||||||||||||||||||
| Leverage (a) | 7,458 | 7.74 | 7,313 | 8.63 | |||||||||||||||||||
| Common shareholders' equity | 7,503 | 7.93 | 7,656 | 8.69 | |||||||||||||||||||
| Tangible common equity (b) | 6,857 | 7.30 | 7,020 | 8.02 | |||||||||||||||||||
| Risk-weighted assets | 69,708 | 66,931 | |||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||
| (dollar amounts in millions) | Capital/Assets | Ratio | Capital/Assets | Ratio | |||||||||
| Common equity tier 1 and tier 1 risk-based | $ | 6,919 | 10.13 | % | $ | 7,470 | 11.14 | % | |||||
| Total risk-based | 8,282 | 12.13 | 8,855 | 13.21 | |||||||||
| Leverage | 6,919 | 9.51 | 7,470 | 10.51 | |||||||||
| Common equity | 7,327 | 9.98 | 7,507 | 10.60 | |||||||||
| Tangible common equity (a) | 6,688 | 9.19 | 6,866 | 9.78 | |||||||||
| Risk-weighted assets | 68,273 | 67,047 | |||||||||||
(b) See Supplemental Financial Data section for reconciliations of non-GAAP financial measures and regulatory ratios.
At December 31, 2019,2021, the Corporation and its U.S. banking subsidiaries exceeded the capital ratios required for an institution to be considered “well capitalized” by the standards developed under the Federal Deposit Insurance Corporation Improvement Act of 1991. Refer to Note 20 to the consolidated financial statements for further discussion of regulatory capital requirements, and capital ratio calculations.calculations and restrictions on the ability of the Corporation's banking subsidiaries to transfer assets to the Corporation.
RISK MANAGEMENT
The Corporation assumes various types of risk as a result of conducting business in the normal course. The Corporation's enterprise risk management framework provides a process for identifying, measuring, controlling and managing these risks. This framework incorporates a risk assessment process, a collection of risk committees that manage the Corporation's major risk elements and a risk appetite statement that outlines the levels and types of risks the Corporation accepts. The Corporation continuously enhances its enterprise risk framework with additional processes, tools and systems designed to not only provide management with deeper insight into the various existing and emerging risks in accordance with its appetite for risk, but also to improve the Corporation's ability to control those risks and ensure that appropriate consideration is received for the risks taken.
The Corporation’s front line employees, the first line of defense, are responsible for the day-to-day management and ownership of risks, including the identification, assessment, measurement and control of risks encountered as a part of the normal course of business. RisksEach of the major risk categories are further monitored and measured by specialized risk managers in the second line of defense comprising specialized risk managers for each of the major risk categories, who reside inwithin the Enterprise Risk Division, andwho provide oversight as well as independent and effective challenge and guidance for the risk management activities of the organization. The Enterprise Risk Division, led by the Chief Risk Officer, is responsible for designing and managing the Corporation’s enterprise risk management framework and ensures effective risk management oversight. Risk management committees serve as a point of review and escalation for those risks which may have risk interdependencies or where risk levels may be nearing the limits outlined in the Corporation’s risk appetite statement. These committees comprise senior and executive management that represent views from both the lines of business and risk management. Internal Audit, the third line of defense, monitors and assesses the overall effectiveness of the risk management framework on an ongoing basis and provides an independent, objective assessment of the Corporation’s ability to manage and control risk to management and the Audit Committee of the Board.
F-17
The Enterprise Risk and Return Committee (formerly known as the Enterprise-Wide Risk Management Committee,Committee), chaired by the Chief Risk Officer, is established by the Enterprise Risk Committee of the Board and is responsible for governance over the risk management framework, providing oversight in managing the Corporation's aggregate risk position and reporting on the comprehensive portfolio of risks as well as the potential impact these risks can have on the Corporation's risk profile and resulting capital level. Capital provides the primary buffer for risk and also serves as a measuring tool when evaluating risk. The Enterprise-WideEnterprise Risk Managementand Return Committee is principally composed of senior officers and executives representing the different risk areas and business units who are appointed by the Chairman and Chief Executive Officer of the Corporation.
The Board's Enterprise Risk Committee meets quarterly and is chartered to assist the Board in promoting the best interests of the Corporation by overseeing policies and risk practices relating to enterprise-wide risk and ensuring compliance with bank regulatory obligations. Members of the Enterprise Risk Committee are selected such that the committee comprises individuals whose experiences and qualifications can lead to broad and informed views on risk matters facing the Corporation and the financial services industry. These include, but are not limited to, existing and emerging risk matters related to credit, market, liquidity, operational, technology, compliance and strategic conditions. A comprehensive risk report is submitted to the Enterprise Risk Committee each quarter providing management's view of the Corporation's aggregate risk position.
Further discussion and analyses of each major risk area are included in the following sub-sections of the Risk Management section in this financial review.
Credit Risk
Credit risk represents the risk of loss due to failure of a customer or counterparty to meet its financial obligations in accordance with contractual terms. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance. It arises any time funds are extended, committed, invested or otherwise exposed, whether reflected on or off the balance sheet. The governance structure is administered through the Strategic Credit Committee. The Strategic Credit Committee is chaired by the Chief Credit Officer and approves recommendations to address credit risk matters through credit policy, credit risk management practices and required credit risk actions. The Strategic Credit Committee also ensures a comprehensive reporting of credit risk levels and trends, including exception levels, along with identification and mitigation of emerging risks. In order to facilitate the corporate credit risk management process, various other corporate functions provide the resources for the Strategic Credit Committee to carry out its responsibilities. The Corporation manages credit risk through underwriting and periodically reviewing and approving its credit exposures using approvedin accordance with established credit policies and guidelines. Additionally, the Corporation manages credit risk through loan portfolio diversification, limiting exposure to any single industry, customer or guarantor, and selling participations and/or syndicating credit exposures above those levels it deems prudent to third parties.
The Credit Division manages credit policy and provides the resources to manage the line of business transactional credit risk, assuring that all exposure is risk rated according to the requirements of the credit risk rating policy and providing business segment reporting support as necessary. The Enterprise Risk Division provides credible and well-documented challenge of overall portfolio credit risk, and other credit-related attributes of the Corporation's loan portfolios, with a particular emphasis on all attendant modeled results. The Corporation's Asset Quality Review function, a division of Internal Audit, audits the accuracy of internal risk ratings that are assigned by the lending and credit groups. The Special Assets Group is responsible for managing the recovery process on distressed or defaulted loans and loan sales.
Portfolio Risk Analytics, within the Credit Division, provides comprehensive reporting on portfolio credit risk levels and trends, continuous assessment and verification of risk rating models, quarterly calculation of the allowance for loan losses and the allowance for credit losses on lending-related commitments and calculations of both expected and unexpected loss.
| (dollar amounts in millions) | |||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Balance at beginning of year | $ | 671 | $ | 712 | $ | 730 | $ | 634 | $ | 594 | |||||||||
| Loan charge-offs: | |||||||||||||||||||
| Commercial | 143 | 95 | 133 | 181 | 139 | ||||||||||||||
| Commercial mortgage | 3 | 3 | 3 | 3 | 3 | ||||||||||||||
| Lease financing | — | — | 1 | — | 1 | ||||||||||||||
| International | 1 | 1 | 6 | 23 | 14 | ||||||||||||||
| Residential mortgage | 1 | — | — | — | 1 | ||||||||||||||
| Consumer | 4 | 4 | 6 | 7 | 10 | ||||||||||||||
| Total loan charge-offs | 152 | 103 | 149 | 214 | 168 | ||||||||||||||
| Recoveries: | |||||||||||||||||||
| Commercial | 35 | 44 | 37 | 43 | 33 | ||||||||||||||
| Real estate construction | — | — | 1 | — | 1 | ||||||||||||||
| Commercial mortgage | 4 | 2 | 9 | 20 | 21 | ||||||||||||||
| International | 1 | 1 | 3 | — | — | ||||||||||||||
| Residential mortgage | 1 | 1 | 1 | 1 | 2 | ||||||||||||||
| Consumer | 4 | 4 | 6 | 4 | 11 | ||||||||||||||
| Total recoveries | 45 | 52 | 57 | 68 | 68 | ||||||||||||||
| Net loan charge-offs | 107 | 51 | 92 | 146 | 100 | ||||||||||||||
| Provision for loan losses | 73 | 11 | 73 | 241 | 142 | ||||||||||||||
| Foreign currency translation adjustment | — | (1 | ) | 1 | 1 | (2 | ) | ||||||||||||
| Balance at end of year | $ | 637 | $ | 671 | $ | 712 | $ | 730 | $ | 634 | |||||||||
| Net loan charge-offs during the year as a percentage of average loans outstanding during the year | 0.21 | % | 0.11 | % | 0.19 | % | 0.30 | % | 0.21 | % | |||||||||
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 assessmentAs a percentage 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. On January 1, 2020, the Corporation adopted a new accounting standard for estimating credit losses (CECL). The day-one impact tototal loans, the allowance for credit losses was not significant. 1.26 percent at December 31, 2021, compared to 1.90 percent at December 31, 2020. Excluding PPP loans, which are guaranteed by the Small Business Administration, the allowance for credit losses was 1.27 percent of total loans at December 31, 2021, compared to 2.03 percent at December 31, 2020. The allowance for credit losses covered 2.3 times and 2.8 times total nonperforming loans at December 31, 2021 and December 31, 2020, respectively.
