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NFIDENCE
Comerica Incorporated 2008 Annual Report

Table of contents

  • Page 1
    NFIDENCE Comerica Incorporated 2008 Annual Report

  • Page 2
    ...: The Business Bank, The Retail Bank, and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating...

  • Page 3
    ....20 7.97 Balance Sheet (at December 31) Total assets Total earning assets Total loans Total deposits Total preferred equity Total shareholders' equity $67,548 62,374 50,505 41,955 2,129 7,152 $ 62,331 57,448 50,743 44,278 - 5,117 Tier 1 Capital Ratio in percent Total Average Assets in millions of...

  • Page 4
    ... our banking center expansion program, which remains a cornerstone of our deposit-gathering efforts and helps attract thousands of new customers to Comerica. Our plans also include lending to new and existing relationship customers for whom we serve as trusted advisors, particularly small businesses...

  • Page 5
    Comerica Incorporated 2008 Annual Report 3 Fourth Quarter and 2008 Financial Performance Jobs, manufacturing, construction and spending declined at an accelerated rate toward year-end. On an annualized basis, excluding the Financial Services Division - our title and escrow business - average loans...

  • Page 6
    ... the appropriate credit standards, loan pricing and return hurdles in place - to new and existing relationship customers. This includes small businesses, middle market companies and wealth management clients. The additional capital also enables us to support the battered housing market through the...

  • Page 7
    ... savings account that can help our business customers offer their employees an affordable option for managing their health care expenses; and the EZ Perks rewards program that allows customers to earn points when they sign for purchases made with their Comerica Check Card. Notable 2008 activities...

  • Page 8
    ...the Treasury for DirectExpress® Debit MasterCard,® a prepaid debit card for Social Security and Supplemental Security Income recipients. The card was introduced to millions of recipients throughout the U.S. in 2008. Within Wealth & Institutional Management, we upgraded our wealth planning division...

  • Page 9
    ... Phoenix/Scottsdale 12 banking centers In California San Francisco & the East Bay, San Jose, Los Angeles, Orange County, San Diego, Fresno, Sacramento & Santa Cruz/ Monterey 96 banking centers In Florida Boca Raton, Fort Lauderdale, Naples, Orlando, Palm Beach Gardens, Riviera Beach, Sarasota...

  • Page 10
    ... Vice President Asset Quality Review Michael H. Michalak Executive Vice President Corporate Planning, Development & Risk Management Thomas D. Ogden Executive Vice President and President, Comerica Bank - Michigan Market Jacquelyn H. Wolf, Ph.D. Executive Vice President and Chief Human Resources Of...

  • Page 11
    FINANCIAL REVIEW AND REPORTS Comerica Incorporated and Subsidiaries Performance Graph ...Financial Results and Key Corporate Initiatives ...Overview/Earnings Performance ...Strategic Lines of Business ...Balance Sheet and Capital Funds Analysis ...Risk Management ...Critical Accounting Policies ......

  • Page 12
    ... Year Cumulative Total Return Among Comerica Incorporated, Keefe 50-Bank Index, and S&P 500 Index (Assumes $100 Invested on 12/31/03 and Reinvestment of Dividends) $200 Comerica Incorporated Keefe 50-Bank Index S&P 500 Index $150 $100 $50 $0 Comerica Incorporated Keefe 50-Bank Index S&P 500 Index...

  • Page 13
    ... ...Preferred stock dividends ...Net income applicable to common stock . PER SHARE OF COMMON STOCK Diluted net income per common share . Cash dividends declared ...Common shareholders' equity ...Market value ...YEAR-END BALANCES Total assets ...Total earning assets ...Total loans ...Total deposits...

  • Page 14
    ... Excluding Commercial Real Estate, net credit-related charge-offs were 46 basis points of average loans in 2008, compare to 20 basis points in 2007. Nonperforming assets increased to $983 million, reflecting challenges in the residential real estate development business located in the Western market...

  • Page 15
    ... customer relationship returns. • Focused significant resources on managing deteriorating credit quality in 2008, particularly in the commercial real estate portfolio. • Continued organic growth focused in high growth markets, including opening 28 new banking centers in 2008. The Corporation...

  • Page 16
    ... review. 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 derived principally from the difference between interest earned on loans and investment...

  • Page 17
    ... in Small Business, Middle Market and Wealth Management with the appropriate pricing and credit standards. - Management expects full-year net interest margin pressure will continue. Management anticipates no change in the Federal Funds rate. Management also expects continued improvement in loan...

  • Page 18
    ... with banks ...Other short-term investments ...Total earning assets ...Cash and due from banks ...Allowance for loan losses ...Accrued income and other assets ... 60,422 3,057 1,185 (691) 4,269 Total assets ...$65,185 Money market and NOW deposits (1) ...$14,245 Savings deposits ...1,344 Customer...

