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CMA Comerica

Filed: 9 Feb 21, 5:04pm
0000028412us-gaap:FiduciaryAndTrustMembercma:FinanceOther1MemberDomain2019-01-012019-12-31

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, 2020
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)
Delaware38-1998421
(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 classTrading symbolName of each exchange on which registered
Common Stock, $5 par valueCMANew 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 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the registrant’s common stock, $5 par value, held by non-affiliates had an aggregate market value of approximately $5.3 billion based on the closing price on the New York Stock Exchange on that date of $38.10 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 5, 2021, the registrant had outstanding 139,286,040 shares of its common stock, $5 par value.
Documents Incorporated by Reference:
Part III: Items 10-14—Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2021.


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, 2020, 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 31 non-banking subsidiaries. At December 31, 2020, Comerica had total assets of approximately $88.1 billion, total deposits of approximately $72.9 billion, total loans of approximately $52.3 billion and shareholders’ equity of approximately $8.1 billion.
Comerica has strategically aligned its operations into three major business segments: the Commercial 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-5 of the Financial Section of this report; (2) under the caption “Rate/Volume Analysis” on page F-6 of the Financial Section of this report; and (3) under the caption “Noninterest Income” on pages F-7 through F-8 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 of Texas, California and Michigan, as well as in the states of Arizona and Florida. They also compete in broader, national geographic markets, as well as markets in Mexico and Canada. They are 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 largely 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 as 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.
In addition, the industry continues to consolidate, which affects competition by eliminating some regional and local institutions, while potentially strengthening the franchises of acquirers.
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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”) (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.); 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. Further, it is too soon for Comerica to predict what legislative or regulatory changes may occur as a result of the recent change in leadership resulting from the recent elections, or, if changes occur, the ultimate effect they would have upon the financial condition or results of operations of Comerica.
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 amended 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, are exempt from all of the Dodd-Frank enhanced prudential standards, except risk committee requirements. As a result, Comerica is no longer subject to Dodd-Frank Act supervisory and company-run stress testing or required to file a resolution plan under Section 165(d) of the Dodd-Frank Act. Comerica is not subject to internal liquidity stress testing and buffer requirements, the Comprehensive Capital Analysis and Review (“CCAR”) process or the Liquidity Coverage Ratio. In addition, Comerica is no longer required to pay the supervision and regulation fee assessment under the Dodd-Frank Act.

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Banks with less than $100 billion in total consolidated assets, including Comerica Bank, are also exempt from company-run stress testing requirements under the EGRRCPA.
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.” If any subsidiary bank of Comerica were to receive a rating under the CRA of less than “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.”
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 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 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 and asset class. 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 September 30, 2020, the federal banking agencies issued a final rule that provides banking organizations that implement the current expected
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credit loss (“CECL”) standard during the 2020 calendar year the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. Comerica elected this deferral and at December 31, 2020, $72 million, or a cumulative 11-basis-point benefit to the capital ratios, was deferred. More information is set forth in the “Capital” section located on pages F-19 through F-21.
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 total capital ratio, Tier 1 capital ratio, CET1 capital ratio and a leverage ratio equal to at least 10.0 percent, 8.0 percent, 6.5 percent and 5.0 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, 2020, Comerica met all of its minimum risk-based capital ratio and leverage ratio requirements plus the applicable capital 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, 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 assets66,931 66,759 
Adjusted 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 
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 assets68,273 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 
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-19 through F-21 of the Financial Section
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of this report and Note 20 of the Notes to Consolidated Financial Statements located on pages F-96 through F-98 of the Financial Section of this report.
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, 2020, 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, 2021, Comerica's subsidiary banks could declare aggregate dividends of approximately $12 million from retained net profits of the preceding two years. Comerica's subsidiary banks declared dividends of $498 million in 2020, $1.2 billion in 2019 and $1.1 billion in 2018.
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 supervisory 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 supervisory 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
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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.
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 give 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 adopted regulations implementing the CCPA on August 14, 2020. Comerica has a physical footprint in California and is 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
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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 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 2020, Comerica’s FDIC insurance expense totaled $33 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.
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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 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
As a depository institution with $50 billion or more of total consolidated assets, Comerica Bank is required to periodically file a resolution plan with the FDIC. On April 16, 2019, the FDIC released an advanced notice of proposed rulemaking (“ANPR”) with respect to the FDIC’s bank resolution plan requirements meant to better tailor bank resolution plans to a firm’s size, complexity and risk profile. The ANPR offers two alternative approaches to resolution planning for commenters to consider and solicits comment on how to tailor the requirements of the rule to reflect differences in size, complexity and other factors among the population of large insured depository institutions, and on whether to increase the current threshold of $50 billion in assets that triggers application of the rule.
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.
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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. 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-55 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 subject to simplified compliance requirements. In June 2020, regulators finalized a rule further modifying the Volcker Rule’s prohibition 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 major 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 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, 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
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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, 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.
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The borrower's sources and uses of funds.
The borrower's debt service capacity.
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 in our commercial portfolio, please see the captions “Energy Lending” and "Leveraged Loans" on pages F-31 through F-32 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 pages F-29 through F-30 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 page F-31 of the Financial Section of this report.
HUMAN CAPITAL RESOURCES
Comerica’s relationship banking strategy relies heavily on the personal relationships and the quality of service provided by employees. Accordingly, Comerica aims to attract, develop and retain employees who can drive financial and strategic growth objectives and build long-term shareholder value. Key items related to Comerica’s human capital resources are described below.
Structure. As of December 31, 2020, Comerica and its subsidiaries had 7,429 full-time and 441 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 Board of Directors and the Governance, Compensation and Nominating Committee are regularly updated on Comerica’s talent development and human capital management strategies. 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, 2020, Comerica’s total employee headcount, on a full-time equivalent basis, was 14 percent lower than as of December 31, 2015. Additionally, for 2020, Comerica managed an average of $15 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, 2020, Comerica’s U.S. colleagues had the following attributes:
Female (%)Minority (%)
Employees6541
Officials and Managers(1)
5228
Executive Officers(2)
3823
(1) Based on EEO-1 job classifications.
(2) Using Securities and Exchange Commission definition.
Comerica was recognized in 2020 as the DiversityInc. No. 3 Top Regional Company for Diversity and LATINA Style's Top 50 Best Company for Latinas to Work in the U.S, as well as receiving a perfect score of 100% on the Human Rights Campaign's Corporate Equality Index (for LGBTQ equality).
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, financial counseling, paid time off, family leave and flexible work schedules. Effective January 2018, Comerica increased its minimum wage to $15 per hour, and in 2020, further increased its minimum wage to $16.50 per hour. 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 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 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 2020, over 6,900 skills-based courses were offered to Comerica colleagues and an average of 24 hours of training per employee were completed. Comerica also supports its employees’ involvement in external development programs. For example, starting in October 2020, Comerica is a participant in the CEO Action for Race and Equity Fellows Program, where one or more Comerica colleagues will commit one year to the Fellows Program while still being employed by Comerica receiving their full salary and benefits.
Comerica’s investment in its employees has resulted in a long-tenured workforce, with average tenure of 12.5 years of service. Of the approximately 1,485 open employee positions filled in 2020, 58% were filled by external hires and 42% were filled by internal hires. Employee turnover for 2020 was 11.6%. In 2020, Comerica conducted our first enterprise-wide employee engagement survey, and nearly 6,700 colleagues participated.
COVID-19. In 2020, in response to the COVID-19 pandemic, over 65 percent of Comerica’s colleagues were able to work remotely, and colleagues whose functions required them to be physically present were eligible for additional "Promise Pay" of up to $175 per week from late March through early June. Comerica also provided stipends to help cover unexpected dependent- and elder-care costs, no-cost health care benefits pertaining to COVID-19 and free telehealth visits and outplacement assistance for spouses of employees. While not a direct response to COVID-19, Comerica did not reduce salaries or any other benefits during this time to support our colleagues through the pandemic.
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 in 2020 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 - in particular the energy industry - 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. 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.
In particular, in 2020, energy markets, which were already experiencing stress prior to the pandemic, were further impacted by the rapid decline in demand resulting from social distancing policies. Energy prices and demand improved in the latter half of 2020 as the economy began to recover, but energy markets remain uncertain. Loans in the Energy business line were $1.6 billion, or approximately 3 percent of total loans, at December 31, 2020. At December 31, 2020, the reserve allocation for Energy loans was approximately 8 percent of the Energy portfolio. If oil and gas prices continue to remain depressed for a prolonged period of time, Comerica's energy portfolio could experience increased credit losses, which could adversely affect Comerica's financial results. Furthermore, a prolonged period of low oil prices could also have a negative impact on the Texas economy, which could have a material adverse effect on Comerica’s business, financial condition and results of operations. For more information regarding Comerica's energy portfolio, please see “Energy Lending” beginning on pages F-31 through F-32 of this report.
For more information regarding certain of Comerica's other lines of business, please see "Concentrations of Credit Risk," "Commercial Real Estate Lending," "Automotive Lending- Dealer," "Automotive Lending- Production," and "Residential Real Estate Lending" on pages F-29 through F-31 of 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
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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-32 of the Financial Section of this report.
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, 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 decreases in the federal funds rate in 2020, or changes in the FRB's balance sheet, 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 significantly in 2020. A continued low interest rate environment will 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-33 of the Financial Section of this report.
Deposits make up a large portion of Comerica’s funding portfolio. Comerica's funding costs may 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, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Comerica has substantial exposure to LIBOR-based products, including loans, securities, derivatives and hedges, and Comerica and the banking industry are preparing to transition away from the widespread use of LIBOR to alternative rates. Comerica began indexing new retail adjustable rate mortgages to SOFR (Secured Overnight Financing Rate) in third quarter 2020. During fourth quarter 2020, Comerica began the process of incorporating fallback language in legacy LIBOR-based commercial loans and updated International Swaps and Derivative Association (ISDA) protocols in interest rate derivatives. Comerica continues to monitor market developments and regulatory updates, including recent
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announcements from the ICE Benchmark Administrator to extend the cessation date for several USD LIBOR tenors to June 30, 2023, as well as collaborate with regulators and industry groups on the transition.
The market transition away from LIBOR to an alternative reference rate 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 replacement of LIBOR with an alternative reference rate;
result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities; and
require the transition to or development of appropriate systems and analytics to effectively transition Comerica’s risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.
Approximately 73 percent of Comerica's loans at December 31, 2020 were tied to LIBOR, which excludes the impact of interest rate swaps converting floating-rate loans to fixed. More information regarding the LIBOR transition is available on pages F-34 through F-35 under "LIBOR Transition."
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.
Further, if Comerica is unable to continue to fund assets through customer bank deposits or access funding sources on favorable terms, or if Comerica suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively, Comerica’s liquidity, operating margins, financial condition and results of operations may be materially adversely affected.
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, such as conditions affecting the financial services industry generally. There can be no assurance that Comerica will maintain its current ratings. In March 2020, S&P Global Ratings revised each of Comerica Incorporated and Comerica Bank's outlook from "Stable" to “Negative,” and in April 2020, Fitch Ratings downgraded Comerica Incorporated and Comerica Bank's long-term issuer default ratings by one notch from "A" to "A-." While recent credit rating actions have had little to no detrimental impact on
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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.
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 monetized 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
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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 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 increased use of mobile and cloud technologies, as well as the increase in remote work due to the COVID-19 pandemic, 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
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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; 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 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. It is too soon for Comerica to predict what legislative or regulatory changes may occur as a result of the change in leadership resulting from the recent elections, or, if changes occur, the ultimate effect they would have upon the financial condition or results of operations of Comerica.
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, 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 current administration has indicated it may propose increases to the federal corporate statutory tax rate. An increase in the federal corporate tax rate may increase Comerica’s tax provision expense. We are unable to predict whether these changes, or other proposals, will ultimately be enacted.
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
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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 largely 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 as 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 Comerica incurring significant expenses without the anticipated increases in revenue, which could result in a material adverse effect on its business.
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. 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
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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.
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. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, 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, particularly as some businesses remain closed or are forced to close again and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. 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-32. Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. We have temporarily closed and/or limited access to certain of our branches and offices or may do so in the future, and our business operations may also be disrupted if significant portions of our workforce are unable to work effectively long-term, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, we have also enacted hardship relief assistance for customers experiencing financial difficulty as a result of COVID-19, including fee and penalty waivers, loan deferrals or other scenarios that may help our customers. As of December 31, 2020, pandemic-related payment deferrals totaled $141 million,
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representing approximately 100 obligors and consisting of 42 percent commercial loans and 58 percent retail loans, primarily residential mortgages.
As well, we are a lender for the Small Business Administration's Paycheck Protection Program ("PPP") and other SBA, Federal Reserve or United States Treasury programs that have been or may be created in the future in response to the pandemic. These programs are new and their effects on Comerica's business are uncertain. 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. The U.S. economy contracted into a recession with unusual speed and force in the first half of 2020, ending the longest expansionary period in U.S. history. The U.S. government and the Federal Reserve responded to the pandemic with unprecedented measures. In addition to the Federal Reserve reducing the target federal funds rate to zero to 0.25 percent, Congress passed the Coronavirus Aid, Relief, and Economic Security Act that included an estimated $2 trillion stimulus package. Although the U.S. economy began to recover in third quarter 2020 as social distancing policies loosened, economic metrics in fourth quarter 2020 indicate an uneven path to recovery. In December 2020, Congress amended the Coronavirus Aid, Relief, and Economic Security Act with the Consolidated Appropriations Act of 2021 to provide an additional $900 billion of stimulus relief to mitigate the continued impacts of the pandemic. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of administered vaccines, as well as the effects of the change in leadership resulting from the recent elections. Conditions related to 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" on pages F-22 through F-38 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.
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
22

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 policies 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 policies 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 policies and processes so they comply with U.S. Generally Accepted Accounting Principles ("GAAP"). In some cases, management must select the 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 policies 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 Policies” on pages F-39 through F-43 of the Financial Section of this report and Note 1 of the Notes to Consolidated Financial Statements located on pages F-52 through F-64 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.
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.
23

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, 2020, Comerica, through its banking affiliates, operated at a total of 546 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 546 locations, 217 were owned and 329 were leased. As of December 31, 2020, 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; 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 located on pages F-98 through F-99 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 5, 2021, there were approximately 8,629 record holders of Comerica's common stock.
    Subject to approval of the Board of Directors, applicable regulatory requirements and the Series A Preferred Stock dividend preference, Comerica expects to continue its policy of paying regular cash dividends on a quarterly basis. A discussion of dividend restrictions applicable to Comerica is set forth in Notes 13 and 20 of the Notes to Consolidated Financial Statements located on pages F-85 and F-96 through F-98 of the Financial Section of this report, in the "Capital" section on pages F-19 through F-21 of the Financial Section of this report and in the “Supervision and Regulation” section of this report.
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
In March 2020, as the economic climate grew increasingly uncertain, Comerica suspended its share repurchase program, with a focus on deploying capital to meet customers' growing financing requirements, resulting in no share repurchases under the program for the remainder of the year. As of December 31, 2020, a total of 87.2 million shares have been authorized for repurchase under the share repurchase program since its inception in 2010. There is no expiration date for Comerica's share repurchase program.
The following table summarizes Comerica's share repurchase activity for the year ended December 31, 2020.
(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 20203,227 4,870 3,322 $58.70 
Total second quarter 2020— 4,870 28.63 
Total third quarter 2020— 4,870 37.94 
October 2020— 4,870 38.26 
November 2020— 4,870 — — 
December 2020— 4,870 — — 
Total fourth quarter 2020— 4,870 38.26 
Total 20203,227 4,870 3,339 $58.58 
(a)Maximum number of shares that may yet be purchased under the publicly announced plans or programs.
(b)Includes approximately 112,000 shares (including 4,000 shares in the quarter ended December 31, 2020) 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, 2020. These transactions are not considered part of Comerica's repurchase program.