The allowance for credit losses decreased by $374 million from $992 million at December 31, 2020 to $618 million at December 31, 2021, primarily reflecting strong credit quality, a sustained recovery by the U.S. economy from the COVID-19 pandemic and benefits of mitigating actions by the U.S. government. In addition to $2.8 trillion of stimulus spending approved by Congress between December 2020 and March 2021, the rollout of the COVID vaccine, strong business spending and improved labor markets contributed to an overall improved economic outlook. However, there continues to be uncertainty related to the impact of emerging COVID-19 variants and vaccine efficacy, supply chain constraints, future monetary and fiscal support and inflationary pressures.
F-18
These factors shaped the 2-year reasonable and supportable forecast used by the Corporation in its CECL modeled estimate at December 31, 2021. The U.S. economy is expected to grow at a moderate pace through the first half of 2022 before normalizing into historical growth rates. Forecasts for other key economic variables, including the unemployment rate, are generally in line with Gross Domestic Product (GDP) projections. Oil prices are expected to decrease from current elevated levels. Interest rates are expected to increase, reflecting the Federal Reserve's revised expectations, while corporate bond spreads reflect normalized default risk. The following table summarizes select economic variables representative of the economic forecasts used to develop the allowance for credit losses estimate at December 31, 2021.
| Economic Variable | Base Forecast | ||||
| Real GDP growth | Gradually normalizes to a long-term growth rate of 2 to 3 percent by third quarter 2022. | ||||
| Unemployment rate | Current levels decrease to 4 percent by second quarter 2022, remaining between 3.5 percent and 4 percent through the remainder of the forecast period. | ||||
| Corporate BBB bond to 10-year Treasury bond spreads | Spreads remain below 2 percent throughout the forecast period. | ||||
| Oil Prices | Prices gradually decline from current levels to $62 by second quarter 2023. | ||||
Due to the high degree of uncertainty regarding the ultimate economic consequence of the pandemic, management considered other economic scenarios to make appropriate qualitative adjustments for certain sectors of its lending portfolio, including more benign and more severe forecasts.
Refer to Note 1 to the consolidated financial statements for a discussion of the methodology used in the determination of the allowance for credit losses, as well as further information about the adoption of CECL, under the "Pending Accounting Pronouncements" section.losses.
| Years Ended December 31 | 2019 | 2018 | 2017 | |||||
| Allowance for loan losses as a percentage of total loans at end of year | 1.27 | % | 1.34 | % | 1.45 | % | ||
| Allowance for loan losses as a multiple of total nonperforming loans at end of year | 3.1x | 2.9x | 1.7x | |||||
| Allowance for loan losses as a multiple of total net loan charge-offs for the year | 6.0x | 13.1x | 7.7x | |||||
The allowance for loan losses was $637 million at December 31, 2019, comparedrepresents management’s estimates of current expected credit losses in the Corporation’s loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually.
Collective loss estimates are determined by applying reserve factors, designed to $671 million at December 31, 2018, a decreaseestimate current expected credit losses, to amortized cost balances over the remaining contractual life of $34 million.the collectively evaluated portfolio. Loans with similar risk characteristics are aggregated into homogeneous pools. The decrease in the allowance for loan losses reflected continued strongalso includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecisions and model imprecision. Credit losses for loans that no longer share risk characteristics with the loan pools are estimated on an individual basis. Individual credit quality, partially offset by an increase in Energy reserves.
Allowance for LoanCredit Losses
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||
| (dollar amounts in millions) | Allocated Allowance | Allowance Ratio (a) | % (b) | Allocated Allowance | % (b) | Allocated Allowance | % (b) | Allocated Allowance | % (b) | Allocated Allowance | % (b) | ||||||||||||||||||||
| December 31 | |||||||||||||||||||||||||||||||
| Business loans | |||||||||||||||||||||||||||||||
| Commercial | $ | 490 | 1.56 | % | 62 | % | $ | 492 | 64 | % | $ | 521 | 63 | % | $ | 547 | 63 | % | $ | 448 | 65 | % | |||||||||
| Real estate construction | 17 | 0.49 | 7 | 19 | 6 | 19 | 6 | 21 | 6 | 12 | 4 | ||||||||||||||||||||
| Commercial mortgage | 81 | 0.84 | 19 | 99 | 18 | 91 | 19 | 93 | 18 | 93 | 18 | ||||||||||||||||||||
| Lease financing | 3 | 0.47 | 1 | 4 | 1 | 12 | 1 | 5 | 1 | 3 | 1 | ||||||||||||||||||||
| International | 10 | 1.04 | 2 | 13 | 2 | 18 | 2 | 16 | 3 | 23 | 3 | ||||||||||||||||||||
| Total business loans | 601 | 1.30 | 91 | 627 | 91 | 661 | 91 | 682 | 91 | 579 | 91 | ||||||||||||||||||||
| Retail loans | |||||||||||||||||||||||||||||||
| Residential mortgage | 7 | 0.35 | 4 | 9 | 4 | 13 | 4 | 11 | 4 | 14 | 4 | ||||||||||||||||||||
| Consumer | 29 | 1.21 | 5 | 35 | 5 | 38 | 5 | 37 | 5 | 41 | 5 | ||||||||||||||||||||
| Total retail loans | 36 | 0.84 | 9 | 44 | 9 | 51 | 9 | 48 | 9 | 55 | 9 | ||||||||||||||||||||
| Total loans | $ | 637 | 1.27 | % | 100 | % | $ | 671 | 100 | % | $ | 712 | 100 | % | $ | 730 | 100 | % | $ | 634 | 100 | % | |||||||||
The allowance for credit losses on lending-related commitments was $31 million at December 31, 2019 comparedestimates current expected credit losses on collective pools of letters of credit and unused commitments to $30 million at December 31, 2018. An analysisextend credit based on reserve factors, determined in a manner similar to business loans, multiplied by a probability of changes in thedraw estimate based on historical experience and credit risk, applied to commitment amounts. The allowance for credit losses on lending-related commitments is presented below.totaled $30 million and $44 million at December 31, 2021 and December 31, 2020, respectively.
F-19
| (dollar amounts in millions) | |||||||||||||||||||
| Years Ended December 31 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Balance at beginning of year | $ | 30 | $ | 42 | $ | 41 | $ | 45 | $ | 41 | |||||||||
| Charge-offs on lending-related commitments (a) | — | — | — | (11 | ) | (1 | ) | ||||||||||||
| Provision for credit losses on lending-related commitments | 1 | (12 | ) | 1 | 7 | 5 | |||||||||||||
| Balance at end of year | $ | 31 | $ | 30 | $ | 42 | $ | 41 | $ | 45 | |||||||||
| December 31, | 2021 | 2020 | |||||||||
| Allowance for credit losses as a percentage of total loans | 1.26 | % | 1.90 | % | |||||||
| Allowance for credit losses as a percentage of total loans excluding PPP loans | 1.27 | 2.03 | |||||||||
| Allowance for credit losses as a multiple of total nonaccrual loans | 2.3x | 2.9x | |||||||||
| Allowance for credit losses as a multiple of total nonperforming loans | 2.3x | 2.8x | |||||||||
Analysis of the saleAllowance for Credit Losses
The table below details net charge-offs (recoveries) as a percentage of unfunded lending-related commitments.total loans by loan category.
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| (dollar amounts in millions) | Net Loan Charge-Offs (Recoveries) | Net Charge-Offs (Recoveries) Ratio (a) | Net Loan Charge-Offs (Recoveries) | Net Charge-Offs (Recoveries) Ratio (a) | Net Loan Charge-Offs (Recoveries) | Net Charge-Offs (Recoveries) Ratio (a) | ||||||||||||||||||||
| Commercial | $ | (15) | (0.05) | % | $ | 198 | 0.62 | % | $ | 108 | 0.34 | % | ||||||||||||||
| Commercial mortgage | 2 | 0.02 | (3) | (0.03) | (1) | (0.01) | ||||||||||||||||||||
| International | 4 | 0.38 | — | — | — | — | ||||||||||||||||||||
| Residential mortgage | (2) | (0.11) | — | — | — | — | ||||||||||||||||||||
| Consumer | 1 | 0.05 | 1 | 0.05 | — | — | ||||||||||||||||||||
| Total loans | $ | (10) | (0.02) | % | $ | 196 | 0.38 | % | $ | 107 | 0.21 | % | ||||||||||||||
(a)Net charge-offs (recoveries) as a percentage of related average loans outstanding.
Net loan charge-offs decreased $206 million to net loan recoveries of $10 million, or 0.02% of total loans, for the year ended December 31, 2021. The $213 million decline in commercial net charge-offs included decreases of $173 million in Energy, $22 million in Technology and Life Sciences and $14 million in Business Banking.
