KeyBank 2014 Annual Report Download - page 113

Even minor changes in the level of estimated losses can significantly affect management’s determination of the
appropriate allowance because those changes must be applied across a large portfolio. To illustrate, an increase in
estimated losses equal to one-tenth of one percent of our consumer loan portfolio as of December 31, 2014,
would indicate the need for a $16 million increase in the allowance. The same increase in estimated losses for the
commercial loan portfolio would result in a $41 million increase in the allowance. Such adjustments to the ALLL
can materially affect financial results. Following the above examples, a $16 million increase in the consumer
loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately $10 million, or
$.01 per common share; a $41 million increase in the commercial loan portfolio allowance would have reduced
earnings on an after-tax basis by approximately $26 million, or $.03 per common share.
As we make decisions regarding the allowance, we benefit from a lengthy organizational history and experience
with credit evaluations and related outcomes. Nonetheless, if our underlying assumptions later prove to be
inaccurate, the ALLL would likely need to be adjusted, possibly having an adverse effect on our results of
operations.
Our accounting policy related to the allowance is disclosed in Note 1 under the heading “Allowance for Loan and
Lease Losses.”
Valuation methodologies
We follow the applicable accounting guidance for fair value measurements and disclosures, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
In the absence of quoted market prices, we determine the fair value of our assets and liabilities using internally
developed models, which are based on third-party data as well as our judgment, assumptions and estimates
regarding credit quality, liquidity, interest rates and other relevant market available inputs. We describe our
application of this accounting guidance, the process used to determine fair values, and the fair value hierarchy in
Note 1 under the heading “Fair Value Measurements,” and in Note 6 (“Fair Value Measurements”).
Valuation methodologies often involve significant judgment, particularly when there are no observable active
markets for the items being valued. To determine the values of assets and liabilities, as well as the extent to
which related assets may be impaired, we make assumptions and estimates related to discount rates, asset returns,
prepayment rates and other factors. The use of different discount rates or other valuation assumptions could
produce significantly different results. The outcomes of valuations that we perform have a direct bearing on the
recorded amounts of assets and liabilities, including loans held for sale, principal investments, goodwill, and
pension and other postretirement benefit obligations.
At December 31, 2014, $15.1 billion, or 16%, of our total assets were measured at fair value on a recurring basis.
Substantially all of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At
December 31, 2014, $1.2 billion, or 1%, of our total liabilities were measured at fair value on a recurring basis.
Substantially all of these liabilities were classified as Level 1 or Level 2.
At December 31, 2014, $18 million, or less than 1%, of our total assets were measured at fair value on a
nonrecurring basis. All of these assets were classified as Level 3. At December 31, 2014, there were no liabilities
measured at fair value on a nonrecurring basis.
A discussion of the valuation methodology applied to our loans held for sale is included in Note 1 under the
heading “Loans Held for Sale.”
Our principal investments include direct and indirect investments, predominantly in privately-held companies.
The fair values of these investments are determined by considering a number of factors, including the target
company’s financial condition and results of operations, values of public companies in comparable businesses,
market liquidity, and the nature and duration of resale restrictions. The fair value of principal investments was
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