Item 6.  Selected Financial Data.
Reference is made to the caption “Selected Financial Data” on page F-3 of the Financial Section of this report.
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    Reference is made to the sections entitled “2020 Overview,” “Results of Operations," "First Quarter 2021 Outlook," "Strategic Lines of Business and Markets," "Balance Sheet and Capital Funds Analysis," "Risk Management," "Critical Accounting Policies," "Supplemental Financial Data" and "Forward-Looking Statements" on pages F-4 through F-46 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-33 through F-38 of the Financial Section of this report.
25

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,” “Reports of Independent Registered Public Accounting Firm,” and “Historical Review” on pages F-47 through F-116 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 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 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-110 and F-111 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 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 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.
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 27, 2021, which sections are hereby incorporated by reference.
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,” “2020 Summary Compensation Table,” “2020 Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End 2020,” “2020 Option Exercises and Stock Vested,” “Pension Benefits at Fiscal Year-End 2020,” “2020 Nonqualified Deferred Compensation,” “Potential Payments upon Termination or Change of Control at Fiscal Year-End 2020” and "Pay Ratio Disclosure" of Comerica's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 27, 2021, which sections are hereby incorporated by reference.
26

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 27, 2021, 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 27, 2021, 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 27, 2021, which section is hereby incorporated by reference.
27


PART IV

Item 15.  Exhibits and Financial Statement Schedules.
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 F-47 through F-113.
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.
3.Exhibits:
2(not applicable)
3.1
3.2
3.3
3.4
4[Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4 in respect of instruments defining the rights of security holders. In accordance with Regulation S-K Item No. 601(b)(4)(iii), the Registrant is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request.]
4.1
4.2
9(not applicable)
10.1†
A†
B†
C†
D†
E†
28

F†
G†
H†
I†
J†
10.2†
A†
B†
C†
D†
E†
F†
G†
H†
I†
J†
K†
29

L†
M†
N†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
A†
B†
C†
30

D†
E†
10.14†
A†
10.15†
10.16†
10.17A†
10.17B†
10.17C†
10.18†
A†
10.19†
A†
10.20†
A†
10.21†
10.22†
13(not applicable)
14(not applicable)
16(not applicable)
18(not applicable)
31

21
22(not applicable)
23.1
24(not applicable)
31.1
31.2
32
33(not applicable)
34(not applicable)
35(not applicable)
95(not applicable)
96(not applicable)
99(not applicable)
101Financial statements from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders' Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.
104The cover page from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included in Exhibit 101).
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 Summary.
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, 2015 and the reinvestment of all dividends during the periods presented.
cma-20201231_g1.jpg
201520162017201820192020
Comerica Incorporated100166215174188156
KBW Bank Index100129152125171153
S&P 500 Index100112136130171203

The performance shown on the graph is not necessarily indicative of future performance.

F-2

SELECTED FINANCIAL DATA
(dollar amounts in millions, except per share data)
Years Ended December 3120202019201820172016
EARNINGS SUMMARY
Net interest income$1,911$2,339$2,352$2,061$1,797
Provision for credit losses53774(1)74248
Noninterest income1,0011,010976(a)1,1071,051
Noninterest expenses1,7841,7431,794(a), (b)1,860(b)1,930(b)
Provision for income taxes117334300491(c)193
Net income4741,1981,235743477
Preferred stock dividends13
Net income attributable to common shares4591,1911,227738473
PER SHARE OF COMMON STOCK
Diluted earnings per common share$3.27$7.87$7.20$4.14$2.68
Cash dividends declared2.722.681.841.090.89
Common shareholders’ equity55.0151.5746.8946.0744.47
Tangible common equity (d)50.4347.0742.8942.3440.79
Market value55.8671.7568.6986.8168.11
Average diluted shares (in millions)
140151171178177
YEAR-END BALANCES
Total assets$88,129$73,402$70,818$71,567$72,978
Total earning assets82,22767,76765,51365,88067,518
Total loans52,29150,36950,16349,17349,088
Total deposits72,86957,29555,56157,90358,985
Total medium- and long-term debt5,7287,2696,4634,6225,160
Total common shareholders’ equity7,6567,3277,5077,9637,796
Total shareholders' equity8,0507,3277,5077,9637,796
AVERAGE BALANCES
Total assets$81,146$71,488$70,724$71,452$71,743
Total earning assets75,41966,13465,41066,30066,545
Total loans51,63150,51148,76648,55848,996
Total deposits65,03855,48155,93557,25857,741
Total medium- and long-term debt6,5496,9555,8424,9694,917
Total common shareholders’ equity7,4537,3087,8097,9527,674
Total shareholders' equity7,6917,3087,8097,9527,674
CREDIT QUALITY
Total allowance for credit losses$992(d)$668$701$754$771
Total nonperforming loans350204229410590
Foreclosed property and other repossessed assets9111517
Total nonperforming assets359215230415607
Net credit-related charge-offs1961075192157
Net credit-related charge-offs as a percentage of average total loans0.38 %0.21 %0.11 %0.19 %0.32 %
Allowance for loan losses as a percentage of total period-end loans1.811.271.341.451.49
Allowance for credit losses as a percentage of total period-end loans1.901.331.401.531.57
Allowance for loan losses as a multiple of total nonperforming loans2.7x3.1x2.9x1.7x1.2x
Allowance for credit losses as a multiple of total nonperforming loans2.8x3.3x3.1x1.8x1.3x
RATIOS
Net interest margin2.54 %3.54 %3.58 %3.11 %2.71 %
Return on average assets0.581.681.751.040.67
Return on average common shareholders’ equity6.1816.3915.829.346.22
Dividend payout ratio79.7833.7125.1725.7732.48
Average common shareholders’ equity as a percentage of average assets9.1810.2211.0411.1310.70
Common equity tier 1 capital as a percentage of risk-weighted assets (e)10.3410.1311.1411.6811.09
Tier 1 capital as a percentage of risk-weighted assets (e)10.9310.1311.1411.6811.09
Common equity ratio8.699.9810.6011.1310.68
Tangible common equity as a percentage of tangible assets (e)8.029.199.7810.329.89
(a)Effective January 1, 2018, adoption of "Topic 606: Revenue from Contracts with Customers" (Topic 606) resulted in a change in presentation which records certain costs in the same category as the associated revenues. The effect of this change was to reduce noninterest income and expenses by $145 million for the year ended December 31, 2018.
(b)Noninterest expenses included restructuring charges of $53 million, $45 million and $93 million in 2018, 2017 and 2016, respectively.
(c)The provision for income taxes for 2017 was impacted by a $107 million charge to adjust deferred taxes as a result of the enactment of the Tax Cuts and Jobs Act.
(d)Allowance for credit losses for December 31, 2020 calculated using the CECL model effective first quarter 2020.
(e)See Supplemental Financial Data section for reconciliations of non-GAAP financial measures and regulatory ratios.
F-3

2020 OVERVIEW
Comerica Incorporated (the Corporation) is a financial holding company headquartered in Dallas, Texas. The Corporation's major business segments are the Commercial 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 and market 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. The most critical of these significant accounting policies are discussed in the “Critical Accounting Policies” section of this financial review.
Full-Year 2020 compared to Full-Year 2019
Net income decreased $724 million, or 60 percent, to $474 million, driven by increased provision for credit losses in light of the forecasted impacts related to the COVID-19 pandemic and lower net interest income resulting from a lower rate environment. Diluted net income per common share was $3.27 in 2020 compared to $7.87 in 2019.
Average loans increased $1.1 billion, or 2 percent, to $51.6 billion. The increase primarily reflected increases in Mortgage Banker Finance, Commercial Real Estate and smaller increases in Business, Retail and Corporate Banking, partially offset by decreases in National Dealer Services and Energy. In 2020, the Corporation participated as a lender in the Small Business Administration's Paycheck Protection Program (PPP), created in response to the COVID-19 pandemic. Average PPP loans for 2020 were $2.5 billion.
Average securities increased $1.3 billion, or 11 percent, to $13.4 billion, as a portion of excess liquidity was invested in $1.8 billion of U.S. Treasury bonds and $500 million of mortgage-backed securities in the third quarter 2020.
Average deposits increased $9.6 billion, or 17 percent, to a record level of $65.0 billion, driven by customers conserving cash in an uncertain economy. Average noninterest-bearing deposits increased $6.4 billion, or 24 percent, while average interest-bearing deposits increased $3.2 billion, or 11 percent.
Net interest income decreased $428 million to $1.9 billion and the net interest margin decreased 100 basis points to 2.54 percent, primarily reflecting the impact of lower interest rates.
The provision for credit losses increased $463 million to $537 million in 2020 from $74 million in 2019, reflecting credit migration and the forecasted impact of the COVID-19 pandemic, including the economic impacts of social distancing which peaked during the first half of 2020, and pressures on Energy.
Noninterest income was relatively stable at $1.0 billion, reflecting decreases in service charges on deposit accounts and commercial lending fees, partially offset by increases in securities trading income and card fees.
Noninterest expenses increased $41 million to $1.8 billion, primarily due to increases in operational losses, outside processing fee expense (net of cloud computing accounting classification change) and FDIC insurance expense, as well as additional expenses related to COVID-19, which included compensation and stipends to colleagues, charitable contributions, cleaning supplies, personal protective equipment and PPP technology costs.
The provision for income taxes decreased $217 million to $117 million, primarily due to lower pre-tax income.
The Corporation repurchased approximately 3.2 million shares of common stock prior to the suspension of the share repurchase program in first quarter 2020 and issued cash dividends of $2.72 per share, returning a total of $567 million to common shareholders.
The Corporation issued $400 million of 5.625% non-cumulative perpetual preferred stock in second quarter 2020, resulting in preferred dividends declared of $13 million.
F-4

RESULTS OF OPERATIONS
The following provides a comparative discussion of the Corporation's consolidated results of operations for 2020 compared to 2019. A comparative discussion of results for 2019 compared to 2018 is provided in the "Results of Operations" section beginning on page F-6 of the Corporation's 2019 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 31202020192018
Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
Average
Balance
InterestAverage
Rate
Commercial loans (a)$32,144 $1,099 3.42 %$32,053 $1,544 4.81 %$30,534 $1,416 4.64 %
Real estate construction loans3,912 147 3.76 3,325 184 5.54 3,155 164 5.21 
Commercial mortgage loans9,839 320 3.25 9,170 447 4.88 9,131 429 4.69 
Lease financing594 20 3.37 557 19 3.44 470 18 3.82 
International loans1,028 37 3.61 1,019 52 5.13 1,021 51 4.97 
Residential mortgage loans1,905 66 3.45 1,929 74 3.85 1,983 75 3.77 
Consumer loans2,209 84 3.80 2,458 119 4.85 2,472 109 4.41 
Total loans (b)51,631 1,773 3.44 50,511 2,439 4.83 48,766 2,262 4.64 
Mortgage-backed securities (c)9,820 221 2.30 9,348 230 2.44 9,099 214 2.28 
U.S. Treasury securities (d)3,612 70 1.98 2,772 67 2.43 2,711 51 1.86 
Total investment securities13,432 291 2.21 12,120 297 2.44 11,810 265 2.19 
Interest-bearing deposits with banks10,203 28 0.27 3,360 69 2.05 4,700 91 1.94 
Other short-term investments153 1 0.72 143 1.26 134 0.96 
Total earning assets75,419 2,093 2.79 66,134 2,807 4.24 65,410 2,619 3.99 
Cash and due from banks878 887 1,135 
Allowance for loan losses(900)(667)(695)
Accrued income and other assets5,749 5,134 4,874 
Total assets$81,146 $71,488 $70,724 
Money market and interest-bearing checking deposits$26,798 72 0.27 $23,417 214 0.91 $22,378 111 0.50 
Savings deposits2,454 1 0.03 2,166 0.05 2,199 0.04 
Customer certificates of deposit2,626 27 1.02 2,522 30 1.18 2,090 10 0.46 
Other time deposits17  2.00 705 17 2.44 — 1.86 
Foreign office time deposits (e)90 1 0.42 27 — 1.39 25 — 1.19 
Total interest-bearing deposits31,985 101 0.31 28,837 262 0.91 26,694 122 0.46 
Short-term borrowings314 1 0.32 369 2.39 62 1.93 
Medium- and long-term debt6,549 80 1.23 6,955 197 2.82 5,842 144 2.47 
Total interest-bearing sources38,848 182 0.47 36,161 468 1.29 32,598 267 0.82 
Noninterest-bearing deposits33,053 26,644 29,241 
Accrued expenses and other liabilities1,554 1,375 1,076 
Shareholders’ equity7,691 7,308 7,809 
Total liabilities and shareholders’ equity$81,146 $71,488 $70,724 
Net interest income/rate spread$1,911 2.32 $2,339 2.95 $2,352 3.17 
Impact of net noninterest-bearing sources of funds 0.22 0.59 0.41 
Net interest margin (as a percentage of average earning assets)  2.54 %  3.54 %  3.58 %
(a)Includes PPP loans with average balance of $2.5 billion, interest income of $63 million and average yield of 2.49% for the year ended December 31, 2020.
(b)Nonaccrual loans are included in average balances reported and in the calculation of average rates.
(c)Average balances included $213 million, $(36) million and $(263) million of unrealized gains and losses for the years ended December 31, 2020, 2019 and 2018, respectively; yields calculated gross of these unrealized gains and losses.
(d)Average balances included $90 million, $30 million and $(37) million of unrealized gains and losses for the years ended December 31, 2020, 2019 and 2018, respectively; yields calculated gross of these unrealized gains and losses.
(e)Includes substantially all deposits by foreign depositors; deposits are primarily in excess of $100,000.


