EX-13 10 dex13.htm FINANCIAL REVIEW AND REPORTS Financial Review and Reports

Exhibit 13

FINANCIAL REVIEW AND REPORTS

Comerica Incorporated and Subsidiaries

 

Performance Graph

     12   

Financial Results and Key Corporate Initiatives

     14   

Overview

     15   

Strategic Lines of Business

     26   

Balance Sheet and Capital Funds Analysis

     31   

Risk Management

     38   

The Dodd-Frank Wall Street Reform and Consumer Protection Act

     60   

Critical Accounting Policies

     60   

Supplemental Financial Data

     69   

Forward-Looking Statements

     70   

Consolidated Financial Statements:

  

Consolidated Balance Sheets

     72   

Consolidated Statements of Income

     73   

Consolidated Statements of Changes in Shareholders’ Equity

     74   

Consolidated Statements of Cash Flows

     75   

Notes to Consolidated Financial Statements

     76   

Report of Management

     147   

Reports of Independent Registered Public Accounting Firm

     148   

Historical Review

     150   

 

11


PERFORMANCE GRAPH

LOGO

The performance shown on the graph is not necessarily indicative of future performance.

 

12


SELECTED FINANCIAL DATA

 

(dollar amounts in millions, except per share data)        
Years Ended December 31   2010            2009            2008            2007            2006         

EARNINGS SUMMARY

                   

Net interest income

  $         1,646        $         1,567        $         1,815        $         2,003        $         1,983     

Provision for loan losses

    480          1,082          686          212          37     

Noninterest income

    789          1,050          893          888          855     

Noninterest expenses

    1,640          1,650          1,751          1,691          1,674     

Provision (benefit) for income taxes

    55          (131       59          306          345     

Income from continuing operations

    260          16          212          682          782     

Net income

    277          17          213          686          893     

Preferred stock dividends

    123          134          17          -          -     

Net income (loss) attributable to common shares

    153          (118       192          680          886     

PER SHARE OF COMMON STOCK

                   

Diluted earnings per common share:

                   

Income (loss) from continuing operations

  $ 0.78        $ (0.80     $ 1.28        $ 4.40        $ 4.81     

Net income (loss)

    0.88          (0.79       1.28          4.43          5.49     

Cash dividends declared

    0.25          0.20          2.31          2.56          2.36     

Common shareholders’ equity

    32.82          32.27          33.38          34.12          32.70     

Market value

    42.24          29.57          19.85          43.53          58.68     

Average diluted shares (in millions)

    173          149          149          154          161     

YEAR-END BALANCES

                   

Total assets

  $ 53,667        $ 59,249        $ 67,548        $ 62,331        $ 58,001     

Total earning assets

    49,352          54,558          62,374          57,448          54,052     

Total loans

    40,236          42,161          50,505          50,743          47,431     

Total deposits

    40,471          39,665          41,955          44,278          44,927     

Total medium and long-term debt

    6,138          11,060          15,053          8,821          5,949     

Total common shareholders’ equity

    5,793          4,878          5,023          5,117          5,153     

Total shareholders’ equity

    5,793          7,029          7,152          5,117          5,153     

AVERAGE BALANCES

                   

Total assets

  $ 55,553        $ 62,809        $ 65,185        $ 58,574        $ 56,579     

Total earning assets

    51,004          58,162          60,422          54,688          52,291     

Total loans

    40,517          46,162          51,765          49,821          47,750     

Total deposits

    39,486          40,091          42,003          41,934          42,074     

Total medium and long-term debt

    8,684          13,334          12,457          8,197          5,407     

Total common shareholders’ equity

    5,625          4,959          5,166          5,070          5,176     

Total shareholders’ equity

    6,068          7,099          5,442          5,070          5,176     

CREDIT QUALITY

                   

Total allowance for credit losses

  $ 936        $ 1,022        $ 808        $ 578        $ 519     

Total nonperforming loans

    1,123          1,181          917          404          214     

Foreclosed property

    112          111          66          19          18     

Total nonperforming assets

    1,235          1,292          983          423          232     

Net credit-related charge-offs

    564          869          472          153          72     

Net credit-related charge-offs as a percentage of average total loans

    1.39        %        1.88        %        0.91        %        0.31        %        0.15        %   

Allowance for loan losses as a percentage of total period-end loans

    2.24          2.34          1.52          1.10          1.04     

Allowance for loan losses as a percentage of total nonperforming loans

    80          83          84          138          231     

RATIOS

                   

Net interest margin (fully taxable equivalent)

    3.24        %        2.72        %        3.02        %        3.66        %        3.79        %   

Return on average assets

    0.50          0.03          0.33          1.17          1.58     

Return on average common shareholders’ equity

    2.74          (2.37       3.79          13.52          17.24     

Dividend payout ratio

    28.41          n/m          179.07          57.79          42.99     

Average common shareholders’ equity as a percentage of average assets

    10.13          7.90          7.93          8.66          9.15     

Tier 1 common capital as a percentage of risk-weighted assets (a)

    10.13          8.18          7.08          6.85          7.54     

Tier 1 capital as a percentage of risk-weighted assets

    10.13          12.46          10.66          7.51          8.03     

Tangible common equity as a percentage of tangible assets (a)

    10.54                7.99                7.21                7.97                8.62           

(a) See Supplemental Financial Data section for reconcilements of non-GAAP financial measures.

n/m - not meaningful.

 

13


2010 FINANCIAL RESULTS AND KEY CORPORATE INITIATIVES

FINANCIAL RESULTS

 

Net income was $277 million for 2010, compared to $17 million for 2009. Net income attributable to common shares was $153 million for 2010, compared to a net loss attributable to common shares of $118 million for 2009. Included in the net income (loss) attributable to common shares were preferred dividends of $123 million and $134 million in 2010 and 2009, respectively. Net income per diluted common share was $0.88 for 2010, compared to a net loss per diluted common share of $0.79 for 2009. The most significant items contributing to the increase in net income are described below.

 

The provision for loan losses decreased $602 million in 2010, compared to 2009, resulting from significant improvements in credit quality. Improvements in credit quality included a decline of $2.2 billion in the Corporation’s internal watch list loans from December 31, 2009 to December 31, 2010, compared to an increase of $2.0 billion in the prior year. Additional indicators of improved credit quality included a decrease of $369 million in the inflow to nonaccrual loans (based on an analysis of nonaccrual loans with book balances greater than $2 million), a decrease in net credit-related charge-offs of $305 million and a decrease of $39 million in loans past due 90 days or more and still accruing in 2010, compared to 2009.

 

Average loans in 2010 were $40.5 billion, a decrease of $5.6 billion from 2009, reflecting subdued loan demand from customers in a modestly recovering economic environment as well as expected runoff in the Commercial Real Estate business line.

 

Average core deposits increased $3.4 billion, or 10 percent, in 2010, compared to 2009. The increase in average core deposits reflected increases in average money market and NOW deposits of $3.4 billion, or 26 percent, and noninterest–bearing deposits of $2.2 billion, or 17 percent, in 2010, partially offset by a decrease in customer certificates of deposit of $2.3 billion. Core deposits exclude other time deposits and foreign office time deposits.

 

Net interest income increased $79 million to $1.6 billion in 2010, compared to 2009. The net interest margin increased 52 basis points to 3.24 percent, primarily due to changes in the funding mix, including a continued shift in funding sources toward lower-cost funds, and improved loan spreads.

 

Noninterest income decreased $261 million compared to 2009. Excluding net securities gains, noninterest income decreased $21 million, or three percent, compared to 2009. Increases of $16 million in commercial lending fees, $7 million in card fees and $7 million in letter of credit fees were partially offset by decreases of $20 million in service charges on deposit accounts and $7 million in fiduciary income. 2009 included net securities gains of $243 million, $15 million in gains related to the repurchase of debt and $8 million in net gains on the termination of leveraged leases.

 

Noninterest expenses decreased $10 million, or one percent, compared to 2009, primarily due to decreases of $28 million in Federal Deposit Insurance Corporation (FDIC) insurance expense, $27 million in defined benefit pension expense and $19 million in other real estate expense, partially offset by an increase of $53 million in salaries expense. The increase in salaries expense was largely driven by an increase in incentive compensation, reflecting improved overall performance and 2010 peer rankings.

 

The Corporation fully redeemed $2.25 billion of Fixed Rate Cumulative Perpetual Preferred Stock (preferred stock) issued in connection with the U.S. Department of Treasury (U.S. Treasury) Capital Purchase Program (the Capital Purchase Program). The redemption was funded by the net proceeds from an $880 million common stock offering completed in the first quarter 2010 and from excess liquidity at the parent company. The redemption resulted in a one-time redemption charge of $94 million in 2010, reflecting the accelerated accretion of the remaining discount, which reduced diluted earnings per common share by $0.54 in 2010. The total impact of the preferred stock, including the redemption charge, cash dividends of $24 million and non-cash discount accretion of $5 million, was a reduction to 2010 diluted earnings per common share of $0.71.

KEY CORPORATE INITIATIVES

 

Completed an $880 million common stock offering and fully redeemed $2.25 billion of preferred stock issued to the U.S. Treasury in the first quarter 2010.

 

14


 

Doubled the quarterly dividend to 10 cents per share in the fourth quarter following the overall positive financial performance trends of the Corporation and a modest improvement in the economy. In addition, the Corporation’s Board of Directors authorized the repurchase of up to 12.6 million shares of common stock in the open market and also authorized the purchase of outstanding warrants to purchase up to 11.5 million shares of the Corporation’s common stock.

 

Redeemed $515 million of 6.576% subordinated notes due 2037 at par in the fourth quarter 2010. The notes related to $500 million of trust preferred securities issued by an unconsolidated subsidiary, which were concurrently redeemed. The Corporation additionally early redeemed $2 billion of Federal Home Loan Bank (FHLB) advances without penalty in 2010.

 

Continued to aggressively focus resources on managing credit quality in 2010, particularly in the Commercial Real Estate business line. Within the Commercial Real Estate business line, year-end 2010 residential real estate development exposure was reduced by $507 million, or 48 percent, compared to year-end 2009, and by $1.4 billion, or 71 percent, compared to year-end 2008.

 

Maintained strong capital ratios, while eliminating all preferred stock and trust preferred securities from Tier 1 and total capital. Tier 1 common capital was 10.13 percent at December 31, 2010, up from 8.18 percent at December 31, 2009.

 

Increased loan and deposit spreads as a result of a strategic initiative which commenced in mid-2008 to better align risk with appropriate returns in changing market conditions.

 

On January 18, 2011, announced a definitive agreement to acquire Sterling Bancshares, Inc. (Sterling) under which the Corporation will acquire all of the outstanding shares of Sterling common stock in a stock-for-stock transaction. Under the terms of the agreement, each outstanding share of Sterling common stock will be exchanged for 0.2365 shares of the Corporation’s common stock upon closing. The transaction is expected to be completed by mid-year 2011 and is subject to customary closing conditions, including approval by Sterling shareholders and regulatory approvals. Sterling is a Houston-based bank holding company with total assets of $5.2 billion at December 31, 2010, which operates banking centers in Houston, San Antonio, Fort Worth and Dallas, Texas.

OVERVIEW

Comerica Incorporated (the Corporation) is a financial holding company headquartered in Dallas, Texas. The Corporation’s major business segments are the Business Bank, the Retail Bank and Wealth & Institutional Management. The core businesses are tailored to each of the Corporation’s four primary geographic markets: Midwest, Western, Texas and Florida.

