Comerica 2008 Annual Report Download - page 66

the Corporation’s stock at the grant date. Using the number of restricted stock awards issued in 2008, a $5.00 per
share increase in stock price would result in an increase in pretax expense of approximately $3 million, from the
assumed base, over the awards’ vesting period. Refer to Notes 1 and 15 to the consolidated financial statements
for further discussion of share-based compensation expense.
Nonmarketable Equity Securities
At December 31, 2008, the Corporation had a $64 million portfolio of investments in indirect private equity
and venture capital funds, and had commitments to fund additional investments of $36 million in future periods.
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 private equity and venture capital fund investments on the
percentage ownership in the fair value of the entire fund, as reported by the fund’s management. In general, the
Corporation does not have the benefit of the same information regarding the fund’s underlying investments as
does the fund’s management. Therefore, after indication that the fund’s management adheres to accepted, sound
and recognized valuation techniques, including concepts in SFAS 157, the Corporation generally utilizes the fair
values assigned to the underlying portfolio investments by the fund’s management. For those funds where fair
value is not reported by the fund’s management, the Corporation derives the fair value of the fund by estimating
the fair value of each underlying investment in the fund. In addition to using qualitative information about each
underlying investment, as provided by the fund’s management, the Corporation gives consideration to
information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions,
offering prices, operating results, financial conditions, exit strategy and other qualitative information, as
available. The lack of an independent source to validate fair value estimates, including the impact of future
capital calls and transfer restrictions, is an inherent limitation in the valuation process. The amount by which the
carrying value exceeds the fair value that is determined to be other-than-temporary impairment is charged to
current earnings and the carrying value of the investment is written down accordingly. While the determination
of fair value involves estimates, no generic assumption is applied to all investments when evaluating for
impairment. As such, each estimate is unique to the individual investment, and none is individually significant.
The inherent uncertainty in the process of valuing equity securities for which a ready market is unavailable may
cause our estimated values of these securities to differ significantly from the values that would have been derived
had a ready market for the securities existed, and those differences could be material. The value of these
investments is at risk to changes in equity markets, general economic conditions and a variety of other factors,
which could result in an impairment charge in future periods.
Auction-Rate Securities
As a result of the Corporation’s 2008 repurchase, at par, of auction-rate securities held by certain customers
in the fourth quarter 2008, the Corporation holds a portfolio of auction-rate securities accounted for as
investment securities available-for-sale and stated at fair value of $1.1 billion at December 31, 2008. Due to the
lack of a robust secondary auction-rate securities market with active fair value indications, fair value at
December 31, 2008 was determined using an income approach based on a discounted cash flow model. Two
significant assumptions were utilized in this model: discount rate (including a liquidity risk premium) and
workout period. The discount rate was calculated using credit spreads of the underlying collateral or similar
securities plus a liquidity risk premium. The liquidity risk premium was based on publicly available press releases
and observed industry auction-rate securities valuations by third parties. The workout period was based on an
assessment of publicly available information on efforts to re-establish functioning markets for these securities.
The fair value of auction-rate securities recorded on the Corporation’s consolidated balance sheets
represents management’s best estimate of the fair value of these instruments within the framework of existing
accounting standards. Changes in the above material assumptions could result in significantly different
valuations. For example, an increase or decrease in the liquidity premium of 100 basis points changes the fair
value by about $20 million.
64