KeyBank 2014 Annual Report Download - page 160

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. To
determine fair value in such cases, depending on the complexity of the valuations required, we use internal
models based on certain assumptions or a third-party valuation service. At December 31, 2014, our Level 3
instruments consist of a convertible preferred security. The security is valued using a cash flow analysis of
the associated private company issuer as determined by a third-party valuation service. The valuation of the
security is negatively impacted by a projected net loss of the associated private company and positively
impacted by a projected net gain.
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
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. The portion
of our Real Estate Capital line of business involved with private equity and mezzanine investments is accounted
for as an investment company in accordance with the applicable accounting guidance, whereby all investments
are recorded at fair value.
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
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