The accounting and reporting policies of the Corporation and its subsidiaries conform to U.S. generally accepted accounting principles (GAAP). The Corporation’s consolidated financial statements are prepared based on the application of accounting policies, the most significant of which are described in Note 1 to the consolidated financial statements. The most critical of these significant accounting policies are discussed in the “Critical Accounting Policies” section of this financial 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 principally derived from the difference between interest earned on loans and investment securities and interest paid on deposits and other funding sources. The Corporation also provides other products and services that meet the financial needs of customers and which generate noninterest income, the Corporation’s secondary source of revenue. Growth in loans, deposits and noninterest income is affected by many factors, including economic conditions in the markets the Corporation serves, the financial requirements and economic health of customers, and successfully adding new customers and/or increasing the number of products used by current customers. Success in providing products and services depends on the financial needs of customers and the types of products desired.

 

15


For full-year 2011, management expects the following, compared to full-year 2010, based on a continuation of modest growth in the economy. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

 

   

A low single-digit decrease in average loans. Excluding the Commercial Real Estate business line, a low single-digit increase in average loans.

   

Average earning assets of approximately $48 billion, reflecting lower excess liquidity in addition to a decrease in average loans.

   

An average net interest margin similar to full-year 2010, based on no increase in the Federal Funds rate.

   

Net credit-related charge-offs between $350 million and $400 million. The provision for credit losses is expected to be between $150 million and $200 million.

   

A low single-digit decline in noninterest income, primarily due to the impact of regulatory changes.

   

A low single-digit increase in noninterest expenses, primarily due to an increase in employee benefits expense.

   

Income tax expense to approximate 36 percent of income before income taxes less approximately $60 million of permanent differences related to low-income housing and bank-owned life insurance.

   

Commence a share repurchase program that, combined with dividend payments, results in a payout of less than 50 percent of earnings.

 

16


ANALYSIS OF NET INTEREST INCOME-Fully Taxable Equivalent (FTE)

 

(dollar amounts in millions)

 

Years Ended December 31

  2010                          2009                          2008                       
     Average
Balance
    Interest     Average
Rate
           Average
Balance
    Interest     Average
Rate
           Average
Balance
    Interest     Average
Rate
        

Commercial loans

  $       21,090      $ 820        3.89        %      $ 24,534      $ 890        3.63        %      $ 28,870      $ 1,468        5.08        %   

Real estate construction loans

    2,839        90        3.17          4,140        121        2.92          4,715        231        4.89     

Commercial mortgage loans

    10,244        421        4.10          10,415        437        4.20          10,411        580        5.57     

Residential mortgage loans

    1,607        85        5.30          1,756        97        5.53          1,886        112        5.94     

Consumer loans

    2,429        86        3.54          2,553        94        3.68          2,559        130        5.08     

Lease financing (a)

    1,086        42        3.88          1,231        40        3.25          1,356        8        0.59     

International loans

    1,222        48        3.94          1,533        58        3.79          1,968        101        5.13     

Business loan swap income (b)

    -        28        -                -        34        -                -        24        -           

Total loans (c)

    40,517        1,620        4.00          46,162        1,771        3.84          51,765        2,654        5.13     

Auction-rate securities available-for-sale

    745        8        1.01          1,010        15        1.47          193        6        2.95     
Other investment securities available-for-sale     6,419        220        3.51                8,378        318        3.88                7,908        384        4.88           

Total investment securities available-for-sale (d)

    7,164        228        3.24          9,388        333        3.61          8,101        390        4.83     

Federal funds sold and securities purchased under agreements to resell

    6        -        0.36          18        -        0.32          93        2        2.08     

Interest-bearing deposits with
banks (e)

    3,191        8        0.25          2,440        6        0.25          219        1        0.61     

Other short-term investments

    126        2        1.58                154        3        1.74                244        10        3.98           

Total earning assets

    51,004        1,858        3.65          58,162        2,113        3.64          60,422        3,057        5.06     

Cash and due from banks

    825              883              1,185         

Allowance for loan losses

    (1,019           (947           (691      

Accrued income and other assets

    4,743              4,711              4,269         
                                         

Total assets

  $   55,553            $ 62,809            $ 65,185         
                                         

Money market and NOW deposits

  $   16,355        51        0.31        $ 12,965        63        0.49        $ 14,245        207        1.45     

Savings deposits

    1,394        1        0.08          1,339        2        0.11          1,344        6        0.45     

Customer certificates of deposit

    5,875        53        0.90                8,131        183        2.26                8,150        263        3.23           

Total interest-bearing core deposits

    23,624        105        0.44          22,435        248        1.11          23,739        476        2.01     

Other time deposits (f)

    306        9        3.04          4,103        121        2.96          6,715        232        3.45     

Foreign office time deposits (g)

    462        1        0.31                653        2        0.29                926        26        2.77           

Total interest-bearing deposits

    24,392        115        0.47          27,191        371        1.37          31,380        734        2.34     

Short-term borrowings

    216        1        0.25          1,000        2        0.24          3,763        87        2.30     

Medium- and long-term debt (f)

    8,684        91        1.05                13,334        165        1.23                12,457        415        3.33           

Total interest-bearing sources

    33,292        207        0.62          41,525        538        1.29          47,600        1,236        2.59     

Noninterest-bearing deposits

    15,094              12,900              10,623         

Accrued expenses and other liabilities

    1,099              1,285              1,520         

Total shareholders’ equity

    6,068              7,099              5,442         
                                         

Total liabilities and shareholders’ equity

  $   55,553            $ 62,809            $ 65,185         
                                         

Net interest income/rate spread (FTE)

    $ 1,651        3.03          $ 1,575        2.35          $ 1,821        2.47     
                                         

FTE adjustment (h)

    $ 5            $ 8            $ 6       
                                         

Impact of net noninterest-bearing sources of funds

                    0.21                                0.37                                0.55           

Net interest margin (as a percentage of average earning assets (FTE) (a) (e)

                    3.24        %                        2.72        %                        3.02        %   
(a)

2008 net interest income declined $38 million and the net interest margin declined six basis points due to tax-related non-cash lease income charges.

(b)

The gain or loss attributable to the effective portion of cash flow hedges of loans is shown in “Business loan swap income”.

(c)

Nonaccrual loans are included in average balances reported and are included in the calculation of average rates.

(d)

Average rate based on average historical cost.

(e)

Excess liquidity, represented by average balances deposited with the Federal Reserve Bank, reduced the net interest margin by 20 basis points, 11 basis points and one basis point in 2010, 2009 and 2008, respectively. Excluding excess liquidity, the net interest margin would have been 3.44% in 2010, 2.83% in 2009 and 3.03% in 2008. See Supplemental Financial Data section for reconcilements of non-GAAP financial measures.

(f)

Other time deposits and medium- and long-term debt average balances have been adjusted to reflect the gain or loss attributable to the risk hedged by risk management swaps that qualify as fair value hedges. The gain or loss attributable to the effective portion of fair value hedges of other time deposits and medium- and long-term debt, which totaled a net gain of $77 million, $61 million and $43 million in 2010, 2009 and 2008, respectively, is included in the related interest expense line item.

(g)

Includes substantially all deposits by foreign domiciled depositors; deposits are primarily in excess of $100,000.

(h)

The FTE adjustment is computed using a federal income tax rate of 35%.

 

17


RATE-VOLUME ANALYSIS

Fully Taxable Equivalent (FTE)

(in millions)

 

     

2010 / 2009

   

2009 / 2008

 
     

Increase
(Decrease)
Due to Rate

   

Increase
(Decrease)
Due to Volume (a)

   

Net
Increase
(Decrease)

   

Increase
(Decrease)
Due to Rate

   

Increase
(Decrease)
Due to Volume (a)

   

Net
Increase
(Decrease)

 

Interest income (FTE):

            

Loans:

            

Commercial loans

   $ 63      $ (133   $ (70   $ (421   $ (157   $ (578

Real estate construction loans

     10        (41     (31     (93     (17     (110

Commercial mortgage loans

     (9     (7     (16     (143     -        (143

Residential mortgage loans

     (4     (8     (12     (8     (7     (15

Consumer loans

     (3     (5     (8     (36     -        (36

Lease financing

     8        (6     2        36        (4     32   

International loans

     2        (12     (10     (26     (17     (43

Business loan swap income

     (6     -        (6     10        -        10   

Total loans

     61        (212     (151     (681     (202     (883

Auction-rate securities available-for-sale

     (5     (2     (7     (3     12        9   

Other investment securities available-for-sale

     (30     (68     (98     (84     18        (66

Total investment securities available-for-sale

     (35     (70     (105     (87     30        (57

Federal funds sold and securities purchased under agreements to resell

     -        -        -        (2     -        (2

Interest-bearing deposits with banks

     -        2        2        (1     6        5   

Other short-term investments

     -        (1     (1     (2     (5     (7

Total interest income (FTE)

     26        (281     (255     (773     (171     (944

Interest expense:

            

Interest-bearing deposits:

            

Money market and NOW accounts

     (22     10        (12     (138     (6     (144

Savings deposits

     (1     -        (1     (4     -        (4

Customer certificates of deposit

     (110     (20     (130     (79     (1     (80

Other time deposits

     3        (115     (112     (34     (77     (111

Foreign office time deposits

     -        (1     (1     (23     (1     (24

Total interest-bearing deposits

     (130     (126     (256     (278     (85     (363

Short-term borrowings

     -        (1     (1     (78     (7     (85

Medium- and long-term debt

     (24     (50     (74     (262     12        (250

Total interest expense

     (154     (177     (331     (618     (80     (698

Net interest income (FTE)

   $ 180      $ (104   $ 76      $ (155   $ (91   $ (246
(a)

Rate/volume variances are allocated to variances due to volume.

NET INTEREST INCOME

Net interest income is the difference between interest and yield-related fees earned on assets and interest paid on liabilities. Adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis. Gains and losses related to the effective portion of risk management interest rate swaps that qualify as hedges are included with the interest income or expense of the hedged item when classified in net interest income. Net interest income on a fully taxable equivalent (FTE) basis comprised 68 percent of total revenues in 2010, compared to 60 percent in 2009 and 67 percent in 2008. The “Analysis of Net Interest Income-Fully Taxable Equivalent” table of this financial review provides an analysis of net interest income for the years ended December 31, 2010, 2009 and 2008. The rate-volume analysis in the table above details the components of the change in net interest income on a FTE basis for 2010 compared to 2009 and 2009 compared to 2008.

 

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Net interest income was $1.6 billion in 2010, an increase of $79 million, or five percent, compared to 2009. The increase in net interest income in 2010 resulted primarily from changes in the funding mix, including a continued shift in funding sources toward lower-cost funds, and improved loan spreads. On a FTE basis, net interest income was $1.7 billion in 2010, an increase of $76 million, or five percent, from 2009. Average earning assets decreased $7.2 billion, or 12 percent, to $51.0 billion in 2010, compared to $58.2 billion in 2009, primarily due to a $5.6 billion, or 12 percent, decrease in average loans, to $40.5 billion, and a $2.2 billion decrease in investment securities available-for-sale, partially offset by an increase of $751 million in average interest-bearing deposits with banks. The net interest margin (FTE) increased 52 basis points to 3.24 percent in 2010, from 2.72 percent in 2009, resulting primarily from the reasons cited for the increase in net interest income discussed above. The net interest margin was reduced by approximately 20 basis points and 11 basis points in 2010 and 2009, respectively, from excess liquidity. Excess liquidity was represented by $3.1 billion and $2.4 billion of average balances deposited with the Federal Reserve Bank (FRB) in 2010 and 2009, respectively, included in “interest-bearing deposits with banks” on the consolidated balance sheets.