  • Page 19
    ...securities available-for-sale ...Federal funds sold and securities purchased under agreements to resell ...Interest-bearing deposits with banks . Other short-term investments ...Total interest income (FTE) ...Interest expense: Interest-bearing deposits: Money market and NOW accounts Savings deposits...

  • Page 20
    ... income). The Financial Services Division serves title and escrow companies that facilitate residential mortgage transactions and benefits from customer deposits related to mortgage escrow balances. Financial Services Division deposit levels may change with the direction of mortgage activity changes...

  • Page 21
    ... investment securities available-for-sale. Average Financial Services Division loans (primarily low-rate) decreased $1.0 billion, and average Financial Services Division noninterest-bearing deposits decreased $1.5 billion in 2007, compared to 2006. Management expects average full-year 2009 net...

  • Page 22
    ... in Western residential real estate development ($171 million), included in the Commercial Real Estate line of business, Middle Market lending ($37 million) and Small Business lending ($26 million). Total net credit-related charge-offs, which includes net charge-offs on both loans and lendingrelated...

  • Page 23
    ...) Service charges on deposit accounts . Fiduciary income ...Commercial lending fees ...Letter of credit fees ...Card fees ...Brokerage fees ...Foreign exchange income ...Bank-owned life insurance ...Net securities gains ...Net gain (loss) on sales of businesses Income from lawsuit settlement...

  • Page 24
    ...are subject to changes in the level of market activity. The decrease in 2008 was primarily due to lower transaction volumes as a result of strained market conditions. The increase in 2007 was primarily due to increased customer investments in money market mutual funds. Foreign exchange income of $40...

  • Page 25
    ...millions) Salaries ...Employee benefits ...Total salaries and employee benefits ...Net occupancy expense ...Equipment expense ...Outside processing fee expense ...Software expense ...Customer services ...Litigation and operational losses ...Provision for credit losses on lending-related commitments...

  • Page 26
    ...a change in the Corporation's core matching contribution rate effective January 1, 2007. For a further discussion of pension and defined contribution plan expense, refer to the ''Critical Accounting Policies'' section of this financial review and Note 16 to the consolidated financial statements. Net...

  • Page 27
    ...lower pre-tax income and included a net after-tax charge of $9 million related to the acceptance of a global settlement offered by the IRS on certain structured leasing transactions, settlement with the IRS on disallowed foreign tax credits related to a series of loans to foreign borrowers and other...

  • Page 28
    ... financial statements. PREFERRED STOCK DIVIDENDS In the fourth quarter 2008, the Corporation participated in the U.S. Department of Treasury (U.S. Treasury) Capital Purchase Program (the Purchase Program) and received proceeds of $2.25 billion from the U.S. Treasury. In return, the Corporation...

  • Page 29
    ... real estate development business, and Middle Market loan portfolios. Noninterest income of $302 million in 2008 increased $11 million from 2007, reflecting a $14 million gain on the sale of MasterCard shares in 2008 and increases in foreign exchange income ($5 million), service charges on deposits...

  • Page 30
    ... due to the declining rate environment in which income received from the lending-related business units decreased faster than the longer-term value attributed to deposits generated by the business units, partially offset by an increase in investment securities available-for-sale. Net loss in the...

  • Page 31
    ...primarily due to increases in reserves for the Middle Market, Small Business and Global Corporate loan portfolios, partially offset by lower reserves for the residential real estate development portfolio in 2008, compared to 2007. Noninterest income of $524 million in 2008 increased $53 million from...

  • Page 32
    ...by a $59 million decrease in average deposit balances. The provision for loan losses increased $46 million, primarily due to increases in reserves for the Commercial Real Estate, Global Corporate and Middle Market loan portfolios in 2008, compared to 2007. Noninterest income of $48 million decreased...

  • Page 33
    ... Division and Other category discussions under the ''Business Segments'' heading above. The following table lists the Corporation's banking centers by geographic market segments. December 31 2008 2007 2006 Midwest (Michigan) ...Western: California ...Arizona ...Texas ...Florida ...International...

  • Page 34
    ...- 180 Total investment securities available-for-sale ...Commercial loans ...Real estate construction loans: Commercial Real Estate business line ...Other business lines ...Total real estate construction loans ...Commercial mortgage loans: Commercial Real Estate business line ...Other business lines...

  • Page 35
    TABLE 5: LOAN MATURITIES AND INTEREST RATE SENSITIVITY Loans Maturing After One But Within After Five Years Five Years (in millions) December 31, 2008 Within One Year * Total Commercial loans ...Real estate construction loans . Commercial mortgage loans . . International loans ... ... ... ... ...

  • Page 36
    ... Excluding Financial Services Division ...Financial Services Division * ...Total commercial loans ...Real estate construction loans: Commercial Real Estate business line ...Other business lines ...Total real estate construction loans ...Commercial mortgage loans: Commercial Real Estate business line...

