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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2019
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 6. Fair Value Measurements In accordance with GAAP, Key measures certain assets and liabilities at fair value. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. 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.” Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present assets and liabilities measured at fair value on a recurring basis at December 31, 2019, and December 31, 2018.
| December 31, 2019 | December 31, 2018
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total
in millions
ASSETS MEASURED ON A RECURRING BASIS |  |  |  |  |  |  |  |
Trading account assets: |  |  |  |  |  |  |  |
U.S. Treasury, agencies and corporations | — |  | $ | 843 |  | — |  | $ | 843 |  | — |  | $ | 578 |  | — |  | $ | 578 |
States and political subdivisions | — |  | 30 |  | — |  | 30 |  | — |  | 60 |  | — |  | 60 |
Other mortgage-backed securities | — |  | 78 |  | — |  | 78 |  | — |  | 164 |  | — |  | 164 |
Other securities | — |  | 44 |  | — |  | 44 |  | — |  | 22 |  | — |  | 22 |
Total trading account securities | — |  | 995 |  | — |  | 995 |  | — |  | 824 |  | — |  | 824 |
Commercial loans | — |  | 45 |  | — |  | 45 |  | — |  | 25 |  | — |  | 25 |
Total trading account assets | — |  | 1,040 |  | — |  | 1,040 |  | — |  | 849 |  | — |  | 849 |
Securities available for sale: |  |  |  |  |  |  |  |
U.S. Treasury, agencies and corporations | — |  | 334 |  | — |  | 334 |  | — |  | 147 |  | — |  | 147 |
States and political subdivisions | — |  | 4 |  | — |  | 4 |  | — |  | 7 |  | — |  | 7 |
Agency residential collateralized mortgage obligations | — |  | 12,783 |  | — |  | 12,783 |  | — |  | 13,962 |  | — |  | 13,962 |
Agency residential mortgage-backed securities | — |  | 1,714 |  | — |  | 1,714 |  | — |  | 2,105 |  | — |  | 2,105 |
Agency commercial mortgage-backed securities | — |  | 6,997 |  | — |  | 6,997 |  | — |  | 3,187 |  | — |  | 3,187 |
Other securities | — |  | — |  | $ | 11 |  | 11 |  | — |  | — |  | $ | 20 |  | 20 |
Total securities available for sale | — |  | 21,832 |  | 11 |  | 21,843 |  | — |  | 19,408 |  | 20 |  | 19,428 |
Other investments: |  |  |  |  |  |  |  |
Principal investments: |  |  |  |  |  |  |  |
Direct | — |  | — |  | 1 |  | 1 |  | — |  | — |  | 1 |  | 1 |
Indirect (measured at NAV) (a) | — |  | — |  | — |  | 68 |  | — |  | — |  | — |  | 96 |
Total principal investments | — |  | — |  | 1 |  | 69 |  | — |  | — |  | 1 |  | 97 |
Equity investments: |  |  |  |  |  |  |  |
Direct | — |  | — |  | 12 |  | 12 |  | — |  | 1 |  | 7 |  | 8 |
Direct (measured at NAV) (a) | — |  | — |  | — |  | 1 |  | — |  | — |  | — |  | 1 |