The Corporation implements various asset and liability management strategies to manage net interest income exposure to interest rate risk. Refer to the “Interest Rate Risk” section of this financial review for additional information regarding the Corporation’s asset and liability management policies.

In 2009, net interest income was $1.6 billion, a decrease of $248 million, or 14 percent, from 2008. The decrease in net interest income in 2009 was primarily due to loan rates declining faster than deposit rates with late 2008 rate reductions, partially offset by increased loan spreads. On a FTE basis, net interest income was $1.6 billion in 2009, a decrease of $246 million, or 13 percent, from 2008. Average earning assets decreased $2.2 billion, or four percent, to $58.2 billion in 2009, compared to 2008, primarily as a result of a $5.6 billion decrease in average loans, partially offset by increases of $2.2 billion in average interest-bearing deposits with banks and $1.3 billion in average investment securities available-for-sale. The net interest margin (FTE) decreased to 2.72 percent in 2009, from 3.02 percent in 2008, resulting primarily from the reasons cited for the decline in net interest income discussed above, as well as excess liquidity and the reduced contribution of noninterest-bearing funds in a significantly lower rate environment. The net interest margin was reduced by 11 basis points in 2009 from excess liquidity, represented by $2.4 billion of average balances deposited with the FRB.

Management expects an average net interest margin similar to full-year 2010 based on no increase in the Federal Funds rate. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

PROVISION FOR CREDIT LOSSES

The provision for credit losses includes both the provision for loan losses and the provision for credit losses on lending-related commitments. The provision for loan losses reflects management’s evaluation of the adequacy of the allowance for loan losses. The provision for credit losses on lending-related commitments, a component of “noninterest expenses” on the consolidated statements of income, reflects management’s assessment of the adequacy of the allowance for credit losses on lending-related commitments. The Corporation performs a detailed credit quality review quarterly to determine the adequacy of the allowance for loan losses and the allowance for credit losses on lending-related commitments and records provisions for each based on the results. For a further discussion of both allowances, refer to the “Credit Risk” and the “Critical Accounting Policies” sections of this financial review.

The provision for loan losses was $480 million in 2010, compared to $1.1 billion in 2009 and $686 million in 2008. The $602 million decrease in the provision for loan losses in 2010, compared to 2009, resulted primarily from significant, broad-based improvements in credit quality. Improvements in credit quality included a decline of $2.2 billion in the Corporation’s internal watch list loans from year-end 2009 to year-end 2010, compared to an increase of $2.0 billion in the same period in 2009. Additional indicators of improved credit quality included a decrease of $369 million in the inflow to nonaccrual loans (based on an analysis of nonaccrual loans with book balances greater than $2 million), a decline in net credit-related charge-offs of $305 million, and

 

19


a decrease of $39 million in loans past 90 days or more and still accruing in 2010, compared to 2009. The increase in the provision for loan losses in 2009, when compared to 2008, was primarily the result of credit challenges in the Middle Market, Commercial Real Estate (primarily residential real estate development), Global Corporate Banking, Leasing and Private Banking loan portfolios.

The national economy was recovering moderately from the middle of 2009 until the middle of the second quarter 2010, when the pace of economic growth slowed in reaction to the European sovereign debt crisis, the temporary interruption of various government support programs and the oil spill in the Gulf of Mexico. Economic growth rebounded in the third quarter and was evidenced by a private-sector led recovery. Real gross domestic product growth was just under three percent from December 31, 2009 to December 31, 2010. Texas continued to outperform the national economy in 2010, with notable strength in manufacturing and energy exploration. Reflecting the broadening recovery in Texas, nonfarm payrolls increased at an approximate two percent annual rate in 2010, compared to slightly below one percent increase nationally. The average Texas Economic Activity Index for the first ten months of 2010 was 91 percent. The Texas Economic Activity Index equally weights nine seasonally-adjusted coincident indicators of real state economic activity. The indicators reflect activity in the energy, manufacturing, travel, and trade sectors, as well as job growth and consumer outlays. The Michigan economy showed signs of recovery with strength in manufacturing, but continued to lag behind the national recovery. The average Michigan Economic Activity Index for the first eleven months of 2010 increased 15 percent from the average for full-year 2009. The Michigan Economic Activity Index represents nine different measures of economic activity compiled by the Corporation. The California economy also appears to be lagging the national recovery. Payrolls through December were rising at a rate of less than one percent, which was slower than the national average. California’s housing sector appears to be improving as prices are now more aligned to income and the inventory of unsold homes has declined. The average California Economic Activity Index compiled by the Corporation for the first eleven months of 2010 increased four percent from the average for full-year 2009. The California Economic Activity Index equally weights nine, seasonally-adjusted, coincident measures of economic activity. Forward-looking indicators suggest that economic conditions in the Corporation’s primary geographic markets are likely to continue to strengthen gradually against a background of moderate national and global expansions.

Net loan charge-offs in 2010 decreased $304 million to $564 million, or 1.39 percent of average total loans, compared to $868 million, or 1.88 percent, in 2009 and $471 million, or 0.91 percent, in 2008. The $304 million decrease in net loan charge-offs in 2010, compared to 2009, consisted primarily of decreases in net loan charge-offs in the Commercial Real Estate ($114 million), Global Corporate Banking ($61 million), Middle Market ($60 million), and Specialty Business ($57 million) business lines, partially offset by an increase in net loan charge-offs in the Private Banking business line ($15 million). The Specialty Businesses business line includes Energy Lending, Leasing, Technology and Life Sciences, Mortgage Banker Finance, Entertainment Lending and the Financial Services Division. The $114 million decrease in net loan charge-offs in the Commercial Real Estate business line reflected decreases in all markets, with the exception of Texas. In the Texas market, Commercial Real Estate business line net loan charge-offs increased $17 million, primarily due to charge-offs in residential land development and multi-use projects in the residential construction loan portfolio. By geographic market, the decrease in net loan charge-offs in 2010, compared to 2009, consisted primarily of decreases in the Midwest ($134 million) and Western ($115 million) markets.

The provision for credit losses on lending-related commitments was a negative provision of $2 million in 2010, compared to provisions of less than $0.5 million in 2009 and $18 million in 2008. The $2 million reduction in the provision for credit losses on lending-related commitments in 2010, compared to 2009, resulted primarily from improved credit quality in unfunded commitments in the Midwest and Western markets and a decrease in specific reserves for letters of credit.

An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is provided in the “Analysis of the Allowance for Loan Losses” table in the “Credit Risk” section of this financial review. An analysis of the changes in the allowance for credit losses on lending-related commitments is also provided in the “Credit Risk” section of this financial review.

 

20


Management expects net credit-related charge-offs between $350 million and $400 million for full-year 2011. The provision for credit losses is expected to be between $150 million and $200 million. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

NONINTEREST INCOME

 

(in millions)                     
Years Ended December 31    2010      2009      2008  

Service charges on deposit accounts

   $         208       $         228       $         229   

Fiduciary income

     154         161         199   

Commercial lending fees

     95         79         69   

Letter of credit fees

     76         69         69   

Card fees

     58         51         58   

Foreign exchange income

     39         41         40   

Bank-owned life insurance

     40         35         38   

Brokerage fees

     25         31         42   

Net securities gains

     3         243         67   

Other noninterest income

     91         112         82   

Total noninterest income

   $ 789       $ 1,050       $ 893   

Noninterest income decreased $261 million to $789 million in 2010, compared to $1.1 billion in 2009, and increased $157 million, or 18 percent, in 2009, compared to $893 million in 2008. Excluding net securities gains, noninterest income decreased three percent in 2010, compared to 2009, and two percent in 2009, compared to 2008. An analysis of significant year over year changes by individual line item follows.

Service charges on deposit accounts decreased $20 million, or nine percent, to $208 million in 2010, compared to $228 million in 2009, and decreased $1 million, or less than one percent, in 2009. The decrease in 2010 was due to lower commercial service charges and reduced fees from retail overdrafts and non-sufficient funds in part due to the impact of Regulation E.

Fiduciary income decreased $7 million, or four percent, to $154 million in 2010, compared to $161 million in 2009, and decreased $38 million, or 19 percent, in 2009. Personal and institutional trust fees are the two major components of fiduciary income. These fees are based on services provided and assets managed. Fluctuations in the market values of the underlying assets managed, which include both equity and fixed income securities, impact fiduciary income. The decrease in 2010 was primarily due to the sale of the Corporation’s proprietary defined contribution plan recordkeeping business in the second quarter 2009. The decrease in 2009, compared to 2008, was primarily due to lower personal trust fees related to market value decline in late 2008 and the sale of the defined contribution plan recordkeeping business.

Commercial lending fees increased $16 million, or 21 percent, to $95 million in 2010, compared to $79 million in 2009, and increased $10 million, or 14 percent, in 2009. The majority of the increase in 2010 resulted from improved pricing on unused commercial loan commitments as well as lower usage levels in 2010. The majority of the increase in 2009 resulted from increased risk-adjusted pricing on unused commercial loan commitments.

Letter of credit fees increased $7 million, or 10 percent, to $76 million in 2010, compared to $69 million in both 2009 and 2008. The increase in 2010 was primarily due to improved pricing on standby letters of credit and new business.

Card fees, which consist primarily of interchange fees earned on debit and commercial cards, increased $7 million, or 15 percent, to $58 million in 2010, compared to $51 million in 2009, and decreased $7 million, or 13 percent, in 2009. Growth in 2010 resulted primarily from the modestly improving economic environment,

 

21


which allowed companies to return to less restrictive spending habits and led to higher levels of commercial card business activity and new customers. The decline in 2009 resulted primarily from lower levels of retail and commercial card business activity.

Bank-owned life insurance income increased $5 million, or 14 percent, to $40 million in 2010, compared to a decrease of $3 million, or eight percent, in 2009. The increase in 2010 resulted primarily from an increase in death benefits received. The decrease in 2009 resulted primarily from a decrease in death benefits received and reduced earnings on bank-owned life insurance policies.

Brokerage fees of $25 million decreased $6 million, or 22 percent, in 2010, compared to a decrease of $11 million, or 25 percent, in 2009. Brokerage fees include commissions from retail brokerage transactions and mutual fund sales and are subject to changes in the level of market activity. The decreases in 2010 and 2009 were primarily due to the impact of lower transaction and dollar volumes despite modest economic growth in 2010.

Net securities gains decreased $240 million, to $3 million in 2010, compared to an increase of $176 million, to $243 million in 2009. Net securities gains in 2010 primarily reflected net gains on sales and redemptions of auction-rate securities ($8 million), partially offset by a loss related to the derivative contract associated with the 2008 sale of the Corporation’s ownership of VISA shares ($5 million). In 2009, net securities gains primarily reflected gains on the sale of residential mortgage-backed securities ($225 million) and gains on the redemption of auction-rate securities ($14 million). Residential mortgage-backed government agency securities were sold in 2009 as market conditions were favorable and there was no longer a need to hold a large portfolio of fixed-rate securities to mitigate the impact of potential future rate declines on net interest income. 2008 included gains from the sales of the Corporation’s ownership of Visa ($48 million) and MasterCard shares ($14 million).

