KeyBank 2014 Annual Report Download - page 169

Loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both
performing and nonperforming loans, we determine any adjustments necessary to record the portfolios at the
lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no loans held for
sale adjusted to fair value at December 31, 2014, or December 31, 2013.
Market inputs, including updated collateral values, and reviews of each borrower’s financial condition influenced
the inputs used in our internal models and other valuation methodologies. The valuations are prepared by the
responsible relationship managers or analysts in our Asset Recovery Group and are reviewed and approved by
the Asset Recovery Group Executive. Actual gains or losses realized on the sale of various loans held for sale
provide a back-testing mechanism for determining whether our valuations of these loans held for sale that are
adjusted to fair value are appropriate.
Valuations of performing commercial mortgage and construction loans held for sale are conducted using internal
models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury
rates, interest rate curves, and risk profiles. These internal models also rely on our own assumptions about the
exit market for the loans and details about individual loans within the respective portfolios. Therefore, we
classify these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include
changes in real estate values, costs of foreclosure, prepayment rates, default rates, and discount rates.
Valuations of nonperforming commercial mortgage and construction loans held for sale are based on current
agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, we use third-
party appraisals, adjusted for current market conditions. Since valuations are based on unobservable data, these
loans are classified as Level 3 assets.
Direct financing leases and operating lease assets held for sale. Our KEF Accounting and Capital Markets groups
are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF
Capital Markets group reports to the President of the KEF line of business. A weekly report is distributed to both
groups that lists all equipment finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF
Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and
the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if
an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.
Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model
that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit
market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions
include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3
assets. KEF has master sale and assignment agreements with numerous institutional investors. Historically, multiple
quotes are obtained, with the most reasonable formal quotes retained. These nonbinding quotes generally lead to a
sale to one of the parties who provided the quote. Leases for which we receive a current nonbinding bid, and the sale
is considered probable, may be classified as Level 2. The validity of these quotes is supported by historical and
continued dealings with these institutions that have fulfilled the nonbinding quote in the past. In a distressed market
where market data is not available, an estimate of the fair value of the leased asset may be used to value the lease,
resulting in a Level 3 classification. In an inactive market, the market value of the assets held for sale is determined
as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an
estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate
swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present
value of future cash flows discounted at the calculated buy rate.
Goodwill and other intangible assets. On a quarterly basis, we review impairment indicators to determine
whether we need to evaluate the carrying amount of goodwill and other intangible assets assigned to Key
Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill.
Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill
impairment testing is required. However, we did not choose to utilize a qualitative assessment in our annual
156