Allocation of the Allowance for Credit Losses
| 2021 | 2020 | |||||||||||||||||||
| (dollar amounts in millions) | Allocated Allowance | Allowance Ratio (a) | % (b) | Allocated Allowance | % (b) | |||||||||||||||
| December 31, | ||||||||||||||||||||
| Allowance for loan losses | ||||||||||||||||||||
| Business loans | ||||||||||||||||||||
| Commercial (c) | $ | 293 | 1.00 | % | 60 | % | $ | 508 | 62 | % | ||||||||||
| Real estate construction | 28 | 0.94 | 6 | 62 | 8 | |||||||||||||||
| Commercial mortgage | 192 | 1.71 | 23 | 299 | 19 | |||||||||||||||
| Lease financing | 6 | 0.97 | 1 | 10 | 1 | |||||||||||||||
| International | 12 | 0.96 | 2 | 16 | 2 | |||||||||||||||
| Total business loans | 531 | 1.17 | 92 | 895 | 92 | |||||||||||||||
| Retail loans | ||||||||||||||||||||
| Residential mortgage | 24 | 1.36 | 4 | 16 | 4 | |||||||||||||||
| Consumer | 33 | 1.56 | 4 | 37 | 4 | |||||||||||||||
| Total retail loans | 57 | 1.47 | 8 | 53 | 8 | |||||||||||||||
| Total loans | 588 | 1.19 | % | 100 | % | $ | 948 | 100 | % | |||||||||||
| Allowance for credit losses on lending-related commitments | ||||||||||||||||||||
| Business commitments | 24 | 35 | ||||||||||||||||||
| Retail commitments | 6 | 9 | ||||||||||||||||||
| Total commitments | 30 | 44 | ||||||||||||||||||
| Allowance for credit losses | $ | 618 | 1.26 | % | $ | 992 | ||||||||||||||
(a)Allocated allowance as a percentage of related loans outstanding.
(b)Loans outstanding as a percentage of total loans.
(c)Includes PPP loans with a balance of $459 million and $3.5 billion at December 31, 2021 and December 31, 2020, respectively.
For additional information regarding the allowance for credit losses, refer to the "Critical Accounting Policies"Estimates" section of this financial review and Notes 1 and 4 to the consolidated financial statements.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, troubled debt restructured loans (TDRs)TDRs which have been renegotiated to less than the original contractual rates (reduced-rate loans) and foreclosed property.assets. TDRs include performing and nonperforming loans. Nonperformingloans, with
F-20
nonperforming TDRs areon either on nonaccrual or reduced-rate status. In accordance with the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Corporation elected not to consider qualifying COVID-19-related modifications, primarily deferrals, as TDRs and did not designate such loans as past due or nonaccrual. The temporary relief provided under the CARES Act applied to modifications made from the start of the COVID-19 pandemic through December 31, 2021. For additional information regarding the Corporation's accounting policies for the CARES Act, refer to Note 1 to the consolidated financial statements.
Summary of Nonperforming Assets and Past Due Loans
| (dollar amounts in millions) | |||||||||||||||||||
| December 31 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Nonaccrual loans: | |||||||||||||||||||
| Business loans: | |||||||||||||||||||
| Commercial | $ | 148 | $ | 141 | $ | 309 | $ | 445 | $ | 238 | |||||||||
| Real estate construction | — | — | — | — | 1 | ||||||||||||||
| Commercial mortgage | 14 | 20 | 31 | 46 | 60 | ||||||||||||||
| Lease financing | — | 2 | 4 | 6 | 6 | ||||||||||||||
| International | — | 3 | 6 | 14 | 8 | ||||||||||||||
| Total nonaccrual business loans | 162 | 166 | 350 | 511 | 313 | ||||||||||||||
| Retail loans: | |||||||||||||||||||
| Residential mortgage | 20 | 36 | 31 | 39 | 27 | ||||||||||||||
| Consumer: | |||||||||||||||||||
| Home equity | 17 | 19 | 21 | 28 | 27 | ||||||||||||||
| Other consumer | — | — | — | 4 | — | ||||||||||||||
| Total consumer | 17 | 19 | 21 | 32 | 27 | ||||||||||||||
| Total nonaccrual retail loans | 37 | 55 | 52 | 71 | 54 | ||||||||||||||
| Total nonaccrual loans | 199 | 221 | 402 | 582 | 367 | ||||||||||||||
| Reduced-rate loans | 5 | 8 | 8 | 8 | 12 | ||||||||||||||
| Total nonperforming loans | 204 | 229 | 410 | 590 | 379 | ||||||||||||||
| Foreclosed property | 11 | 1 | 5 | 17 | 12 | ||||||||||||||
| Total nonperforming assets | $ | 215 | $ | 230 | $ | 415 | $ | 607 | $ | 391 | |||||||||
| Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms | $ | 20 | $ | 19 | $ | 31 | $ | 38 | $ | 27 | |||||||||
| Interest income recognized | 5 | 4 | 7 | 6 | 5 | ||||||||||||||
| Nonperforming loans as a percentage of total loans | 0.40 | % | 0.46 | % | 0.83 | % | 1.20 | % | 0.77 | % | |||||||||
| Loans past due 90 days or more and still accruing | $ | 26 | $ | 16 | $ | 35 | $ | 19 | $ | 17 | |||||||||
| (dollar amounts in millions) | |||||||||||
| December 31 | 2021 | 2020 | |||||||||
| Nonaccrual loans | $ | 264 | $ | 347 | |||||||
| Reduced-rate loans | 4 | 3 | |||||||||
| Total nonperforming loans | 268 | 350 | |||||||||
| Foreclosed property | 1 | 8 | |||||||||
| Other repossessed assets | — | 1 | |||||||||
| Total nonperforming assets | $ | 269 | $ | 359 | |||||||
| Nonaccrual loans as a percentage of total loans | 0.54 | % | 0.66 | % | |||||||
| Nonperforming loans as a percentage of total loans | 0.54 | 0.67 | |||||||||
| Nonperforming assets as a percentage of total loans and foreclosed property | 0.55 | 0.69 | |||||||||
| Loans past due 90 days or more and still accruing | $ | 27 | $ | 45 | |||||||
Nonperforming assets decreased $15$90 million to $215$269 million at December 31, 2019,2021, from $230$359 million at December 31, 2018.2020. The decrease in nonperforming assets primarily reflected a $100 million decrease in nonperforming Energy loans, which are a component of commercial loans. Nonperforming assetsloans were 0.430.54 percent of total loans and foreclosed property at December 31, 2019,2021, compared to 0.460.67 percent at December 31, 2018.2020. For further information regarding the composition of nonaccrual loans, refer to Note 4 to the consolidated financial statements.
| (in millions) | |||||||
| December 31 | 2019 | 2018 | |||||
| Nonperforming TDRs: | |||||||
| Nonaccrual TDRs | $ | 36 | $ | 73 | |||
| Reduced-rate TDRs | 5 | 8 | |||||
| Total nonperforming TDRs | 41 | 81 | |||||
| Performing TDRs (a) | 69 | 101 | |||||
| Total TDRs | $ | 110 | $ | 182 | |||
if not for the provisions in the CARES Act.
The following table presents a summary of changes in nonaccrual loans.
| (in millions) | |||||||||||
| Years Ended December 31 | 2021 | 2020 | |||||||||
| Balance at beginning of period | $ | 347 | $ | 199 | |||||||
| Loans transferred to nonaccrual (a) | 193 | 482 | |||||||||
| Nonaccrual loan gross charge-offs | (70) | (238) | |||||||||
| Loans transferred to accrual status (a) | (25) | (3) | |||||||||
| Nonaccrual loans sold | (34) | (14) | |||||||||
| Payments/other (b) | (147) | (79) | |||||||||
| Balance at end of period | $ | 264 | $ | 347 | |||||||
| (in millions) | |||||||
| Years Ended December 31 | 2019 | 2018 | |||||
| Balance at beginning of period | $ | 221 | $ | 402 | |||
| Loans transferred to nonaccrual (a) | 230 | 197 | |||||
| Nonaccrual loan gross charge-offs | (152 | ) | (103 | ) | |||
| Loans transferred to accrual status (a) | (7 | ) | (6 | ) | |||
| Nonaccrual loans sold | (15 | ) | (39 | ) | |||
| Payments/other (b) | (78 | ) | (230 | ) | |||
| Balance at end of period | $ | 199 | $ | 221 | |||
(b)Includes net changes related to nonaccrual loans with balances less than or equal to $2 million, payments on nonaccrual loans with book balances greater than $2 million and transfers of nonaccrual loans to foreclosed property.
There were 2318 borrowers with balancesa balance greater than $2 million, totaling $193 million, transferred to nonaccrual status in 2019,2021, a decrease of 924 compared to 3242 borrowers totaling $482 million in 2018.2020. For further information about the composition of loans transferred to nonaccrual during the current period, refer to the nonaccrual information by industry category table below.