Other noninterest income decreased $21 million, or 19 percent, in 2010, compared to an increase of $30 million, or 37 percent, in 2009. The following table illustrates fluctuations in certain categories included in “other noninterest income” on the consolidated statements of income.

 

(in millions)                   
Years Ended December 31    2010     2009     2008  

Other noninterest income

      

Deferred compensation asset returns (a)

   $         5      $         10      $         (26

Net income (loss) from principal investing and warrants

     3        (6     (10

Risk management hedge gains (losses) from interest rate and foreign exchange contracts

     (2     (6     8   

Amortization of low income housing investments

     (51     (48     (46

Gain on repurchase of debt

     2        15        -   

Net gain on termination of leveraged leases

     -        8        -   

Net gain on sales of businesses

     -        5        -   

(a)    Compensation deferred by the Corporation’s officers is invested in stocks and bonds to reflect the investment selections of the officers. Income (loss) earned on these assets is reported in noninterest income and the offsetting increase (decrease) in the liability is reported in salaries expense.

         

Management expects a low single-digit decline in noninterest income for full-year 2011, compared to full-year 2010, primarily due to the impact of regulatory changes. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

 

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NONINTEREST EXPENSES

 

(in millions)                    
Years Ended December 31    2010     2009      2008  

Salaries

   $         740      $         687       $         781   

Employee benefits

     179        210         194   

Total salaries and employee benefits

     919        897         975   

Net occupancy expense

     162        162         156   

Equipment expense

     63        62         62   

Outside processing fee expense

     96        97         104   

Software expense

     89        84         76   

FDIC Insurance expense

     62        90         16   

Legal Fees

     35        37         29   

Advertising expense

     30        29         30   

Other real estate expense

     29        48         10   

Litigation and operational losses

     11        10         103   

Provision for credit losses on lending-related commitments

     (2     -         18   

Other noninterest expenses

     146        134         172   

Total noninterest expenses

   $ 1,640      $ 1,650       $ 1,751   

Noninterest expenses decreased $10 million, or one percent, to $1,640 million in 2010, compared to $1,650 million in 2009, and decreased $101 million, or six percent, in 2009, from $1,751 million in 2008. Excluding an $88 million net charge related to the repurchase of auction-rate securities from certain customers in 2008, noninterest expenses decreased $13 million, or one percent, in 2009, compared to 2008. An analysis of increases and decreases by individual line item is presented below.

Salaries expense increased $53 million, or eight percent, in 2010, compared to a decrease of $94 million, or 12 percent, in 2009. The increase in salaries expense in 2010 was primarily due to an increase in incentive compensation of $56 million, reflecting improved overall performance and 2010 peer rankings. The Corporation’s incentive programs are designed to reward performance and provide market competitive total compensation. Business unit incentives are tied to new business and business unit profitability, while executive incentives are tied to the Corporation’s overall performance and peer-based comparisons of results. During the time the Corporation was a participant in the Capital Purchase Program, adjustments were made to the incentive programs to comply with related restrictions. The decrease in salaries expense in 2009 was primarily due to decreases in business unit and executive incentives ($57 million), regular salaries ($39 million), share-based compensation ($19 million) and severance ($15 million), partially offset by an increase in deferred compensation plan costs ($36 million). The decrease in regular salaries in 2009 was primarily the result of a decrease in staff of approximately 850 full-time equivalent employees from year-end 2008 to year-end 2009.

Employee benefits expense decreased $31 million, or 15 percent, in 2010, compared to an increase of $16 million, or eight percent, in 2009. The decrease in 2010 resulted primarily from a decline in defined benefit pension expense largely driven by higher than expected net gains on plan assets in 2009. The increase in 2009 resulted primarily from an increase in defined benefit pension expense driven by a decrease in the discount rate. For a further discussion of defined benefit pension expense, refer to the “Critical Accounting Policies” section of this financial review and Note 18 to the consolidated financial statements.

Net occupancy and equipment expense increased $1 million, or less than one percent, to $225 million in 2010, compared to an increase of $6 million, or three percent, in 2009. Net occupancy and equipment expense increased $7 million in 2009 due to the addition of new banking centers.

 

23


Outside processing fee expense decreased $1 million, or one percent, to $96 million in 2010, from $97 million in 2009, compared to a decrease of $7 million, or seven percent, in 2009. The decrease in 2009 was largely due to lower volumes in activity-based processing charges resulting from the 2009 sale of the Corporation’s proprietary defined contribution plan recordkeeping business.

Software expense increased $5 million, or seven percent, in 2010, compared to an increase of $8 million, or 10 percent, in 2009. The increase in 2010 was primarily due to software upgrades in the banking centers and throughout the Corporation. The increase in 2009 was mostly due to a full year of amortization expense for investments in technology made throughout 2008.

FDIC insurance expense decreased $28 million to $62 million in 2010, compared to an increase of $74 million in 2009. The decrease in 2010 was primarily due to the 2009 industry-wide special assessment charge of $29 million. In addition to the industry-wide special assessment charge, 2009 results reflected an increase in base assessment rates.

Legal fees decreased $2 million to $35 million in 2010, from $37 million in 2009, and increased $8 million in 2009. The increase in 2009 was primarily due to increased loan workout and collection expenses, partially offset by lower other litigation expenses.

Advertising expense increased $1 million, or five percent to $30 million in 2010, from $29 million in 2009, and decreased one million in 2009.

Other real estate expenses decreased $19 million to $29 million in 2010, from $48 million in 2009, and increased $38 million in 2009. Other real estate expenses reflects write-downs, net gains (losses) on sales and carrying costs related primarily to foreclosed property. The decrease in 2010 was primarily due to a decrease in write-downs on foreclosed property and net gains on foreclosed property sold. The increase in 2009 was primarily due to write-downs on foreclosed property of $34 million in 2009 reflecting declines in property values. For additional information regarding foreclosed property, refer to “Nonperforming Assets” in the “Credit Risk” section of this financial review.

Litigation and operational losses increased $1 million to $11 million in 2010, from $10 million in 2009, and decreased $93 million in 2009. Litigation and operational losses include traditionally defined operating losses, such as fraud and processing losses, as well as uninsured losses and litigation losses. These expenses are subject to fluctuation due to timing of authorized and actual litigation settlements, as well as insurance settlements. Litigation and operational losses in 2008 included a net charge of $88 million related to the repurchase of auction-rate securities from certain customers. For additional information on the repurchase of auction-rate securities, refer to “Investment Securities Available-for-Sale” in the “Balance Sheet and Capital Funds Analysis” section and “Critical Accounting Policies” section of this financial review and Note 4 to the consolidated financial statements.

Other noninterest expenses increased $12 million, or eight percent, in 2010, and decreased $38 million, or 21 percent, in 2009. The increase in 2010 was primarily due to a $5 million loss on the redemption of trust preferred securities and smaller increases in several other expense categories. The decrease in 2009 was due in part to decreases of $11 million, or 40 percent, in travel and entertainment expenses, and $9 million in customer services expenses.

Management expects a low single-digit increase in noninterest expenses for full-year 2011, compared to full-year 2010, primarily due to an increase in employee benefits expense. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

 

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INCOME TAXES AND TAX-RELATED ITEMS

The provision for income taxes was a provision of $55 million in 2010, compared to a benefit of $131 million in 2009 and a provision of $59 million in 2008. The increase in the provision for income taxes in 2010 was due primarily to an increase in income before income taxes. The income tax benefit in 2009 reflected the decrease in income before taxes compared to 2008, included a $24 million non-taxable gain on the termination of certain leveraged leases and a benefit of $14 million related to the settlement of certain tax matters due to the audit of years 2001-2004, the filing of certain amended state tax returns and a reduction of tax interest due to anticipated refunds due from the Internal Revenue Service (IRS).

Net deferred tax assets were $383 million at December 31, 2010, compared to $158 million at December 31, 2009, an increase of $225 million, primarily due to a reduction in deferred tax liabilities resulting from payments made to the IRS in 2010 for structured leasing transactions, an increase in unutilized tax credits and an increase in deferred tax assets resulting from adjustments to defined benefit and other postretirement plans recognized in other comprehensive income at December 31, 2010. Included in net deferred tax assets at December 31, 2010 were deferred tax assets of $708 million. Deferred tax assets were evaluated for realization and it was determined that no valuation allowance was needed. This conclusion is based on available evidence of loss carryback capacity, projected future reversals of existing taxable temporary differences and assumptions made regarding future events.

Management expects full-year 2011 income tax expense to approximate 36 percent of income before income taxes less approximately $60 million of permanent differences related to low-income housing and bank-owned life insurance. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX

Income from discontinued operations, net of tax, was $17 million in 2010, compared to $1 million in both 2009 and 2008. The $16 million increase in 2010, when compared to 2009, resulted from a $17 million after-tax gain in the first quarter 2010 from the cash settlement of a note receivable related to the 2006 sale of an investment advisory subsidiary. For further information on the cash settlement of the note and discontinued operations, refer to Note 25 to the consolidated financial statements.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends were $123 million in 2010, compared to $134 million and $17 million in 2009 and 2008, respectively.

In the fourth quarter 2008, the Corporation participated in the Capital Purchase Program and received proceeds of $2.25 billion from the U. S. Treasury. In return, the Corporation issued 2.25 million shares of preferred stock and granted a warrant to purchase 11.5 million shares of common stock to the U.S. Treasury. The preferred stock paid a cumulative dividend rate of five percent per annum on the liquidation preference of $1,000 per share.

The proceeds from the Capital Purchase Program were allocated between the preferred stock and the related warrant based on relative fair value, which resulted in an original discount to the preferred stock of $124 million, which was accreted on a level yield basis and recognized as additional preferred stock dividends.

In 2010, the Corporation fully redeemed the $2.25 billion of preferred stock issued in connection with the Capital Purchase Program. The redemption was funded by the net proceeds from an $880 million common stock offering completed in the first quarter 2010 and from excess liquidity at the parent company. Preferred stock dividends in 2010 included a one-time redemption charge of $94 million, reflecting the accelerated accretion of the remaining discount, cash dividends of $24 million and non-cash discount accretion of $5 million. Preferred stock dividends in 2009 and 2008 included $22 million and $3 million, respectively, of non-cash discount accretion. Preferred stock dividends reduced diluted earnings per common share by $0.71, $0.90 and $0.12 in 2010, 2009 and 2008, respectively.

 

25


For further information on the Capital Purchase Program, refer to the “Capital” section of this financial review and Note 14 to the consolidated financial statements.

STRATEGIC LINES OF BUSINESS

BUSINESS SEGMENTS

The Corporation’s operations are strategically aligned into three major business segments: the Business Bank, the Retail Bank and Wealth & Institutional Management. These business segments are differentiated based upon the products and services provided. In addition to the three major business segments, the Finance Division is also reported as a segment. The Other category includes discontinued operations and items not directly associated with these business segments or the Finance Division. Note 23 to the consolidated financial statements describes the business activities of each business segment and the methodologies which form the basis for these results, and presents financial results of these business segments for the years ended December 31, 2010, 2009 and 2008.

The following table presents net income (loss) by business segment.

 

(dollar amounts in millions)                                                            
Years Ended December 31    2010    2009    2008

Business Bank

   $     529        107      %    $     147        104      %    $     237        89      %

Retail Bank

     (31     (6        (48     (34        34        13     

Wealth & Institutional Management (a)

     (3     (1          43        30             (4     (2    
     495        100      %      142        100      %      267        100      %

Finance

     (234          (110          (48    

Other (b)

     16                     (15                  (6            

Total

   $ 277                   $ 17                   $ 213               
  (a)

2008 included an $88 million net charge ($56 million, after-tax) related to the repurchase of auction-rate securities from customers.