F-5

Rate/Volume Analysis
(in millions)
Years Ended December 312020/20192019/2018
Decrease
Due to Rate
Increase
(Decrease)
Due to 
Volume (a)
Net
(Decrease)
Increase
Increase (Decrease)
Due to Rate
Increase
(Decrease)
Due to 
Volume (a)
Net
Increase
(Decrease)
Interest Income:
Commercial loans$(447)$2 $(445)$54 $74 $128 
Real estate construction loans(59)22 (37)11 20 
Commercial mortgage loans(149)22 (127)16 18 
Lease financing 1 1 (2)
International loans(15) (15)— 
Residential mortgage loans(7)(1)(8)(2)(1)
Consumer loans(26)(9)(35)11 (1)10 
 Total loans(703)37 (666)92 85 177 
Mortgage-backed securities(14)5 (9)15 16 
U.S. Treasury securities(12)15 3 17 (1)16 
 Total investment securities(26)20 (6)32 — 32 
Interest-bearing deposits with banks(59)18 (41)(27)(22)
Other short-term investments(1) (1)— 
Total interest income(789)75 (714)129 59 188 
Interest Expense:
Money market and interest-bearing checking deposits(151)9 (142)96 103 
Customer certificates of deposit(4)1 (3)10 10 20 
Other time deposits(16)(1)(17)— 17 17 
Foreign office time deposits 1 1 — — — 
Total interest-bearing deposits(171)10 (161)106 34 140 
Short-term borrowings(8) (8)— 
Medium- and long-term debt(110)(7)(117)16 37 53 
Total interest expense(289)3 (286)122 79 201 
Net interest income$(500)$72 $(428)$$(20)$(13)
(a)Rate/volume variances are allocated to variances due to volume.
    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, 2020, 2019 and 2018 and details of the components of the change in net interest income for 2020 compared to 2019 as well as 2019 compared to 2018.
Net interest income was $1.9 billion, a decrease of $428 million, and net interest margin decreased 100 basis points to 2.54 percent, both primarily reflecting the impact of lower interest rates. Average earning assets increased $9.3 billion, primarily reflecting increases of $6.8 billion in lower-yielding interest-bearing deposits with banks and $2.5 billion in PPP loans. Average funding sources increased $2.7 billion, reflecting a $3.2 billion increase in interest-bearing deposits, partially offset by a $406 million decrease 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.
Provision for Credit Losses
The provision for credit losses, which includes the provision for loan losses and the provision for credit losses on lending-related commitments, calculated under the current expected credit loss (CECL) model for the twelve months ended December 31, 2020, increased $463 million to $537 million, primarily driven by credit migration and the forecasted impact of the COVID-19 pandemic in the first half of 2020, including the economic impacts of social distancing, as well as pressures on
F-6

Energy. Net loan charge-offs increased $89 million to $196 million, or 0.38 percent of average total loans, compared to $107 million, or 0.21 percent. Energy net loan charge-offs increased $39 million to $125 million, while general Middle Market net loan charge-offs increased by $37 million to $38 million.
An analysis of the allowance for credit losses and a summary of nonperforming assets are presented under the "Credit Risk" subheading in the "Risk Management" section of this financial review. Further information about the adoption of CECL is presented in Note 1 to the consolidated financial statements.
Noninterest Income
(in millions)
Years Ended December 31202020192018
Card fees$270 $257 $244 
Fiduciary income209 206 206 
Service charges on deposit accounts185 203 211 
Commercial lending fees77 91 85 
Bank-owned life insurance44 41 39 
Foreign exchange income40 44 47 
Letter of credit fees37 38 40 
Brokerage fees21 28 27 
Net securities losses (7)(19)
Other noninterest income (a)118 109 96 
Total noninterest income$1,001 $1,010 $976 
(a)The table below provides further details on certain categories included in other noninterest income.
Noninterest income was relatively stable at $1.0 billion. Decreases in service charges on deposit accounts, commercial lending fees, brokerage fees, customer derivative income, foreign exchange income and income from principal investing and warrants were mostly offset by increases in securities trading income, card fees, investment banking fees and deferred compensation asset returns (offset in noninterest expenses). Noninterest income was also impacted by a $7 million reduction in net securities losses, primarily due to a repositioning loss recorded in 2019, as well as a gain recorded in the fourth quarter of 2019 on the sale of Comerica's Health Savings Account (HSA) business.
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 million, or 5 percent, driven by volume increases in the government card program from stimulus payments under the Coronavirus Aid, Relief, and Economic Security Act, as amended by the Consolidated Appropriations Act of 2021 (CARES Act), resulting in higher interchange revenue, partially offset by a decrease in commercial and consumer card volumes due to the impact of social distancing restrictions.
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 $18 million, or 9 percent. The decrease reflected pandemic-driven changes in customer behavior. On commercial accounts, activity levels declined, while earnings credit allowances provided to customers increased due to growth in deposit balances. Additionally, consumer accounts were impacted by reduced non-sufficient funds and overdraft fees.
Commercial lending fees include fees assessed on the unused portion of lines of credit (unused commitment fees), syndication agent fees and loan servicing fees. These fees decreased $14 million, or 15 percent, reflecting a decrease in syndication agent fees.
Foreign exchange income decreased $4 million, or 8 percent, due to pandemic-related disruptions to international business flows and global shutdowns throughout the year.
Brokerage fees are commissions earned for facilitating securities transactions for customers as well as other brokerage services provided. Brokerage fees decreased $7 million, or 23 percent, primarily due to lower money market funds fee revenue driven by spread reductions in fees earned as a result of the decline in the fed funds rate in early 2020.
Other noninterest income increased $9 million, or 8 percent, driven by increases of $14 million in securities trading income due to fair value gains from previously converted warrants, $7 million in deferred compensation asset returns (offset in noninterest expenses) and $5 million in investment banking fees. These increases were partially offset by the $6 million decrease from the gain on sale of Comerica's HSA business in 2019, as well as decreases of $5 million in customer derivative income and $4 million in income from principal investing and warrants.
F-7

(in millions)
Years Ended December 31202020192018
Customer derivative income (a)$27 $32 $26 
Securities trading income23 
Deferred compensation asset returns (b)16 (2)
Investment banking fees11 
Income from principal investing and warrants3 
Net gain on sale of business (c) — 
All other noninterest income38 40 51 
Other noninterest income$118 $109 $96 
(a)    Customer derivative income included unfavorable valuation adjustments of $18 million and $7 million for the twelve months ended December 31, 2020 and 2019, respectively, and a favorable adjustment of $2 million for the twelve months ended December 31, 2018.
(b)    Compensation deferred by the Corporation's officers and directors is invested based on investment selections of the officers and directors. Income earned on these assets is reported in noninterest income and the offsetting change in deferred compensation plan liabilities is reported in salaries and benefits expense.
(c)    Gain on sale of the Corporation's HSA business.
Noninterest Expenses
(in millions)
Years Ended December 31202020192018
Salaries and benefits expense$1,019 $1,020 $1,009 
Outside processing fee expense (a)242 264 255 
Occupancy expense156 154 152 
Software expense (a)154 117 125 
Equipment expense49 50 48 
Advertising expense35 34 30 
FDIC insurance expense33 23 42 
Restructuring charges — 53 
Other noninterest expenses96 81 80 
Total noninterest expenses$1,784 $1,743 $1,794 
(a)Includes classification adjustments related to costs incurred in cloud computing arrangements of $33 million for the twelve months ended December 31, 2020. These adjustments reduce outside processing fee expense and increase software expense due to the prospective adoption of ASU No. 2018-15, effective January 1, 2020.
Noninterest expenses increased $41 million to $1.8 billion. The change in noninterest expenses was primarily due to increases in operational losses, outside processing fee expense (net of classification change) and FDIC insurance expense, partially offset by a decrease in travel and entertainment expense. Expenses incurred during 2020 included approximately $18 million related to COVID-19, primarily for compensation and stipends to colleagues, charitable contributions, cleaning supplies, personal protective equipment and PPP technology costs.
Salaries and benefits expense was stable at $1.0 billion, reflecting lower incentive and annual stock-based compensation, mostly offset by merit increases and higher deferred compensation expense (offset in noninterest income).
Outside processing fee expense, net of the $33 million classification change, increased $11 million, or 4 percent, primarily due to volume-driven increases in government card processing expenses tied to card fee revenues and increased mortgage application volumes, partially offset by decreases in service fees associated with credit and collection.
FDIC insurance expense increased $10 million, or 43 percent, to $33 million, primarily due to higher risk-based assessment fees.
Other noninterest expenses increased $15 million and included increases of $16 million in operational losses related to several unrelated events, $5 million in other pension and postretirement benefit costs and $4 million in charitable contributions, partially offset by a $10 million reduction in travel and entertainment expense related to the pandemic.
Income Taxes and Related Items
The provision for income taxes was $117 million in 2020, compared to $334 million in 2019. The $217 million decrease in the provision for income taxes primarily reflected lower pre-tax income partially offset by an $11 million decrease in tax benefits from employee stock transactions.
Net deferred tax assets were $4 million at December 31, 2020, compared to $42 million at December 31, 2019. Refer to Note 18 to the consolidated financial statements for information about the components of net deferred tax assets. Deferred tax assets of $404 million were evaluated for realization and it was determined that a valuation allowance of $3 million related to state net operating loss carryforwards was needed at both December 31, 2020 and 2019. These conclusions were based on
F-8

available evidence of projected future reversals of existing taxable temporary differences, assumptions made regarding future events and, when applicable, state loss carryback capacity.

FIRST QUARTER 2021 OUTLOOK
First Quarter 2021 Outlook

This outlook is based on management expectations for gradual improvement in economic conditions.
Decline in average loans reflects decreases in Mortgage Banker Finance and Energy, partially offset by growth in National Dealer Services and general Middle Market. PPP loan forgiveness potentially exceeds additional advances.
Average deposits to remain strong.
Decline in net interest income with lower average loan balances, LIBOR and security yields as well as two fewer days in the quarter, partially offset by careful management of loan and deposit pricing.
Provision for credit losses reflects pace of economic recovery; net charge-offs modestly higher.
Decrease in noninterest income as fourth quarter levels of deferred compensation asset returns, card fees, warrants and securities trading income not expected to repeat, as well as a seasonal reduction in syndication fees; partly offset by increases in service charges on deposit accounts, fiduciary income and brokerage fees.
Decrease in noninterest expenses reflects lower deferred compensation and pension expenses, seasonal reduction in occupancy, staff insurance and advertising, as well as two less days in the quarter; partially offset by higher annual stock-based compensation.
Income tax expense to be approximately 22 percent of pre-tax income, excluding discrete items.
Maintain strong capital levels. Preferred stock dividends of $6 million.
F-9

STRATEGIC LINES OF BUSINESS AND MARKETS
The Corporation has strategically aligned its operations into three major business segments: the Commercial 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, 2020, 2019 and 2018.
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 crediting rates. As overall interest rates decreased in 2020, business segments, particularly those focused on generating deposits, were impacted by lower FTP crediting rates on deposits compared to the prior year. Similarly, FTP charges for funding loans decreased in 2020. Effective January 1, 2019, the Corporation prospectively discontinued allocating an additional FTP charge for the cost of maintaining liquid assets to support potential draws on unfunded loan commitments.
Business Segments
The following table presents net income (loss) by business segment.
(dollar amounts in millions)
Years Ended December 31202020192018
Commercial Bank$660 91 %$1,021 82 %$1,024 85 %
Retail Bank(9)(1)83 65 
Wealth Management74 10 140 11 121 10 
725 100 %1,244 100 %1,210 100 %
Finance(252)(57)(1)
Other1 11 26 
Total$474  $1,198  $1,235 
F-10

The following sections present a summary of the performance of each of the Corporation's business segments for 2020 compared to 2019.
Commercial Bank
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$1,608 $1,655 $(47)(3)%
Provision for credit losses495 88 407 n/m
Noninterest income555 555 — — 
Noninterest expenses826 795 31 
Provision for income taxes182 306 (124)(41)
Net income$660 $1,021 $(361)(35)%
Net credit-related charge-offs$192 $111 $81 74 %
Selected average balances:
Loans$44,123 $43,477 $646 %
Deposits36,603 29,047 7,556 26 
n/m - not meaningful
The $646 million increase in average loans primarily reflected growth in Mortgage Banker Finance, due to elevated activity, Commercial Real Estate and Business Banking, partially offset by decreases in National Dealer Services, due to an imbalance in supply and demand resulting in lower inventory, and Energy. The 2020 period included average PPP loans totaling $2.0 billion. Average deposits increased $7.6 billion, reflecting increases in all deposit categories, as customers conserved cash due to an uncertain economy. The Commercial Bank's net income decreased $361 million to $660 million. Net interest income decreased $47 million to $1.6 billion, primarily due to lower interest income from deposits (FTP basis). The provision for credit losses increased $407 million to $495 million, reflecting credit migration and the forecasted impact of the COVID-19 pandemic. Net credit-related charge-offs increased $81 million to $192 million, primarily due to increases in Energy and general Middle Market. Noninterest income was stable, while noninterest expenses increased $31 million, primarily reflecting increased corporate overhead and higher FDIC insurance expense, partially offset by lower salaries and benefits expense.
Retail Bank
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$502 $568 $(66)(12)%
Provision for credit losses7 (4)11 n/m
Noninterest income110 132 (22)(17)
Noninterest expenses619 597 22 
(Benefit) provision for income taxes(5)24 (29)n/m
Net (loss) income$(9)$83 $(92)n/m
Net credit-related charge-offs$1 $$— — %
Selected average balances:
Loans$2,468 $2,104 $364 17 %
Deposits22,832 20,743 2,089 10 
n/m - not meaningful
Average loans increased $364 million due to loans to small businesses, including PPP loans. Average deposits increased $2.1 billion, reflecting increases in all deposit categories. The Retail Bank's net income decreased $92 million to a net loss of $9 million. Net interest income decreased $66 million to $502 million due to lower interest income from deposits (FTP basis), partially offset by higher loan interest income (FTP basis) from the increase in average balances. The provision for credit losses increased $11 million from a benefit of $4 million. Noninterest income decreased $22 million, including lower service charges on deposit accounts. Noninterest expenses increased $22 million, primarily due to higher salaries and benefits expense and operational losses.
F-11

Wealth Management
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$167 $183 $(16)(9)%
Provision for credit losses35 (14)49 n/m
Noninterest income263 270 (7)(3)
Noninterest expenses301 283 18 
Provision for income taxes20 44 (24)(54)
Net income$74 $140 $(66)(48)%
Net credit-related charge-offs (recoveries)$3 $(5)$n/m
Selected average balances:
Loans$5,045 $4,935 $110 %
Deposits4,402 3,833 569 15 
n/m - not meaningful
Average loans remained relatively stable at approximately $5.0 billion. Average deposits increased $569 million, reflecting increases in all deposit categories. Wealth Management's net income decreased $66 million to $74 million. Net interest income decreased $16 million to $167 million, primarily due to lower interest income from deposits (FTP basis). The provision for credit losses increased $49 million from a benefit of $14 million. Net credit-related charge-offs increased $8 million to $3 million. Noninterest income decreased $7 million to $263 million, predominantly due to a decrease in brokerage fees. Noninterest expenses increased $18 million, primarily reflecting higher salaries and benefits expense and corporate overhead.
Market Segments
The following table presents net income (loss) by market segment.
(dollar amounts in millions)
Years Ended December 31202020192018
Michigan$225 31 %$369 30 %$326 27 %
California247 34 454 36 377 31 
Texas(33)(5)119 10 228 19 
Other Markets286 40 302 24 279 23 
725 100 %1,244 100 %1,210 100 %
Finance & Other(251)(46)25 
Total$474  $1,198  $1,235  
The following sections present a summary of the performance of each of the Corporation's market segments for 2020 compared to 2019.
Michigan
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$660 $729 $(69)(10)%
Provision for credit losses95 (11)106 n/m
Noninterest income273 291 (18)(6)
Noninterest expenses559 554 
Provision for income taxes54 108 (54)(50)
Net income$225 $369 $(144)(39)%
Net credit-related charge-offs$14 $11 $31 %
Selected average balances:
Loans$12,509 $12,553 $(44)— %
Deposits23,500 20,081 3,419 17 
n/m - not meaningful
F-12

