KeyBank 2013 Annual Report Download - page 162

from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other
mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral
performance, and “To Be Announced” prices. In valuations of securities issued by state and political
subdivisions, inputs used by the third-party pricing service also include material event notices.
On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure
the fair value determination is consistent with the applicable accounting guidance and that our assets are properly
classified in the fair value hierarchy. To perform this validation, we:
/review documentation received from our third-party pricing service regarding the inputs used in their
valuations and determine a level assessment for each category of securities;
/substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-
party pricing service to comparable inputs for similar securities; and
/substantiate the fair values determined for a sample of securities by comparing the fair values provided by
our third-party pricing service to prices from other independent sources for the same and similar securities.
We analyze variances and conduct additional research with our third-party pricing service and take
appropriate steps based on our findings.
Private equity and mezzanine investments.Private equity and mezzanine investments consist of investments in
debt and equity securities through our Real Estate Capital line of business. They include direct investments made
in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in
properties. There is no active market for these investments, so we employ other valuation methods.
Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly
influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are
responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly
basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then
adjusted to fair value based on current market conditions using the discounted cash flow method based on the
expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. Periodically, we
obtain a third-party appraisal for the investments to validate the specific inputs for determining fair value.
Inputs used in calculating future cash flows include the cost of build-out, future selling prices, current market
outlook, and operating performance of the investment. Investment income and expense assumptions are based on
market inputs, such as rental/leasing rates and vacancy rates for the geographic- and property type-specific
markets. For investments under construction, investment income and expense assumptions are determined using
expected future build-out costs and anticipated future rental prices based on current market conditions, discount
rates, holding period, the terminal cap rate and sales commissions paid in the terminal cap year. For investments
that are in lease-up or are fully leased, income and expense assumptions are based on the geographic market’s
current lease rates, underwritten expenses, market lease terms, and historical vacancy rates. Asset Management
validates these inputs on a quarterly basis through the use of industry publications, third-party broker opinions,
and comparable property sales, where applicable. Changes in the significant inputs (rental/leasing rates, vacancy
rates, valuation capitalization rate, discount rate, and terminal cap rate) would significantly affect the fair value
measurement. Increases in rental/leasing rates would increase fair value while increases in the vacancy rates, the
valuation capitalization rate, the discount rate, and the terminal cap rate would decrease fair value.
Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of
statements from the investment manager to calculate net asset value per share. A primary input used in estimating
fair value is the most recent value of the capital accounts as reported by the general partners of the funds in
which we invest. The calculation to determine the investment’s fair value is based on our percentage ownership
in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the
requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of
December 31, 2013, management has not committed to a plan to sell these investments. Therefore, these
investments continue to be valued using the net asset value per share methodology.
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