  • Page 37
    ... Ended December 31 2008 2007 Change (dollar amounts in millions) Average Loans By Business Line: Percent Change Middle Market ...Commercial Real Estate ...Global Corporate Banking ...National Dealer Services ...Specialty Businesses: Excluding Financial Services Division Financial Services Division...

  • Page 38
    ...business line also had $1.4 billion of average 2008 loans not classified as commercial real estate on the consolidated balance sheet. Refer to the ''Commercial Real Estate Lending'' portion of the ''Risk Management'' section of this financial review for more information. Average residential mortgage...

  • Page 39
    ...Accounting Policies'' section of this financial review and Notes 23 and 28 to the consolidated financial statements. Short-Term Investments Short-term investments include federal funds sold and securities purchased under agreements to resell, interest-bearing deposits with banks and other short-term...

  • Page 40
    ..., due to reduced home prices, as well as, lower home mortgage financing and refinancing activity. Financial Services Division deposit levels may change with the direction of mortgage activity changes, and the desirability of and competition for such deposits. Average short-term borrowings increased...

  • Page 41
    ...' equity in 2008: (in millions) Balance at January 1, 2008 ...Retention of earnings (net income less cash dividends declared) . Change in accumulated other comprehensive income (loss): Investment securities available-for-sale ...Cash flow hedges ...Defined benefit and other postretirement plans...

  • Page 42
    ... banking regulators in 2006, the after-tax charge associated with the impact of SFAS No. 158, ''Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans'' on pension and post-retirement plan accounting was excluded from the calculation of regulatory capital ratios. Therefore...

  • Page 43
    ... with contractual terms. The Corporation manages credit risk through underwriting, periodically reviewing and approving its credit exposures using Board committee approved credit policies and guidelines. Additionally, the Corporation manages credit risk through loan sales and loan portfolio...

  • Page 44
    ... Balance at beginning of year ...Loan charge-offs: Domestic Commercial ...Real estate construction Commercial Real Estate business line ...Other business lines ...Total real estate construction ...Commercial mortgage Commercial Real Estate business line ...Other business lines ...Total commercial...

  • Page 45
    ... 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...

  • Page 46
    ... 31, 2007. The Corporation's loan portfolio is heavily composed of business loans, which in the event of default are typically carried on the books at fair value as nonperforming assets for a longer period of time than are consumer loans, which are generally fully charged off when they become...

  • Page 47
    ... assets include loans on nonaccrual status, loans which 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. Residential mortgage loans are generally...

  • Page 48
    ... than the rate charged for new loans with comparable risk and have met the requirements for return to accrual status are not included in nonperforming assets. However, such loans may be required to be evaluated for impairment. Refer to Note 4 to the consolidated financial statements for a further...

  • Page 49
    ... to nonaccrual with balances greater than $2 million in 2008, $729 million were from the Commercial Real Estate business line, including $510 million located in the Western market, and $241 million were from the Middle market business line. There were 41 loan relationships, each greater than...

  • Page 50
    ... 2008 Loans Transferred Net Loan to Non-Accrual (1) Charge-Offs (dollar amounts in millions) Real Estate ...Manufacturing ...Services ...Retail Trade ...Contractors ...Wholesale Trade ...Automotive ...Finance ...Transportation ...Technology-related ...Holding & Other Investment Churches ...Consumer...

  • Page 51
    ... of total loans at December 31, 2008. Commercial Real Estate Lending The Corporation limits risk inherent in its commercial real estate lending activities by limiting exposure to those borrowers directly involved in the commercial real estate markets and adhering to conservative policies on 49

  • Page 52
    ...percent had balances of less than $1 million. This total included $8.9 billion of primarily owner-occupied commercial mortgage loans. The geographic distribution of commercial real estate loan borrowers is an important factor in diversifying credit risk. The following table indicates, by location of...

  • Page 53
    Corporation's real estate construction and commercial mortgage loans to borrowers in the Commercial Real Estate business line. December 31, 2008 Location of Property Other Western Michigan Texas Florida Markets (dollar amounts in millions) Project Type: Total Percent of Total Real estate ...

  • Page 54
    ... activities. The Asset and Liability Policy Committee meets regularly to discuss and review market risk management strategies and is comprised of executive and senior management from various areas of the Corporation, including finance, lending, deposit gathering and risk management. Interest Rate...

  • Page 55
    ... stock, resulting from the Corporation's fourth quarter 2008 participation in the Purchase Program. Changes in interest rates will continue to impact the Corporation's net interest income in 2009. Interest rate risk is actively managed principally through the use of either on-balance sheet financial...