Average loans were relatively stable, while average deposits increased $3.4 billion, reflecting increases in all deposit categories as customers conserved cash due to an uncertain economy. The Michigan market's net income decreased $144 million to $225 million. Net interest income decreased $69 million to $660 million, primarily due to lower interest income from deposits (FTP basis). The provision for credit losses increased $106 million from a benefit of $11 million, reflecting increases in general Middle Market, Business Banking and Corporate Banking. Noninterest income decreased $18 million, including decreases in service charges on deposit accounts, card fees and brokerage fees, while noninterest expenses were relatively stable.
California
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$723 $808 $(85)(11)%
Provision for credit losses134 (33)167 n/m
Noninterest income147 173 (26)(15)
Noninterest expenses414 406 
Provision for income taxes75 154 (79)(51)
Net income$247 $454 $(207)(46)%
Net credit-related charge-offs$31 $$23 n/m
Selected average balances:
Loans$18,265 $18,413 $(148)(1)%
Deposits19,386 16,846 2,540 15 
n/m - not meaningful
Average loans were relatively stable, while average deposits increased $2.5 billion, reflecting increases in all deposit categories. The California market's net income decreased $207 million to $247 million. Net interest income decreased $85 million to $723 million, primarily due to lower interest income from deposits (FTP basis). The provision for credit losses increased $167 million from a benefit of $33 million reflecting credit migration and the forecasted impact of the COVID-19 pandemic. Net credit-related charge-offs increased $23 million to $31 million, including increases in general Middle Market and Technology and Life Sciences, partially offset by a decline in Entertainment. Noninterest income decreased $26 million to $147 million, reflecting decreases in commercial lending fees, warrant income, card fees and customer derivative income. Noninterest expenses increased $8 million, predominantly due to an increase in corporate overhead.
Texas
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$465 $493 $(28)(5)%
Provision for credit losses270 119 151 n/m
Noninterest income120 128 (8)(7)
Noninterest expenses359 345 14 
(Benefit) provision for income taxes(11)38 (49)n/m
Net (loss) income$(33)$119 $(152)n/m
Net credit-related charge-offs$151 $93 $58 63 %
Selected average balances:
Loans$10,813 $10,616 $197 %
Deposits10,209 8,780 1,429 16 
n/m - not meaningful
F-13

Average loans were relatively stable, while average deposits increased $1.4 billion, reflecting increases in all deposit categories. The Texas market's net income decreased $152 million to a net loss of $33 million. Net interest income decreased $28 million to $465 million, primarily due to lower interest income from deposits (FTP basis). The provision for credit losses increased $151 million to $270 million, reflecting increases in Business Banking, Commercial Real Estate and general Middle Market. Net credit-related charge-offs increased $58 million to $151 million, primarily due to increases in Energy and general Middle Market. Noninterest income decreased $8 million, including lower service charges on deposit accounts, customer derivative income, card fees and commercial lending fees, partially offset by higher investment banking fees and smaller increases in other categories. Noninterest expenses increased $14 million, predominately due to an increase in corporate overhead.
Other Markets
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest income$429 $376 $53 14 %
Provision for credit losses38 (5)43 n/m
Noninterest income388 365 23 
Noninterest expenses414 370 44 12 
Provision for income taxes79 74 
Net income$286 $302 $(16)(5)%
Net credit-related recoveries$ $(5)$n/m
Selected average balances:
Loans$10,052 $8,934 $1,118 13 %
Deposits10,742 7,916 2,826 36 
n/m - not meaningful
Average loans increased $1.1 billion, which includes a sizable increase in Mortgage Banker Finance. Average deposits increased $2.8 billion, including increases in all categories with the exception of time deposits. Other Markets' net income decreased $16 million to $286 million. Net interest income increased $53 million to $429 million, primarily due to the increase in average loans. The provision for credit losses increased $43 million from a benefit of $5 million, including increases in Corporate Banking, Technology and Life Sciences and Private Banking, partially offset by a decrease in Mortgage Banker Finance. Noninterest income increased $23 million, predominantly due to higher card fees. Noninterest expenses increased $44 million, primarily reflecting increases in operational losses and corporate overhead.
Finance & Other Segments
Years Ended December 31,Percent
Change
(dollar amounts in millions)20202019Change
Earnings summary:
Net interest expense$(366)$(67)$(299)n/m
Provision for credit losses (4)n/m
Noninterest income73 53 20 39 %
Noninterest expenses38 68 (30)(45)
Benefit for income taxes(80)(40)(40)96 
Net loss$(251)$(46)$(205)n/m
Selected average balances:
Loans$(8)$(5)$(3)60 %
Deposits1,201 1,858 (657)(35)
n/m - not meaningful
Average deposits decreased $657 million, primarily reflecting a decrease in other time deposits. Net loss for the Finance & Other category increased $205 million to $251 million. Net interest expense decreased $299 million, due to decreased net FTP revenue as a result of lower rates charged to the business segments under the Corporation's internal FTP methodology. Noninterest income increased $20 million, driven by net securities losses recorded in 2019 due to securities repositioning, as well as increased securities trading and customer derivative income. Noninterest expenses decreased $30 million, primarily due to lower salaries and benefits expense.
F-14

The following table lists the Corporation's banking centers by geographic market segment.
December 31202020192018
Michigan189192193 
Texas123123122 
California96 96 96 
Other Markets:
Arizona17 17 17 
Florida7 
Canada111
Total Other Markets25 25 25 
Total433 436 436 
F-15

BALANCE SHEET AND CAPITAL FUNDS ANALYSIS
Analysis of Investment Securities and Loans
(in millions)
December 3120202019201820172016
Investment securities available-for-sale:
U.S. Treasury and other U.S. government agency securities$4,658 $2,792 $2,727 $2,727 $2,779 
Residential mortgage-backed securities (a)10,370 9,606 9,318 (b)8,124 7,872 
State and municipal securities — — 
Equity and other non-debt securities — — 82 129 
Total investment securities available-for-sale15,028 12,398 12,045 10,938 10,787 
Investment securities held to maturity:
Residential mortgage-backed securities (a)  — (b)1,266 1,582 
Total investment securities$15,028 $12,398 $12,045 $12,204 $12,369 
Commercial loans$32,753 $31,473 $31,976 $31,060 $30,994 
Real estate construction loans4,082 3,455 3,077 2,961 2,869 
Commercial mortgage loans9,912 9,559 9,106 9,159 8,931 
Lease financing594 588 507 468 572 
International loans:
Banks and other financial institutions— — — 
Commercial and industrial926 1,009 1,013 979 1,256 
Total international loans926 1,009 1,013 983 1,258 
Residential mortgage loans1,830 1,845 1,970 1,988 1,942 
Consumer loans:
Home equity1,588 1,711 1,765 1,816 1,800 
Other consumer606 729 749 738 722 
Total consumer loans2,194 2,440 2,514 2,554 2,522 
Total loans$52,291 $50,369 $50,163 $49,173 $49,088 
(a)Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b)Effective with the adoption of ASU 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” on January 1, 2018, the Corporation transferred residential mortgage-backed securities with a book value of approximately $1.3 billion from held-to-maturity to available-for-sale.
F-16

Earning Assets
Loans
On a period-end basis, total loans increased $1.9 billion to $52.3 billion at December 31, 2020, compared to $50.4 billion at December 31, 2019. Average total loans increased $1.1 billion to $51.6 billion in 2020, compared to $50.5 billion in 2019. The following tables provide information about the changes in the Corporation's average loan portfolio in 2020 compared to 2019.
(dollar amounts in millions)Percent
Change
Years Ended December 3120202019Change
By Business Line:
General Middle Market$12,227 $12,139 $88 %
National Dealer Services5,967 7,652 (1,685)(22)
Equity Fund Services2,367 2,570 (203)(8)
Energy2,021 2,449 (428)(17)
Environmental Services1,406 1,200 206 17 
Technology and Life Sciences1,298 1,265 33 
Entertainment657 739 (82)(11)
Total Middle Market25,943 28,014 (2,071)(7)
Commercial Real Estate6,564 5,595 969 17 
Corporate Banking4,492 4,231 261 
Small Business3,948 3,487 461 13 
Mortgage Banker Finance3,176 2,150 1,026 48 
Total Commercial Bank44,123 43,477 646 
Total Retail Bank2,468 2,104 364 17 
Total Wealth Management5,045 4,935 110 
Total Finance and Other(5)(5)— — %
Total loans$51,631 $50,511 $1,120 %
By Loan Type:
Commercial loans (a)$32,144 $32,053 91 — %
Real estate construction loans3,912 3,325 587 18 
Commercial mortgage loans9,839 9,170 669 
Lease financing594 557 37 
International loans1,028 1,019 
Residential mortgage loans1,905 1,929 (24)(1)
Consumer loans:
Home equity1,667 1,741 (74)(4)
Other consumer542 717 (175)(24)
Total consumer loans2,209 2,458 (249)(10)
Total loans$51,631 $50,511 $1,120 %
By Geographic Market:
Michigan$12,509 $12,553 $(44)— %
California18,265 18,413 (148)(1)
Texas10,813 10,616 197 
Other Markets10,052 8,934 1,118 13 
Finance and Other(8)(5)(3)60 %
Total loans$51,631 $50,511 $1,120 %
(a) Includes PPP loans with average balances of $2.5 billion for the year ended December 31, 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 decreases in National Dealer Services and Energy. National Dealer Services provides floor plan inventory financing and commercial mortgages to auto dealerships. The $1.7 billion decrease in National Dealer Services loans reflected an imbalance in supply and demand resulting in lower inventory. Customers in the Energy business line are primarily engaged in the oil and gas businesses. The $428 million decrease in Energy loans reflected lower oil and gas prices as well as reduced production activity. For more information on Energy loans, refer to "Energy Lending" in the "Risk Management" section of this financial review.
F-17

Mortgage Banker Finance provides short-term, revolving lines of credit to independent mortgage banking companies and therefore partly reflects the level of home sales and refinancing activity in the market as a whole. The $1.0 billion increase was primarily due to elevated activity resulting from the lower interest rate environment.
Commercial Real Estate is comprised of real estate construction and commercial mortgage loans. Real estate construction loans primarily include loans in the Commercial Real Estate business line, which generally serve commercial real estate developers. Commercial mortgage loans are loans where the primary collateral is a lien on any real property and are primarily loans secured by owner-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. The $969 million increase in Commercial Real Estate was primarily driven by additional draws on existing multifamily, industrial and storage construction lines, a slowdown in prepayments due to current economic conditions and increased term debt financing.
Investment Securities
(dollar amounts in millions)U.S. Treasury and other U.S. government agency securitiesResidential mortgage-backed securities (a)Total investment securities
December 31, 2020AmountYieldAmountYieldAmountYield
Maturity (b)
Within 1 year$1,570 1.31 %$1 1.56 %$1,571 1.31 %
1-5 Years3,088 1.68 209 2.35 3,297 1.72 
5-10 Years  716 2.22 716 2.22 
After 10 Years  9,444 1.57 9,444 1.57 
Total4,658 1.55 10,370 1.63 15,028 1.57 
Weighted Average Maturity (years)1.8 23.3 16.6 
(a)Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
(b)Based on final contractual maturity.
Investment securities were $15.0 billion at December 31, 2020 and $12.4 billion at December 31, 2019. At December 31, 2020, the weighted-average expected life of the Corporation's residential mortgage-backed securities portfolio was approximately 2.9 years. On an average basis, investment securities increased $1.3 billion to $13.4 billion in 2020, compared to $12.1 billion in 2019, as a portion of excess liquidity was invested in $1.8 billion of U.S. Treasury bonds and $500 million of mortgage-backed securities in the third quarter of 2020.
The Corporation repositioned treasury securities in 2019 by selling $1.0 billion and purchasing higher-yielding treasuries, which resulted in after-tax losses of $6 million.
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-bearing deposits with banks increased $9.9 billion to $14.7 billion at December 31, 2020, resulting from growth in relationship-based deposits as customers conserve cash in an uncertain economy. On an average basis, interest-bearing deposits with banks increased $6.8 billion to $10.2 billion in 2020.
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 to held-for-sale. Other short-term investments increased $17 million to $172 million at December 31, 2020. On an average basis, other short-term investments increased $10 million to $153 million in 2020.
F-18

Deposits and Borrowed Funds
At December 31, 2020, total deposits were $72.9 billion, an increase of $15.6 billion, or 27%, compared to $57.3 billion at December 31, 2019, reflecting increases of $12.0 billion, or 44%, in noninterest-bearing deposits and $3.6 billion, or 12%, in interest-bearing deposits. The Corporation's average deposits and borrowed funds balances are detailed in the following table.
(dollar amounts in millions)Percent
Change
Years Ended December 3120202019Change
Noninterest-bearing deposits$33,053 $26,644 $6,409 24 %
Money market and interest-bearing checking deposits26,798 23,417 3,381 14 
Savings deposits2,454 2,166 288 13 
Customer certificates of deposit2,626 2,522 104 
Other time deposits17 705 (688)(98)
Foreign office time deposits90 27 63 n/m
Total deposits$65,038 $55,481 $9,557 17 %
Short-term borrowings$314 $369 $(55)(15)
Medium- and long-term debt6,549 6,955 (406)(6)
Total borrowed funds$6,863 $7,324 $(461)(6)%
n/m - not meaningful
Average deposits increased $9.6 billion to $65.0 billion in 2020, compared to $55.5 billion in 2019, reflecting increases of $6.4 billion in noninterest-bearing and $3.2 billion in interest-bearing deposits. The increases were primarily the result of customers continuing to conserve cash in the face of the current uncertain economic climate.
There were no short-term borrowings at December 31, 2020, compared to $71 million at December 31, 2019. Short-term borrowings primarily include federal funds purchased, short-term FHLB advances and securities sold under agreements to repurchase. Average short-term borrowings decreased $55 million, to $314 million in 2020, compared to $369 million in 2019.
The Corporation uses medium- and long-term debt, which includes long-term FHLB advances, medium- and long-term senior notes as well as subordinated notes, to provide funding for earning assets, liquidity and regulatory capital. Total medium- and long-term debt at December 31, 2020 decreased $1.5 billion to $5.7 billion, compared to $7.3 billion at December 31, 2019. The decrease primarily reflected the early redemption of $1.0 billion of FHLB advances, as well as the maturity of $675 million of medium-term notes. Average medium- and long-term debt decreased $406 million, or 6 percent, to $6.5 billion in 2020, compared to $7.0 billion in 2019.
Further information on medium- and long-term debt is provided in Note 12 to the consolidated financial statements.
Capital
Total shareholders' equity increased $723 million to $8.1 billion at December 31, 2020, compared to $7.3 billion at December 31, 2019. The following table presents a summary of changes in total shareholders' equity in 2020.
(in millions)
  
