Comerica 2014 Annual Report Download - page 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-54
Nonperforming TDRs include TDRs on nonaccrual status and loans which have been renegotiated to less than the original
contractual rates (reduced-rate loans). All TDRs are considered impaired loans.
Loan Origination Fees and Costs
Substantially all loan origination fees and costs are deferred and amortized to net interest income of over the life of the
related loan or over the commitment period as a yield adjustment. Net deferred income on originated loans, including unearned
income and unamortized costs, fees, premiums and discounts, totaled $267 million and $287 million at December 31, 2014 and
2013, respectively.
Loan fees on unused commitments and net origination fees related to loans sold are recognized in noninterest income.
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 Corporation disaggregates the loan portfolio into segments for purposes of determining the allowance for credit
losses. These segments are based on the level at which the Corporation develops, documents and applies a systematic methodology
to determine the allowance for credit losses. The Corporation's portfolio segments are business loans and retail loans. Business
loans are defined as those belonging to the commercial, real estate construction, commercial mortgage, lease financing and
international loan portfolios. Retail loans consist of traditional residential mortgage, home equity and other consumer loans.
For further information on the Allowance for Credit Losses, refer to Note 4.
Allowance for Loan Losses
The allowance for loan losses represents management’s assessment of probable, estimable losses inherent in the
Corporation’s loan portfolio. The allowance for loan losses includes specific allowances, based on individual evaluations of certain
loans, and allowances for homogeneous pools of loans with similar risk characteristics.
The Corporation individually evaluates certain impaired loans on a quarterly basis and establishes specific allowances
for such loans, if required. A loan is considered impaired when it is probable that interest or principal payments will not be made
in accordance with the contractual terms of the loan agreement. Consistent with this definition, all loans for which the accrual of
interest has been discontinued (nonaccrual loans) are considered impaired. The Corporation individually evaluates nonaccrual
loans with book balances of $2 million or more and accruing loans whose terms have been modified in a TDR. The threshold for
individual evaluation is revised on an infrequent basis, generally when economic circumstances change significantly. Specific
allowances for impaired loans are estimated using one of several methods, including the estimated fair value of underlying collateral,
observable market value of similar debt or discounted expected future cash flows. Collateral values supporting individually
evaluated impaired loans are evaluated quarterly. Either appraisals are obtained or appraisal assumptions are updated at least
annually unless conditions dictate increased frequency. The Corporation may reduce the collateral value based upon the age of the
appraisal and adverse developments in market conditions.
Loans which do not meet the criteria to be evaluated individually are evaluated in homogeneous pools of loans with
similar risk characteristics. Business loans are assigned to pools based on the Corporation's internal risk rating system. Internal
risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by the
Corporation’s senior management, generally at least annually or more frequently upon the occurrence of a circumstance that affects
the credit risk of the loan. For business loans not individually evaluated, losses inherent to the pool are estimated by applying
standard reserve factors to outstanding principal balances. Standard reserve factors are based on estimated probabilities of default
for each internal risk rating, set to a default horizon based on an estimated loss emergence period, and loss given default. These
factors are evaluated quarterly and updated annually, unless economic conditions necessitate a change, giving consideration to
count-based borrower risk rating migration experience and trends, recent charge-off experience, current economic conditions and
trends, changes in collateral values of properties securing loans, and trends with respect to past due and nonaccrual amounts.
The allowance for business loans not individually evaluated 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 (i) risk factors that have not been fully addressed in internal risk ratings, (ii) imprecision in the risk rating system
resulting from inaccuracy in assigning and/or entering risk ratings in the loan accounting system, (iii) market conditions and (iv)
model imprecision. Risk factors that have not been fully addressed in internal risk ratings may include portfolios where recent
historical losses exceed expected losses or known recent events are expected to alter risk ratings once evidence is acquired, portfolios
where a certain level of concentration introduces added risk, or changes in the level and quality of experience held by lending
management. An additional allowance for risk rating errors is calculated based on the results of risk rating accuracy assessments
performed on samples of business loans conducted by the Corporation's asset quality review function, a function independent of