  • Page 56
    ... rate and foreign currency risks associated with specific assets and liabilities (e.g., customer loans or deposits denominated in foreign currencies). Such instruments may include interest rate caps and floors, purchased put options, foreign exchange forward contracts and foreign exchange swap...

  • Page 57
    ... customers requesting such services. Customer-initiated and other notional activity represented 81 percent of total interest rate, energy and foreign exchange contracts at December 31, 2008, compared to 68 percent at December 31, 2007. Refer to Notes 1 and 20 to the consolidated financial statements...

  • Page 58
    ... assets, commitments to fund private equity and venture capital investments, unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The following commercial commitments table summarizes the Corporation's commercial commitments...

  • Page 59
    ... 2008, the Bank became a member of the Federal Home Loan Bank of Dallas, Texas (FHLB), which provides short- and long-term funding to its members through advances collateralized by real estate-related assets. The actual borrowing capacity is contingent on the amount of collateral available to be...

  • Page 60
    ... A1 A+ A (high) The parent company held $11 million of cash and cash equivalents and $2.3 billion of short-term investments with a subsidiary bank at December 31, 2008, mostly from the Purchase Program proceeds. Refer to the ''Preferred Stock Dividends'' section of this financial review for further...

  • Page 61
    ... the valuation of stock options and restricted stock, refer to the ''Critical Accounting Policies'' section of this financial review. Nonmarketable Equity Securities At December 31, 2008, the Corporation had a $64 million portfolio of investments in private equity and venture capital funds, with...

  • Page 62
    ... of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the Corporation's expansion of its banking center network and employment and tax matters. The Enterprise-Wide Compliance Committee, comprised of senior business unit managers...

  • Page 63
    ... 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. The...

  • Page 64
    ... management estimates would primarily affect the Business Bank segment. VALUATION METHODOLOGIES Fair Value of Level 3 Financial Instruments On January 1, 2008, the Corporation adopted SFAS 157 which defines fair value as the exchange price that would be received to sell an asset or paid to transfer...

  • Page 65
    ...-free interest rate, the expected dividend yield, expected volatility factors of the market price of the Corporation's common stock and the expected option life. For further discussion on the valuation model inputs, see Note 15 to the consolidated financial statements. Changes in input assumptions...

  • Page 66
    ... of its private equity and venture capital fund investments on the percentage ownership in the fair value of the entire fund, as reported by the fund's management. In general, the Corporation does not have the benefit of the same information regarding the fund's underlying investments as does...

  • Page 67
    ...the Income Approach and the Market Approach. The fair value of the warrant at inception was calculated using a binomial lattice model. For the preferred shares valuation, the discounted cash flow method was utilized in applying the income approach, including the application of a discount rate, based...

  • Page 68
    ...-free interest rate, the expected dividend yield, expected volatility factors of the market price of the Corporation's common stock and the expected life of the warrant. PENSION PLAN ACCOUNTING The Corporation has defined benefit plans in effect for substantially all full-time employees hired before...

  • Page 69
    ... the plan in 2008. For the foreseeable future, the Corporation has sufficient liquidity to make such payments. Pension expense is recorded in ''employee benefits'' expense on the consolidated statements of income, and is allocated to business segments based on the segment's share of salaries expense...

  • Page 70
    ... time; • unfavorable developments concerning credit quality could adversely affect the Corporation's financial results; • problems faced by residential real estate developers could adversely affect the Corporation; • businesses or industries in which the Corporation has lending concentrations...

  • Page 71
    ...new products and services; • changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing, could adversely affect the Corporation's net interest income and balance sheet; • operational difficulties or information security problems could adversely...

  • Page 72
    ...ASSETS Cash and due from banks ...Federal funds sold and securities purchased under agreements to resell ...Interest-bearing deposits with banks ...Other short-term investments ...Investment securities available-for-sale ...Commercial loans ...Real estate construction loans Commercial mortgage loans...

  • Page 73
    ... Service charges on deposit accounts . . Fiduciary income ...Commercial lending fees ...Letter of credit fees ...Card fees ...Brokerage fees ...Foreign exchange income ...Bank-owned life insurance ...Net securities gains ...Net gain (loss) on sales of businesses . Income from lawsuit settlement...

  • Page 74
    ... ...Total comprehensive income ...Cash dividends declared on common stock ($2.31 per share) ...Purchase of common stock ...Issuance of preferred stock and related warrant Accretion of discount on preferred stock ...Net issuance of common stock under employee stock plans ...Share-based compensation...

  • Page 75
    ... securities available-for-sale Purchases of investment securities available-for-sale ...Purchases of Federal Home Loan Bank stock ...Net increase in loans ...Net increase in fixed assets ...Net decrease in customers' liability on acceptances outstanding . . Proceeds from sales of businesses...

  • Page 76
    .... The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles and prevailing practices within the banking industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to...

