Comerica 2009 Annual Report Download - page 79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
collateral values of properties securing loans (using index-based estimates), and trends with respect to past due
and nonaccrual amounts, and are supported by underlying analysis, including information on migration and loss
given default studies from each of the Corporation’s three largest domestic geographic markets (Midwest,
Western and Texas), as well as mapping to bond tables. For collateral-dependent real estate loans, independent
appraisals are obtained at loan inception and updated on an as-needed basis, generally at the time a loan is
determined to be impaired and at least annually thereafter.
Actual loss ratios experienced in the future may vary from those estimated. The uncertainty occurs because
factors may exist which affect the determination of probable losses inherent in the loan portfolio and are not
necessarily captured by the application of estimated loss ratios or identified industry-specific risks. A portion of
the allowance is maintained to capture these probable losses and reflects management’s view that the allowance
should recognize the margin for error inherent in the process of estimating expected loan losses. Factors that
were considered in the evaluation of the adequacy of the Corporation’s allowance include the inherent
imprecision in the risk rating system which covers probable loan losses as a result of an inaccuracy in assigning
risk ratings or stale ratings which may not have been updated for recent negative trends in particular credits. In
the first quarter 2009, the Corporation refined the methodology used to estimate the imprecision in the risk
rating system portion of the allowance by only applying the identified error rate in assigning risk ratings, based
on semiannual reviews, solely to the loan population that was tested. Previously, the error rate was applied to a
larger population of loans. This change in methodology reduced the allowance by approximately $16 million in
the first quarter 2009.
The total allowance for loan losses is available to absorb losses from any segment within the portfolio.
Unanticipated economic events, including political, economic and regulatory instability in countries where the
Corporation has loans, could cause changes in the credit characteristics of the portfolio and result in an
unanticipated increase in the allowance. Inclusion of other industry-specific portfolio exposures in the
allowance, as well as significant increases in the current portfolio exposures, could also increase the amount of
the allowance. Any of these events, or some combination thereof, may result in the need for additional provision
for loan losses in order to maintain an allowance that complies with credit risk and accounting policies.
Loans deemed uncollectible are charged off and deducted from the allowance. The provision for loan losses
and recoveries on loans previously charged off are added to the allowance.
Allowance for Credit Losses on Lending-Related Commitments
The allowance for credit losses on lending-related commitments provides for probable credit losses
inherent in lending-related commitments, including unused commitments to extend credit, letters of credit and
financial guarantees. Lending-related commitments for which it is probable that the commitment will be drawn
(or sold) are reserved with the same estimated loss rates as loans, or with specific reserves. In general, the
probability of draw for letters of credit is considered certain once the credit is assigned a risk rating that is
generally consistent with regulatory defined substandard or doubtful. Other letters of credit and all unfunded
commitments have a lower probability of draw, to which standard loan loss rates are applied. The allowance for
credit losses on lending-related commitments is included in ‘‘accrued expenses and other liabilities’’ on the
consolidated balance sheets, with the corresponding charge reflected in ‘‘provision for credit losses on lending-
related commitments’’ in the noninterest expenses section on the consolidated statements of income.
Nonperforming Assets
Nonperforming assets consist of loans, including loans held-for-sale, and debt securities for which the
accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market
rates due to a serious weakening of the borrower’s financial condition, and real estate which has been acquired
through foreclosure and is awaiting disposition.
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