Comerica 2013 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-65
securities. The methods used to value trading securities are the same as the methods used to value investment securities available-
for-sale, discussed below.
Loans held-for-sale
Loans held-for-sale, included in “other short-term investments” on the consolidated balance sheets, are recorded at the
lower of cost or fair value. Loans held-for-sale may be carried at fair value on a nonrecurring basis when fair value is less than
cost. The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. As such,
the Corporation classifies both loans held-for-sale subjected to nonrecurring fair value adjustments and the estimated fair value
of loans held-for sale as Level 2.
Investment securities available-for-sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Level 1 securities include those
traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities include residential mortgage-backed securities
issued by U.S. government agencies and U.S. government-sponsored entities and corporate debt securities. The fair value of Level
2 securities was determined using quoted prices of securities with similar characteristics, or pricing models based on observable
market data inputs, primarily interest rates, spreads and prepayment information.
Securities classified as Level 3 represent securities in less liquid markets requiring significant management assumptions
when determining fair value. Auction-rate securities comprise Level 3 securities. Due to the lack of a robust secondary auction-
rate securities market with active fair value indicators, fair value for all periods presented was determined using an income approach
based on a discounted cash flow model. The discounted cash flow model utilizes two significant inputs: discount rate 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 derived from the rate at which various types of similar auction-rate securities had been
redeemed or sold. The workout period was based on an assessment of publicly available information on efforts to re-establish
functioning markets for these securities and the Corporation's own redemption experience. Significant increases in any of these
inputs in isolation would result in a significantly lower fair value. The Corporate Development Department, with appropriate
oversight and approval provided by senior management, is responsible for determining the valuation methodology for auction-
rate securities and for updating significant inputs based on changes to the factors discussed above. Valuation results, including an
analysis of changes to the valuation methodology and significant inputs, are provided to senior management for review on a
quarterly basis.
Loans
The Corporation does not record loans at fair value on a recurring basis. However, the Corporation may establish a
specific allowance for an impaired loan based on the fair value of the underlying collateral. Such loan values are reported as
nonrecurring fair value measurements. Collateral values supporting individually evaluated impaired loans are evaluated quarterly.
When management determines that the fair value of the collateral requires additional adjustments, either as a result of non-current
appraisal value or when there is no observable market price, the Corporation classifies the impaired loan as Level 3. The Special
Assets Group is responsible for performing quarterly credit quality reviews for all impaired loans as part of the quarterly allowance
for loan losses process overseen by the Chief Credit Officer, during which valuation adjustments to updated collateral values are
determined.
The Corporation discloses fair value estimates for loans. The estimated fair value is determined based on characteristics
such as loan category, repricing features and remaining maturity, and includes prepayment and credit loss estimates. For variable
rate business loans that reprice frequently, the estimated fair value is based on carrying values adjusted for estimated credit losses
inherent in the portfolio at the balance sheet date. For other business loans and retail loans, fair values are estimated using a
discounted cash flow model that employs a discount rate that reflects the Corporation's current pricing for loans with similar
characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance
sheet date. The rates take into account the expected yield curve, as well as an adjustment for prepayment risk, when applicable.
The Corporation classifies the estimated fair value of loans held for investment as Level 3.
Customers’ liability on acceptances outstanding and acceptances outstanding
Customers' liability on acceptances outstanding is included in "accrued income and other assets" and acceptances
outstanding are included in "accrued expenses and other liabilities" on the consolidated balance sheets. Due to their short-term
nature, the carrying amount of these instruments approximates the estimated fair value. As such, the Corporation classifies the
estimated fair value of these instruments as Level 1.