  • Page 77
    ... further discussion of SFAS 157, refer to Note 23 to the consolidated financial statements. Other Short-Term Investments Other short-term investments include trading securities and loans held-for-sale. Trading securities are carried at market value. Realized and unrealized gains or losses on trading...

  • Page 78
    ... below certain levels of credit risk and may allocate a specific portion of the allowance to such loans based upon this review. Business loans are those belonging to the commercial, real estate construction, commercial mortgage, lease financing and international loan portfolios. A portion of the...

  • Page 79
    ... assets are comprised 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...

  • Page 80
    ... assets. The estimated useful lives are generally 10-33 years for premises that the Corporation owns and three to eight years for furniture and equipment. Leasehold improvements are amortized over the terms of their respective leases, or 10 years, whichever is shorter. Software Capitalized software...

  • Page 81
    ... Securities The Corporation has a portfolio of investments in private equity and venture capital funds. The majority of these investments are not readily marketable and are reported in ''accrued income and other assets'' on the consolidated balance sheets. The investments are individually reviewed...

  • Page 82
    ... balance sheets. Further information on the Corporation's obligations under guarantees is included in Note 20. Loan Origination Fees and Costs On January 1, 2008, the Corporation prospectively implemented a refinement in the application of SFAS No. 91, ''Accounting for Loan Origination Fees...

  • Page 83
    ..., a discount rate used to determine the current benefit obligation and a long-term expected return on plan assets. Net periodic pension expense includes service cost, interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related...

  • Page 84
    ... deposits with banks'' on the consolidated balance sheets. Cash flows from discontinued operations are reported as separate line items within cash flows from operating, investing and financing activities in the consolidated statements of cash flows. Other Comprehensive Income (Loss) The Corporation...

  • Page 85
    ... derivatives by primary underlying risk exposure (e.g., interest rate, credit or foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge, net investment hedge, and non-hedges), (2) information about the volume of derivative activity in a flexible format that the preparer...

  • Page 86
    ... on the Corporation's financial condition and results of operations. In December 2008, the FASB issued FSP No. FAS 132(R)-1, ''Employers' Disclosures about Postretirement Benefit Plan Assets,'' (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amends SFAS No. 132(R), ''Employers' Disclosures about Pensions and...

  • Page 87
    ... FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries Note 3 - Investment Securities A summary of the Corporation's investment securities available-for-sale follows: Amortized Cost Gross Gross Unrealized Unrealized Gains Losses (in millions) Fair Value December 31, 2008 U.S. Treasury...

  • Page 88
    ... rates and liquidity, not a change in the probability of contractual cash flows. The Corporation has the ability and intent to hold these available-for-sale investment securities until maturity or market price recovery, and full collection of the amounts due according to the contractual terms...

  • Page 89
    ...the issuers of auction-rate securities generally have the right to redeem or refinance the debt. As a result, the expected life of auction-rate securities may differ significantly from the contractual life. Sales, calls and write-downs of investment securities available-for-sale resulted in realized...

  • Page 90
    ... income and other assets'' on the consolidated balance sheets. December 31 2008 2007 (in millions) Nonaccrual loans: Commercial ...Real estate construction: Commercial Real Estate business line ...Other business lines ...Total real estate construction ...Commercial mortgage: Commercial Real Estate...

  • Page 91
    ... cash flows discounted at the loan's effective interest rate or observable market value. Note 5 - Allowance for Loan Losses An analysis of changes in the allowance for loan losses follows: 2008 2007 2006 (dollar amounts in millions) Balance at January 1 ...Loan charge-offs ...Recoveries on loans...

  • Page 92
    ... part of credit policies. The Corporation is a regional financial services holding company with a geographic concentration of its on-balance sheet and off-balance sheet activities in Michigan, California and Texas. The Corporation has an industry concentration with the automotive industry. Loans to...

  • Page 93
    ... 31, 2008, 2007 and 2006 are shown in the following table. Amounts in all periods are based on business segments in effect at December 31, 2008. Business Bank Wealth & Retail Insitutional Bank Management (in millions) Total Balances at December 31, 2008, 2007 and 2006 ... $90 $47 $13 $150 91

  • Page 94
    ... and securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Other short-term borrowings, which may consist of Federal Reserve Term Auction Facility borrowings, commercial paper, borrowed securities, term federal funds purchased, short-term...

  • Page 95
    ...FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries notes and treasury tax and loan deposits, generally mature within one to 120 days from the transaction date. The following table provides a summary of short-term borrowings. Federal Funds Purchased Other and Securities Sold Under Short-term...

  • Page 96
    ... due 2008 to 2012 ...Floating rate based on PRIME indices due 2008 ...Floating rate based on Federal Funds indices due 2009 ...Federal Home Loan Bank advances: Floating rate based on LIBOR indices due 2009 to 2014 ...Total subsidiaries ...Total medium- and long-term debt ... The carrying value of...

