Comerica 2015 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-57
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
the lending and credit groups responsible for assigning the initial internal risk rating at the time of approval. Qualitative adjustments
for market conditions are determined based on an established framework. The determination of the appropriate adjustment is based
on management's analysis of observable macroeconomic metrics, including consideration of regional metrics within the
Corporation's footprint, internal credit risk movement and a qualitative assessment of the lending environment, including
underwriting standards, current economic and political conditions, and other factors affecting credit quality. Management recognizes
the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending
upon the level of uncertainty that currently exists in one or more assumption.
In the second quarter 2014, the Corporation enhanced the approach used to determine the standard reserve factors used
in estimating the allowance for credit losses, which had the effect of capturing certain elements in the standard reserve component
that had formerly been included in the qualitative assessment. The impact of the change was largely neutral to the total allowance
for loan losses at June 30, 2014. However, because standard reserves are allocated to the segments at the loan level, while qualitative
reserves are allocated at the portfolio level, the impact of the methodology change on the allowance of each segment reflected the
characteristics of the individual loans within each segment's portfolio, causing segment reserves to increase or decrease accordingly.
In the first quarter 2013, the Corporation enhanced the approach utilized for determining standard reserve factors by
changing from a dollar-based migration method for developing probability of default statistics to a count-based method. Under
the dollar-based method, each dollar that moved to default received equal weight in the determination of standard reserve factors
for each internal risk rating. As a result, the movement of larger loans impacted standard reserve factors more than the movement
of smaller loans. By moving to a count-based approach, where each loan that moves to default receives equal weighting, unusually
large or small loans will not have a disproportionate influence on the standard reserve factors. The change resulted in a $40 million
increase to the allowance for loan losses at March 31, 2013.