Comerica 2007 Annual Report Download - page 48

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Allowance for Credit Losses
The allowance for credit losses includes both the allowance for loan losses and the allowance for credit losses on
lending-related commitments. The allowance for loan losses represents management’s assessment of probable
losses inherent in the Corporation’s loan portfolio. The allowance for loan losses provides for probable losses that
have been identified with specific customer relationships and for probable losses believed to be inherent in the loan
portfolio, but that have not been specifically identified. Internal risk ratings are assigned to each business loan at the
time of approval and are subject to subsequent periodic reviews by the Corporation’s senior management. The
Corporation performs a detailed credit quality review quarterly on both large business and certain large personal
purpose consumer and residential mortgage loans that have deteriorated below certain levels of credit risk and may
allocate a specific portion of the allowance to such loans based upon this review. The Corporation defines business
loans as those belonging to the commercial, real estate construction, commercial mortgage, lease financing and
international loan portfolios. A portion of the allowance is allocated to the remaining business loans by applying
estimated loss ratios, based on numerous factors identified below, to the loans within each risk rating. In addition, a
portion of the allowance is allocated to these remaining loans based on industry specific risks inherent in certain
portfolios that have experienced above average losses, including portfolio exposures to technology-related indus-
tries, Michigan and California residential real estate development and Small Business Administration loans.
Furthermore, a portion of the allowance is allocated to these remaining loans based on industry specific risks
inherent in certain portfolios that have not yet manifested themselves in the risk ratings, including portfolio
exposures to the automotive industry and California residential real estate development. The portion of the
allowance allocated to all other consumer and residential mortgage loans is determined by applying estimated loss
ratios to various segments of the loan portfolio. Estimated loss ratios for all portfolios incorporate factors such as
recent charge-off experience, current economic conditions and trends, 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 three largest domestic geographic markets (Midwest, Western and Texas), as well as
mapping to bond tables. The allowance for credit losses on lending-related commitments, included in “accrued
expenses and other liabilities” on the consolidated balance sheets, 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 becomes a watch list credit. Non-watch list letters of credits and
all unfunded commitments have a lower probability of draw, to which standard loan loss rates are applied.
The total allowance for loan losses was $557 million at December 31, 2007, compared to $493 million at
December 31, 2006. The increase resulted mostly from an increase in individual and industry reserves for
customers in the real estate industry, primarily Michigan and California residential real estate development. This
increase was partially offset by reductions in the industry reserves for customers in the automotive, air trans-
portation, contractor and entertainment industries. An analysis of the changes in the allowance for loan losses is
presented in Table 8 on page 45 of this financial review. The allowance for credit losses on lending-related
commitments was $21 million at December 31, 2007, compared to $26 million at December 31, 2006, a decrease
of $5 million, resulting primarily from a decrease in specific reserves related to unused commitments extended to
two large customers in the automotive industry that were previously reserved at quoted prices and now are
reserved using standard unfunded commitment methodology. An analysis of the changes in the allowance for
credit losses on lending-related commitments is presented on page 45 of this financial review.
46