KeyBank 2013 Annual Report Download - page 161

valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is
governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable.
Various Working Groups that report to the Fair Value Committee analyze and approve the valuation
methodologies used to fair value assets and liabilities managed within specific areas. The Working Groups are
discussed in more detail in the qualitative disclosures within this footnote and in Note 13 (“Acquisitions and
Discontinued Operations”). Formal documentation of the fair valuation methodologies is prepared by the lines of
business and support areas as appropriate. The documentation details the asset or liability class and related
general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting
methods, valuation methodology, group responsible for valuations, and valuation inputs.
Additional information regarding our accounting policies for determining fair value is provided in Note 1
(“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Qualitative Disclosures of Valuation Techniques
Loans. Most loans recorded as trading account assets are valued based on market spreads for similar assets since
they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based
on observable market data for similar assets.
Securities (trading and available for sale).We own several types of securities, requiring a range of valuation
methods:
/Securities are classified as Level 1 when quoted market prices are available in an active market for the
identical securities. Level 1 instruments include exchange-traded equity securities.
/Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is
determined using pricing models (either by a third-party pricing service or internally) or quoted prices of
similar securities. These instruments include municipal bonds; bonds backed by the U.S. government;
corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets;
and certain agency and corporate CMOs. Inputs to the pricing models include: standard inputs, such as yields,
benchmark securities, bids, and offers; actual trade data (i.e., spreads, credit ratings, and interest rates) for
comparable assets; spread tables; matrices; high-grade scales; and option-adjusted spreads.
/Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. In
such cases, we use internal models based on certain assumptions to determine fair value. Our Level 3
instruments consist of certain commercial mortgage-backed securities. Our Real Estate Capital line of
business is responsible for the quarterly valuation process for these securities. The methodology incorporates
a loan-by-loan credit review in combination with discounting the risk-adjusted bond cash flows. A detailed
credit review of the underlying loans involves a screening process using a multitude of filters to identify the
highest risk loans associated with these commercial mortgage-backed securities. Each of the highest risk
loans identified is re-underwritten and loan-specific defaults and recoveries are assigned. A matrix approach
is used to assign an expected default and recovery percentage for the remaining loans. Bond classes are then
run through a discounted cash flow analysis, taking into account the expected default and recovery
percentages as well as discount rates developed by our Finance area. Inputs for the Level 3 internal models
include expected cash flows from the underlying loans, which take into account expected default and
recovery percentages, market research, and discount rates commensurate with current market conditions.
Changes in the credit quality of the underlying loans or market discount rate would impact the value of the
bonds. An increase in the underlying loan credit quality or decrease in the market discount rate would
positively impact the bond value. A decrease in the underlying loan credit quality or increase in the market
discount rate would negatively impact the bond value.
The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The
valuations provided by the third-party pricing service are based on observable market inputs, which include
benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained
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