F-21
The following table presents the composition of nonaccrual loans by balance and the related number of borrowers at December 31, 20192021 and 2018.2020.
| 2019 | 2018 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| (dollar amounts in millions) | Number of Borrowers | Balance | Number of Borrowers | Balance | (dollar amounts in millions) | Number of Borrowers | Balance | Number of Borrowers | Balance | |||||||||||||||||||||||||||
| Under $2 million | 708 | $ | 74 | 799 | $ | 78 | Under $2 million | 580 | $ | 63 | 682 | $ | 83 | |||||||||||||||||||||||
| $2 million - $5 million | 8 | 22 | 14 | 41 | $2 million - $5 million | 14 | 46 | 20 | 61 | |||||||||||||||||||||||||||
| $5 million - $10 million | 6 | 49 | 10 | 69 | $5 million - $10 million | 7 | 54 | 9 | 73 | |||||||||||||||||||||||||||
| $10 million - $25 million | 4 | 54 | 2 | 33 | $10 million - $25 million | 5 | 69 | 7 | 94 | |||||||||||||||||||||||||||
| Greater than $25 million | Greater than $25 million | 1 | 32 | 1 | 36 | |||||||||||||||||||||||||||||||
| Total | 726 | $ | 199 | 825 | $ | 221 | Total | 607 | $ | 264 | 719 | $ | 347 | |||||||||||||||||||||||
The following table presents a summary of nonaccrual loans at December 31, 20192021 and loans transferred to nonaccrual and net loan charge-offs for the year ended December 31, 2019,2021, based on North American Industry Classification System (NAICS) categories.
| December 31, 2021 | Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||
| (dollar amounts in millions) | Nonaccrual Loans | Loans Transferred to Nonaccrual (a) | Net Loan Charge-Offs (Recoveries) | ||||||||||||||||||||||||||||||||
| Industry Category | |||||||||||||||||||||||||||||||||||
| Transportation & Warehousing | $ | 44 | 17 | % | $ | 24 | 12 | % | $ | 10 | (99) | % | |||||||||||||||||||||||
| Manufacturing | 37 | 14 | 40 | 21 | 17 | (172) | |||||||||||||||||||||||||||||
| Residential Mortgage | 36 | 14 | 18 | 9 | (2) | (2) | |||||||||||||||||||||||||||||
| Real Estate & Home Builders | 30 | 12 | 24 | 12 | 3 | (31) | |||||||||||||||||||||||||||||
| Wholesale Trade | 26 | 10 | — | — | 1 | (5) | |||||||||||||||||||||||||||||
| Services | 14 | 5 | 2 | 1 | (2) | 18 | |||||||||||||||||||||||||||||
| Mining, Quarrying and Oil & Gas Extraction | 14 | 5 | 28 | 15 | (48) | 482 | |||||||||||||||||||||||||||||
| Health Care & Social Assistance | 12 | 4 | 20 | 10 | 8 | (74) | |||||||||||||||||||||||||||||
| Information & Communication | 12 | 4 | — | — | — | — | |||||||||||||||||||||||||||||
| Arts, Entertainment & Recreation | 9 | 3 | — | — | 1 | (5) | |||||||||||||||||||||||||||||
| Retail Trade | 3 | 1 | — | — | 1 | (11) | |||||||||||||||||||||||||||||
| Contractors | 2 | 1 | — | — | (1) | 10 | |||||||||||||||||||||||||||||
| Utilities | — | — | 30 | 16 | 5 | (49) | |||||||||||||||||||||||||||||
| Other (b) | 25 | 10 | 7 | 4 | (3) | 38 | |||||||||||||||||||||||||||||
| Total | $ | 264 | 100 | % | $ | 193 | 100 | % | $ | (10) | 100 | % | |||||||||||||||||||||||
| December 31, 2019 | Year Ended December 31, 2019 | |||||||||||||||||||
| (dollar amounts in millions) | Nonaccrual Loans | Loans Transferred to Nonaccrual (a) | Net Loan Charge-Offs (Recoveries) | |||||||||||||||||
| Industry Category | ||||||||||||||||||||
| Mining, Quarrying and Oil & Gas Extraction | $ | 43 | 22 | % | $ | 128 | 56 | % | $ | 86 | 81 | % | ||||||||
| Wholesale Trade | 38 | 19 | 42 | 18 | 3 | 3 | ||||||||||||||
| Manufacturing | 28 | 14 | 16 | 7 | 1 | 1 | ||||||||||||||
| Residential Mortgage | 20 | 10 | 3 | 1 | — | — | ||||||||||||||
| Information & Communication | 13 | 6 | 23 | 10 | 5 | 5 | ||||||||||||||
| Services | 11 | 5 | 5 | 2 | 7 | 6 | ||||||||||||||
| Health Care & Social Assistance | 6 | 3 | — | — | 9 | 8 | ||||||||||||||
| Real Estate & Home Builders | 5 | 3 | — | — | (2 | ) | (2 | ) | ||||||||||||
| Contractors | 4 | 2 | 3 | 1 | (3 | ) | (3 | ) | ||||||||||||
| Other (b) | 31 | 16 | 10 | 5 | 1 | 1 | ||||||||||||||
| Total | $ | 199 | 100 | % | $ | 230 | 100 | % | $ | 107 | 100 | % | ||||||||
(b)Consumer, excluding residential mortgage and certain personal purpose nonaccrual loans and net charge-offs, is 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 the process of collection. Loans past due 90 days or more increased $10decreased $18 million to $26$27 million at December 31, 2019,2021, compared to $16$45 million at December 31, 2018.2020. Loans past due 30-89 days decreased $6$251 million to $127$153 million at December 31, 2019,2021, compared to $133$404 million at December 31, 2018.2020. Loans past due 30 days or more and still accruing interest as a percentage of total loans were 0.36 percent and 0.86 percent at December 31, 2021 and December 31, 2020, respectively. 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 loans with balances of $1 million or more 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.
| (dollar amounts in millions) | |||||||||||
| December 31 | 2021 | 2020 | |||||||||
| Total criticized loans | $ | 1,573 | $ | 2,947 | |||||||
| As a percentage of total loans | 3.2 | % | 5.6 | % | |||||||
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| (dollar amounts in millions) | ||||||||
| December 31 | 2019 | 2018 | ||||||
| Total criticized loans | $ | 2,120 | $ | 1,548 | ||||
| As a percentage of total loans | 4.2 | % | 3.1 | % | ||||
The $572 million increase$1.4 billion decrease in criticized loans induring the year ended December 31, 20192021 included increasesdecreases of $423$540 million in general Middle Market and $161$538 million in Energy.
For further information regarding the Corporation's nonperforming assets policies, and impaired loans, refer to Notes 1 and 4 to the consolidated financial statements.
Concentrations of Credit Risk
Concentrations of credit risk may exist when a number of borrowers are engaged in similar activities, or activities in the same geographic region, and have similar economic characteristics that would cause them to be similarly impacted by changes in economic or other conditions. The Corporation has concentrations of credit risk with the automotive and commercial real estate and automotive industries. All other industry concentrations, as defined by management, individually represented less than 10 percent of total loans at December 31, 2019.2021.
| 2019 | 2018 | ||||||||||||
| (in millions) | Loans Outstanding | Percent of Total Loans | Loans Outstanding | Percent of Total Loans | |||||||||
| December 31 | |||||||||||||
| Production: | |||||||||||||
| Domestic | $ | 963 | $ | 946 | |||||||||
| Foreign | 286 | 385 | |||||||||||
| Total production | 1,249 | 2.5 | % | 1,331 | 2.7 | % | |||||||
| Dealer: | |||||||||||||
| Floor plan | 3,967 | 4,678 | |||||||||||
| Other | 3,447 | 3,419 | |||||||||||
| Total dealer | 7,414 | 14.7 | % | 8,097 | 16.1 | % | |||||||
| Total automotive | $ | 8,663 | 17.2 | % | $ | 9,428 | 18.8 | % | |||||
Commercial Real Estate Lending
At December 31, 2019,2021, the Corporation's commercial real estate portfolio represented 2629 percent of total loans. The following table summarizes the Corporation's commercial real estate loan portfolio by loan category.
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in millions) | Commercial Real Estate business line (a) | Other (b) | Total | Commercial Real Estate business line (a) | Other (b) | Total | |||||||||||||||||||||||||||||
| Real estate construction loans | $ | 2,391 | $ | 557 | $ | 2,948 | $ | 3,657 | $ | 425 | $ | 4,082 | |||||||||||||||||||||||
| Commercial mortgage loans | 3,338 | 7,917 | 11,255 | 2,273 | 7,639 | 9,912 | |||||||||||||||||||||||||||||
| Total commercial real estate | $ | 5,729 | $ | 8,474 | $ | 14,203 | $ | 5,930 | $ | 8,064 | $ | 13,994 | |||||||||||||||||||||||
(a)Primarily loans to real estate developers.
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
| (in millions) | Commercial Real Estate business line (a) | Other (b) | Total | Commercial Real Estate business line (a) | Other (b) | Total | |||||||||||||||||
| Real estate construction loans | $ | 3,044 | $ | 411 | $ | 3,455 | $ | 2,687 | $ | 390 | $ | 3,077 | |||||||||||
| Commercial mortgage loans | 2,176 | 7,383 | 9,559 | 1,743 | 7,363 | 9,106 | |||||||||||||||||
| Total commercial real estate | $ | 5,220 | $ | 7,794 | $ | 13,014 | $ | 4,430 | $ | 7,753 | $ | 12,183 | |||||||||||
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 $13.0$14.2 billion at December 31, 2019.2021. Of the total, $5.2$5.7 billion, or 40 percent, were to borrowers in the Commercial Real Estate business line, which includes loans to real estate developers, an increasea decrease of $790$201 million compared to December 31, 2018.2020. Commercial real estate loans in other business lines totaled $7.8$8.5 billion, or 60 percent, at December 31, 2019.2021, an increase of $410 million compared to December 31, 2020. These loans consisted primarily of owner-occupied commercial mortgages, which bear credit characteristics similar to non-commercial real estate business loans. Generally, loans previously reported as real estate construction are classified as commercial mortgage loans upon receipt of a certificate of occupancy. In 2021, the Corporation performed an in-depth review of the status of these loans which resulted in $1.2 billion of loans previously reported as real estate construction to be classified as commercial mortgage loans as of December 31, 2021.