Indirect (measured at NAV) (a) | — |  | — |  | — |  | 8 |  | — |  | — |  | — |  | 9 |
Total equity investments | — |  | — |  | 12 |  | 21 |  | — |  | 1 |  | 7 |  | 18 |
Total other investments | — |  | — |  | 13 |  | 90 |  | — |  | 1 |  | 8 |  | 115 |
Loans, net of unearned income (residential) | — |  | — |  | 4 |  | 4 |  | — |  | — |  | 3 |  | 3 |
Loans held for sale (residential) | — |  | 140 |  | — |  | 140 |  | — |  | 54 |  | — |  | 54 |
Derivative assets: |  |  |  |  |  |  |  |
Interest rate | — |  | 941 |  | 22 |  | 963 |  | — |  | 410 |  | 5 |  | 415 |
Foreign exchange | $ | 49 |  | 18 |  | — |  | 67 |  | $ | 70 |  | $ | 36 |  | $ | — |  | $ | 106 |
Commodity | — |  | 208 |  | — |  | 208 |  | — |  | 333 |  | — |  | 333 |
Credit | — |  | — |  | 1 |  | 1 |  | — |  | 1 |  | — |  | 1 |
Other | — |  | 9 |  | 5 |  | 14 |  | — |  | 6 |  | 3 |  | 9 |
Derivative assets | 49 |  | 1,176 |  | 28 |  | 1,253 |  | 70 |  | 786 |  | 8 |  | 864 |
Netting adjustments (b) | — |  | — |  | — |  | (473 | ) | — |  | — |  | — |  | (333 | )
Total derivative assets | 49 |  | 1,176 |  | 28 |  | 780 |  | 70 |  | 786 |  | 8 |  | 531 |
Total assets on a recurring basis at fair value | $ | 49 |  | $ | 24,188 |  | $ | 56 |  | $ | 23,897 |  | $ | 70 |  | $ | 21,098 |  | $ | 39 |  | $ | 20,980 |
LIABILITIES MEASURED ON A RECURRING BASIS |  |  |  |  |  |  |  |
Bank notes and other short-term borrowings: |  |  |  |  |  |  |  |
Short positions | $ | 19 |  | $ | 686 |  | — |  | $ | 705 |  | $ | 14 |  | $ | 530 |  | — |  | $ | 544 |
Derivative liabilities: |  |  |  |  |  |  |  |
Interest rate | — |  | 253 |  | — |  | 253 |  | — |  | 297 |  | — |  | 297 |
Foreign exchange | 43 |  | 17 |  | — |  | 60 |  | 58 |  | 37 |  | — |  | 95 |
Commodity | — |  | 200 |  | — |  | 200 |  | — |  | 323 |  | — |  | 323 |
Credit | — |  | 1 |  | 9 |  | 10 |  | — |  | 1 |  | — |  | 1 |
Other | — |  | 10 |  | — |  | 10 |  | — |  | 7 |  | — |  | 7 |
Derivative liabilities | 43 |  | 481 |  | 9 |  | 533 |  | 58 |  | 665 |  | — |  | 723 |
Netting adjustments (b) | — |  | — |  | — |  | (335 | ) | — |  | — |  | — |  | (337 | )
Total derivative liabilities | 43 |  | 481 |  | 9 |  | 198 |  | 58 |  | 665 |  | — |  | 386 |
Total liabilities on a recurring basis at fair value | $ | 62 |  | $ | 1,167 |  | 9 |  | $ | 903 |  | $ | 72 |  | $ | 1,195 |  | — |  | $ | 930 |
(a) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
(b) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
Qualitative Disclosures of Valuation Techniques The following table describes the valuation techniques and significant inputs used to measure the classes of assets and liabilities reported at fair value on a recurring basis, as well as the classification of each within the valuation hierarchy.
