KeyBank 2009 Annual Report Download - page 133

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
December 31, 2009
in millions Level 1 Level 2 Level 3 Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans — $ 3 $679 $682
Loans held for sale
(a)
— — 85 85
Operating lease assets — — 9 9
Goodwill and other intangible assets — — — —
Accrued income and other assets — 36 118 154
Total assets on a nonrecurring basis at fair value — $39 $891 $930
(a)
During the fourth quarter of 2009, we transferred $82 million of commercial and consumer loans from held-for-sale status to the held-to-maturity portfolio at their current fair value.
ASSETS MEASURED AT FAIR VALUE
ON A NONRECURRING BASIS
Certain assets and liabilities are measured at fair value on a nonrecurring
basis in accordance with GAAP. The adjustments to fair value generally
result from the application of accounting guidance that requires assets and
liabilities to be recorded at the lower of cost or fair value, or assessed for
impairment. The following table presents our assets measured at fair
value on a nonrecurring basis at December 31, 2009.
Wetypically adjust the carrying amount of our impaired loans when there
is evidence of probable loss and the expected fair value of the loan is less
than its contractual amount. The amount of the impairment may be
determined based on the estimated present value of future cash flows, the
fair value of the underlying collateral or the loan’sobservable market
price. Cash flow analysis considers internally developed inputs, such as
discount rates, default rates, costs of foreclosure and changes in real estate
values. The fair value of the collateral, which may take the formof real
estate or personal property, is based on internal estimates, field
observations and assessments provided by third-party appraisers. Impaired
loans with a specifically allocated allowance based on cash flow analysis
or the underlying collateral are classified as Level 3 assets, while those
with a specifically allocated allowance based on an observable market
price that reflects recent sale transactions for similar loans and collateral
are classified as Level 2. Current market conditions, including credit risk
profiles and decreased real estate values, impacted the inputs used in our
internal valuation analysis, resulting in write-downs of these assets.
Through a quarterly analysis of our commercial loan and lease portfolios
held for sale, we determined that certain adjustments were necessary to
record the portfolios at the lower of cost or fair value in accordance with
GAAP.After adjustments, these loans and leases totaled $94 million at
December 31, 2009. Current market conditions, including credit risk
profiles, liquidity and decreased real estate values, impacted the inputs
used in our internal models and other valuation methodologies, resulting
in write-downs of these assets.
The valuations of performing commercial mortgage and construction loans
areconducted 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, as well as our own assumptions
about the exit market for the loans and details about individual loans
within the respective portfolios. Therefore, we have classified 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.
The valuations of nonperforming commercial mortgage and construction
loans are based on current agreements to sell the loans or approved
discounted payoffs. If a negotiated value is not available, third party
appraisals, adjusted for current market conditions, are used. Since
valuations arebased on unobservable data, these loans have been
classified as Level 3 assets.
The valuation of commercial finance and operating leases is 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. These
leases have been classified as Level 3 assets. The inputs related to our
assumptions include changes in the value of leased items and internal
credit ratings. In addition, commercial leases may be valued using
nonbinding bids when they areavailable and current. The leases valued
under this methodology are classified as Level 2 assets.
On a quarterly basis, we review impairment indicators to determine
whether we need to evaluate the carrying amount of the goodwill and
other intangible assets assigned to our Community Banking and National
Banking units. We also perform an annual impairment test for goodwill.
Fair value of our reporting units is determined using both an income
approach (discounted cash flow method) and a market approach (using
publicly traded company and recent transactions data), which are
weighted equally. Inputs used include market available data, such as
industry, historical and expected growth rates and peer valuations, as well
as internally driven inputs, such as forecasted earnings and market
participant insights. Since this valuation relies on a significant number
of unobservable inputs, we have classified these assets as Level 3.
During the first quarter of 2009, we wrote off all of the goodwill that
had been assigned to the National Banking unit. For additional
information on the results of goodwill impairment testing, see Note 11
(“Goodwill and Other Intangible Assets”).
The fair value of other intangible assets is calculated using a cash flow
approach. While the calculation to test for recoverability uses a number
of assumptions that arebased on current market conditions, the
calculation is based primarily on unobservable assumptions; therefore
the assets areclassified as Level 3. Inputs aredependent on the type of
intangible being valued, and include such items as attrition rates, types
of customers, revenue streams, prepayment rates, refinancing probabilities
and credit defaults. For additional information on the results of other
intangible assets impairment testing, see Note 11.