The real estate construction loan portfolio primarily contains loans made to long-time customers with satisfactory completion experience. CriticizedThere were no criticized real estate construction loans in the Commercial Real Estate business line totaled $31 million and $23at December 31, 2021, compared to $27 million at December 31, 2019 and 2018, respectively.2020. In other business lines, there were no criticized real estate construction loans at December 31, 2019, compared to $8totaled $35 million at December 31, 2018.2021, compared to $20 million at December 31, 2020. There were no netreal estate construction loan charge-offs in either of the years ended December 31, 20192021 and 2018.2020.
Commercial mortgage loans are loans where the primary collateral is a lien on any real property and are primarily loans secured by owner occupiedowner-occupied real estate. Real property is generally considered primary collateral if the value of that collateral represents more than 50 percent of the commitment at loan approval. Loans in the commercial mortgage portfolio generally mature within three to five years. Criticized commercial mortgage loans in the Commercial Real Estate business line totaled $55$29 million and $61$73 million at December 31, 20192021 and December 31, 2018,2020, respectively. In other business lines, $242$219 million and $206$440 million of commercial mortgage loans were criticized at December 31, 20192021 and 2018,2020, respectively. Commercial mortgage loansloan net recoveriescharge-offs were $1$2 million in 2019,2021, compared to net recoveries of $3 million in 2020.
Automotive Lending - Dealer:
The following table presents a summary of dealer loans.
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| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (dollar amounts in millions) | Loans Outstanding | Percent of Total Loans | Loans Outstanding | Percent of Total Loans | |||||||||||||||||||
| Dealer: | |||||||||||||||||||||||
| Floor plan | $ | 681 | $ | 2,344 | |||||||||||||||||||
| Other | 3,481 | 3,348 | |||||||||||||||||||||
| Total dealer | $ | 4,162 | 8.4 | % | $ | 5,692 | 10.9 | % | |||||||||||||||
Substantially all dealer loans are in the National Dealer Services business line and primarily include floor plan financing and other loans to automotive dealerships. Floor plan loans, included in commercial loans in the Consolidated Balance Sheets, totaled $681 million at December 31, 2021, a decrease of $1.7 billion compared to $2.3 billion at December 31, 2020, due to an imbalance in supply and demand impacted by a shortage in microchips used in automotive production. At December 31, 2021 and 2020, other loans in the National Dealer Services business line totaled $3.5 billion and $3.3 billion, respectively, including $2.0 billion of owner-occupied commercial real estate mortgage loans at both December 31, 2021 and 2020.
There were no nonaccrual dealer loans at both December 31, 2021, and 2020. Additionally, there were no net charge-offs of $1dealer loans in either of the years ended December 31, 2021 and 2020.
Automotive Lending- Production:
The following table presents a summary of loans to borrowers involved with automotive production.
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Loans Outstanding (a) | Percent of Total Loans | Loans Outstanding (a) | Percent of Total Loans | ||||||||||||||||||||
| (dollar amounts in millions) | |||||||||||||||||||||||
| Production: | |||||||||||||||||||||||
| Domestic | $ | 789 | $ | 791 | |||||||||||||||||||
| Foreign | 323 | 302 | |||||||||||||||||||||
| Total production | $ | 1,112 | 2.3 | % | $ | 1,093 | 2.1 | % | |||||||||||||||
(a)Excludes PPP loans.
Loans to borrowers involved with automotive production, primarily Tier 1 and Tier 2 suppliers, totaled $1.1 billion at both December 31, 2021 and 2020. These borrowers have faced, and could face in the future, financial difficulties due to disruptions in auto production as well as their supply chains and logistics operations as a result of the COVID-19 pandemic. As such, management continues to monitor this portfolio.
There were no nonaccrual loans to borrowers involved with automotive production at December 31, 2021, compared to $7 million at December 31, 2020. Criticized automotive production loans were 15 percent of the automotive production portfolio at December 31, 2021, compared to 24 percent at December 31, 2020. Automotive production loan net charge-offs totaled $7 million for the year ended December 31, 2021, compared to $2 million for the same period in 2018.2020.
For further information regarding significant group concentrations of credit risk, refer to Note 5 to the consolidated financial statements.
Residential Real Estate Lending
At December 31, 2019,2021, residential real estate loans represented 7 percent of total loans. The following table summarizes the Corporation's residential mortgage and home equity loan portfolios by geographic market.
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollar amounts in millions) December 31 | Residential Mortgage Loans | % of Total | Home Equity Loans | % of Total | Residential Mortgage Loans | % of Total | Home Equity Loans | % of Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollar amounts in millions) | (dollar amounts in millions) | Residential Mortgage Loans | Percent of Total | Home Equity Loans | % of Total | Residential Mortgage Loans | Percent of Total | Home Equity Loans | Percent of Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Geographic market: | Geographic market: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Michigan | $ | 412 | 22 | % | $ | 603 | 35 | % | $ | 406 | 21 | % | $ | 650 | 37 | % | Michigan | $ | 434 | 24 | % | $ | 484 | 32 | % | $ | 428 | 23 | % | $ | 540 | 34 | % | |||||||||||||||||||||||||||||||||||||||||
| California | 932 | 51 | 699 | 41 | 993 | 50 | 710 | 40 | California | 870 | 49 | 660 | 43 | 927 | 51 | 655 | 41 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Texas | 275 | 15 | 346 | 20 | 310 | 16 | 346 | 20 | Texas | 245 | 14 | 329 | 21 | 254 | 14 | 328 | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Markets | 226 | 12 | 63 | 4 | 261 | 13 | 59 | 3 | Other Markets | 222 | 13 | 60 | 4 | 221 | 12 | 65 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,845 | 100 | % | $ | 1,711 | 100 | % | $ | 1,970 | 100 | % | $ | 1,765 | 100 | % | Total | $ | 1,771 | 100 | % | $ | 1,533 | 100 | % | $ | 1,830 | 100 | % | $ | 1,588 | 100 | % | |||||||||||||||||||||||||||||||||||||||||
Residential real estate loans, which consist of traditional residential mortgages and home equity loans and lines of credit, totaled $3.6$3.3 billion at December 31, 2019.2021. 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
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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.
Residential mortgages totaled $1.8 billion at December 31, 2019,2021, and were primarily larger, variable-rate mortgages originated and retained for certain private banking relationship customers. Of the $1.8 billion of residential mortgage loans outstanding, $20$36 million were on nonaccrual status at December 31, 2019.2021. The home equity portfolio totaled $1.7$1.5 billion at December 31, 2019,2021, of which $1.6 billion96 percent was outstanding under primarily variable-rate, interest-only home equity lines of credit, $89 million3 percent were in amortizing status and $23 million1 percent were closed-end home equity loans. Of the $1.7$1.5 billion of home equity loans outstanding, $17$12 million were on nonaccrual status at December 31, 2019.2021. A majority of the home equity portfolio was secured by junior liens at December 31, 2019.2021.
Energy Lending
The Corporation has a portfolio of Energy loans that are included entirely in commercial loans in the Consolidated Balance Sheets. Customers in the Corporation's Energy business line (approximately 150120 relationships) are engaged in three segments of the oil and gas business: exploration and production (E&P), midstream and energy services. 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 generally subject to semi-annual borrowing base re-determinations based on a variety of factors including updated prices (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.
The following table summarizes information about the Corporation's Energy business line.
| (dollar amounts in millions) | 2021 | 2020 | |||||||||||||||||||||||||||
| December 31 | Outstandings | Nonaccrual | Criticized (a) | Outstandings | Nonaccrual | Criticized (a) | |||||||||||||||||||||||
| Exploration and production (E&P) | $ | 971 | 80 | % | $ | 14 | $ | 46 | $ | 1,295 | 81 | % | $ | 114 | $ | 527 | |||||||||||||
| Midstream | 212 | 18 | — | — | 261 | 16 | — | 56 | |||||||||||||||||||||
| Services | 21 | 2 | — | 12 | 44 | 3 | — | 13 | |||||||||||||||||||||
| Total Energy business line | $ | 1,204 | 100 | % | $ | 14 | $ | 58 | $ | 1,600 | 100 | % | $ | 114 | $ | 596 | |||||||||||||
| As a percentage of total Energy loans | 1 | % | 5 | % | 7 | % | 37 | % | |||||||||||||||||||||
| (dollar amounts in millions) | 2019 | 2018 | |||||||||||||||||||||
| December 31 | Outstandings | Nonaccrual | Criticized (a) | Outstandings | Nonaccrual | Criticized (a) | |||||||||||||||||
| Exploration and production (E&P) | $ | 1,741 | 78 | % | $ | 43 | $ | 289 | $ | 1,771 | 82 | % | $ | 46 | $ | 143 | |||||||
| Midstream | 432 | 20 | — | 63 | 298 | 14 | — | 43 | |||||||||||||||
| Services | 48 | 2 | — | 14 | 94 | 4 | 2 | 19 | |||||||||||||||
| Total Energy business line | $ | 2,221 | 100 | % | $ | 43 | $ | 366 | $ | 2,163 | 100 | % | $ | 48 | $ | 205 | |||||||
| As a percentage of total Energy loans | 2 | % | 16 | % | 2 | % | 9 | % | |||||||||||||||
Loans in the Energy business line totaled $2.2$1.2 billion, or approximately 42 percent of total loans, at December 31, 2019, an increase2021, a decrease of $58 million.$396 million compared to December 31, 2020. Total exposure, including unused commitments to extend credit and letters of credit, was $4.3$2.9 billion (a utilization rate of 39 percent) and $4.5$3.1 billion at December 31, 20192021 and December 31, 2018,2020, respectively.