Asset/liability class | Valuation technique | Valuation hierarchy classification(s)
Securities (trading account assets and available for sale) | Fair value of level 1 securities is determined by: • Quoted market prices available in an active market for identical securities. This includes exchange-traded equity securities. Fair value of level 2 securities is determined by: • Pricing models (either by a third party pricing service or internally). Inputs include: yields, benchmark securities, bids, 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. • Observable market prices of similar securities. Fair value of level 3 securities is determined by: • Internal models, principally discounted cash flow models (income approach). • Revenue multiples of comparable public companies (market approach). For level 3 securities, increases in the discount rate applied in the discounted cash flow models would negatively affect the fair value. Increases in valuation multiples of comparable companies would positively affect the fair value. 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. | Level 1, 2, and 3 (primarily Level 2)
Commercial loans (trading account assets) | Fair value is based on: • Observable market price spreads for similar loans. Valuations reflect prices within the bid-ask spread that are most representative of fair value. | Level 2
Principal investments (direct) | Direct principal investments consist of equity and debt instruments of private companies made by our principal investing entities. Fair value is determined using: • Operating performance and market multiples of comparable businesses • Other unique facts and circumstances related to each individual investment Direct principal investments are accounted for as investment companies in accordance with the applicable accounting guidance, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. We are in the process of winding down our direct principal investment portfolio. As of December 31, 2019, the balance is less than $1 million. | Level 3
Principal investments (indirect) | Indirect principal investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values and qualify for the practical expedient to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). Indirect principal investments are also accounted for as investment companies, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. Under the provisions of the Volcker Rule, we are required to dispose or conform our indirect investments to the requirements of the statute by no later than July 21, 2022. As of December 31, 2019, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. | NAV
The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at December 31, 2019, as well as financial support provided for the years ended December 31, 2019, and December 31, 2018.
|  |  |  | Financial support provided
|  |  |  | Year ended December 31,
|  | December 31, 2019 |  | 2019 |  | 2018
in millions |  | Fair Value |  |  | Unfunded Commitments |  |  | Funded Commitments |  |  | Funded Other |  |  | Funded Commitments |  |  | Funded Other |
INVESTMENT TYPE |  |  |  |  |  |  |  |  |  |  |  |
Direct investments (a) |  | $ | 1 |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | $ | — |
Indirect investments (b) |  | 68 |  |  | $ | 21 |  |  | $ | — |  |  | — |  |  | $ | 1 |  |  | — |
Total |  | $ | 69 |  |  | $ | 21 |  |  | $ | — |  |  | 1 |  |  | $ | 1 |  |  | $ | — |
(a) | Our direct investments consist of equity and debt investments directly in independent business enterprises. Operations of the business enterprises are handled by management of the portfolio company. The purpose of funding these enterprises is to provide financial support for business development and acquisition strategies. We infuse equity capital based on an initial contractual cash contribution and later from additional requests on behalf of the companies’ management.
(b) | Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. At December 31, 2019, no significant liquidation of the underlying investments has been communicated to Key. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.
Asset/liability class | Valuation technique | Valuation hierarchy classification(s)
Other direct equity investments | Fair value is determined using: • Discounted cash flows • Operating performance and market/exit multiples of comparable businesses • Other unique facts and circumstances related to each individual investment For level 3 securities, increases in the discount rate applied in the discounted cash flow models would negatively affect the fair value. Increases in valuation multiples of comparable companies would positively affect the fair value. Level 2 investments reflect the price of recent investments, which is deemed representative of fair value. | Level 2 and 3
Other direct and indirect equity investments (NAV) | Certain direct investments do not have readily determinable fair values and qualify for the practical expedient in the accounting guidance that allows us to estimate fair value based upon net asset value per share. | NAV