  • Page 97
    ... short- and long-term funding collateralized by mortgage-related assets to its members. FHLB advances bear interest at variable rates based on LIBOR and were secured by $4.8 billion of real estate-related loans and $3.2 billion of mortgage-backed investment securities at December 31, 2008. The Bank...

  • Page 98
    ... as part of the Corporation's publicly announced repurchase program were transacted in the open market and were within the scope of Rule 10b-18, which provides a safe harbor for purchases in a given day if an issuer of equity securities satisfies the manner, timing, price and volume conditions of...

  • Page 99
    ... to pay for grant prices and/or taxes related to stock option exercises and restricted stock vesting under the terms of an employee share-based compensation plan. In the fourth quarter 2008, the Corporation participated in the U.S. Department of Treasury (U.S. Treasury) Capital Purchase Program (the...

  • Page 100
    ...investment securities available-for-sale, the change in accumulated net gains and losses on cash flow hedges, the change in the accumulated foreign currency translation adjustment and the change in the accumulated defined benefit and other postretirement plans adjustment. The consolidated statements...

  • Page 101
    ... adjustment for gains (losses) included in net income, due to sale of foreign subsidiaries ...Change in foreign currency translation adjustment ...Balance at end of period ...Accumulated defined benefit pension and other postretirement plans adjustment: Balance at beginning of period, net of tax...

  • Page 102
    ... FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries Note 14 - Net Income Per Common Share Basic income from continuing operations and net income per common share are computed by dividing income from continuing operations applicable to common stock and net income applicable to common stock...

  • Page 103
    ...: Comerica Incorporated share-based plans ...Munder share-based plans * ...Total share-based compensation expense ...Related tax benefits recognized in net income ...* $51 - $51 $19 $59 - $59 $21 $57 7 $64 $23 Excludes $9 million of long-term incentive plan expense triggered by the 2006 sale of...

  • Page 104
    ... STATEMENTS Comerica Incorporated and Subsidiaries used in the binomial option-pricing model as outlined in the table below was based on the federal ten-year treasury interest rate. The expected dividend yield was based on the historical and projected dividend yield patterns of the Corporation...

  • Page 105
    ... years before retirement. The defined benefit plans' assets are invested in equity securities (including certain collective investment funds and mutual investment funds), U.S. Treasury and other Government agency securities, Government-sponsored enterprise securities, and corporate bonds and notes...

  • Page 106
    ... FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries The following table sets forth reconciliations of the projected benefit obligation and plan assets of the Corporation's qualified defined benefit pension plan, non-qualified defined benefit pension plan and postretirement benefit plan...

  • Page 107
    ... Comerica Incorporated and Subsidiaries The following table details the amounts recognized in accumulated other comprehensive income (loss) at December 31, 2008 and 2007, and changes for the years then ended, for the qualified defined benefit pension plan, non-qualified defined benefit pension plan...

  • Page 108
    ... as follows: Qualified Non-Qualified Defined Benefit Defined Benefit Pension Plan Pension Plan Years Ended December 31 2008 2007 2006 2008 2007 2006 (in millions) Service cost ...Interest cost ...Expected return on plan assets ...Amortization of prior service cost (credit) Amortization of net loss...

  • Page 109
    ... TO CONSOLIDATED FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries Postretirement Benefit Plan Years Ended December 31 2008 2007 2006 (in millions) Interest cost ...Expected return on plan assets ...Amortization of transition obligation . Amortization of prior service cost ...Amortization...

  • Page 110
    ...after considering both long-term returns in the general market and long-term returns experienced by the assets in the plan. The returns on the various asset categories are blended to derive one long-term rate of return. The Corporation reviews its pension plan assumptions on an annual basis with its...

  • Page 111
    ... defined benefit pension plan. The postretirement benefit plan is fully invested in bank-owned life insurance policies. Qualified Defined Benefit Pension Plan Percentage of Target Plan Assets at Allocation December 31 2009 2008 2007 Asset Category Equity securities ...Fixed income, including cash...

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    ... the calendar year. Effective September 16, 2008, the Corporation eliminated Comerica Stock as an investment option for future deposits including employee contributions, matching contributions and transfers. Employee benefits expense included expense for the plans of $22 million, $20 million and $13...

  • Page 113
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries position taken by the Corporation with respect to those transactions. The Corporation believes that its tax returns were filed based upon applicable statutes, regulations and case law in effect at the time of the ...

  • Page 114
    ... during the lease term, the expected timing of the income tax cash flows generated from a leveraged lease is revised. In 2007 the Corporation recorded a one-time non-cash after-tax charge to beginning retained earnings of $46 million to reflect changes in expected timing of the income tax cash flows...