Leveraged Loans
Certain loans in the Corporation's commercial portfolio are considered leveraged transactions. These loans are typically used for mergers, acquisitions, business recapitalizations, refinancing and equity buyouts. To help mitigate the risk associated with these loans, the Corporation focuses on middle market companies with highly capable management teams, strong sponsors and solid track records of financial performance. Industries prone to cyclical downturns and acquisitions with a high degree of integration risk are generally avoided. Other considerations include the sufficiency of collateral, the level of balance sheet leverage and the adequacy of financial covenants. During the underwriting process, cash flows are stress testedstress-tested to evaluate the borrowers' abilities to handle economic downturns and an increase in interest rates.
The FDIC defines higher-risk commercial and industrial (HR C&I) loans for assessment purposes as loans generally with leverage of four times total debt to earnings before interest, taxes and depreciation (EBITDA) as well as three times senior debt to EBITDA, excluding certain collateralized loans.
The following table summarizes information about HR C&I loans, were $2.6 billionwhich represented 6 percent and $2.5 billion5 percent of total loans at December 31, 20192021 and 2018,December 31, 2020, respectively. Criticized loans within
F-25
(in millions) December 31 | 2021 | 2020 | |||||||||
| Outstandings | $ | 2,927 | $ | 2,441 | |||||||
| Criticized | 299 | 418 | |||||||||
| Net loan charge-offs recorded during the years ended December 31, | 18 | 25 | |||||||||
Other Sectors Most at Risk due to Economic Stress Resulting from COVID-19 Impacts
As the HR C&Ieconomy recovers, aided by additional stimulus packages and the rollout of the COVID vaccine, the Corporation has continued to monitor the lingering impacts of the pandemic on its customers. In addition to the energy, automotive production and leveraged loan portfolios, the Corporation considers the following sectors of its loan portfolio were $169 million and $147 million at December 31, 2019 and 2018, respectively. Charge-offsto be most vulnerable to financial risks from business disruptions caused by the pandemic spread mitigation efforts. For further discussion, see Item 1.A "Risk Factors" on page 13 of HR C&Ithis report.
| December 31, 2021 | |||||||||||||||||||||||
Sector based on NAICS category (dollar amounts in millions) | Loans (a) | Percent of Total Loans | Percent Criticized (b) | Percent Nonaccrual (c) | |||||||||||||||||||
| Retail Commercial Real Estate (d) | $ | 790 | 1.6 | % | 1.3 | % | — | % | |||||||||||||||
| Hotels | 651 | 1.4 | 3.7 | 1.5 | |||||||||||||||||||
| Retail Goods and Services | 290 | 0.6 | 6.6 | — | |||||||||||||||||||
| Arts/Recreation | 206 | 0.4 | 21.5 | 5.0 | |||||||||||||||||||
| All other impacted sectors (e) | 1,106 | 2.2 | 7.4 | 1.7 | |||||||||||||||||||
| Total | $ | 3,043 | 6.2 | % | 5.9 | % | 1.3 | % | |||||||||||||||
(a)Excludes PPP loans.
(b)Sector criticized loans totaled $6 million in 2019 and $15 million in 2018.as a percentage of sector total loans.
(c)Sector nonaccrual loans as a percentage of sector total loans.
(e)Includes airlines, restaurants and bars, childcare, coffee shops, cruise lines, education, gasoline and convenience stores, religious organizations, senior living, freight, as well as travel arrangements.
F-26
Market and Liquidity Risk
Market risk represents the risk of loss due to adverse movement in prices, including interest rates, foreign exchange rates, commodity prices and equity prices. Liquidity risk represents the risk that the Corporation does not have sufficient access to funds to maintain its normal operations at all times, or does not have the ability to raise or borrow funds at a reasonable cost at all times.
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. Corporate Treasury 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.
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 scenarios, including both idiosyncratic and market-wide in nature, which vary in terms of duration and severity. The evaluation as of December 31, 2021 projected that sufficient sources of liquidity were available under each series of events.
In addition to assessing liquidity risk on a consolidated basis, Corporate Treasury also monitors the parent company's liquidity and has established limitsliquidity coverage requirements for the minimum number of months into the future in which the parent company can meet existing and forecastedmeeting expected obligations without the support of additional dividends from subsidiaries. ALCO's policy on liquidity policyrisk management requires the parent company to maintain sufficient liquidity to meet expected capital and debtcash obligations withover a targetperiod of 24 months but no less than 1812 months. The Corporation had liquid assets of $1.1 billion on an unconsolidated basis at December 31, 2021.
Corporate Treasury and the Enterprise Risk Division support ALCO in measuring, monitoring and managing interest rate risk as well as all other market risks. Key activities encompass: (i) providing information and analyses 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; and (v) monitoring of industry trends and analytical tools to be used in the management of interest rate and all other market and liquidity risks.
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. Including the impact of interest rate swaps converting floating-rate loans to fixed, the Corporation's loan composition at December 31, 20192021 was 6260 percent 30-day LIBOR, 6rate (primarily LIBOR), 22 percent other LIBOR (primarily 60-day), 14fixed-rate, 13 percent prime, and 185 percent fixed rate. Thiscomprised of 60-and 90-day rates. Additionally, 30 percent of total loans had non-zero interest rate floors protecting against future rate declines. The composition of the loan portfolio creates sensitivity to interest rate movements due to the imbalance between the faster repricing of the floating-rate loan portfolio versus 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 fixed-rate investment securities, which provide liquidity to the balance sheet and act to mitigate the inherent interest rate sensitivity, as well as hedging with interest rate swaps and options. Other mitigating factors include interest rate floors on a portion of the loan portfolio. 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 casebase-case net interest income under an unchanged interest rate environment. Model assumptions in this base case at December 31, 2021 included a modest increase in loan balances, loan spreads held at current levels, a moderate decrease in deposit balances and the securities portfolio held at existing
F-27
levels. Existing derivative instruments entered into for risk management purposes as of the balance sheet dates
are included in the analysis, but no additional hedging is forecasted. At December 31, 2019,2021, these derivative instruments comprise interest rate swaps that convert $3.3$2.7 billion of fixed-rate medium- and long-term debt to variable rates through fair value hedges and convert $4.6$5.1 billion of variable-rate loans to fixed rates through cash flow hedges. During the fourth quarter of 2021, $3.0 billion of forward starting cash flow hedges were added. Additionally, included in this analysis are $14.9 billion of loans that were subject to an average interest rate floor of 0.6 percent at December 31, 2021. This base casebase-case net interest income is then compared against interest rate scenarios in which short-term rates rise or decline 100 basis points (with a floor of zero percent) in a linear, non-parallel fashion from the base case over 12 months, resulting in an average increase or decrease in short-term interest rateschange of 50 basis points over the period.period while long-term rates increase or decrease to a lesser degree.
As of February 15, 2022, cash flow hedges to convert $1.8 billion of variable-rate loans to fixed rates were entered into during the first quarter of 2022 which had an average rate and duration of 1.84% and 5.5 years, respectively, and varying start dates through April 2022. The first quarter 2022 cash flow hedges are not included in the interest rate sensitivity model assumptions.
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. Ingrowth which are in line with historical patterns. However, 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 rising rate scenario reflects a greater decrease in deposits than we have experienced historically as rates 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 December 31, 20192021 and 2018,2020, 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 | |||||||||||||||||||||||||||||||||||||||
| Estimated Annual Change | |||||||||||||||||||||||||||||||||||||||
| (in millions) | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| (dollar amounts in millions) | (dollar amounts in millions) | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| December 31 | Amount | % | Amount | % | December 31 | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
| Change in Interest Rates: | Change in Interest Rates: | Change in Interest Rates: | |||||||||||||||||||||||||||||||||||||
| Rising 100 basis points | $ | 90 | 4 | % | $ | 82 | 3 | % | Rising 100 basis points | $ | 205 | 12 | % | Rising 100 basis points | $ | 161 | 9 | % | |||||||||||||||||||||
| Declining 100 basis points | (135 | ) | (6 | ) | (155 | ) | (6 | ) | |||||||||||||||||||||||||||||||
| Declining to zero percent | Declining to zero percent | (46) | (3) | Declining to zero percent | (34) | (2) | |||||||||||||||||||||||||||||||||
Sensitivity to declining interest rates decreasedincreased from December 31, 20182020 to December 31, 20192021 due to higher deposit volumes, partially offset by growth in floating-rate loans with floors and the impact of swaps converting variable-rate loans to fixed rates.securities portfolio. There is limited remaining potential for downward movement in rates before hitting zero percent floors. Sensitivity to rising interest rates increased due to changes in balance sheet composition,higher deposit volumes and forgiveness of fixed-rate PPP loans, partially offset by growth in floating-rate loans with floors and the addition of swaps converting variable-rate loans to fixed rates.
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 Corporation primarily monitors the percentage change on the base casebase-case economic value of equity. The economic value of equity analysis is based on an immediate parallel 100 basis point shock.shock with a floor of zero percent.
