Comerica 2012 Annual Report Download - page 80

F-46
on the results of this review and in light of the current rate environment, the Corporation updated its assumptions, discount factors
and control premiums. The updated assumptions included maintaining the low Federal funds target rate through the end of 2014.
For the years after 2014, the Corporation developed rate assumptions based on the expectation of modest increases in the Federal
Funds target rate, eventually reaching a normal interest rate environment. Increases to the fair value of the reporting units were
in part a result of the improvement in the stock price of the Corporation as well as the stock prices of the guideline companies
used in the market approach. The first step of the interim goodwill impairment test performed in the first quarter 2012 indicated
that the estimated fair values of each of the reporting units substantially exceeded their carrying values, including goodwill. The
results of the goodwill impairment test for each reporting unit were subjected to stress testing as appropriate.
The annual test of goodwill impairment was performed as of the beginning of the third quarter 2012. The Corporation's
assumptions included maintaining the low Federal funds target rate through the end of 2014 with modest increases thereafter until
eventually reaching a normal interest rate environment. In September 2012, the Federal Reserve updated their expectation for the
Federal Funds target rate to remain at currently low levels through mid-2015. This announcement by the Federal Reserve did not
significantly impact the results of the annual goodwill impairment test. Increases to the estimated fair value of the Retail Bank
were in part a result of lower imputed cost of equity capital, due particularly to improvements to the level of non-diversified risk,
and continued improvement in the stock price of the Corporation as well as the stock prices of the guideline companies used in
the market approach. At the conclusion of the first step of the annual goodwill impairment tests performed in the third quarter
2012, the estimated fair values of all reporting units substantially exceeded their carrying amounts, including goodwill. The results
of the annual test of the goodwill impairment test for each reporting unit were subjected to stress testing as appropriate.
Economic conditions impact the assumptions related to interest and growth rates, loss rates and imputed cost of equity
capital. The fair value estimates for each reporting unit incorporated current economic and market conditions, including the recent
Federal Reserve announcements and the impact of legislative and regulatory changes, to the extent known and as described above.
However, further weakening in the economic environment, such as adverse changes in interest rates, a 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.
PENSION PLAN ACCOUNTING
The Corporation has defined benefit pension plans in effect for substantially all full-time employees hired before January
1, 2007. Benefits under the plans are based on years of service, age and compensation. Assumptions are made concerning future
events that will determine the amount and timing of required benefit payments, funding requirements and defined benefit pension
expense. The three major assumptions are the discount rate used in determining the current benefit obligation, the long-term rate
of return expected on plan assets and the rate of compensation increase. The assumed 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 detailed 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 invested in certain collective investment and mutual funds, common stocks, U.S. Treasury and
other U.S. government agency securities, and corporate and municipal bonds and notes. The rate of compensation increase is based
on reviewing recent annual pension-eligible compensation increases as well as the expectation of future increases. 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 assumptions used to calculate 2013 expense for the defined benefit pension plans were a discount rate of 4.20 percent,
a long-term rate of return on plan assets of 7.25 percent and a rate of compensation increase of 4.00 percent. Defined benefit
pension expense in 2013 is expected to be approximately $84 million, an increase of $9 million from the $75 million recorded in
2012, primarily driven by declines in the discount rate and the expected long-term rate of return on plan assets. The increase in
pension expense is expected to be partially offset by a $4 million decrease in postretirement benefit expense, resulting in a net
increase of $5 million in retirement-related benefits expense in 2013.
Changing the 2013 key actuarial assumptions discussed above by 25 basis points would have the following impact on
defined benefit pension expense in 2013:
25 Basis Point
(in millions) Increase Decrease
Key Actuarial Assumption:
Discount rate $(9.2) $ 9.2
Long-term rate of return (4.6) 4.6
Rate of compensation increase 3.1 (3.1)