Comerica 2012 Annual Report Download - page 100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-66
dilutive adjustments made to the conversion factor of the Visa Class B to Class A shares based on the ultimate outcome of litigation
involving Visa. Conversely, the Corporation will be compensated by the counterparty for any increase in the conversion factor
from anti-dilutive adjustments. The recurring fair value of the derivative contract is based on unobservable inputs consisting of
management's estimate of the litigation outcome, timing of litigation settlements and payments related to the derivative. Significant
increases in the estimate of litigation outcome and the timing of litigation settlements in isolation would result in a significantly
higher liability fair value. Significant increases in payments related to the derivative in isolation would result in a significantly
lower liability fair value. The Corporation classifies the derivative liability as Level 3. On July 13, 2012, Visa announced it had
reached an agreement in principle to settle the multi-district interchange litigation which pertains to its Class B shares. The
announcement of this settlement did not have a material impact on the fair value of the Corporation’s liability.
Nonmarketable equity securities
The Corporation has a portfolio of indirect (through funds) private equity and venture capital investments with a carrying
value of $13 million at December 31, 2012. These funds generally cannot be redeemed and the majority are 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 17
years. 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. 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. On a quarterly basis, the Corporate Development Department is responsible, with appropriate oversight and approval
provided by senior management, for performing the valuation procedures and updating significant inputs, as are primarily provided
by the underlying fund's management. The Corporation classifies both nonmarketable equity securities subjected to nonrecurring
fair value adjustments and the estimated fair value of nonmarketable equity securities not recorded at fair value in their entirety
on a recurring basis as Level 3. Commitments to fund additional investments in nonmarketable equity securities recorded at fair
value on a nonrecurring basis were $2 million and $1 million at December 31, 2012 and 2011, respectively.
The Corporation also holds restricted equity investments, primarily FHLB and 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 $89 million and $92 million at December 31,
2012 and 2011, respectively, and its investment in FRB stock totaled $85 million at both December 31, 2012 and 2011. The
Corporation believes its investments in FHLB and FRB stock are ultimately recoverable at par. Therefore, the carrying amount
for these restricted equity investments approximates fair value. The Corporation classifies the estimated fair value of such
investments as Level 1.
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 of the property. The Special Assets Group obtains updated independent
market prices and appraised values, as required by state regulation or deemed necessary based on market conditions, and determines
if additional write-downs are necessary. On a quarterly basis, senior management reviews all other real estate and determines
whether the carrying values are reasonable, based on the length of time elapsed since receipt of independent market price or
appraised value and current market conditions. Other real estate carried at fair value based on an observable market price or a
current appraised value is classified by the Corporation as Level 2. When management determines that the fair value of other real
estate requires additional adjustments, either as a result of a non-current appraisal or when there is no observable market price,
the Corporation classifies the other real estate as Level 3.