Comerica 2014 Annual Report Download - page 86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
F-49
Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the
measurement date. Fair value is based on the assumptions market participants would use when pricing an asset or liability.
Trading securities, investment securities available-for-sale, derivatives and deferred compensation plan liabilities are
recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record other assets
and liabilities at fair value on a nonrecurring basis, such as impaired loans, other real estate (primarily foreclosed property),
nonmarketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve
write-downs of individual assets or application of lower of cost or fair value accounting.
Fair value measurements and disclosures guidance establishes a three-level fair value hierarchy based on the markets in
which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The fair value hierarchy
gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Fair value measurements
are separately disclosed by level within the fair value hierarchy. For assets and liabilities recorded at fair value, it is the Corporation’s
policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value
measurements.
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
The Corporation generally utilizes third-party pricing services to value Level 1 and Level 2 trading and investment
securities, as well as certain derivatives designated as fair value hedges. Management reviews the methodologies and assumptions
used by the third-party pricing services and evaluates the values provided, principally by comparison with other available market
quotes for similar instruments and/or analysis based on internal models using available third-party market data. The Corporation
may occasionally adjust certain values provided by the third-party pricing service when management believes, as the result of its
review, that the adjusted price most appropriately reflects the fair value of the particular security.
Fair value measurements for assets and liabilities where limited or no observable market data exists are based primarily
upon estimates, often calculated based on the economic and competitive environment, the characteristics of the asset or liability
and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate
settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results
of current or future values.
Following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities
recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures
for financial instruments not recorded at fair value in their entirety on a recurring basis. The descriptions include an indication of
the level of the fair value hierarchy in which the assets or liabilities are classified. Transfers of assets or liabilities between levels
of the fair value hierarchy are recognized at the beginning of the reporting period, when applicable.
Cash and due from banks, federal funds sold and interest-bearing deposits with banks
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.
Trading securities and associated deferred compensation plan liabilities
Trading securities include securities held for trading purposes as well as assets held related to employee deferred compensation
plans. Trading securities and associated deferred compensation plan liabilities are recorded at fair value on a recurring basis
and included in “other short-term investments” and “accrued expenses and other liabilities,” respectively, on the consolidated
balance sheets. Level 1 trading securities include assets related to employee deferred compensation plans, which are invested
in mutual funds, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and other
securities traded on an active exchange, such as the New York Stock Exchange. Deferred compensation plan liabilities represent
the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets. Level 2 trading
securities include municipal bonds and residential mortgage-backed securities issued by U.S. government-sponsored entities