Balance at January 1, 2020$7,327 
Cumulative effect of change in accounting principle (a)13 
Net income474 
Cash dividends declared on common stock(378)
Cash dividends declared on preferred stock(13)
Purchase of common stock(194)
Issuance of preferred stock394 
Other comprehensive income:
Investment securities$146 
Cash flow hedges121 
Defined benefit and other postretirement plans136 
Total other comprehensive income403 
Share-based compensation24 
Balance at December 31, 2020$8,050 
(a) Effective January 1, 2020, the Corporation adopted the provisions of ASU No. 2016-13, "Financial Instruments - Credit Losses" (Topic 326). For further information, refer to Note 1 to the consolidated financial statements.
F-19

The following table summarizes the Corporation’s repurchase activity for the year ended December 31, 2020.
(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 20203,227 4,870 3,322 $58.70 
Second Quarter 2020 4,870 6 28.63 
Third Quarter 2020 4,870 7 37.94 
Fourth Quarter 2020 4,870 4 38.26 
Total 20203,227 4,870 3,339 58.58 
(a) Maximum number of shares that may yet be purchased under the publicly announced plans or programs.
(b) Includes approximately 112,000 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, 2020. These transactions are not considered part of the Corporation's repurchase program.
In March 2020, as the economic climate grew increasingly uncertain, the Corporation suspended its share repurchase program with a focus on deploying capital to meet customers' growing financing requirements, resulting in no share repurchases under the program for the remainder of the year. The Corporation will continue to assess the resumption of repurchases subject to various factors including financial performance, capital needs and market conditions. Since the inception of the share repurchase program in 2010, a total of 87.2 million shares have been authorized for repurchase. There is no expiration date for the share repurchase program.
In May 2020, the Corporation issued $400 million of 5.625% non-cumulative perpetual preferred stock, which yielded $394 million in proceeds net of underwriting discounts and offering expenses. See Note 13 to the consolidated financial statements for further information about the terms of the preferred stock.
The Corporation is prepared to continue using capital and liquidity in a responsible way to assist customers impacted by the COVID-19 crisis with a target of attaining and maintaining a Common Equity Tier 1 (CET1) capital ratio of approximately 10 percent. At December 31, 2020, the Corporation's CET1 capital ratio was 10.34 percent, an increase of 21 basis points compared to December 31, 2019.
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 CET1 capital, additional Tier 1 capital and Tier II 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 2020, the Corporation elected regulatory relief to defer the impact of adopting the CECL model for measuring credit losses on regulatory capital. At December 31, 2020, $72 million, or a cumulative 11-basis-point benefit to the capital ratios, was deferred. Also in 2020, the Corporation adopted capital rules issued by federal banking agencies that simplified certain regulatory capital rules, including the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions and minority interests. For further information about the adoption of CECL, refer to Note 1 to the consolidated financial statement.
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.
F-20

The following table presents the minimum ratios required.
Common equity tier 1 capital to risk-weighted assets4.5 %
Tier 1 capital to risk-weighted assets6.0 
Total capital to risk-weighted assets8.0 
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, 2020December 31, 2019
(dollar amounts in millions)Capital/AssetsRatioCapital/AssetsRatio
Common equity tier 1 (a), (b)$6,919 10.34 %$6,919 10.13 %
Tier 1 risk-based (a), (b)7,313 10.93 6,919 10.13 
Total risk-based (a)8,833 13.20 8,282 12.13 
Leverage (a)7,313 8.63 6,919 9.51 
Common shareholders' equity7,656 8.69 7,327 9.98 
Tangible common equity (b)7,020 8.02 6,688 9.19 
Risk-weighted assets (a)66,931 68,273 
(a)December 31, 2020 risk-weighted assets and ratios reflect deferral of CECL model impact as calculated per regulatory guidance.
(b)See Supplemental Financial Data section for reconciliations of non-GAAP financial measures and regulatory ratios.
At December 31, 2020, 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, capital ratio calculations and restrictions on the ability of the Corporation's banking subsidiaries to transfer assets to the Corporation.
F-21

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. Each of the major risk categories are further monitored and measured by specialized risk managers in the second line of defense within the Enterprise Risk Division, who provide oversight, 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.
The Enterprise-Wide Risk Management 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-Wide Risk Management 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 approved 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
F-22

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.
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. Effective January 1, 2020, the allowance for credit losses reflected the adoption of Topic 326, which requires companies to estimate credit losses using the CECL framework. As a percentage of total loans, the allowance for credit losses was 1.90 percent at December 31, 2020, compared to 1.33 percent at December 31, 2019. Excluding $3.5 billion in PPP loans, which are guaranteed by the Small Business Administration, the allowance for credit losses was 2.03 percent of total loans at December 31, 2020. The allowance for credit losses covered 2.8 times and 3.3 times total nonperforming loans at December 31, 2020 and December 31, 2019, respectively.
At adoption on January 1, 2020, the scope and severity of the economic crisis resulting from the COVID-19 pandemic were unknown. As such, the economic scenario used by the Corporation to develop its estimate of CECL as of the adoption date reflected a continued moderate U.S. economic expansion compared to 2019 levels and a stable interest rate environment, with the federal funds rate remaining in the 1.50- to 1.75-percent range. Other assumptions included the resolution of trade tensions, a calmer global economy and a strong U.S. dollar, all of which supported modest industrial production growth and stable oil prices. The forecast also assumed strong labor market conditions to support the consumer sector. Management considered the level of uncertainty regarding its economic assumptions as part of the qualitative adjustment. The adoption of CECL resulted in a $17 million day-one decrease in the allowance for credit losses, from $668 million at December 31, 2019 under the incurred loss model. See Note 1 to the consolidated financial statements for further information about the adoption of CECL.
The allowance for credit losses increased by $341 million from the adoption date to $992 million at December 31, 2020, primarily reflecting the economic impacts of the COVID-19 pandemic and the response by domestic and global governmental authorities, including quarantines and other social distancing policies aimed at fighting the spread of the virus. In early 2020, energy markets, which were experiencing stress prior to the pandemic, were further impacted by the rapid decline in demand resulting from social distancing policies. Energy prices and demand improved in the second half of 2020 as the economy began to recover, but energy markets remain uncertain.
The U.S. economy contracted into a recession with unusual speed and force in the first half of 2020, ending the longest expansionary period in U.S. history. The U.S. government and the Federal Reserve responded to the pandemic with unprecedented measures. The Federal Reserve reduced the target federal funds rate to zero to 0.25 percent and Congress passed the CARES Act that included an estimated $2 trillion stimulus package. Although the U.S. economy began to recover in third quarter 2020 as social distancing policies loosened, economic metrics in fourth quarter 2020 indicate an uneven path to recovery. In December 2020, Congress amended the CARES Act through the Consolidated Appropriations Act of 2021 to add an additional $900 billion of stimulus relief to mitigate the continued impacts of the pandemic. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of administered vaccines, as well as the effects of the change in leadership resulting from the recent elections.
These factors shaped the 2-year reasonable and supportable forecast used by the Corporation in its CECL modeled estimate at December 31, 2020. After a partial rebound in real gross domestic product (GDP) growth in third and fourth quarters 2020, forecasted GDP reaches pre-pandemic, fourth quarter 2019 levels by the latter portion of 2021, normalizing into historical growth rates in the second half of the forecast period. Forecasts for other key economic variables, including the unemployment rate and oil prices, are generally in line with GDP projections. Interest rates remain low, reflecting the Federal Reserve's expectation that rates will remain at current levels in the near-to mid-term, while corporate bond rates reflect decreasing default risk, with slight improvements as the forecasted horizon moved by one quarter. Economic forecasts for fourth quarter 2020 were generally consistent with third quarter 2020 forecasts. The following table summarizes the forecasts for the economic variables most impactful to the allowance for credit losses estimate at December 31, 2020.
F-23

Economic VariableBase Forecast
Real GDP growthGrowth peaks at 4 percent in second and third quarters 2021, normalizing into long-term growth rates of 2 to 3 percent through 2022.
Unemployment rateCurrent levels gradually decrease throughout forecast period to 5 percent by fourth quarter 2022.
Corporate BBB bond to 10-year Treasury bond spreadsSpreads at normalized levels between 1.5 and 1.7 percent throughout the forecast period.
Oil PricesPrices steadily increase from $40 to $53 per barrel by fourth quarter 2022.
Due to the high degree of uncertainty regarding the ultimate economic consequences of the pandemic, as well as the effectiveness of the government's stimulus packages, 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.
Allowance for Loan Losses
The allowance for loan losses represents 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 estimate current expected credit losses, to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Loans with similar risk characteristics are aggregated into homogeneous pools. The allowance for loan losses also 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 loss estimates are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings (TDRs) and are based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.    
Allowance for Credit Losses on Lending-Related Commitments
The allowance for credit losses on lending-related commitments estimates current expected credit losses on collective pools of letters of credit and unused commitments to extend credit based on reserve factors, determined in a manner similar to business loans, multiplied by a probability of draw estimate based on historical experience and credit risk, applied to commitment amounts.