  • Page 115
    ... were as follows: December 31 2008 2007 (in millions) Deferred tax assets: Allowance for loan losses ...Deferred loan origination fees and costs Other comprehensive income ...Employee benefits ...Foreign tax credit ...Tax interest ...Auction-rate securities ...Other temporary differences, net...

  • Page 116
    ... level of customer deposits in the Corporation's banking subsidiaries. The average required reserve balances were $292 million and $267 million for the years ended December 31, 2008 and 2007, respectively. Banking regulations limit the transfer of assets in the form of dividends, loans or advances...

  • Page 117
    ... increased Tier 1 and total capital ratios for Comerica Incorporated (Consolidated). For more information regarding the Capital Purchase Program, refer to Note 12 to the consolidated financial statements. The following is a summary of the capital position of the Corporation and Comerica Bank, its...

  • Page 118
    ... purposes is generally offset by changes in the value of rate sensitive assets or liabilities. Derivative Instruments The Corporation, as an end-user, employs a variety of financial instruments for risk management purposes. Activity related to these instruments is centered predominantly in...

  • Page 119
    ... with the existing and forecasted floating rate loans. Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in foreign currencies. The Corporation employs cash instruments, such as investment securities, as well as derivative instruments to...

  • Page 120
    .... The Corporation also may use various other types of financial instruments to mitigate interest rate and foreign currency risks associated with specific assets or liabilities. Such instruments include interest rate caps and floors, foreign exchange forward contracts, investment securities, foreign...

  • Page 121
    ...same counterparty. Fee income is earned from entering into various transactions, principally foreign exchange contracts, interest rate contracts, and energy derivative contracts at the request of customers. The Corporation mitigates market risk inherent in customer-initiated interest rate and energy...

  • Page 122
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries The following table presents the composition of derivative instruments held or issued in connection with customer-initiated and other activities. Notional/ Contract Amount Unrealized Unrealized Gains Losses (in ...

  • Page 123
    ... over-the-counter. Foreign exchange contracts expose the Corporation to both market risk and credit risk. The Corporation also uses foreign exchange rate swaps and cross-currency swaps for risk management purposes. Energy Derivative Contracts The Corporation offers energy derivative contracts...

  • Page 124
    ...expose the Corporation to both credit and market risk. Credit-Related Financial Instruments The Corporation issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. The Corporation's credit risk associated with these instruments is represented by...

  • Page 125
    ..., primarily as part of a syndicated lending arrangement, for a fee, guarantees a portion of the credit risk on an interest rate swap agreement between the lead bank in the syndicate and the customer. In the event of default by the customer, the Corporation would be required to pay the portion of the...

  • Page 126
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries underwriting, periodically reviewing and approving its credit exposures using Board committee approved credit policies and guidelines. December 31 2008 (dollar amounts in millions) Total watch list standby and ...

  • Page 127
    ...the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, loans held for investment and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting...

  • Page 128
    ... Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities primarily include mortgage-backed securities issued by government-sponsored entities. Securities classified as Level 3 represent securities...

  • Page 129
    ...risk management or customer-initiated activities are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Corporation measures fair value using internally developed models that use primarily market observable inputs, such as yield curves...

  • Page 130
    ... the purchase of non-rated municipal and corporate bonds. The increase in investment securities available-for-sale was primarily due to the Corporation's purchase of auction-rate securities. The decrease in derivative assets was impacted by fair value adjustments and settlements of warrants. Other...

  • Page 131
    ... Corporation's remaining ownership of Visa shares, discussed in ''Financial Guarantees'' above. Year Ended December 31, 2008 Investment Derivative Securities Assets Available-for-Sale (Warrants) (in millions) Recurring Level 3 Assets and Liabilities Trading Securities Other Liabilities Balance...

  • Page 132
    ... or the current market values of similar loans. Loans: Domestic business loans consist of commercial, real estate construction, commercial mortgage and equipment lease financing loans. The estimated fair value of the Corporation's variable rate domestic business loans is represented by the carrying...

  • Page 133
    ...of checking, savings and certain money market deposit accounts, is represented by the amounts payable on demand. The carrying amount of deposits in foreign offices approximates their estimated fair value, while the estimated fair value of term deposits is calculated by discounting the scheduled cash...

  • Page 134
    ...Trading securities ...Loans held-for-sale ...Total short-term investments ...Investment securities available-for-sale ...Total loans ...Less allowance for loan losses ...Net loans ...Customers' liability on acceptances outstanding ...Loan servicing rights ...Liabilities Demand deposits (noninterest...

  • Page 135
    ... in the section entitled ''Business Segments'' in the financial review. The Business Bank is primarily comprised of the following businesses: middle market, commercial real estate, national dealer services, international finance, global corporate, leasing, financial services, and technology and life...

  • Page 136
    ... of financial services provided to small business customers, this business segment offers a variety of consumer products, including deposit accounts, installment loans, credit cards, student loans, home equity lines of credit and residential mortgage loans. Wealth & Institutional Management offers...