 

  (b)

Includes discontinued operations and items not directly associated with the three major business segments or the Finance Division.

 

 

The Business Bank’s net income of $529 million increased $382 million for the year ended December 31, 2010, compared to net income of $147 million in 2009. Net interest income (FTE) was $1.4 billion in 2010, an increase of $42 million, or three percent, compared to 2009. The increase in net interest income (FTE) was primarily due to an increase in loan and deposit spreads and the benefit provided by a $3.6 billion increase in average deposits, partially offset by a $5.1 billion decrease in average loans. The provision for loan losses decreased $574 million to $286 million in 2010, from $860 million in 2009, reflecting decreases in the Commercial Real Estate, Middle Market and Global Corporate Banking business lines. Net credit-related charge-offs of $424 million decreased $288 million, primarily due to decreases in charge-offs in the Commercial Real Estate, Global Corporate Banking and Middle Market business lines. Noninterest income of $303 million in 2010 increased $12 million from 2009, primarily due to increases in commercial lending fees ($15 million), letter of credit fees ($7 million), card fees ($6 million), and foreign exchange income ($5 million), partially offset by an $8 million 2009 net gain on the termination of certain leveraged leases and a decline in service charges on deposit accounts ($6 million). Noninterest expenses of $632 million in 2010 decreased $6 million from 2009, primarily due to decreases in other real estate expense ($19 million), processing costs ($17 million), the provision for credit losses on lending related commitments ($11 million), employee benefit expenses ($5 million), and nominal decreases in other noninterest expense categories, partially offset by increases in allocated corporate overhead expenses ($45 million) and salaries expense ($13 million). The net corporate overhead expense allocation rates were approximately 6.5 percent and 3.3 percent of total noninterest expenses for all business segments in 2010 and 2009, respectively. The increase in rate in 2010, when compared to 2009, resulted mostly from a decrease in funding credits provided to the business segments resulting from the redemption of preferred

 

26


stock. The increase in salaries expense was primarily driven by an increase in incentive compensation, reflecting improved financial performance and final 2010 peer rankings. The provision for income taxes (FTE) of $226 million for the year ended December 31, 2010, increased $252 million, compared to a benefit for income taxes (FTE) of $26 million for the comparable period the prior year, primarily due to an increase in income before income taxes.

The net loss for the Retail Bank was $31 million in 2010, compared to a net loss of $48 million in 2009. Net interest income (FTE) of $531 million increased $21 million, or four percent, in 2010, primarily due to an increase in loan and deposit spreads, partially offset by decreases in average loans of $621 million and average deposits of $435 million. The provision for loan losses decreased $38 million to $105 million in 2010, reflecting decreases in the Small Business Banking and Personal Banking business lines. Net credit-related charge-offs of $88 million decreased $31 million, primarily due to a decrease in charge-offs in the Small Business Banking business line. Noninterest income of $174 million decreased $16 million in 2010, from $190 million in 2009, primarily due to a $13 million decline in service charges on deposit accounts. Noninterest expenses of $648 million in 2010 increased $6 million from 2009, primarily due to increases of $24 million in allocated net corporate overhead expenses and $7 million in incentive compensation expense, partially offset by decreases in FDIC insurance expense ($11 million), employee benefit expense ($6 million), and other real estate expenses ($3 million). Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

The net loss for Wealth & Institutional Management was $3 million in 2010, compared to net income of $43 million in 2009. Net interest income (FTE) of $170 million increased $9 million, or six percent, in 2010, compared to 2009, primarily due to the benefit provided by an increase in average deposits of $108 million and increases in loan and deposit spreads. The provision for loan losses increased $28 million to $90 million, primarily reflecting an increase in Private Banking in the Midwest market. Net credit-related charge-offs of $52 million increased $14 million, primarily due to increases in Private Banking in the Western and Midwest markets. Noninterest income of $240 million decreased $29 million, in 2010, primarily due to decreases in fiduciary income ($8 million), brokerage fees ($7 million), a decrease in gains on the sales and redemptions of auction-rate securities ($6 million) and a second quarter 2009 gain related to the sale of the defined contribution plan recordkeeping business ($5 million). Noninterest expenses of $324 million in 2010 increased $22 million from 2009, due to increases in allocated net corporate overhead expense ($15 million) and incentive compensation expense ($5 million). The 2009 sale of the defined contribution plan recordkeeping business was the primary reason for the decreases in fiduciary income for the year ended December 31, 2010, compared to the prior year. Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

The net loss in the Finance Division was $234 million in 2010, compared to a net loss of $110 million in 2009. The increase in net loss primarily reflected a $232 million decrease in the noninterest income, primarily due to $225 million of 2009 gains on the sale of residential mortgage-backed securities, partially offset by a decrease of $37 million in net interest expense (FTE) and an increase of $72 million in the provision for income taxes. The decrease in net interest expense (FTE) was primarily due to a reduction in excess liquidity and a decline in wholesale funding, partially offset by the impact of the Corporation’s internal funds transfer methodology. The methodology is designed to centralize interest rate risk in the Finance Division and to measure profitability across all interest rate environments. To that end, the Finance Division pays the three major business segments for the long-term value of deposits based upon their assumed lives. The three major business segments pay the Finance Division for funding based on the repricing and term characteristics of their loans. The reduction in loan volume from 2009 to 2010 resulted in less income to the Finance Division, while growth in deposits and their long-term value resulted in greater expenses paid by the Finance Division to the business segments. Noninterest expenses increased $1 million as a decrease in FDIC insurance expense ($8 million) was more than offset by a $5 million loss on the redemption of trust preferred securities and nominal increases in other noninterest expense categories.

 

27


Net income in the Other category was $16 million in 2010, compared to a net loss of $15 million in 2009. The increase in net income of $31 million reflected a $17 million after-tax discontinued operations gain recognized in the first quarter 2010, partially offset by timing differences between when corporate expenses are reflected as a consolidated expense and when the expenses are allocated to the business segments.

GEOGRAPHIC MARKET SEGMENTS

The Corporation’s management accounting system also produces market segment results for the Corporation’s four primary geographic markets: Midwest, Western, Texas and Florida. In addition to the four primary geographic markets, Other Markets and International are also reported as market segments. The Finance & Other Businesses category includes discontinued operations and items not directly associated with the market segments. Note 23 to the consolidated financial statements presents a description of each of these market segments as well as the financial results for the years ended December 31, 2010, 2009 and 2008.

The following table presents net income (loss) by market segment.

 

(dollar amounts in millions)
Years Ended December 31    2010    2009    2008       

Midwest

   $     171        35      %    $     40        29      %    $     204        77      %

Western

     114        23           (16     (11        (20     (8  

Texas

     70        14           40        28           53        20     

Florida

     (13     (3        (23     (17        (13     (5  

Other Markets (a)

     100        20           77        54           14        5     

International

     53        11             24        17             29        11       
     495        100      %      142        100      %      267        100      %

Finance & Other Businesses (b)

     (218                  (125                  (54            

Total

   $ 277                   $ 17                   $ 213               

(a)2008 included an $88 million net charge ($56 million, after-tax) related to the repurchase of auction-rate securities from customers.

 

(b)Includes discontinued operations and items not directly associated with the market segments.

   

  

   

The Midwest market’s net income increased $131 million to $171 million in 2010, compared to $40 million in 2009. Net interest income (FTE) of $816 million increased $15 million, or two percent, from 2009, primarily due to an increase in loan and deposit spreads and the benefit provided by a $592 million increase in average deposits, partially offset by a $2.1 billion decrease in average loans. The provision for loan losses decreased $238 million, to $199 million in 2010, compared to 2009, reflecting decreases in the Middle Market, Leasing, and Commercial Real Estate business lines, partially offset by an increase in Private Banking. Net credit-related charge-offs decreased $134 million, primarily due to decreases in charge-offs in the Middle Market, Leasing, Commercial Real Estate and Small Business Banking business lines. Noninterest income of $397 million in 2010 decreased $37 million from 2009, primarily due to decreases in service charges on deposit accounts ($13 million), fiduciary income ($9 million) and brokerage fees ($4 million), an $8 million net 2009 gain on the termination of certain leveraged leases and a $4 million loss related to the 2008 sale of the Corporation’s ownership of VISA shares, partially offset by an increase in card fees ($6 million). Noninterest expenses of $751 million in 2010 decreased $7 million from 2009, primarily due to decreases in salaries expense other than incentive compensation ($11 million), processing costs ($10 million), FDIC insurance expense ($9 million), employee benefits expense ($9 million), other real estate expense ($6 million), and nominal decreases in other noninterest expense categories, partially offset by an increase in allocated net corporate overhead expenses ($33 million) and incentive compensation ($13 million). Refer to the Business Bank discussion above for an explanation of the increase in allocated net corporate overhead expenses.

 

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The Western market’s net income of $114 million increased $130 million in 2010, compared to a net loss of $16 million in 2009. Net interest income (FTE) of $639 million increased $16 million, or three percent, in 2010, primarily due to an increase in loan and deposit spreads and the benefit provided by a $927 million increase in average deposits, partially offset by a $1.6 billion decline in average loans. The provision for loan losses decreased $210 million, to $148 million in 2010, reflecting decreases in the Commercial Real Estate, Global Corporate Banking and Middle Market business lines. Net credit-related charge-offs decreased $115 million, primarily due to decreases in charge-offs in the Commercial Real Estate and Global Corporate Banking business lines. Noninterest income was $135 million in 2010, an increase of $2 million from 2009, primarily due to an increase in foreign exchange income of $5 million, partially offset by a $4 million decrease in service charges on deposit accounts. Noninterest expenses of $432 million in 2010 decreased $2 million from 2009, primarily due to decreases in other real estate expenses ($9 million), processing costs ($6 million), FDIC insurance ($4 million), and nominal decreases in other noninterest expense categories, partially offset by an increase in allocated net corporate overhead expenses ($25 million) and incentive compensation ($8 million). Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

The Texas market’s net income increased $30 million to $70 million in 2010, compared to $40 million in 2009. Net interest income (FTE) of $318 million increased $20 million, or seven percent, in 2010, compared to 2009. The increase in net interest income (FTE) was primarily due to an increase in loan and deposit spreads and the benefit provided by an increase of $808 million in average deposits, partially offset by a $904 million decline in average loans. The provision for loan losses decreased $37 million, primarily due to decreases in the Specialty Businesses, Middle Market and Commercial Real Estate business lines. Net credit-related charge-offs of $47 million decreased $6 million from the prior year, as an increase in the Commercial Real Estate business line was more than offset by decreases in the Specialty Businesses, Middle Market and Small Business Banking business lines. Noninterest income of $91 million in 2010 increased $5 million from 2009, primarily due to an increase in commercial lending fees of $6 million. Noninterest expenses of $253 million in 2010 increased $15 million from 2009, primarily due to increases in allocated net corporate overhead expenses ($14 million) and salaries expense ($7 million). Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

The net loss in the Florida market was $13 million in 2010, compared to a net loss of $23 million in 2009. Net interest income (FTE) of $43 million in 2010 decreased $1 million, primarily due to a $167 million decrease in loan balances, partially offset by an increase in loan and deposit spreads. The provision for loan losses decreased $26 million, primarily reflecting decreases in the Commercial Real Estate and Middle Market business lines. Net credit-related charge-offs of $30 million decreased $18 million from the prior year, primarily due to decreases in charge-offs in the Commercial Real Estate and Middle Market business lines. Noninterest income of $14 million in 2010 increased $2 million from 2009, reflecting nominal increases in several noninterest income categories. Noninterest expenses of $44 million in 2010 increased $7 million from 2009 due to an increase in allocated corporate overhead expenses ($3 million) and nominal increases in several other noninterest expense categories. Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

Net income in Other Markets increased $23 million to $100 million in 2010, compared to $77 million in 2009. Net interest income (FTE) of $182 million in 2010 increased $18 million from 2009, primarily due to increases in loan and deposit spreads and the benefit provided by a $562 million increase in average deposits, partially offset by a $603 million decrease in average loans. The provision for loan losses decreased $33 million, reflecting decreases in the Commercial Real Estate and Specialty Businesses business lines, partially offset by an increase in the Middle Market business line. Net credit-related charge-offs decreased $19 million, primarily due to decreases in charge-offs in the Commercial Real Estate and Specialty Businesses business lines, partially offset by an increase in charge-offs in the Middle Market business line. Noninterest income of $45 million decreased $7 million in 2010, compared to 2009, primarily due to a $5 million gain related to the sale of the defined contribution plan recordkeeping business in the second quarter 2009 and a $6 million decrease in gains

 

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on the sales and redemptions of auction-rate securities, partially offset by nominal increases in other noninterest income categories. Noninterest expenses of $90 million in 2010 increased $6 million from 2009, primarily due to an increase in net allocated corporate overhead expenses ($5 million). Refer to the previous Business Bank discussion for an explanation of the increase in allocated net corporate overhead expenses.

