Comerica 2011 Annual Report Download - page 105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-68
involving Visa. Conversely, the Corporation will be compensated by the counterparty for any increase in the conversion factor
from anti-dilutive adjustments. The fair value of the derivative contract was based on unobservable inputs consisting of
management’s estimate of the litigation outcome, timing of litigation settlements and payments related to the derivative. The
Corporation classifies the derivative liability as recurring Level 3.
Nonmarketable equity securities
The Corporation has a portfolio of indirect (through funds) private equity and venture capital investments. These funds
generally cannot be redeemed and the majority is not readily marketable. Distributions from these funds are received by the
Corporation as a result of the liquidation of underlying investments of the funds and/or as income distributions. It is estimated
that the underlying assets of the funds will be liquidated over a period of up to 15 years. The value of these investments is at risk
to changes in equity markets, general economic conditions and a variety of other factors. The investments are accounted for on
the cost or equity method and are individually reviewed for impairment on a quarterly basis by comparing the carrying value to
the estimated fair value. These investments may be carried at fair value on a nonrecurring basis when they are deemed to be
impaired and written down to fair value. For such investments, fair value measurement guidance permits the use of net asset value,
provided the net asset value is calculated by the fund in compliance with fair value measurement guidance applicable to investment
companies. Where there is not a readily determinable fair value, the Corporation estimates fair value for indirect private equity
and venture capital investments based on the Corporation’s percentage ownership in the net asset value of the entire fund, as
reported by the fund, after indication that the fund adheres to applicable fair value measurement guidance. For those funds where
the net asset value is not reported by the fund, 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, 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. Commitments to fund additional investments in
nonmarketable equity securities recorded at fair value on a nonrecurring basis were $1 million at both December 31, 2011 and
2010.
The Corporation also holds restricted equity investments, primarily Federal Home Loan Bank (FHLB) and Federal
Reserve Bank (FRB) stock. Restricted equity securities are not readily marketable and are recorded at cost (par value) and evaluated
for impairment based on the ultimate recoverability of the par value. No significant observable market data for these instruments
is available. The Corporation considers the profitability and asset quality of the issuer, dividend payment history and recent
redemption experience, when determining the ultimate recoverability of the par value. The Corporation’s investment in FHLB
stock totaled $92 million and $128 million at December 31, 2011 and 2010, respectively, and its investment in FRB stock totaled
$85 million and $59 million at December 31, 2011 and 2010, respectively. The Corporation believes its investments in FHLB and
FRB stock are ultimately recoverable at par.
The Corporation classifies nonmarketable equity securities subjected to nonrecurring fair value adjustments as Level 3.
Other real estate
Other real estate is included in “accrued income and other assets” on the consolidated balance sheets and includes primarily
foreclosed property. Foreclosed property is initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing
a new cost basis. Subsequently, foreclosed property is carried at the lower of cost or fair value, less costs to sell. Other real estate
may be carried at fair value on a nonrecurring basis when fair value is less than cost. Fair value is based upon independent market
prices, appraised value or management’s estimate of the value. Foreclosed property carried at fair value based on an observable
market price or a current appraised value is classified by the Corporation as nonrecurring Level 2. When management determines
that the fair value of the foreclosed property requires additional adjustments, either as a result of a non-current appraisal or when
there is no observable market price, the Corporation classifies the foreclosed property as nonrecurring Level 3.
Loan servicing rights
Loan servicing rights, included in “accrued income and other assets” on the consolidated balance sheets and primarily
related to Small Business Administration loans, are subject to impairment testing. A valuation model is used for impairment testing,
which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for
comparable instruments and a discount rate determined by management. If the valuation model reflects a value less than the
carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such,
the Corporation classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.