  • Page 137
    ......Provision (benefit) for income taxes (FTE) . Income from discontinued operations, net of Net income (loss) ...Net credit-related charge-offs ...Selected average balances: Assets ...Loans ...Deposits ...Liabilities ...Attributed equity ...Statistical data: Return on average assets (1) ...Return on...

  • Page 138
    ... the Corporation's funding, liquidity and capital needs, performing interest sensitivity analysis and executing various strategies to manage the Corporation's exposure to liquidity, interest rate risk and foreign exchange risk. The Corporation's total revenues from customers and long-lived assets...

  • Page 139
    ... net charge ($56 million, after-tax) related to the repurchase of auction-rate securities from customers. Year Ended December 31, 2007 Finance & Other Other Texas Florida Markets International Businesses (dollar amounts in millions) Midwest Western Total Earnings summary: Net interest income...

  • Page 140
    ... ...Provision (benefit) for income taxes (FTE) ...Income from discontinued operations, net of tax ...Net income ...Net credit-related charge-offs Selected average balances: Assets ...Loans ...Deposits ...Liabilities ...Attributed equity ...Statistical data: Return on average assets (1) . Return on...

  • Page 141
    ... Statements BALANCE SHEETS - COMERICA INCORPORATED December 31 2008 2007 (in millions, except share data) ASSETS Cash and due from subsidiary bank ...Short-term investments with subsidiary bank Other short-term investments ...Investment in subsidiaries, principally banks Premises and equipment...

  • Page 142
    ... ...EXPENSES Interest on medium- and long-term debt Salaries and employee benefits ...Net occupancy expense ...Equipment expense ...Other noninterest expenses ... Total expenses ...Income before provision (benefit) for income taxes and equity in undistributed earnings of subsidiaries ...Provision...

  • Page 143
    ...income taxes ...Excess tax benefits from share-based compensation arrangements ...Other, net ...Net cash provided by operating activities ...INVESTING ACTIVITIES Net proceeds from private equity and venture capital investments ...Capital transactions with subsidiaries ...Net increase in fixed assets...

  • Page 144
    ...'' on the consolidated statements of income is a net loss on the sale of $12 million, which is reflected in the Corporation's Business Bank business segment and International geographic market segment. As part of the sale transaction, the Corporation transferred $24 million of loans and $18 million...

  • Page 145
    ... of Auction-Rate Securities On September 18, 2008, the Corporation announced an offer to repurchase, at par, auction-rate securities (ARS) held by certain retail and institutional clients that were purchased through Comerica Securities, a broker/ dealer subsidiary of Comerica Bank. ARS that...

  • Page 146
    ..., net of tax ...Net income ...Preferred stock dividends ...Net income applicable to common stock ...Basic earnings per common share: Income from continuing operations ...Net income ...Diluted earnings per common share: Income from continuing operations ...Net income ... $0.01 0.02 0.01 0.02...

  • Page 147
    ... FINANCIAL STATEMENTS Comerica Incorporated and Subsidiaries 2007 Fourth Third Second First Quarter Quarter Quarter Quarter (in millions, except per share data) Interest income ...Interest expense ...Net interest income ...Provision for loan losses ...Net securities gains ...Noninterest income...

  • Page 148
    ... consolidated financial statements, management develops and maintains effective internal controls, including those over financial reporting, as defined in the Securities and Exchange Act of 1934, as amended. The Corporation's internal control over financial reporting includes policies and procedures...

  • Page 149
    ... accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts...

  • Page 150
    ... of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform...

  • Page 151
    ...ASSETS Cash and due from banks ...Federal funds sold and securities purchased under agreements to resell ...Interest-bearing deposits with banks ...Other short-term investments ...Investment securities available-for-sale ...Commercial loans ...Real estate construction loans Commercial mortgage loans...

  • Page 152
    ... INCOME Service charges on deposit accounts . Fiduciary income ...Commercial lending fees ...Letter of credit fees ...Card fees ...Brokerage fees ...Foreign exchange income ...Bank-owned life insurance ...Net securities gains ...Net gain (loss) on sales of businesses Income from lawsuit settlement...

  • Page 153
    ... RATES (FULLY TAXABLE EQUIVALENT BASIS) Federal funds sold and securities purchased under agreements to resell Interest-bearing deposits with banks ...Other short-term investments ...Investment securities available-for-sale ...Commercial loans ...Real estate construction loans Commercial mortgage...

  • Page 154
    ... to the Senior Financial Officer Code of Ethics within four business days of such an event. Form 10-K A copy of Comerica's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission, will be provided without charge upon written...

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    Comerica Corporate Headquarters Comerica Bank Tower 1717 Main Street Dallas, Texas 75201 www.comerica.com