The table below, as of December 31, 20192021 and 2018,December 31, 2020, displays the estimated impact on the economic value of equity from the interest rate scenario described above.
| (in millions) | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| (dollar amounts in millions) | (dollar amounts in millions) | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| December 31 | Amount | % | Amount | % | December 31 | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
| Change in Interest Rates: | Change in Interest Rates: | Change in Interest Rates: | |||||||||||||||||||||||||||||||||||||
| Rising 100 basis points | $ | 716 | 7 | % | $ | 434 | 3 | % | Rising 100 basis points | $ | 1,353 | 9 | % | Rising 100 basis points | $ | 1,793 | 18 | % | |||||||||||||||||||||
| Declining 100 basis points | (1,178 | ) | (12 | ) | (1,023 | ) | (8 | ) | |||||||||||||||||||||||||||||||
| Declining to zero percent | Declining to zero percent | (446) | (3) | Declining to zero percent | (551) | (6) | |||||||||||||||||||||||||||||||||
The sensitivity of the economic value of equity to rising and declining rates increaseddecreased from December 31, 2018 and2020 to December 31, 20192021 primarily due to changes in expected deposit livesduration extension and balance sheet composition, partially offsetgrowth in the securities portfolio. Sensitivity to declining rates also decreased due to the increase in the securities portfolio and is limited by the additionassumption of swaps converting variable-rate loans to fixed rate.a zero percent rate floor.
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The contractual maturity distribution of the loan portfolio is presented below.
| Loans Maturing | |||||||||||||||
(in millions) December 31, 2019 | Within One Year (a) | After One But Within Five Years | After Five Years | Total | |||||||||||
| Commercial loans | $ | 15,068 | $ | 15,423 | $ | 982 | $ | 31,473 | |||||||
| Real estate construction loans | 1,321 | 1,978 | 156 | 3,455 | |||||||||||
| Commercial mortgage loans | 1,856 | 4,922 | 2,781 | 9,559 | |||||||||||
| International loans | 343 | 583 | 83 | 1,009 | |||||||||||
| Total | $ | 18,588 | $ | 22,906 | $ | 4,002 | $ | 45,496 | |||||||
| Sensitivity of loans to changes in interest rates: | |||||||||||||||
| Predetermined (fixed) interest rates | $ | 595 | $ | 2,147 | $ | 588 | $ | 3,330 | |||||||
| Floating interest rates | 17,993 | 20,759 | 3,414 | 42,166 | |||||||||||
| Total | $ | 18,588 | $ | 22,906 | $ | 4,002 | $ | 45,496 | |||||||
| Loans Maturing | |||||||||||||||||||||||||||||
(in millions) December 31, 2021 | Within One Year (a) | After One But Within Five Years | After Five But Within Fifteen Years | After Fifteen Years | Total | ||||||||||||||||||||||||
| Commercial loans | $ | 13,008 | $ | 15,084 | $1,124 | $ | 150 | $ | 29,366 | ||||||||||||||||||||
| Real estate construction loans | 913 | 1,820 | 202 | 13 | 2,948 | ||||||||||||||||||||||||
| Commercial mortgage loans | 2,493 | 5,395 | 3,325 | 42 | 11,255 | ||||||||||||||||||||||||
| Lease financing | 50 | 540 | 50 | — | 640 | ||||||||||||||||||||||||
| International loans | 593 | 550 | 65 | — | 1,208 | ||||||||||||||||||||||||
| Residential mortgage loans | 4 | 2 | 232 | 1,533 | 1,771 | ||||||||||||||||||||||||
| Consumer loans | 529 | 152 | 168 | 1,248 | 2,097 | ||||||||||||||||||||||||
| Total | $ | 17,590 | $ | 23,543 | $ | 5,166 | $ | 2,986 | $ | 49,285 | |||||||||||||||||||
(a)Includes demand loans, loans having no stated repayment schedule or maturity and overdrafts.
The Corporation uses investment securities and derivative instruments as asset and liability management tools with the overall objective of managing the volatility of net interest income from changes in interest rates. These tools assist management in achieving the desired interest rate risk management objectives. Activity related to derivative instruments currently involves interest rate swaps effectively converting fixed-rate medium- and long-term debt tocomposition of loans with a floating rate as well as variable rate loans to a fixed rate.maturity date over one year are presented below based on contractual terms.
| Loans Maturing After One Year | |||||||||||||||||
(in millions) December 31, 2021 | Predetermined (Fixed) Interest Rate | Floating Interest Rate | Total | ||||||||||||||
| Commercial loans | $ | 697 | $ | 15,661 | $ | 16,358 | |||||||||||
| Real estate construction loans | 22 | 2,013 | 2,035 | ||||||||||||||
| Commercial mortgage loans | 1,182 | 7,580 | 8,762 | ||||||||||||||
| Lease financing | 459 | 131 | 590 | ||||||||||||||
| International loans | 41 | 574 | 615 | ||||||||||||||
| Residential mortgage loans | 398 | 1,369 | 1,767 | ||||||||||||||
| Consumer loans | 47 | 1,521 | 1,568 | ||||||||||||||
| Total | $ | 2,846 | $ | 28,849 | $ | 31,695 | |||||||||||
Risk Management Derivative Instruments
The Corporation uses investment securities and derivative instruments as asset and liability management tools with the overall objective of managing the volatility of net interest income from changes in interest rates. These tools assist management in achieving the desired interest rate risk management objectives. Activity related to derivative instruments currently involves interest rate swaps effectively converting fixed-rate medium- and long-term debt to a floating rate as well as variable rate loans to a fixed rate.
(in millions) Risk Management Notional Activity | Interest Rate Contracts | Foreign Exchange Contracts | Totals | (in millions) Risk Management Notional Activity | Interest Rate Contracts | Foreign Exchange Contracts | Totals | |||||||||||||||||||||
| Balance at January 1, 2018 | $ | 1,775 | $ | 650 | $ | 2,425 | ||||||||||||||||||||||
| Balance at January 1, 2020 | Balance at January 1, 2020 | $ | 7,875 | $ | 330 | $ | 8,205 | |||||||||||||||||||||
| Additions | 850 | 10,095 | 10,945 | Additions | 1,000 | 7,141 | 8,141 | |||||||||||||||||||||
| Maturities/amortizations | — | (10,443 | ) | (10,443 | ) | Maturities/amortizations | (675) | (7,029) | (7,704) | |||||||||||||||||||
| Balance at December 31, 2018 | $ | 2,625 | $ | 302 | $ | 2,927 | ||||||||||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | $ | 8,200 | $ | 442 | $ | 8,642 | |||||||||||||||||||||
| Additions | 5,600 | 7,922 | 13,522 | 3,000 | 8,057 | 11,057 | ||||||||||||||||||||||
| Maturities/amortizations | (350 | ) | (7,894 | ) | (8,244 | ) | Maturities/amortizations | (500) | (8,047) | (8,547) | ||||||||||||||||||
| Balance at December 31, 2019 | $ | 7,875 | $ | 330 | $ | 8,205 | ||||||||||||||||||||||
| Balance at December 31, 2021 | Balance at December 31, 2021 | $ | 10,700 | $ | 452 | $ | 11,152 | |||||||||||||||||||||
(a)$3.0 billion of forward starting receive fixed interest rate swaps that will become effective on their contractual start dates in 2022 and 2023.
The notional amount of risk management interest rate swaps totaled $7.9$10.7 billion at December 31, 2019, and $2.6 billion at December 31, 2018,2021, which included fair value hedging strategies that convert $3.3$2.7 billion of fixed-rate medium- and long-term debt to a floating rate as well as cash flow hedging strategies that convert $4.6$8.1 billion of variable-rate loans to a fixed rate. Risk management interest rate swaps generated $4$163 million and $7$121 million of net interest income for the years ended December 31, 20192021 and 2018,December 31, 2020, respectively.
In addition to interest rate swaps, the Corporation employs various other types of derivative instruments as offsetting positions to mitigate exposures to foreign currency risks associated with specific assets and liabilities (e.g., customer loans or
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deposits denominated in foreign currencies). Such instruments may include foreign exchange spot and forward contracts as well as foreign exchange swap agreements.
Further information regarding risk management derivative instruments is provided in Note 8 to the consolidated financial statements.
Customer-Initiated and Other Derivative Instruments
(in millions) Customer-Initiated and Other Notional Activity | Interest Rate Contracts | Energy Derivative Contracts | Foreign Exchange Contracts | Totals | (in millions) Customer-Initiated and Other Notional Activity | Interest Rate Contracts | Energy Derivative Contracts | Foreign Exchange Contracts | Totals | |||||||||||||||||||||||||||||
| Balance at January 1, 2018 | $ | 14,389 | $ | 1,847 | $ | 1,884 | $ | 18,120 | ||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | Balance at January 1, 2020 | $ | 17,827 | $ | 3,089 | $ | 1,013 | $ | 21,929 | |||||||||||||||||||||||||||||
| Additions | 4,245 | 2,287 | 50,220 | 56,752 | Additions | 7,660 | 2,607 | 37,743 | 48,010 | |||||||||||||||||||||||||||||
| Maturities/amortizations | (2,195 | ) | (1,481 | ) | (50,639 | ) | (54,315 | ) | Maturities/amortizations | (2,465) | (2,484) | (36,855) | (41,804) | |||||||||||||||||||||||||
| Terminations | (1,554 | ) | (3 | ) | (370 | ) | (1,927 | ) | Terminations | (1,501) | (91) | — | (1,592) | |||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 14,885 | $ | 2,650 | $ | 1,095 | $ | 18,630 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | $ | 21,521 | $ | 3,121 | $ | 1,901 | $ | 26,543 | |||||||||||||||||||||||||||||
| Additions | 6,411 | 2,719 | 38,805 | 47,935 | Additions | 5,370 | 7,992 | 42,173 | 55,535 | |||||||||||||||||||||||||||||
| Maturities/amortizations | (2,289 | ) | (2,198 | ) | (38,887 | ) | (43,374 | ) | Maturities/amortizations | (2,713) | (2,790) | (42,358) | (47,861) | |||||||||||||||||||||||||
| Terminations | (1,180 | ) | (82 | ) | — | (1,262 | ) | Terminations | (3,178) | (553) | — | (3,731) | ||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 17,827 | $ | 3,089 | $ | 1,013 | $ | 21,929 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | Balance at December 31, 2021 | $ | 21,000 | $ | 7,770 | $ | 1,716 | $ | 30,486 | |||||||||||||||||||||||||||||
The Corporation sells and purchases interest rate caps and floors and enters into foreign exchange contracts, interest rate swaps and energy derivative contracts to accommodate the needs of customers requesting such services. Changes in the fair value of customer-initiated and other derivatives are recognized in earnings as they occur. To limit the market risk of these activities, the Corporation generally takes offsetting positions with dealers. The notional amounts of offsetting positions are included in the table above. Customer-initiated and other notional activity represented 73 percent and 8675 percent of total interest rate, energy and foreign exchange contracts at December 31, 20192021 and 2018,2020, respectively.