The International market’s net income increased $29 million, to $53 million in 2010, compared to $24 million in 2009. Net interest income (FTE) of $73 million in 2010 increased $4 million, or seven percent, from 2009, primarily due to an increase in loan spreads and the benefit provided by a $325 million increase in average deposits, partially offset by a $344 million decrease in average loans. The negative provision for loan losses of $7 million in 2010 represents a decrease of $40 million compared to 2009, primarily due to decreases in specific allowances and total loans. Noninterest income of $35 million in 2010 increased $2 million from 2009, primarily due to increases in letter of credit fee income. Noninterest expenses of $34 million increased $3 million in 2010 compared to 2009, primarily due to an increase in net allocated corporate overhead expenses.

The net loss for the Finance & Other Business segment was $218 million in 2010, compared to a net loss of $125 million in 2009. The $93 million increase in net loss resulted from the same reasons noted in the Finance Division and Other category discussions under the “Business Segments” heading above.

The following table lists the Corporation’s banking centers by geographic market segment.

 

December 31    2010      2009      2008  

Midwest (Michigan)

             217                 232                 233   

Western:

        

California

     103         98         96   

Arizona

     17         16         12   
     120         114         108   

Texas

     95         90         87   

Florida

     11         10         10   

International

     1         1         1   

Total

     444         447         439   

 

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BALANCE SHEET AND CAPITAL FUNDS ANALYSIS

Total assets were $53.7 billion at December 31, 2010, a decrease of $5.5 billion from $59.2 billion at December 31, 2009. On an average basis, total assets decreased $7.2 billion to $55.6 billion in 2010, from $62.8 billion in 2009, resulting primarily from decreases in loans ($5.6 billion) and investment securities available-for-sale ($2.2 billion), partially offset by an increase in interest-bearing deposits with banks ($751 million). Also, on an average basis, total liabilities decreased $6.2 billion to $49.5 billion in 2010, from $55.7 billion in 2009, resulting primarily from decreases of $4.7 billion in medium- and long-term debt, $3.8 billion in other time deposits and $784 million in short-term borrowings, partially offset by an increase of $3.4 billion in core deposits.

ANALYSIS OF INVESTMENT SECURITIES AND LOANS

 

(in millions)

              
December 31    2010      2009      2008      2007      2006  

U.S. Treasury and other U.S. government agency securities

   $ 131       $ 103       $ 79       $ 36       $ 46   

Residential mortgage-backed securities

     6,709         6,261         7,861         6,165         3,497   

State and municipal securities

     39         47         66         3         4   

Corporate debt securities:

              

Auction-rate debt securities

     1         150         147         -         -   

Other corporate debt securities

     26         50         42         46         46   

Equity and other non-debt securities:

              

Auction-rate preferred securities

     570         706         936         -         -   

Money market and other mutual funds

     84         99         70         46         69   

Total investment securities available-for-sale

   $ 7,560       $ 7,416       $ 9,201       $ 6,296       $ 3,662   

Commercial loans

   $     22,145       $     21,690       $     27,999       $     28,223       $     26,265   

Real estate construction loans:

              

Commercial Real Estate business line (a)

     1,826         3,002         3,844         4,100         3,453   

Other business lines (b)

     427         459         633         716         750   

Total real estate construction loans

     2,253         3,461         4,477         4,816         4,203   

Commercial mortgage loans:

              

Commercial Real Estate business line (a)

     1,937         1,889         1,725         1,467         1,544   

Other business lines (b)

     7,830         8,568         8,764         8,581         8,115   

Total commercial mortgage loans

     9,767         10,457         10,489         10,048         9,659   

Residential mortgage loans

     1,619         1,651         1,852         1,915         1,677   

Consumer loans:

              

Home equity

     1,704         1,817         1,796         1,616         1,654   

Other consumer

     607         694         796         848         769   

Total consumer loans

     2,311         2,511         2,592         2,464         2,423   

Lease financing

     1,009         1,139         1,343         1,351         1,353   

International loans:

              

Banks and other financial institutions

     2         1         7         27         47   

Commercial and industrial

     1,130         1,251         1,746         1,899         1,804   

Total international loans

     1,132         1,252         1,753         1,926         1,851   

Total loans

   $ 40,236       $ 42,161       $ 50,505       $ 50,743       $ 47,431   
(a)

Primarily loans to real estate investors and developers.

(b)

Primarily loans secured by owner-occupied real estate.

 

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EARNING ASSETS

Total earning assets decreased $5.2 billion, or ten percent, to $49.4 billion at December 31, 2010, from $54.6 billion at December 31, 2009. Average earning asset balances are reflected in the “Analysis of Net Interest Income-Fully Taxable Equivalent” table of this financial review.

Loans

The following tables detail the Corporation’s average loan portfolio by loan type, business line and geographic market.

 

(dollar amounts in millions)

Years Ended December 31

   2010      2009     Change     Percent
Change
      

Average Loans By Loan Type:

           

Commercial loans

   $         21,090       $         24,534      $         (3,444     (14 )   %

Real estate construction loans:

           

Commercial Real Estate business line (a)

     2,404         3,538        (1,134     (32  

Other business lines (b)

     435         602        (167     (28  

Total real estate construction loans

     2,839         4,140        (1,301     (31  

Commercial mortgage loans:

           

Commercial Real Estate business line (a)

     2,000         1,694        306        18     

Other business lines (b)

     8,244         8,721        (477     (5  

Total commercial mortgage loans

     10,244         10,415        (171     (2  

Residential mortgage loans

     1,607         1,756        (149     (8  

Consumer loans:

           

Home equity

     1,746         1,796        (50     (3  

Other consumer

     683         757        (74     (10  

Total consumer loans

     2,429         2,553        (124     (5  

Lease financing

     1,086         1,231        (145     (12  

International loans

     1,222         1,533        (311     (20  

Total loans

   $ 40,517       $ 46,162      $ (5,645     (12 )   %

Average Loans By Business Line:

           

Middle Market

   $ 12,074       $ 13,932      $ (1,858     (13 )   %

Commercial Real Estate

     5,218         6,437        (1,219     (19  

Global Corporate Banking

     4,562         6,006        (1,444     (24  

National Dealer Services

     3,459         3,466        (7     -     

Specialty Businesses (c)

     4,973         5,561        (588     (11  

Total Business Bank

     30,286         35,402        (5,116     (14  

Small Business

     3,524         3,948        (424     (11  

Personal Financial Services

     1,862         2,059        (197     (10  

Total Retail Bank

     5,386         6,007        (621     (10  

Private Banking

     4,819         4,758        61        1     

Total Wealth & Institutional Management

     4,819         4,758        61        1     

Finance/Other

     26         (5     31        N/M     

Total loans

   $ 40,517       $ 46,162      $ (5,645     (12 )   %

Average Loans By Geographic Market:

           

Midwest

   $ 14,510       $ 16,592      $ (2,082     (13 )   %

Western

     12,705         14,281        (1,576     (11  

Texas

     6,480         7,384        (904     (12  

Florida

     1,578         1,745        (167     (10  

Other Markets

     3,653         4,256        (603     (14  

International

     1,565         1,909        (344     (18  

Finance/Other

     26         (5     31        N/M     

Total loans

   $ 40,517       $ 46,162      $ (5,645     (12 )   %
(a)

Primarily loans to real estate investors and developers.

(b)

Primarily loans secured by owner-occupied real estate.

(c)

Includes Entertainment, Energy, Leasing, Financial Services Division, Mortgage Banker Finance, and Technology and Life Sciences.

N/M

- not meaningful.

 

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Total loans were $40.2 billion at December 31, 2010, a decrease of $2.0 billion from $42.2 billion at December 31, 2009. As shown in the tables above, total average loans decreased $5.6 billion, or 12 percent, to $40.5 billion in 2010, compared to 2009, with declines in all geographic markets and in most business lines from 2009 to 2010 reflecting subdued loan demand from customers in a modestly recovering economic environment. While average loan outstandings declined in 2010, the pace of decline continued to slow during each successive quarter of 2010, and the Corporation was encouraged by the fourth quarter 2010 growth in the commercial loan portfolio.

Average commercial real estate loans, consisting of real estate construction and commercial mortgage loans, decreased $1.5 billion, or 10 percent, to $13.1 billion in 2010, from $14.6 billion in 2009. Commercial mortgage loans are loans where the primary collateral is a lien on any real property. Real property is generally considered primary collateral if the value of that collateral represents more than 50 percent of the commitment at loan approval. Average loans to borrowers in the Commercial Real Estate business line, which primarily includes loans to real estate investors and developers, represented $4.4 billion, or 34 percent of average total commercial real estate loans, in 2010, compared to $5.2 billion, or 36 percent of average total commercial real estate loans, in 2009. The decrease in average commercial real estate loans to borrowers in the Commercial Real Estate business line in 2010 largely resulted from the Corporation’s continued efforts to reduce exposure to the residential real estate developer business. The remaining $8.7 billion and $9.4 billion of average commercial real estate loans in other business lines in 2010 and 2009, respectively, were primarily loans secured by owner-occupied real estate. In addition to the $13.1 billion of average 2010 commercial real estate loans discussed above, the Commercial Real Estate business line also had $814 million of average 2010 loans not classified as commercial real estate on the consolidated balance sheet.

Average residential mortgage loans, which primarily include mortgages originated and retained for certain relationship customers, decreased $149 million, or eight percent, to $1.6 billion in 2010, from 2009.

For more information on real estate loans, refer to the “Commercial and Residential Real Estate Lending” portion of the “Risk Management” section of this financial review.