F-24


Analysis of the Allowance for Credit Losses
(dollar amounts in millions)
20202019201820172016
Balance at beginning of year
Allowance for loan losses$637 $671 $712 $730 $634 
Allowance for credit losses on lending-related commitments31 30 42 41 45 
Allowance for credit losses668 701 754 771 679 
Cumulative effect of change in accounting principle(17)— — — — 
Loan charge-offs:
Commercial232 143 95 133 181 
Commercial mortgage1 
Lease financing — — — 
International 23 
Residential mortgage — — — 
Consumer5 
Total loan charge-offs238 152 103 149 214 
Recoveries on loans previously charged-off:
Commercial34 35 44 37 43 
Real estate construction — — — 
Commercial mortgage4 20 
International — 
Residential mortgage 
Consumer4 
Total recoveries42 45 52 57 68 
Net loan charge-offs196 107 51 92 146 
Foreign currency translation adjustment — (1)
Charge-offs on lending-related commitments (a) — — — 11 
Provision for credit losses:
Provision for loan losses524 73 11 73 241 
Provision for credit losses on lending-related commitments13 (12)
Provision for credit losses537 74 (1)74 248 
Balance at end of year
Allowance for loan losses948 637 671 712 730 
Allowance for credit losses on lending-related commitments44 31 30 42 41 
Allowance for credit losses$992 $668 $701 $754 $771 
Allowance for loan losses as a percentage of total loans at end of year1.81 %1.27 %1.34 %1.45 %1.49 %
Allowance for loan losses as a percentage of total loans excluding PPP loans1.94 n/an/an/an/a
Allowance for credit losses as a percentage of total loans at end of year1.90 1.33 1.40 1.53 1.57 
Allowance for credit losses as a percentage of total loans excluding PPP loans2.03 n/an/an/an/a
Allowance for loan losses as a multiple of total nonperforming loans at end of year2.7x3.1x2.9x1.7x1.2x
Allowance for credit losses as a multiple of total nonperforming loans at end of year2.8x3.3x3.1x1.8x1.3x
Allowance for loan losses as a multiple of total net loan charge-offs for the year4.8x6.0x13.1x7.7x5.0x
Net loan charge-offs during the year as a percentage of average loans outstanding during the year0.38 %0.21 %0.11 %0.19 %0.30 %
(a)    Charge-offs result from the sale of unfunded lending-related commitments.
n/a - not applicable
As a percentage of total loans, the allowance for loan losses was 1.81 percent at December 31, 2020, compared to 1.27 percent at December 31, 2019. Excluding PPP loans, the allowance for loan losses was 1.94 percent of total loans at December 31, 2020. The allocation of reserves for Energy loans was approximately 8 percent in response to sustained pressures on the Energy portfolio. Nonperforming loans were 0.67 percent of total loans at December 31, 2020, compared to 0.40 percent
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at December 31, 2019, and the allowance for loan losses covered 2.7 times and 3.1 times total nonperforming loans at December 31, 2020 and 2019, respectively.
The allowance for credit losses on lending-related commitments totaled $44 million and $31 million at December 31, 2020 and 2019, respectively.
Allocation of the Allowance for Credit Losses
20202019201820172016
(dollar amounts in millions)Allocated
Allowance
Allowance
Ratio (a)
% (b)Allocated
Allowance
% (b)Allocated
Allowance
% (b)Allocated
Allowance
% (b)Allocated
Allowance
% (b)
December 31
Allowance for loan losses
Business loans
Commercial (c)$508 1.55 %62 %$490 62 %$492 64 %$521 63 %$547 63 %
Real estate construction62 1.53 8 17 19 19 21 
Commercial mortgage299 3.02 19 81 19 99 18 91 19 93 18 
Lease financing10 1.67 1 12 
International16 1.69 2 10 13 18 16 
Total business loans895 1.85 92 601 91 627 91 661 91 682 91 
Retail loans
Residential mortgage16 0.87 4 13 11 
Consumer37 1.70 4 29 35 38 37 
Total retail loans53 1.32 8 36 44 51 48 
Total loans948 1.81 %100 %$637 100 %671 100 %712 100 %730 100 %
Allowance for credit losses on lending-related commitments
Business commitments35 28 26 38 38 
Retail commitments9 
Total commitments44 31 30 42 41 
Allowance for credit losses$992 1.90 %$668 $701 $754 $771 
(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 $3.5 billion at December 31, 2020.
For additional information regarding the allowance for credit losses, refer to the "Critical Accounting Policies" section of this financial review and Notes 1 and 4 to the consolidated financial statements.
Nonperforming Assets
Nonperforming assets include loans on nonaccrual status, TDRs which have been renegotiated to less than the original contractual rates (reduced-rate loans) and foreclosed assets. TDRs include performing and nonperforming loans, with nonperforming TDRs on either nonaccrual or reduced-rate status. In accordance with the provisions of the CARES Act, the Corporation elected not to consider qualifying COVID-19-related modifications, primarily deferrals, as TDRs and does not designate such loans as past due or nonaccrual. For additional information regarding the Corporation's accounting policies for the CARES Act, refer to Note 1 to the consolidated financial statements.
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Summary of Nonperforming Assets and Past Due Loans
(dollar amounts in millions)
December 3120202019201820172016
Nonaccrual loans:
Business loans:
Commercial$252 $148 $141 $309 $445 
Real estate construction1 — — — — 
Commercial mortgage29 14 20 31 46 
Lease financing1 — 
International — 14 
Total nonaccrual business loans283 162 166 350 511 
Retail loans:
Residential mortgage47 20 36 31 39 
Consumer:
Home equity17 17 19 21 28 
Other consumer — — — 
Total consumer17 17 19 21 32 
Total nonaccrual retail loans64 37 55 52 71 
Total nonaccrual loans347 199 221 402 582 
Reduced-rate loans3 
Total nonperforming loans350 204 229 410 590 
Foreclosed property8 11 17 
Other repossessed assets1 — — — — 
Total nonperforming assets$359 $215 $230 $415 $607 
Gross interest income that would have been recorded had the nonaccrual and reduced-rate loans performed in accordance with original terms$24 $20 $19 $31 $38 
Interest income recognized6 
Nonperforming loans as a percentage of total loans0.67 %0.40 %0.46 %0.83 %1.20 %
Nonperforming assets as a percentage of total loans and foreclosed property0.69 0.43 0.46 0.84 1.24 
Loans past due 90 days or more and still accruing$45 $26 $16 $35 $19 
Nonperforming assets increased $144 million to $359 million at December 31, 2020, from $215 million at December 31, 2019. Nonperforming assets were 0.69 percent of total loans and foreclosed property at December 31, 2020, compared to 0.43 percent at December 31, 2019.
As of December 31, 2020, COVID-19-related payment deferrals totaled $141 million, or 0.27 percent of total loans, representing approximately 100 obligors and consisting of 58 percent retail loans, primarily residential mortgages, and 42 percent commercial loans. Initial deferrals have expired and new requests have been nominal as customers continue to adjust to the new environment, resulting in a $244 million decrease in deferrals since third quarter 2020. Loans with COVID-19-related deferred payments on a third deferral, primarily residential mortgages, totaled $72 million at December 31, 2020 and would generally be considered TDRs if not for the provisions in the CARES Act.
The following table presents a summary of TDRs at December 31, 2020 and 2019.
(in millions)
December 3120202019
Nonperforming TDRs:
Nonaccrual TDRs$33 $36 
Reduced-rate TDRs3 
Total nonperforming TDRs36 41 
Performing TDRs (a)41 69 
Total TDRs$77 $110 
(a)TDRs that do not include a reduction in the original contractual interest rate which are performing in accordance with their modified terms.
During the twelve months ended December 31, 2020, $22 million of previously performing Energy TDRs were transferred to nonaccrual or charged off. At December 31, 2020, Energy TDRs totaled $9 million, all of which were on nonaccrual status, compared to $14 million at December 31, 2019.
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The following table presents a summary of changes in nonaccrual loans.
(in millions)
Years Ended December 3120202019
Balance at beginning of period$199 $221 
Loans transferred to nonaccrual (a)482 230 
Nonaccrual loan gross charge-offs(238)(152)
Loans transferred to accrual status (a)(3)(7)
Nonaccrual loans sold(14)(15)
Payments/other (b)(79)(78)
Balance at end of period$347 $199 
(a)Based on an analysis of nonaccrual loans with book balances greater than $2 million.
(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 42 borrowers with a balance greater than $2 million, totaling $482 million, transferred to nonaccrual status in 2020, an increase of 19, compared to 23 borrowers totaling $230 million in 2019. 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.
The following table presents the composition of nonaccrual loans by balance and the related number of borrowers at December 31, 2020 and 2019.
20202019
(dollar amounts in millions)Number of
Borrowers
BalanceNumber of
Borrowers
Balance
Under $2 million682 $83 708 $74 
$2 million - $5 million20 61 22 
$5 million - $10 million9 73 49 
$10 million - $25 million7 94 54 
Greater than $25 million1 36 — — 
Total719 $347 726 $199 
The following table presents a summary of nonaccrual loans at December 31, 2020 and loans transferred to nonaccrual and net loan charge-offs for the year ended December 31, 2020, based on North American Industry Classification System (NAICS) categories.
December 31, 2020Year Ended December 31, 2020
(dollar amounts in millions)Nonaccrual LoansLoans Transferred to
Nonaccrual (a)
Net Loan Charge-Offs
Industry Category
Mining, Quarrying and Oil & Gas Extraction$114 33 %$289 60 %$125 64 %
Residential Mortgage47 14 14 3   
Transportation & Warehousing36 10 36 7   
Manufacturing33 10 27 6 5 3 
Wholesale Trade29 8 13 3 10 5 
Real Estate & Home Builders16 4 24 5 11 6 
Information & Communication14 4   1 1 
Services12 3 21 4 8 4 
Arts, Entertainment & Recreation9 3 24 5 15 8 
Health Care & Social Assistance4 1 2 1 3 1 
Retail Trade4 1 12 2 11 5 
Contractors3 1     
Other (b)26 8 20 4 7 3 
Total$347 100 %$482 100 %$196 100 %
(a)Based on an analysis of nonaccrual loans with book balances greater than $2 million.
(b)Consumer, excluding residential mortgage and certain personal purpose nonaccrual loans and net charge-offs, is included in the Other category.
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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 $19 million to $45 million at December 31, 2020, compared to $26 million at December 31, 2019. Loans past due 30-89 days increased $277 million to $404 million at December 31, 2020, compared to $127 million at December 31, 2019. 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 3120202019
Total criticized loans$2,947 $2,120 
As a percentage of total loans5.6 %4.2 %
The $827 million increase in criticized loans during the year ended December 31, 2020 included increases of $347 million in general Middle Market and $230 million in Energy.
For further information regarding the Corporation's nonperforming assets policies, 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 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, 2020.
Commercial Real Estate Lending
At December 31, 2020, the Corporation's commercial real estate portfolio represented 27 percent of total loans. The following table summarizes the Corporation's commercial real estate loan portfolio by loan category.
December 31, 2020December 31, 2019
(in millions)Commercial Real Estate business line (a)Other (b)TotalCommercial Real Estate business line (a)Other (b)Total
Real estate construction loans$3,657 $425 $4,082 $3,044 $411 $3,455 
Commercial mortgage loans2,273 7,639 9,912 2,176 7,383 9,559 
Total commercial real estate$5,930 $8,064 $13,994 $5,220 $7,794 $13,014 
(a)Primarily loans to real estate developers.
(b)Primarily loans secured by owner-occupied real estate.
The Corporation limits risk inherent in its commercial real estate lending activities by monitoring borrowers directly involved in the commercial real estate markets and adhering to conservative policies on loan-to-value ratios for such loans. Commercial real estate loans, consisting of real estate construction and commercial mortgage loans, totaled $14.0 billion at December 31, 2020. Of the total, $5.9 billion, or 42 percent, were to borrowers in the Commercial Real Estate business line, which includes loans to real estate developers, an increase of $710 million compared to December 31, 2019. Commercial real estate loans in other business lines totaled $8.1 billion, or 58 percent, at December 31, 2020. These loans consisted primarily of owner-occupied commercial mortgages, which bear credit characteristics similar to non-commercial real estate business loans.
The real estate construction loan portfolio primarily contains loans made to long-time customers with satisfactory completion experience. Criticized real estate construction loans in the Commercial Real Estate business line totaled $27 million and $31 million at December 31, 2020 and 2019, respectively. In other business lines, criticized real estate construction loans totaled $20 million at December 31, 2020, compared to none at December 31, 2019. There were no net charge-offs in either of the years ended December 31, 2020 and 2019.
Commercial mortgage loans are loans where the primary collateral is a lien on any real property and are primarily loans secured by owner 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
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totaled $73 million and $55 million at December 31, 2020 and 2019, respectively. In other business lines, $440 million and $242 million of commercial mortgage loans were criticized at December 31, 2020 and 2019, respectively. Commercial mortgage loan net recoveries were $3 million and $1 million in 2020 and 2019, respectively.
Automotive Lending - Dealer:
The following table presents a summary of dealer loans.
20202019
(in millions)Loans
Outstanding
Percent of
Total Loans
Loans
Outstanding
Percent of
Total Loans
Dealer:
Floor plan$2,344 $3,967 
Other3,348 3,447 
Total dealer$5,692 10.9 %$7,414 14.7 %
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 $2.3 billion at December 31, 2020, a decrease of $1.7 billion compared to $4.0 billion at December 31, 2019 due to an imbalance in supply and demand resulting in lower inventory. At December 31, 2020 and 2019, other loans in the National Dealer Services business line totaled $3.3 billion and $3.4 billion, respectively, including $2.0 billion of owner-occupied commercial real estate mortgage loans at both December 31, 2020 and 2019. The National Dealer Services business line includes a wide array of franchises with a focus on mega dealers consisting of five or more dealerships in a group.
There were no nonaccrual dealer loans at December 31, 2020, compared to $9 million at December 31, 2019. Additionally, there were no net charge-offs of dealer loans in either of the years ended December 31, 2020 and 2019.
Automotive Lending- Production:
The following table presents a summary of loans to borrowers involved with automotive production.
20202019
Loans
Outstanding (a)
Percent of
Total Loans
Loans
Outstanding
Percent of
Total Loans
(in millions)
Production:
Domestic$791 $963 
Foreign302 286 
Total production$1,093 2.1 %$1,249 2.5 %
(a)Excludes PPP loans.
Loans to borrowers involved with automotive production, primarily Tier 1 and Tier 2 suppliers, totaled $1.1 billion and $1.2 billion at December 31, 2020 and 2019, respectively. These borrowers could face 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 prudently increased allocated reserves for this portfolio in 2020.
Nonaccrual loans to borrowers involved with automotive production totaled $7 million at December 31, 2020 and $10 million at December 31, 2019. Criticized automotive production loans were 24 percent of the automotive production portfolio at December 31, 2020, compared to 15 percent at December 31, 2019. Automotive production loan net charge-offs totaled $2 million in the year ended December 31, 2020, compared to net recoveries of $1 million for the same period in 2019.
For further information regarding significant group concentrations of credit risk, refer to Note 5 to the consolidated financial statements.
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Residential Real Estate Lending
At December 31, 2020, 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.


20202019
(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
Geographic market:
Michigan$428 23 %$540 34 %$412 22 %$603 35 %
California927 51 655 41 932 51 699 41 
Texas254 14 328 21 275 15 346 20 
Other Markets221 12 65 4 226 12 63 
Total$1,830 100 %$1,588 100 %$1,845 100 %$1,711 100 %
Residential real estate loans, which consist of traditional residential mortgages and home equity loans and lines of credit, totaled $3.4 billion at December 31, 2020. The residential real estate portfolio is principally located within the Corporation's primary geographic markets. Substantially all residential real estate loans past due 90 days or more are placed on nonaccrual status, and substantially all junior lien home equity loans that are current or less than 90 days past due are placed on nonaccrual status if full collection of the senior position is in doubt. At no later than 180 days past due, such loans are charged off to current appraised values less costs to sell.
Residential mortgages totaled $1.8 billion at December 31, 2020, 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, $47 million were on nonaccrual status at December 31, 2020. The home equity portfolio totaled $1.6 billion at December 31, 2020, of which $1.5 billion was outstanding under primarily variable-rate, interest-only home equity lines of credit, $70 million were in amortizing status and $16 million were closed-end home equity loans. Of the $1.6 billion of home equity loans outstanding, $17 million were on nonaccrual status at December 31, 2020. A majority of the home equity portfolio was secured by junior liens at December 31, 2020.
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 130 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)20202019
December 31OutstandingsNonaccrualCriticized (a)OutstandingsNonaccrualCriticized (a)
Exploration and production (E&P)$1,295 81 %$114 $527 $1,741 78 %$43 $289 
Midstream261 16  56 432 20 — 63 
Services44 3  13 48 — 14 
Total Energy business line$1,600 100 %$114 $596 $2,221 100 %$43 $366 
As a percentage of total Energy loans7 %37 %%16 %
(a)Includes nonaccrual loans.
Loans in the Energy business line totaled $1.6 billion, or approximately 3 percent of total loans, at December 31, 2020, a decrease of $621 million. Total exposure, including unused commitments to extend credit and letters of credit, was $3.1 billion (a utilization rate of 52 percent) and $4.3 billion at December 31, 2020 and December 31, 2019, respectively.
The decrease in total exposure in the Energy business line primarily reflected reduced borrowing bases as a result of lower oil and gas prices as well as reduced production activity. At December 31, 2020, the Corporation had completed approximately 92 percent of the Fall borrowing base re-determinations, resulting in a modest decrease to borrowing bases. The value and coverage benefit of hedging contracts are dependent upon the oil/gas price in each contract, as well as the operational costs, which are different for each borrower. As of December 31, 2020, 75 percent of the Corporation's E&P customers had at least 50 percent of their oil and/or gas production hedged up to one year and 38 percent of customers had at least 50 percent of production hedged for two years or more.
F-31

The Corporation's allowance methodology considers the various risk elements within the loan portfolio. When merited, the Corporation may incorporate a qualitative reserve component for Energy loans. The allocation of reserves for Energy loans was approximately 8 percent of the Energy portfolio at December 31, 2020. Energy markets, which were already experiencing stress prior to the pandemic, were further impacted by the rapid decline in demand resulting from social distancing policies. Demand and prices improved slightly in the latter half of 2020 as the economy began to recover, but energy markets remain uncertain. There were $125 million and $86 million in net credit-related charge-offs in the Energy business line for the years ended December 31, 2020 and 2019, respectively. Nonaccrual Energy loans increased $71 million to $114 million at December 31, 2020, compared to $43 million at December 31, 2019. Criticized loans increased $230 million to $596 million at December 31, 2020.
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-tested to evaluate the borrowers' abilities to handle economic downturns and an increase in interest rates. Management considers the leveraged loan portfolio to be one of the most sensitive to economic impacts stemming from the COVID-19 pandemic and social distancing policies and has continued to set aside increased reserves for this portfolio as of December 31, 2020. Certain energy, automotive production and loans in other portfolios specifically identified as subject to additional stress due to COVID-19 impacts, totaling approximately $250 million, are also considered leveraged transactions.
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.
(in millions)20202019
Outstandings$2,441 $2,553 
Criticized418 169 
Net loan charge-offs
Years ended December 31,25 

Other Sectors Most at Risk due to Economic Stress Resulting from COVID-19 Impacts
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering in place policies has impacted, and will continue to impact, many of the Corporation’s customers. In addition to the energy, automotive production and leveraged loan portfolios, the Corporation considers the following sectors of its loan portfolio to 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 this report.
December 31, 2020
Sector based on NAICS category (dollar amounts in millions)
Loans (a)Percent of Total LoansPercent Criticized (b)Percent Nonaccrual (c)
Retail Commercial Real Estate (d)$785 1.5 %4.7 % %
Hotels557 1.1 11.6 1.7 
Arts/Recreation238 0.5 30.4 4.5 
Retail Goods and Services228 0.4 10.4  
All other impacted sectors (e)1,022 2.0 9.6 0.6 
Total$2,830 5.4 %10.5 %0.9 %
(a)Excludes PPP loans.
(b)Sector criticized loans as a percentage of sector total loans.
(c)Sector nonaccrual loans as a percentage of sector total loans.
(d)Loans in the retail commercial real estate sector are primarily included in the Corporation's commercial real estate portfolio.
(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-32

