Comerica 2008 Annual Report Download - page 129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
establishes an allowance for loan losses. The allowance, based on the fair value of impaired loans, is estimated
using one of several methods, including collateral value, market value of similar debt, enterprise value,
liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans
for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
At December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the
collateral. Impaired loans where an allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market
price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2. When a
current appraised value is not available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the Corporation records the
impaired loan as nonrecurring Level 3.
Derivative Assets and Liabilities: Substantially all of the derivative instruments held or issued by the
Corporation for risk management or customer-initiated activities are traded in over-the-counter markets where
quoted market prices are not readily available. For those derivatives, the Corporation measures fair value using
internally developed models that use primarily market observable inputs, such as yield curves and option
volatilities, and include the value associated with counterparty credit risk. As such, the Corporation classifies
those derivative instruments as Level 2. Examples of Level 2 derivatives are interest rate swaps, energy and
foreign exchange derivative contracts.
The Corporation also holds a portfolio of warrants for generally non-marketable equity securities. These
warrants are primarily from high technology, non-public companies obtained as part of the loan origination
process. Warrants which contain a net exercise provision are required to be accounted for as derivatives and
recorded at fair value. Fair value is determined using a Black-Scholes valuation model, which has five inputs:
risk-free rate, expected life, volatility, exercise price, and the per share market value of the underlying company.
Where sufficient financial data existed, a market approach method was utilized to estimate the current value of
the underlying company. When quoted market values were not available, an index method was utilized. The
estimated fair value of the underlying securities for warrants requiring valuation at fair value were adjusted for
discounts related to lack of liquidity. The Corporation classifies warrants accounted for as derivatives in
recurring Level 3.
Financial Guarantees: A liability under an indemnification agreement related to the sale of the
Corporation’s remaining ownership of Visa shares is a financial guarantee recorded at fair value and included in
‘‘other liabilities’’ on the consolidated balance sheets. The fair value of the indemnification agreement was
determined using a probability weighted estimate of cash flows under various scenarios. As such, the
Corporation classifies this financial guarantee as recurring Level 3.
Foreclosed Assets: Upon transfer from the loan portfolio, foreclosed assets are adjusted to and
subsequently carried at the lower of carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair
value of the collateral is based on an observable market price or a current appraised value, the Corporation
records the foreclosed asset as nonrecurring Level 2. When a current appraised value is not available or
management determines the fair value of the collateral is further impaired below the appraised value and there is
no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.
Nonmarketable Equity Securities: The Corporation has a portfolio of indirect (through funds) private
equity and venture capital investments. The majority of these investments are not readily marketable. The
investments are individually reviewed for impairment on a quarterly basis by comparing the carrying value to the
estimated fair value. The Corporation bases its estimates of fair value for the majority of its indirect private equity
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