Based on a continuation of modest growth in the economy, management expects a low single-digit decrease in average loans for full-year 2011, compared to full-year 2010. Excluding the Commercial Real Estate business line, management expects a low single-digit increase in average loans for full-year 2011, compared to full-year 2010. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

 

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ANALYSIS OF INVESTMENT SECURITIES PORTFOLIO

(Fully Taxable Equivalent)

 

    Maturity (a)        
(dollar amounts in millions)

December 31, 2010

  Within 1 Year   1 - 5 Years   5 - 10 Years   After 10 Years   Total            Weighted
Average
Maturity
 
     Amount     Yield          Amount     Yield          Amount     Yield          Amount     Yield          Amount     Yield            Yrs./Mos.  

Available-for-sale

                               

U.S. Treasury and other

                               

U.S. government agency securities

  $ 131        0.31      %   $ -        -      %   $ -        -      %   $ -        -      %   $ 131        0.31        %        0/6   

Residential mortgage-backed securities

    -        -          238        4.46          137        3.66          6,334        3.45          6,709        3.49          13/6   

State and municipal securities (b)

    -        -          1        9.83          2        0.49          36        0.49          39        0.68          16/6   

Corporate debt securities:

                               

Auction-rate debt securities

    -        -          -        -          -        -          1        0.89          1        0.89          26/1   

Other corporate debt securities

    26        1.12          -        -          -        -          -        -          26        1.11          0/9   

Equity and other non-debt securities:

                               

Auction-rate preferred securities (c)

    -        -          -        -          -        -          570        1.00          570        1.00          -   

Money market and other mutual funds (d)

    -        -            -        -            -        -            84        -            84        -                -   

Total investment securities

available-for-sale

  $ 157        0.45      %   $ 239        4.47      %   $ 139        3.62      %   $ 7,025        3.24      %   $ 7,560        3.22        %        13/3   
(a)

Based on final contractual maturity.

(b) Primarily auction-rate securities.
(c) Auction-rate preferred securities have no contractual maturity and are excluded from weighted average maturity.
(d) Balances are excluded from the calculation of total yield and weighted average maturity.

Investment Securities Available-for-Sale

Investment securities available-for-sale increased $144 million to $7.6 billion at December 31, 2010, from $7.4 billion at December 31, 2009, primarily reflecting an increase of $448 million of residential mortgage-backed securities, as purchases more than offset early redemptions and maturities, partially offset by a $292 million decrease in auction-rate securities. On an average basis, investment securities available-for-sale decreased $2.2 billion to $7.2 billion in 2010, compared to $9.4 billion in 2009.

Auction-rate securities were purchased in 2008 as a result of the Corporation’s September 2008 offer to repurchase, at par, auction-rate securities held by certain retail and institutional clients that were sold through Comerica Securities, a broker/dealer subsidiary of Comerica Bank (the Bank). As of December 31, 2010, the Corporation’s auction-rate securities portfolio was carried at an estimated fair value of $609 million, compared to $901 million at December 31, 2009. During 2010, auction-rate securities with a par value of $308 million were redeemed or sold, resulting in net securities gains of $8 million. As of December 31, 2010, approximately 50 percent of the aggregate ARS par value had been redeemed or sold since acquisition, for a cumulative net gain of $27 million. For additional information on the repurchase of auction-rate securities, refer to the “Critical Accounting Policies” section of this financial review and Note 4 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 investments. Federal funds sold offer supplemental earnings opportunities and serve correspondent banks. Average federal funds sold and securities purchased under agreements to resell decreased $12 million to $6 million during 2010, compared to 2009. Interest-bearing deposits with banks are investments with banks in developed countries or international banking facilities of foreign banks located in the United States and include deposits with the FRB. Average interest-bearing deposits with banks increased $751 million to $3.2 billion in 2010, compared to 2009, due to an increase in average

 

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deposits with the FRB. At December 31, 2010, interest-bearing deposits with the FRB totaled $1.3 billion, compared to $4.8 billion at December 31, 2009. Other short-term investments include trading securities and loans held-for-sale. Loans held-for-sale typically represent residential mortgage loans and Small Business Administration loans that have been originated with management’s intention to sell. Short-term investments, other than loans held-for-sale, provide a range of maturities less than one year and are mostly used to manage liquidity requirements of the Corporation. Average other short-term investments decreased $28 million to $126 million in 2010, compared to 2009.

Based on a continuation of modest growth in the economy, management expects average earning assets of approximately $48 billion for full-year 2011, reflecting lower excess liquidity in addition to a decrease in average loans. This outlook does not include any impact from the pending acquisition of Sterling Bancshares, Inc.

INTERNATIONAL CROSS-BORDER OUTSTANDINGS

(year-end outstandings exceeding 1% of total assets)

 

(in millions)

December 31

           Government
and Official
Institutions
             Banks and
Other Financial
Institutions
             Commercial     
and Industrial     
     Total       

Mexico

     2010       $           -       $           -       $ 645       $ 645   
     2009            -            -         681         681   
       2008                  -                  -         883         883   

International assets are subject to general risks inherent in the conduct of business in foreign countries, including economic uncertainties and each foreign government’s regulations. Risk management practices minimize the risk inherent in international lending arrangements. These practices include structuring bilateral agreements or participating in bank facilities, which secure repayment from sources external to the borrower’s country. Accordingly, such international outstandings are excluded from the cross-border risk of that country. Mexico, with cross-border outstandings of $645 million, or 1.20 percent of total assets at December 31, 2010, was the only country with outstandings exceeding 1.00 percent of total assets at year-end 2010. There were no countries with cross-border outstandings between 0.75 and 1.00 percent of total assets at year-end 2010. Additional information on the Corporation’s Mexican cross-border risk is provided in the table above.

DEPOSITS AND BORROWED FUNDS

The Corporation’s average deposits and borrowed funds balances are detailed in the following table.

 

(dollar amounts in millions)

Years Ended December 31

   2010      2009      Change     Percent
Change
        

Noninterest-bearing deposits

   $           15,094       $         12,900       $          2,194        17        %   

Money market and NOW deposits

     16,355         12,965         3,390        26     

Savings deposits

     1,394         1,339         55        4     

Customer certificates of deposit

     5,875         8,131         (2,256     (28  

Total core deposits

     38,718         35,335         3,383        10     

Other time deposits

     306         4,103         (3,797     (93  

Foreign office time deposits

     462         653         (191     (29  

Total deposits

   $ 39,486       $ 40,091       $ (605     (2     %   

Short-term borrowings

   $ 216       $ 1,000       $ (784     (78     %   

Medium- and long-term debt

     8,684         13,334         (4,650     (35  

Total borrowed funds

   $ 8,900       $ 14,334       $ (5,434     (38     %   

 

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Average deposits were $39.5 billion in 2010, a decrease of $605 million, or two percent, from $40.1 billion in 2009. Average core deposits increased $3.4 billion, or 10 percent, to $38.7 billion in 2010, compared to 2009. Within average core deposits, nearly all business lines showed increases from 2009 to 2010, including Global Corporate Banking (31 percent), Specialty Businesses (25 percent) and Middle Market (12 percent). Average core deposits increased in all geographic markets from 2009 to 2010, including Other Markets (36 percent), International (33 percent), Florida (21 percent), Texas (18 percent) and Western (8 percent). The increase in average core deposits was, in part, due to an increased level of savings by customers during the uncertain economic conditions throughout 2010. Average other time deposits decreased $3.8 billion and average foreign office time deposits decreased $191 million in 2010, compared to 2009. Other time deposits represent certificates of deposit issued to institutional investors in denominations in excess of $100,000 and to retail customers in denominations of less than $100,000 through brokers, and are an alternative to other sources of purchased funds.

The Corporation participated in the Transaction Account Guarantee Program (TAGP) from its inception in October 2008 through June 30, 2010. During that time, the FDIC provided unlimited deposit insurance protection on noninterest-bearing transaction accounts (as defined by the FDIC). In April 2010, the FDIC adopted an interim rule extending the TAGP through December 31, 2010 for financial institutions that desired to continue participation. The Corporation and its subsidiary banks elected to opt-out of the FDIC’s TAGP extension, effective July 1, 2010. On July 1, 2010, deposit insurance reverted back to the statutory coverage limit of $250,000 per depositor. The Dodd-Frank Wall Street Reform and Consumer Protection Act (The Financial Reform Act) reinstated, for all financial institutions, unlimited deposit insurance protection for the period December 31, 2010 through December 31, 2012 for traditional noninterest-bearing and certain interest-bearing demand deposit accounts. As currently proposed by the FDIC, there will not be a separate assessment for unlimited deposit insurance coverage for this period. For more information regarding the Financial Reform Act, refer to the “The Dodd-Frank Wall Street Reform and Consumer Protection Act” section of this financial review.

Short-term borrowings primarily include federal funds purchased, securities sold under agreements to repurchase and treasury tax and loan notes. Average short-term borrowings decreased $784 million, to $216 million in 2010, compared to $1.0 billion in 2009, mostly reflecting decreases in federal funds purchased.

The Corporation uses medium-term debt and long-term debt to provide funding to support earning assets. On an average basis, medium- and long-term debt decreased $4.7 billion, or 35 percent, in 2010, compared to 2009. Medium- and long-term debt decreased $4.9 billion in 2010, to $6.1 billion at December 31, 2010, compared to December 31, 2009, resulting primarily from the early redemptions of $2.0 billion of floating-rate FHLB advances, at par, originally due in 2012 and 2013 and $515 million of 6.576% subordinated notes originally due in 2037, along with maturities of $1.5 billion of FHLB advances and $950 million of medium-term notes, partially offset by the issuance of $300 million of medium-term senior notes in 2010.

Further information on medium- and long-term debt is provided in Note 13 to the consolidated financial statements. For further information regarding the redemption of trust preferred securities, refer to the “Capital” section of this financial review and Note 13 to the consolidated financial statements.

CAPITAL

Total shareholders’ equity decreased $1.2 billion to $5.8 billion at December 31, 2010, compared to $7.0 billion at December 31, 2009.

In the first quarter 2010, the Corporation fully redeemed $2.25 billion of preferred stock issued in connection with the Capital Purchase Program. The redemption was funded by the net proceeds from an $880 million common stock offering completed in the first quarter 2010 and from excess liquidity at the parent company. In the second quarter 2010, the U.S. Treasury sold the related warrant, which granted the right to purchase 11.5 million shares of the Corporation’s common stock at $29.40 per share. Prior to the public sale, the warrant was separated into 11.5 million warrants to purchase one share of the Corporation’s common stock at an

 

36


exercise price of $29.40 per share. The sale of the warrant by the U.S. Treasury had no impact on the Corporation’s equity. The warrants remained outstanding at December 31, 2010 and were included in “capital surplus” on the consolidated balance sheets at their original fair value of $124 million.

In the fourth quarter 2010, the Board of Directors authorized the Corporation to repurchase up to 12.6 million shares of its outstanding common stock, and authorized the purchase of up to all 11.5 million outstanding warrants. The shares and warrants may be purchased from time to time in the open market. The shares may be held in treasury or retired. The share repurchase program superseded the Corporation’s previous repurchase programs.

For 2011, management expects to commence a share repurchase program that, combined with dividend payments, results in a payout of less than 50 percent of earnings.

Refer to Note 14 to the consolidated financial statements for additional information on the Capital Purchase Program and the Corporation’s share repurchase program.