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.
In addition to assessing liquidity risk on a consolidated basis, Corporate Treasury also monitors the parent company's liquidity and has established limits for the minimum number of months into the future in which the parent company can meet existing and forecasted obligations without the support of additional dividends from subsidiaries. ALCO's liquidity policy requires the parent company to maintain sufficient liquidity to meet expected capital and debt obligations with a target of 24 months but no less than 18 months.
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, 2020 was 62 percent LIBOR, 12 percent prime and 26 percent fixed rate. Additionally, 20 percent of 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 sensitivity, as well as hedging with interest rate swaps and options. The Corporation actively manages its exposure to interest rate risk with the principal objective of optimizing net interest income and the economic value of equity while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
Since no single measurement system satisfies all management objectives, a combination of techniques is used to manage interest rate risk. These techniques examine the impact of interest rate risk on net interest income and the economic value of equity under a variety of alternative scenarios, including changes in the level, slope and shape of the yield curve utilizing multiple simulation analyses. Simulation analyses produce only estimates of net interest income as the assumptions used are inherently uncertain. Actual results may differ from simulated results due to many factors, including, but not limited to, the timing, magnitude and frequency of changes in interest rates, market conditions, regulatory impacts and management strategies.
Sensitivity of Net Interest Income to Changes in Interest Rates
The analysis of the impact of changes in interest rates on net interest income under various interest rate scenarios is management's principal risk management technique. Management models a base case net interest income under an unchanged interest rate environment. Existing derivative instruments entered into for risk management purposes as of the balance sheet dates are included in the analysis, but no additional hedging is forecasted. At December 31, 2020, these derivative instruments comprise interest rate swaps that convert $2.7 billion of fixed-rate medium- and long-term debt to variable rates through fair value hedges and convert $5.6 billion of variable-rate loans to fixed rates through cash flow hedges. Additionally, included in this analysis are $10.6 billion of loans that were subject to an average interest rate floor of 0.86 percent at December 31, 2020. This base-case net interest income is then compared against interest rate scenarios in which rates rise or decline 100 basis points
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(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 rates of 50 basis points over the period.
Each scenario includes assumptions such as loan growth, investment security prepayment levels, depositor behavior, yield curve changes, loan and deposit pricing, and overall balance sheet mix and growth. In this low rate environment, depositors have maintained a higher level of liquidity and their historical behavior may be less indicative of future trends. As a result, the 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, 2020 and 2019, 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
(dollar amounts in millions)20202019
December 31Amount%Amount%
Change in Interest Rates:Change in Interest Rates:
Rising 100 basis points$161 9 %Rising 100 basis points$90 %
Declining to zero percent(34)(2)Declining 100 basis points(135)(6)
Sensitivity to declining interest rates decreased from December 31, 2019 to December 31, 2020 due to changes in balance sheet composition, as well as limited remaining downward movement in rates before hitting zero percent floors. Sensitivity to rising interest rates increased due to changes in balance sheet composition, partially offset by fixed-rate PPP lending and an increase in the number of variable-rate loans with active floors.
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-case economic value of equity. At December 31, 2020, the economic value of equity analysis is based on an immediate parallel 100 basis point shock with a floor of zero percent, compared to an immediate parallel 100 basis point shock at December 31, 2019.
The table below, as of December 31, 2020 and 2019, displays the estimated impact on the economic value of equity from the interest rate scenarios described above.
(dollar amounts in millions)20202019
December 31Amount%Amount%
Change in Interest Rates:Change in Interest Rates:
Rising 100 basis points$1,793 18 %Rising 100 basis points$716 %
Declining to zero percent(551)(6)Declining 100 basis points(1,178)(12)
The sensitivity of the economic value of equity to rising rates increased from December 31, 2019 to December 31, 2020 due to changes in deposit pay rates and expected lives, partially offset by increased variable-rate loans with floors. The sensitivity to declining rates decreased due to changes in balance sheet composition as well as limited remaining downward movement in rates before hitting modeled zero-percent floors.
LIBOR Transition
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The Corporation has substantial exposure to LIBOR-based products, including loans, securities, derivatives and hedges, and is preparing for a transition from LIBOR toward alternative rates. A dedicated program office and governance structure, with direction and oversight from the Chief Executive Officer, Chief Financial Officer and Chief Risk Officer, continues to guide a cross-functional implementation team to execute an enterprise LIBOR transition plan. Comerica’s enterprise transition milestones are closely aligned with recommendations from the Alternative Reference Rates Committee (ARRC) for both best practices and recommended 2020 objectives. Beginning in second quarter 2020, customer disclosure information for both consumer and commercial loans were provided for new originations. The Corporation began indexing new retail adjustable rate mortgages to SOFR (Secured Overnight Financing Rate) in third quarter 2020. During fourth quarter 2020, the Corporation began the process of incorporating fallback language in legacy LIBOR-based commercial loans and updated International Swaps and Derivative Association (ISDA) protocols in interest rate derivatives. The Corporation continues to monitor market developments and regulatory updates, including recent announcements from the ICE Benchmark Administrator to extend the cessation date for several USD LIBOR tenors to June 30, 2023, as well as collaborate with regulators and industry groups on the transition. For a
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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.
Loan Maturities and Interest Rate Sensitivity
Loans Maturing
(in millions)
December 31, 2020
Within One
Year (a)
After One
But Within
Five Years
After
Five Years
Total
Commercial loans$15,045 $16,869 $839 $32,753 
Real estate construction loans1,455 2,411 216 4,082 
Commercial mortgage loans1,773 5,012 3,127 9,912 
International loans341 529 56 926 
Total$18,614 $24,821 $4,238 $47,673 
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates$360 $4,339 $489 $5,188 
Floating interest rates18,254 20,482 3,749 42,485 
Total$18,614 $24,821 $4,238 $47,673 
(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 to a floating rate as well as variable rate loans to a fixed rate.
Risk Management Derivative Instruments
(in millions)
Risk Management Notional Activity
Interest
Rate
Contracts
Foreign
Exchange
Contracts
Totals
Balance at January 1, 2019$2,625 $302 $2,927 
Additions5,600 7,922 13,522 
Maturities/amortizations(350)(7,894)(8,244)
Balance at December 31, 2019$7,875 $330 $8,205 
Additions1,000 7,141 8,141 
Maturities/amortizations(675)(7,029)(7,704)
Balance at December 31, 2020$8,200 $442 $8,642 
The notional amount of risk management interest rate swaps totaled $8.2 billion at December 31, 2020 and $7.9 billion at December 31, 2019, which included fair value hedging strategies that convert $5.6 billion of fixed-rate medium- and long-term debt to a floating rate as well as cash flow hedging strategies that convert $2.7 billion of variable-rate loans to a fixed rate. Risk management interest rate swaps generated $121 million and $4 million of net interest income for the years ended December 31, 2020 and December 31, 2019, 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 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.
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Customer-Initiated and Other Derivative Instruments
(in millions)
Customer-Initiated and Other Notional Activity
Interest
Rate
Contracts
Energy
Derivative
Contracts
Foreign
Exchange
Contracts
Totals
Balance at January 1, 2019$14,885 $2,650 $1,095 $18,630 
Additions6,411 2,719 38,805 47,935 
Maturities/amortizations(2,289)(2,198)(38,887)(43,374)
Terminations(1,180)(82)— (1,262)
Balance at December 31, 2019$17,827 $3,089 $1,013 $21,929 
Additions7,660 2,607 37,743 48,010 
Maturities/amortizations(2,465)(2,484)(36,855)(41,804)
Terminations(1,501)(91) (1,592)
Balance at December 31, 2020$21,521 $3,121 $1,901 $26,543 
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 75 percent and 73 percent of total interest rate, energy and foreign exchange contracts at December 31, 2020 and 2019, respectively.
Further information regarding customer-initiated and other derivative instruments is provided in Note 8 to the consolidated financial statements.
Liquidity Risk and Off-Balance Sheet Arrangements
Liquidity is the ability to meet financial obligations through the maturity or sale of existing assets or the acquisition of additional funds. Various financial obligations, including contractual obligations and commercial commitments, 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 noncancelable contractual obligations and future required minimum payments. Refer to Notes 9, 10, 12, 18 and 26 to the consolidated financial statements for further information regarding these contractual obligations.
Contractual Obligations
Minimum Payments Due by Period
(in millions)
December 31, 2020
TotalLess than
1 Year
1-3
Years
4-5
Years
More than
5 Years
Deposits without a stated maturity (a)$70,670 $70,670 
Certificates of deposit and other deposits with a stated maturity (a)2,199 1,823 $322 $32 $22 
Medium- and long-term debt (a)5,450  850 850 3,750 
Operating leases403 60 108 86 149 
Commitments to fund low income housing partnerships165 107 44 6 8 
Other long-term obligations (b)325 103 75 26 121 
Total contractual obligations$79,212 $72,763 $1,399 $1,000 $4,050 
Medium- and long-term debt (parent company only) (a) (c)$1,650 $ $850 $ $800 
(a)Deposits and borrowings exclude accrued interest.
(b)Includes unrecognized tax benefits.
(c)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.
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Commercial Commitments
Expected Expiration Dates by Period
(in millions)
December 31, 2020
TotalLess than
1 Year
1-3
Years
4-5
Years
More than
5 Years
Unused commitments to extend credit$26,740 $7,683 $10,817 $5,264 $2,976 
Standby letters of credit and financial guarantees3,273 2,855 296 52 70 
Commercial letters of credit30 29 1   
Total commercial commitments$30,043 $10,567 $11,114 $5,316 $3,046 
Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Corporation. Refer to the “Other Market Risks” section below and Note 8 to the consolidated financial statements for a further discussion of these commercial commitments.
Wholesale Funding
The Corporation may access the purchased funds market when necessary, which includes a variety of funding sources. Capacity for incremental purchased funds at December 31, 2020 included short-term FHLB advances, the ability to purchase federal funds, sell securities under agreements to repurchase, as well as issue deposits through brokers. Purchased funds, which includes brokered deposits and short-term borrowings, decreased to $66 million at December 31, 2020, compared to $295 million at December 31, 2019, as total deposits increased, reducing the need for additional funding sources.
At December 31, 2020, the Bank had pledged loans totaling $18.0 billion which provided for up to $14.2 billion of available collateralized borrowing with the FRB.
The Bank is a member of the FHLB of Dallas, Texas, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets. Actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. At December 31, 2020, $19.5 billion of real estate-related loans and $4.4 billion of investment securities were pledged to the FHLB as collateral for current and potential future borrowings. The Corporation used excess liquidity to repay $2.8 billion of FHLB advances in the first quarter of 2021. Potential future borrowing capacity of approximately $12.0 billion is available at December 31, 2020.
Additionally, the Bank had the ability to issue up to $13.5 billion of debt at December 31, 2020 under an existing $15.0 billion note program which allows the issuance of debt with maturities between three months and 30 years. The Corporation also maintains a shelf registration statement with the Securities and Exchange Commission from which it may issue debt and equity securities.
The ability of the Corporation and the Bank to raise funds at competitive rates is impacted by rating agencies' views of the credit quality, liquidity, capital and earnings of the Corporation and the Bank. As of December 31, 2020, 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 IncorporatedComerica Bank
December 31, 2020RatingOutlookRatingOutlook
Standard and Poor’sBBB+NegativeA-Negative
Moody’s Investors ServiceA3StableA3Stable
Fitch RatingsA-StableA-Stable
The Corporation satisfies liquidity needs with either liquid assets or various funding sources. Liquid assets totaled $25.9 billion at December 31, 2020, compared to $17.9 billion at December 31, 2019. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks, other short-term investments and unencumbered investment securities.
The Corporation performs monthly liquidity stress testing to evaluate its ability to meet funding needs in hypothetical stressed environments. Such environments cover a series of broad events, distinguished in terms of duration and severity. The evaluation as of December 31, 2020 projected that sufficient sources of liquidity were available under each series of events.
Other Market Risks
Market risk related to the Corporation's trading instruments is not significant, as trading activities are limited. Certain components of the Corporation's noninterest income, primarily fiduciary income, are at risk to fluctuations in the market values of underlying assets, particularly equity and debt securities. Other components of noninterest income, primarily brokerage fees, are at risk to changes in the volume of market activity.
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Operational Risk
Operational risk represents the risk of loss resulting from inadequate or failed internal processes and people, or from external events, excluding in most cases those driven by technology (see Technology Risk below). The Corporation's definition of operational risk includes fraud; employment practice and workplace safety; clients, products and business practice; business continuity or disaster recovery; execution, delivery, and process management; third party and model risks. The definition does not include strategic or reputational risks. Although operational losses are experienced by all companies and are routinely incurred in business operations, the Corporation recognizes the need to identify and control operational losses and seeks to limit losses to a level deemed appropriate by management, as outlined in the Corporation’s risk appetite statement. The appropriate risk level is determined through consideration of the nature of the Corporation's business and the environment in which it operates, in combination with the impact from, and the possible impact on, other risks faced by the Corporation. Operational risk is mitigated through a system of internal controls that are designed to keep operating risks at appropriate levels. The Operational Risk Management Committee monitors risk management techniques and systems. The Corporation has developed a framework that includes a centralized operational risk reporting function in the Enterprise Risk Division and business/support unit risk liaisons responsible for managing operational risk specific to the respective business lines.
Technology Risk
Technology risk represents the risk of loss or adverse outcomes arising from the people, processes, applications and infrastructure that support the technology environment. The Corporation's definition of technology risk includes technology delivery risk, technology investment risk, cybersecurity risk, information security risk and information management risk. Technology risk is inclusive of the risks associated with the execution of technology processes and activities by third-party contractors and suppliers to the Corporation. Other risk types may materialize in the event of a technology risk event, such as the risk of a financial reporting error or regulatory non-compliance, and the impact of such risks are highly interdependent with operational risk.
The Technology Risk Management Committee, comprising senior and executive business unit managers, as well as managers responsible for technology, cybersecurity, information security and enterprise risk management, oversees technology risk. The Technology Risk Management Committee also ensures that appropriate actions are implemented in business units to mitigate risk to an acceptable level.
Compliance Risk
Compliance risk represents the risk of sanctions or financial loss resulting from the Corporation's failure to comply with all applicable laws, regulations and standards of good banking practice. The impact of such risks is highly interdependent with strategic risk, as the reputational impact from compliance breaches can be severe. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending, consumer protection, employment and tax matters, over-the-counter derivative activities and other regulated activities.
The Enterprise-Wide Compliance Committee, comprising senior and executive business unit managers, as well as managers responsible for compliance, audit and overall risk, oversees compliance risk. This enterprise-wide approach provides a consistent view of compliance across the organization. The Enterprise-Wide Compliance Committee also ensures that appropriate actions are implemented in business units to mitigate risk to an acceptable level.
Strategic Risk
Strategic risk represents the risk of inadequate returns or possible losses due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, failure to determine appropriate consideration for risks accepted, and any other event not identified in the defined risk categories of credit, market and liquidity, operational, technology or compliance risks. Mitigation of the various risk elements that represent strategic risk is achieved through numerous metrics and initiatives to help the Corporation better understand, measure and report on such risks. The Executive Strategic and Pricing Committee, comprised of senior managers, oversees strategic risk and ensures that strategic risk is mitigated to appropriate levels.
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CRITICAL ACCOUNTING POLICIES
The Corporation’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1. These policies require numerous estimates and strategic or economic assumptions, which may prove inaccurate or subject to variations. Changes in underlying factors, assumptions or estimates could have a material impact on the Corporation’s future financial condition and results of operations. At December 31, 2020, the most critical of these significant accounting policies were the policies related to the allowance for credit losses, fair value measurement, goodwill, pension plan accounting and income taxes. These policies were reviewed with the Audit Committee of the Corporation’s Board of Directors and are discussed more fully below.
ALLOWANCE FOR CREDIT LOSSES
In accordance with CECL, the allowance for credit losses, which includes both the allowance for loan losses and the allowance for credit losses on lending-related commitments, is calculated with the objective of maintaining a reserve for current expected credit losses over the remaining contractual life of the portfolio. The Corporation uses loss factors, based on estimated probability of default for internal risk ratings and loss given default, to determine the allowance for credit losses for the majority of its portfolio. Management applies loss factors to pools of loans and lending-related commitments with similar risk characteristics, calibrates these factors using economic forecasts and incorporates qualitative adjustments. For further discussion of the methodology used in the determination of the allowance for credit losses, refer to Note 1 to the consolidated financial statements. For further discussion on the economic forecast incorporated into the 2020 model, refer to the “Risk Management” section of this financial review.
Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, current as well as forecasted economic factors, and other relevant information. The calculation is inherently subjective and requires management to exercise significant judgment in developing assumptions for the estimate, the most significant of which are the loan risk rating process, development of economic forecasts and application of qualitative adjustments. Sensitivities are disclosed to demonstrate how changes in loan risk ratings and economic forecast scenarios may impact the allowance for credit losses. Sensitivities only consider changes to each specific assumption in isolation and their impact to the quantitative modeled results. They do not contemplate impacts to the qualitative framework.
Loan Risk Rating Process
Reserve factors are applied to pools of loans based on risk characteristics, including the Corporation's internal risk rating system; therefore, loss estimates are highly dependent on the accuracy of the risk rating assigned to each loan. The inherent imprecision in the risk rating system resulting from inaccuracy in assigning and/or entering risk ratings in the loan accounting system is monitored by the Corporation's asset quality review function. Changes to internal risk ratings, beyond the forecasted migration inherent in the credit models, would result in a different estimated allowance for credit losses. To illustrate, if 5 percent of the individual risk ratings were adjusted down by one rating across all pools, the allowance for loan losses as of December 31, 2020 would change by approximately $9 million.
Forecasted Economic Variables
Management selects models through which historical reserve factor estimates are calibrated to economic forecasts over the reasonable and supportable forecast period based on the projected performance of specific economic variables that statistically correlate with the probability of default and loss given default pools. Loss estimates revert to historical loss experience for contractual lives beyond the forecast period. Management selects economic variables it believes to be most relevant based on the composition of the loan portfolio and customer base, including forecasted levels of employment, gross domestic product, corporate bond and treasury spreads, industrial production levels, consumer and commercial real estate price indices as well as housing statistics.
The allowance for credit losses is highly sensitive to the economic forecasts used to develop the estimate. Due to the high level of uncertainty regarding significant assumptions, such as the ultimate impact of the global pandemic and effectiveness of government stimulus programs, the Corporation evaluated a range of economic scenarios, including a more severe economic forecast scenario, with varying speeds of recovery. The following table summarizes the more severe forecast scenario for the economic variables that are most impactful.