Further information regarding customer-initiated and other derivative instruments is provided in Note 8 to the consolidated financial statements.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Effective March 2021, the FCA confirmed that certain LIBOR tenors will no longer be supported after December 31, 2021 and that the remaining tenors, including those most commonly used by the Corporation, will cease to be supported after June 30, 2023. The Corporation has substantial exposure to LIBOR-based products, including loans and derivatives, and is preparing for a transition from LIBOR toward alternative rates.
As of July 1, 2021, the Corporation was operationally ready to issue new Secured Overnight Financing Rate (SOFR)-based cash and derivative products. Additionally, as of September 30, 2021, the Corporation was operationally ready to issue new Bloomberg Short-Term Bank Yield Index (BSBY)-based cash and derivative products. The Corporation ceased originating LIBOR-based products in the fourth quarter of 2021, while communications and learning activities to support customers and colleagues are ongoing. As of December 31, 2021, the Corporation estimates that approximately half of its LIBOR-based commercial loans have maturity dates prior to the cessation of LIBOR. Of the remaining loans with maturity dates beyond the cessation date, the Corporation estimates that 40% incorporate fallback language and is confident that it will achieve timely remediation of all other loans. In addition to remediation activity on LIBOR-based loans, the Corporation has enacted the International Swaps and Derivatives Association (ISDA) protocols related to derivatives. Once events occur that trigger a fallback, the reference rate for the variable leg of the swap will fall back from LIBOR to the ISDA Fallback Rate, which is the daily SOFR plus a spread.
The Corporation's enterprise transition timelines are closely aligned with recommendations from the Alternative Reference Rates Committee for both best practices and recommended objectives. The Corporation will continue to align with industry and regulatory guidelines regarding the cessation of LIBOR as well as monitor market developments for transitioning to alternative reference rates. For a discussion of the various risks facing the Corporation in relation to the transition away from LIBOR, see the market risk discussion within “Item 1A. Risk Factors.”
Sources of Liquidity
The Corporation maintains a liquidity position that it believes will adequately satisfy its financial obligations while taking into account potential commitment draws and Off-Balance Sheet Arrangementsdeposit run-off that may occur in the normal course of business. The majority of the Corporation's balance sheet is funded by customer deposits. Cash flows from loan repayments, increases in
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deposit accounts, activity in the securities portfolio and the purchased funds market serve as the Corporation's primary liquidity sources.
The Corporation satisfies incremental liquidity needs with either liquid assets or external funding sources. The Corporation had access to liquid assets of $35.3 billion at December 31, 2021, which included cash on deposit with the Federal Reserve and the portion of the investment securities portfolio that the Corporation can sell without third-party consent.
In addition, the Corporation may access external funding sources when necessary, which include FHLB advances, federal funds, reverse repurchase agreements, brokered deposits and Corporation-issued bonds. The Corporation maintains a shelf registration statement with the Securities and Exchange Commission from which it may issue debt and equity securities. In April 2021, the Bank terminated a $15.0 billion note program, under which the Bank had the ability to meet financial obligations throughissue up to $13.5 billion of debt at the maturity or saletime of existing assetstermination. The termination of the program does not impact outstanding notes issued under the program or the acquisitionBank's ability to issue notes in the future.
Purchased funds decreased to $50 million at December 31, 2021, compared to $66 million at December 31, 2020. At December 31, 2021, the Bank had pledged loans totaling $21.2 billion which provided for up to $17.0 billion of additional funds. available collateralized borrowing with the Federal Reserve Bank (FRB). The Bank is also 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 loans, certain government agency-backed securities and other eligible assets. Actual borrowing capacity is contingent on the amount of collateral pledged to the FHLB. At December 31, 2021, $18.3 billion of real estate-related loans were pledged to the FHLB as collateral providing $10.2 billion for potential future borrowings.
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, earnings and other relevant factors related to the Corporation and the Bank. As of December 31, 2021, 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 | ||||||||||||||||||||||
| December 31, 2021 | 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 | |||||||||||||||||||
Potential Uses of Liquidity
Various financial obligations includingsuch as contractual obligations, unfunded commitments and commercial commitments,deposit withdrawals may require future cash payments by the Corporation. Certain obligations are recognized on the Consolidated Balance Sheets, while others are off-balance sheet under U.S. generally accepted accounting principles.
The following contractual obligations table summarizes the Corporation's material noncancelable contractual obligations and future required minimum payments. Refer to Notes 6, 9, 10, 11, 12, and 1826 to the consolidated financial statements for further information regarding these contractual obligations.
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Selected Contractual Obligations
| Minimum Payments Due by Period | |||||||||||||||||||||||||||||
(in millions) December 31, 2021 | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||||||||||||
| Deposits without a stated maturity (a) | $ | 80,316 | $ | 80,316 | |||||||||||||||||||||||||
| Certificates of deposit and other deposits with a stated maturity (a) | 2,023 | 1,837 | $ | 135 | $ | 38 | $ | 13 | |||||||||||||||||||||
| Medium- and long-term debt (a) | 2,650 | — | 1,350 | 750 | 550 | ||||||||||||||||||||||||
| Operating leases | 412 | 60 | 118 | 90 | 144 | ||||||||||||||||||||||||
| Total contractual obligations | $ | 85,401 | $ | 82,213 | $ | 1,603 | $ | 878 | $ | 707 | |||||||||||||||||||
| Medium- and long-term debt (parent company only) (a) (b) | $ | 1,650 | $ | — | $ | 850 | $ | 250 | $ | 550 | |||||||||||||||||||
| Minimum Payments Due by Period | |||||||||||||||||||
(in millions) December 31, 2019 | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||
| Deposits without a stated maturity (a) | $ | 54,093 | $ | 54,093 | |||||||||||||||
| Certificates of deposit and other deposits with a stated maturity (a) | 3,202 | 2,970 | 180 | 26 | 26 | ||||||||||||||
| Short-term borrowings (a) | 71 | 71 | — | — | — | ||||||||||||||
| Medium- and long-term debt (a) | 7,125 | 675 | — | 1,350 | 5,100 | ||||||||||||||
| Operating leases | 438 | 60 | 115 | 88 | 175 | ||||||||||||||
| Commitments to fund low income housing partnerships | 160 | 98 | 52 | 5 | 5 | ||||||||||||||
| Other long-term obligations (b) | 356 | 101 | 92 | 34 | 129 | ||||||||||||||
| Total contractual obligations | $ | 65,445 | $ | 58,068 | $ | 439 | $ | 1,503 | $ | 5,435 | |||||||||
| Medium- and long-term debt (parent company only) (a) (c) | $ | 1,650 | $ | — | $ | — | $ | 850 | $ | 800 | |||||||||
(b)Parent company only amounts are included in the medium- and long-term debt minimum payments above.
In addition to contractual obligations, other commercial commitments of the Corporation impact liquidity. These include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The following table summarizes the Corporation's commercial commitments and expected expiration dates by period.
Commercial Commitments
| Expected Expiration Dates by Period | ||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) December 31, 2021 | (in millions) December 31, 2021 | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||||||||||||||||||||||||||||||
| Expected Expiration Dates by Period | ||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) December 31, 2019 | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||||||||||||||||||||||||||||
| Unused commitments to extend credit | $ | 26,861 | $ | 10,863 | $ | 8,648 | $ | 4,507 | $ | 2,843 | Unused commitments to extend credit | $ | 29,464 | $ | 7,887 | $ | 11,633 | $ | 6,594 | $ | 3,350 | |||||||||||||||||||||||||||
| Standby letters of credit and financial guarantees | 3,320 | 2,837 | 319 | 103 | 61 | Standby letters of credit and financial guarantees | 3,378 | 3,008 | 168 | 128 | 74 | |||||||||||||||||||||||||||||||||||||
| Commercial letters of credit | 18 | 17 | — | 1 | — | Commercial letters of credit | 44 | 38 | 6 | — | — | |||||||||||||||||||||||||||||||||||||
| Total commercial commitments | $ | 30,199 | $ | 13,717 | $ | 8,967 | $ | 4,611 | $ | 2,904 | Total commercial commitments | $ | 32,886 | $ | 10,933 | $ | 11,807 | $ | 6,722 | $ | 3,424 | |||||||||||||||||||||||||||