The following table presents a summary of changes in total shareholders’ equity in 2010:

 

(in millions)               

Balance at January 1, 2010

     $ 7,029   

Retention of earnings (net income less cash dividends declared)

       195   

Change in accumulated other comprehensive loss:

    

Investment securities available-for-sale

   $ 3     

Cash flow hedges

     (16  

Defined benefit and other postretirement plans

     (40  
          

Total change in accumulated other comprehensive income (loss)

       (53

Issuance of common stock, net

       849   

Redemption of preferred stock

       (2,250

Repurchase of common stock under employee stock plans

       (4

Issuance of common stock under employee stock plans

       (2

Share-based compensation

       32   

Other

             (3

Balance at December 31, 2010

           $ 5,793   

Further information on the change in accumulated other comprehensive income (loss) is provided in Note 15 to the consolidated financial statements.

In July 2010, the Financial Reform Act was signed into law, which prohibits holding companies with more than $15 billion in assets from including trust preferred securities in Tier 1 capital, with a phase-in period of three years, beginning on January 1, 2013. As of December 31, 2010, the Corporation had no outstanding trust preferred securities. For further discussion of the Financial Reform Act, refer to “The Dodd-Frank Wall Street Reform and Consumer Protection Act” section of this financial review.

The Corporation assesses capital adequacy against the risk inherent in the balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss. At December 31, 2010, the Corporation and its U.S. banking subsidiaries exceeded the capital ratios required for an institution to be considered “well capitalized” by the standards developed under the Federal Deposit Insurance Corporation Improvement Act of 1991. Refer to Note 21 to the consolidated financial statements for further discussion of regulatory capital requirements and capital ratio calculations.

 

37


In December 2009, the Basel Committee on Banking Supervision (the Basel Committee) released proposed Basel III guidance on bank capital and liquidity. In September 2010, the Basel Committee proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio and additional capital and liquidity requirements, with rules expected to be implemented between 2013 and 2019. Adoption in the U.S. is expected to occur over a similar timeframe, but the final form of the U.S. rules is uncertain. Based on information currently available, the Corporation believes that the expected impacts from changes in the components of capital and the calculation of risk-weighted assets will not be material. A higher degree of uncertainty exists regarding the implementation and interpretation of the liquidity rules; however, based on information currently available, the Corporation expects the liquidity requirements to be manageable. While uncertainty exists in both the final form of the Basel III guidance and whether or not the Corporation will be required to adopt the guidelines, the Corporation is closely monitoring their development.

RISK MANAGEMENT

The Corporation assumes various types of risk in the normal course of business. Management classifies risk exposures into six areas: (1) credit, (2) market, (3) liquidity, (4) operational, (5) compliance and (6) business risks and considers credit risk as the most significant risk.

The Corporation continuously enhances its risk management capabilities with additional processes, tools and systems designed to provide management with deeper insight into the Corporation’s various risks, assess its appetite for risk, enhance the Corporation’s ability to control those risks and ensure that appropriate return is received for the risks taken.

Specialized risk managers, along with the risk management committees in credit, market, liquidity, operational and compliance are responsible for the day-to-day management of those respective risks. The Enterprise-Wide Risk Management Committee has been established by the Enterprise Risk Committee of the Board and charged with responsibility for establishing the governance over the risk management process, providing oversight in managing the Corporation’s aggregate risk position and reporting on the comprehensive portfolio of risks and the potential impact these risks can have on the Corporation’s risk profile and resulting capital level. The Enterprise-Wide Risk Management Committee is principally composed of senior officers representing the different risk areas and business units who are appointed by the Chairman and Chief Executive Officer of the Corporation.

The Board’s Enterprise Risk Committee meets quarterly and is chartered to assist the Board in promoting the best interest of the Corporation by overseeing policies, procedures and risk practices relating to enterprise-wide risk and compliance with bank regulatory obligations. Members of the Enterprise Risk Committee are selected such that the committee comprises individuals whose experiences and qualifications can lead to broad and informed views on risk matters facing the Corporation and the financial services industry, including, but not limited to, risk matters that address credit, market, liquidity, operational, compliance and general business conditions. A comprehensive risk report is submitted to the Enterprise Risk Committee each quarter providing management’s view of the Corporation’s risk position.

CREDIT RISK

Credit risk represents the risk of loss due to failure of a customer or counterparty to meet its financial obligations in accordance 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 diversification, limiting exposure to any single industry, customer or guarantor, and selling participations and/or syndicating to third parties credit exposures above those levels it deems prudent.

The governance structure is administered through the Strategic Credit Committee. The Strategic Credit Committee is chaired by the Chief Credit Officer and approves recommendations to address credit risk matters through credit policy, credit risk management practices, and required credit risk actions. In order to facilitate the corporate credit risk management process, various other corporate functions provide the resources for the Strategic Credit Committee to carry out its responsibilities.

 

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Credit Administration provides the resources to manage the line of business transactional credit risk, assuring that all exposure is risk rated according to the requirements of the credit risk rating policy and providing business segment reporting support as necessary.

Portfolio Risk Analytics provides comprehensive reporting on portfolio credit risks, continuous assessment and verification of risk rating models, quarterly calculation of the allowance for loan losses and the allowance for credit losses on lending-related commitments and calculation of economic credit risk capital.

The Special Assets Group is responsible for managing the recovery process on distressed or defaulted loans and loan sales.

 

39


ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

 

(dollar amounts in millions)

Years Ended December 31

   2010             2009             2008             2007             2006         

Balance at beginning of year

   $       985         $       770         $       557         $       493         $       516     

Loan charge-offs:

                        

Domestic

                        

Commercial

     195           375           183           89           44     

Real estate construction:

                        

Commercial Real Estate business line (a)

     175           234           184           37           -     

Other business lines (b)

     4                 1                 1                 5                 -           

Total real estate construction

     179           235           185           42           -     

Commercial mortgage:

                        

Commercial Real Estate business line (a)

     53           90           72           15           4     

Other business lines (b)

     138                 81                 28                 37                 13           

Total commercial mortgage

     191           171           100           52           17     

Residential mortgage

     14           21           7           -           -     

Consumer

     39           34           22           13           23     

Lease financing

     1           36           1           -           10     

International

     8                 23                 2                 -                 4           

Total loan charge-offs

     627           895           500           196           98     

Recoveries:

                        

Domestic

                        

Commercial

     25           18           17           27           27     

Real estate construction

     11           1           3           -           -     

Commercial mortgage

     16           3           4           4           4     

Residential mortgage

     1           -           -           -           -     

Consumer

     4           2           3           4           3     

Lease financing

     5           1           1           4           -     

International

     1                 2                 1                 8                 4           

Total recoveries

     63                 27                 29                 47                 38           

Net loan charge-offs

     564           868           471           149           60     

Provision for loan losses

     480           1,082           686           212           37     
Foreign currency translation adjustment      -                 1                 (2              1                 -           

Balance at end of year

   $ 901               $ 985               $ 770               $ 557               $ 493           

Allowance for loan losses as a percentage of total loans at end of year

     2.24        %         2.34        %         1.52        %         1.10        %         1.04        %   
Net loan charge-offs during the year as a percentage of average loans outstanding during the year      1.39                 1.88                 0.91                 0.30                 0.13           
(a)

Primarily charge-offs of loans to real estate investors and developers.

(b)

Primarily charge-offs of loans secured by owner-occupied real estate.

 

40


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, estimable losses inherent in the Corporation’s loan portfolio. The allowance for credit losses on lending-related commitments, included in “accrued expenses and other liabilities” on the consolidated balance sheets, provides for probable losses inherent in lending-related commitments, including unused commitments to extend credit and letters of credit.

The allowance for loan losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans with similar risk characteristics for the remaining business and retail loans. The Corporation defines business loans 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.

The total allowance for loan losses is sufficient to absorb incurred losses inherent in the total loan portfolio. Unanticipated economic events, including political, economic and regulatory instability could cause changes in the credit characteristics of the portfolio and result in an unanticipated increase in the allowance. Inclusion of other industry-specific portfolio exposures in the allowance, as well as significant increases in the current portfolio exposures, could also increase the amount of the allowance. Any of these events, or some combination thereof, may result in the need for additional provision for loan losses in order to maintain an allowance that complies with credit risk and accounting policies. The allowance for loan losses was $901 million at December 31, 2010, compared to $985 million at December 31, 2009, a decrease of $84 million, or eight percent. The decrease resulted primarily from improvements in credit quality, including a decline of $2.2 billion in the Corporation’s internal watch list loans from December 31, 2009 to December 31, 2010. The Corporation’s internal watch list is generally consistent with loans in the Special Mention, Substandard and Doubtful (nonaccrual) categories defined by regulatory authorities. Additional indicators of improved credit quality included a decrease in the inflow to nonaccrual (based on an analysis of nonaccrual loans with balances greater than $2 million) of $369 million and a $305 million decrease in net credit-related charge-offs from December 31, 2009 to December 31, 2010. The $84 million decrease in the allowance for loan losses consisted of decreases in the Commercial Real Estate (primarily the Western market), Middle Market (primarily the Midwest market) and Global Corporate Banking business lines, partially offset by an increase in industry specific allowances for customers in the Private Banking business line (mostly the Midwest market). The allowance for loan losses as a percentage of total period-end loans was 2.24 percent at December 31, 2010, compared to 2.34 percent at December 31, 2009. Nonperforming loans of $1.1 billion at December 31, 2010 decreased $58 million, or five percent, compared to December 31, 2009. As noted above, all large nonperforming loans are individually reviewed each quarter for potential charge-offs and reserves. Charge-offs are taken as amounts are determined to be uncollectible. A measure of the level of charge-offs already taken on nonperforming loans is the current book balance as a percentage of the contractual amount owed. At December 31, 2010, nonperforming loans were charged-off to 54 percent of the contractual amount, compared to 56 percent at December 31, 2009. This level of write-downs is consistent with losses experienced on loan defaults in 2010 and in recent years. The allowance as a percentage of total nonperforming loans, a ratio which results from the actions noted above, was 80 percent at December 31, 2010, compared to 83 percent at December 31, 2009. The Corporation’s loan portfolio is primarily 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 nonperforming, resulting in a lower nonperforming loan allowance coverage when compared to banking organizations with higher concentrations of consumer loans. The allowance for loan losses as a multiple of total annual net loan charge-offs increased to 1.6 times for the year ended December 31, 2010, compared to 1.1 times for the year ended December 31, 2009, as a result of the decline in net loan charge-offs in 2010.

 

41


The allowance as a percentage of total loans, as a percentage of total nonperforming loans and as a multiple of annual net loan charge-offs is provided in the following table.

 

Years Ended December 31    2010           2009           2008       

Allowance for loan losses as a percentage of total loans at end of year

     2.24      %      2.34      %      1.52      %

Allowance for loan losses as a percentage of total nonperforming loans at end of year

     80           83           84     

Allowance for loan losses as a multiple of total net loan charge-offs for the year

     1.6      x      1.1      x      1.6      x

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

 

(dollar amounts in millions)  
December 31   2010     2009     2008     2007     2006  
     Allocated
Allowance
   

Allowance

Ratio (a)

    % (b)    

Allocated

Allowance

    % (b)    

Allocated

Allowance

    % (b)    

Allocated

Allowance

    % (b)    

Allocated

Allowance

    % (b)  

Business loans

                                 

Commercial

  $ 422        1.91        %        54        %      $ 456        51        %      $ 380        55        %      $ 288        55        %      $ 320        55        %   

Real estate construction

    102        4.52          6          194        8          194        9          128        9          29        9     

Commercial mortgage

    272        2.78          24          219        25          147        21          92        20          80        20     

Lease financing

    8        0.79          3          13        3          6        3          15        3          27        3     

International

    20        1.75                3                33        3                12        3                11        4                13        4           

Total business loans

    824        2.27          90          915        90    <