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Economic VariableMore Severe Forecast
Real GDP growthContracts through third quarter 2021, including a 5 percent decline in the first quarter 2021, followed by a gradual improvement to a growth rate above 4 percent by the end of the forecast period.
Unemployment rateCurrent levels increase to near 10 percent in the second half of 2021, gradually lowering to below 9 percent by the end of the forecast period.
Corporate BBB bond to 10-year Treasury bond spreadsSpreads widen above 2.5 percent in the near term, gradually normalizing to 2 percent or lower in 2022.
Oil PricesDecline below $25 per barrel part-way through the forecast period before improving to over $30 per barrel by fourth quarter 2022.
Selecting a different forecast in the current environment could result in a significantly different estimated allowance for credit losses. To illustrate, absent model overlays and other qualitative adjustments that are part of the quarterly reserving process, if the Corporation selected the more severe scenario to inform its models, the allowance for credit losses as of December 31, 2020 would increase by approximately $515 million. However, factoring in model overlays and qualitative adjustments could result in a materially different estimate under a more severe scenario.
Qualitative Adjustments and Model Overlays
The Corporation includes qualitative adjustments, as appropriate, intended to capture the impact of uncertainties not reflected in the quantitative estimate, including foresight risk, model imprecisions and input imprecisions. Qualitative adjustments for foresight risk reflect the inherent imprecision in economic forecasts and may be included based on management’s evaluation of different forecast scenarios, ranging from more benign to more severe, and known recent events impacting the Corporation’s portfolio. Model imprecision adjustments and model overlays may be included to mitigate known limitations in the quantitative models. Input imprecision includes adjustments for portfolios where recent historical losses exceed expected losses or known recent events are expected to alter risk ratings once evidence is acquired, as well as a qualitative assessment of the lending environment, including underwriting standards, current economic and political conditions, and other factors affecting credit quality. Qualitative reserves at December 31, 2020 primarily included adjustments for uncertainties related to forecasted economic variables.
Other Considerations
To the extent actual outcomes differ from management estimates, additional provision for credit losses may be required that would adversely impact earnings in future periods. The allowance is assigned to business segments, and any earnings impact resulting from actual outcomes differing from management estimates would primarily affect the Commercial Bank segment.
FAIR VALUE MEASUREMENT
Investment securities available-for-sale, derivatives and deferred compensation plan assets and associated liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans that have been reduced based on the fair value of the underlying collateral, other real estate (primarily foreclosed property), nonmarketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve write-downs of individual assets or application of lower of cost or fair value accounting.
Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. Notes 1 and 2 to the consolidated financial statements include information about the fair value hierarchy, the extent to which fair value is used to measure assets and liabilities, as well as the valuation methodologies and key inputs used.
At December 31, 2020, assets and liabilities measured using observable inputs that are classified as Level 1 or Level 2 represented 98.8 percent and 100 percent of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.
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GOODWILL
Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination and is subsequently evaluated at least annually for impairment. Goodwill impairment testing is performed at the reporting unit level, equivalent to a business segment or one level below. The Corporation has three reporting units: the Commercial Bank, the Retail Bank and Wealth Management. At December 31, 2020, goodwill totaled $635 million, including $473 million allocated to the Commercial Bank, $101 million allocated to the Retail Bank and $61 million allocated to Wealth Management.
The Corporation performs its annual evaluation of goodwill impairment in the third quarter of each year and may elect to perform a quantitative impairment analysis or first conduct a qualitative analysis to determine if a quantitative analysis is necessary. Additionally, the Corporation evaluates goodwill impairment on an interim basis if events or changes in circumstances between annual tests indicate additional testing may be warranted to determine if goodwill might be impaired.
In the first quarter 2020, economic conditions deteriorated significantly with the spread of the coronavirus global pandemic. The outbreak resulted in social distancing requirements throughout the world, severely restricting the economy. In response to the crisis, the Federal Reserve lowered the Federal Funds rate in March 2020 to close to zero. Additionally, the U.S. government initiated numerous measures to support the economy, including the CARES Act. Given the economic deterioration in the first quarter of 2020, the Corporation assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised economic conditions, including projections of the duration of current conditions and timing of a potential recovery; industry and market considerations; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units; performance of the Corporation’s stock and other relevant events. The Corporation further considered the amount by which fair value exceeded book value for each unit in the most recent quantitative analysis and sensitivities performed. At the conclusion of the first quarter 2020 assessment, the Corporation determined that it was more likely than not that the fair value of each reporting unit exceeded its carrying value.
In second quarter 2020, the Corporation performed a quantitative goodwill impairment test in response to continued macroeconomic deterioration and the ongoing impacts to the banking industry and markets in which the Corporation operates. The estimated fair values of the reporting units were determined using a blend of two commonly used valuation techniques: the market approach and the income approach. For the market approach, valuations of reporting units considered a combination of earnings and equity multiples from companies with characteristics similar to each reporting unit. Since the fair values determined under the market approach are representative of noncontrolling interests, the valuations incorporated a control premium. For the income approach, estimated future cash flows were derived from internal forecasts and economic expectations for each reporting unit. In the short- and mid-term, forecasts incorporated current economic conditions and ongoing impacts of the global pandemic, including a federal funds target near zero and an elevated allowance for credit losses. Long-term projections reflected normalized rate and credit environments, as well as a long-term rate of return for each reporting unit. Projections were discounted using an applicable discount rate to calculate fair value. The discount rate was based on the imputed cost of equity capital appropriate for each reporting unit, which incorporated the risk-free rate of return, the level of non-diversified risk associated with companies with characteristics similar to the reporting unit, a size risk premium and a market equity risk premium. The discount rate further reflected the uncertainty of current economic conditions and potential impacts to the forecasted financial information. The combined fair value of all units was compared to the Corporation’s market capitalization for reasonableness. At the conclusion of the quantitative impairment test in second quarter 2020, the estimated fair values of all reporting units substantially exceeded their carrying amounts, including goodwill.
The annual goodwill impairment test was performed as of the beginning of third quarter 2020. The Corporation assessed qualitative factors to determine whether it was more likely than not that the fair value of any reporting unit was less than its carrying amount, including goodwill. Qualitative factors included economic conditions, industry and market considerations, cost factors, overall financial performance, regulatory developments and performance of the Corporation’s stock, among other events and circumstances. At the conclusion of the qualitative assessment in third quarter 2020, the Corporation determined that it was more likely than not that the fair value of each reporting unit exceeded its carrying value.
Analyzing goodwill includes consideration of various factors that continue to rapidly evolve and for which significant uncertainty remains, including the impact of the coronavirus global pandemic to the economy and ongoing government intervention to mitigate that impact. Further weakening in the economic environment, such as continued decline in the performance of the reporting units or other factors, could cause the fair value of one or more of the reporting units to fall below their carrying value, resulting in a goodwill impairment charge. Additionally, new legislative or regulatory changes not anticipated in management's expectations may cause the fair value of one or more of the reporting units to fall below the carrying value, resulting in a goodwill impairment charge. Any impairment charge would not affect the Corporation's regulatory capital ratios, tangible common equity ratio or liquidity position.

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PENSION PLAN ACCOUNTING
The Corporation has a qualified and non-qualified defined benefit pension plan. Effective January 1, 2017, benefits are calculated using a cash balance formula based on years of service, age, compensation and an interest credit based on the 30-year Treasury rate. Participants under age 60 as of December 31, 2016 are eligible to receive a frozen final average pay benefit in addition to amounts earned under the cash balance formula. Participants age 60 or older as of December 31, 2016 continue to be eligible for a final average pay benefit. The Corporation makes assumptions concerning future events that will determine the amount and timing of required benefit payments, funding requirements and defined benefit pension expense. The major assumptions are the discount rate used in determining the current benefit obligation, the long-term rate of return expected on plan assets, mix of assets within the portfolio and the projected mortality rate.
The discount rate is determined by matching the expected cash flows of the pension plans to a portfolio of high quality corporate bonds as of the measurement date, December 31. The long-term rate of return expected on plan assets is set after considering both long-term returns in the general market and long-term returns experienced by the assets in the plan. The current target asset allocation model for the plans is provided in Note 17 to the consolidated financial statements. The expected returns on these various asset categories are blended to derive one long-term return assumption. The assets are primarily invested in certain collective investment funds, common stocks, U.S. Treasury and other U.S. government agency securities, as well as corporate and municipal bonds and notes. Mortality rate assumptions are based on mortality tables published by third-parties such as the Society of Actuaries, considering other available information including historical data as well as studies and publications from reputable sources.
The Corporation reviews its pension plan assumptions on an annual basis with its actuarial consultants to determine if the assumptions are reasonable and adjusts the assumptions to reflect changes in future expectations. The major assumptions used to calculate 2021 defined benefit plan pension expense (benefit) were as follows:
Discount rate2.71 %
Long-term rate of return on plan assets6.50 %
Mortality table:
Base table (a)Pri-2012
Mortality improvement scale (a)MP-2020
(a)Issued by the Society of Actuaries
Defined benefit plan benefit is expected to increase $37 million to approximately $61 million in 2021, compared to a benefit of $24 million in 2020. This includes service cost expense of $41 million and a benefit from other components of $102 million. Service costs are included in salaries and benefits expense, while the benefit from other components are included in other noninterest expenses on the Consolidated Statements of Income.
Changing the 2021 discount rate and long-term rate of return by 25 basis points would impact defined benefit expense in 2021 by $8 million and $7 million, respectively.
Due to the long-term nature of pension plan assumptions, actual results may differ significantly from the actuarial-based estimates. Differences resulting in actuarial gains or losses are required to be recorded in shareholders' equity as part of accumulated other comprehensive loss and amortized to defined benefit pension expense in future years. Refer to Note 17 to the consolidated financial statements for further information.
INCOME TAXES
The calculation of the Corporation's income tax provision and tax-related accruals is complex and requires the use of estimates and judgments. The provision for income taxes is the sum of income taxes due for the current year and deferred taxes. Deferred taxes arise from temporary differences between the income tax basis and financial accounting basis of assets and liabilities. Accrued taxes represent the net estimated amount due to or to be received from taxing jurisdictions, currently or in the future, and are included in accrued income and other assets or accrued expenses and other liabilities on the Consolidated Balance Sheets. The Corporation assesses the relative risks and merits of tax positions for various transactions after considering statutes, regulations, judicial precedent and other available information and maintains tax accruals consistent with these assessments. The Corporation is subject to audit by taxing authorities that could question and/or challenge the tax positions taken by the Corporation.
Included in net deferred taxes are deferred tax assets. Deferred tax assets are evaluated for realization based on available evidence of projected future reversals of existing taxable temporary differences, assumptions made regarding future events and, when applicable, state loss carryback capacity. A valuation allowance is provided when it is more-likely-than-not that some portion of the deferred tax asset will not be realized.
Changes in the estimate of accrued taxes occur due to changes in tax law, interpretations of existing tax laws, new judicial or regulatory guidance, and the status of examinations conducted by taxing authorities that impact the relative risks and merits of tax positions taken by the Corporation. These changes, when they occur, impact the estimate of accrued taxes and
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could be significant to the operating results of the Corporation. For further information on tax accruals and related risks, see Note 18 to the consolidated financial statements.

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SUPPLEMENTAL FINANCIAL DATA
The Corporation believes non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate the adequacy of common equity and our performance trends. Tangible common equity is used by the Corporation to measure the quality of capital and the return relative to balance sheet risk.
Common equity tier 1 capital ratio removes preferred stock from the Tier 1 capital ratio as defined by and calculated in conformity with bank regulations. The tangible common equity ratio removes the effect of intangible assets from capital and total assets. Tangible common equity per share of common stock removes the effect of intangible assets from common shareholders' equity per share of common stock.

The following table provides a reconciliation of non-GAAP financial measures and regulatory ratios used in this financial review with financial measures defined by GAAP.

(dollar amounts in millions)20202019201820172016
Common Equity Tier 1 Capital (a):
Tier 1 capital$7,313 $6,919 $7,470 $7,773 $7,540 
Less:
Fixed-rate reset non-cumulative perpetual preferred stock394 — — — — 
Common equity tier 1 capital$6,919 $6,919 $7,470 $7,773 $7,540 
Risk-weighted assets$66,931 $68,273 $67,047 $66,575 $67,966 
Tier 1 capital ratio10.93 %10.13 %11.14 %11.68 %11.09 %
Common equity tier 1 capital ratio10.34 10.13 11.14 11.68 11.09 
Tangible Common Equity Ratio:
Total shareholders' equity$8,050 $7,327 $7,507 $7,963 $7,796 
Less:
Fixed-rate reset non-cumulative perpetual preferred stock394 — — — — 
Common shareholders' equity$7,656 $7,327 $7,507 $7,963 $7,796 
Less:
Goodwill635 635 635 635 635 
Other intangible assets1