Loans held for sale and held for investment (residential) | Residential mortgage loans held for sale are accounted for at fair value. Fair values are based on: • Quoted market prices, where available • Prices for other traded mortgage loans with similar characteristics • Purchase commitments and bid information received from market participants Prices are adjusted as necessary to include: • The embedded servicing value in the loans • The specific characteristics of certain loans that are priced based on the pricing of similar loans. (These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans.) Residential loans held for investment: Certain residential loans held for sale contain salability exceptions that make them unable to be sold into the performing loan sales market. Loans in this category are transferred to the held to maturity loan portfolio and are included in “Loans, net of unearned income” on the balance sheet. This type of loan is classified as level 3 in the valuation hierarchy as transaction details regarding sales of this type of loan are often unavailable. Fair value is based upon: • Unobservable bid information from brokers and investors | Level 1, 2 and 3 (primarily level 2)
Derivatives | Exchange-traded derivatives are valued using quoted prices in active markets and, therefore, are classified as Level 1 instruments. The majority of our derivative positions are level 2 and are valued using internally developed models based on market convention and observable market inputs. These derivative contracts include interest rate swaps, certain options, floors, cross currency swaps, credit default swaps, and forward mortgage loan sale commitments. Significant inputs used in the valuation models include: • Interest rate curves • Yield curves • LIBOR and Overnight Index Swap (OIS) discount rates • LIBOR and OIS curves, index pricing curves, foreign currency curves • Volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity) • Current prices for mortgage securities and investor supplied prices | Level 1, 2, and 3 (primarily level 2)
Asset/liability class | Valuation technique | Valuation hierarchy classification(s)
Derivatives (continued) | We have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as: • Bond spreads and asset values The unobservable internally derived assumptions include: • Loss given default • Internal risk ratings of customers and the remaining term of the underlying transactions The fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations. We use interest rate lock commitments for our residential mortgage business, which are classified as Level 3 instruments. The significant components of the valuation model include: • Interest rates observable in the market • Observable market prices for similar securities • The probability of the loan closing (i.e. the "pull-through" amount, a significant unobservable input). Increases in the probability of the loan closing would positively affect the fair value. Valuation of residential mortgage forward sale commitments utilizes observable market prices of comparable commitments and mortgage securities (Level 2). | Level 1, 2, and 3 (primarily level 2)
Liability for short positions | This includes fixed income securities held by our broker dealer in its trading inventory. Fair value of level 1 securities is determined by: • Quoted market prices available in an active market for identical securities Fair value of level 2 securities is determined by: • Observable market prices of similar securities • Market activity, spreads, credit ratings and interest rates for each security type | Level 1 and 2
Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment. The credit component considers master netting and collateral agreements and is determined by the individual counterparty based on potential future exposures, expected recovery rates, and market-implied probabilities of default. We also make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:
• | the amount of time since the last relevant valuation;
• | whether there is an actual trade or relevant external quote available at the measurement date; and
• | volatility associated with the primary pricing components.
We regularly validate the pricing methodologies of valuations derived from a 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 its 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. Changes in Level 3 Fair Value Measurements The following table shows the change in the fair values of our Level 3 financial instruments for the years ended December 31, 2019, and December 31, 2018.
in millions | Beginning of Period Balance | Gains (Losses) included in comprehensive income | Gains (Losses) Included in Earnings |  | Purchases | Sales | Settlements | Transfers Other | Transfers into Level 3 |  | Transfers out of Level 3 |  | End of Period Balance | Unrealized Gains (Losses) Included in Earnings |
Year ended December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other securities | $ | 20 |  | $ | 15 |  | — |  |  | — |  | — |  | — |  | — |  | — |  |  | $ | (24 | ) |  | $ | 11 |  | — |  |
Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct | 1 |  | — |  | — |  |  | — |  | — |  | — |  | — |  | — |  |  | — |  |  | 1 |  | — |  |
Equity investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct | 7 |  | — |  | $ | 4 |  | (c) | — |  | — |  | — |  | — |  | $ | 1 |  |  | — |  |  | 12 |  | 4 |  |
Loans held for sale | — |  | — |  | — |  |  | — |  | $ | (1 | ) | — |  | $ | 1 |  | — |  |  | — |  |  | — |  | — |  |
Loans held for investment | 3 |  | — |  | — |  |  | — |  | — |  | — |  | 1 |  | — |  |  | — |  |  | 4 |  | — |  |
Derivative instruments (b) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate | 5 |  | — |  | 3 |  | (d) | $ | 2 |  | (1 | ) | — |  | — |  | 21 |  | (e) | (8 | ) | (e) | 22 |  | — |  |
Credit | — |  | — |  | (8 | ) | (d) | — |  | — |  | — |  | — |  | — |  |  | — |  |  | (8 | ) | — |  |
Other (a) | 3 |  | — |  | — |  |  | — |  | — |  | — |  | 2 |  | — |  |  | — |  |  | 5 |  | — |  |
in millions | Beginning of Period Balance | Gains (Losses) included in comprehensive income | Gains (Losses) Included in Earnings |  | Purchases | Sales | Settlements | Transfers Other | Transfers into Level 3 |  | Transfers out of Level 3 |  | End of Period Balance | Unrealized Gains (Losses) Included in Earnings |
Year ended December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other securities | $ | 20 |  | — |  | — |  |  | — |  | — |  | — |  | — |  | — |  |  | — |  |  | $ | 20 |  | — |  |
Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct | 13 |  | — |  | $ | (1 | ) | (c) | $ | 5 |  | $ | (16 | ) | — |  | — |  | — |  |  | — |  |  | 1 |  | — |  |
Equity investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Direct | 3 |  | — |  | — |  |  | — |  | — |  | — |  | — |  | $ | 4 |  |  | — |  |  | 7 |  | — |  |
Loans held for sale | 1 |  | — |  | — |  |  | — |  | (1 | ) | — |  | $ | (1 | ) | 1 |  |  | — |  |  | — |  | — |  |
Loans held for investment | 2 |  | — |  | — |  |  | — |  | — |  | — |  | 1 |  | — |  |  | — |  |  | 3 |  | — |  |
Derivative instruments (b) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate | 9 |  | — |  | (2 | ) | (d) | 1 |  | (2 | ) | — |  | — |  | 7 |  | (e) | $ | (8 | ) | (e) | 5 |  | — |  |
Credit | 1 |  | — |  | (31 | ) | (d) | — |  | — |  | $ | 30 |  | — |  | — |  |  | — |  |  | — |  | — |  |
Other (a) | 3 |  | — |  | — |  |  | — |  | — |  | — |  | $ | — |  | — |  |  | — |  |  | 3 |  | — |  |
(a) | Amounts represent Level 3 interest rate lock commitments.
(b) | Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.
(c) | Realized and unrealized gains and losses on principal investments are reported in “other income” on the income statement. Realized and unrealized losses on equity investments are reported in “other income” on the income statement.
(d) | Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.
(e) | Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant.
Assets and Liabilities 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. There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2019, and December 31, 2018. The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2019, and December 31, 2018:
| December 31, 2019 | December 31, 2018
in millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total
ASSETS MEASURED ON A NONRECURRING BASIS |  |  |  |  |  |  |  |
Impaired loans and leases | — |  | — |  | $ | 76 |  | $ | 76 |  | — |  | — |  | $ | 42 |  | $ | 42 |
Accrued income and other assets | — |  | $ | 118 |  | 51 |  | 169 |  | — |  | — |  | 16 |  | 16 |
Total assets on a nonrecurring basis at fair value | — |  | $ | 118 |  | $ | 127 |  | $ | 245 |  | — |  | — |  | $ | 58 |  | $ | 58 |
Qualitative Disclosures of Valuation Techniques The following table describes the valuation techniques and significant inputs used to measure the significant classes of assets and liabilities reported at fair value on a nonrecurring basis, as well as the classification of each within the valuation hierarchy.
Asset/liability class | Valuation technique | Valuation hierarchy classification(s)
Impaired loans and leases | Loans are evaluated for impairment on a quarterly basis; impairment typically occurs when there is evidence of a probable loss and the expected value of the loan is less than the contractual value of the loan. 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’s observable market price based on recent sales of similar loans and collateral. Cash flow analysis considers internally developed inputs including: • Discount rates • Default rates • Costs of foreclosure • Changes in collateral values The fair value of the underlying collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, and assessments provided by third-party appraisers. We perform or reaffirm appraisals of collateral-dependent impaired loans at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due, or there has been a material deterioration in the performance of the project or condition of the property. Adjustments to outdated appraisals that result in an appraisal value less than the carrying amount of a collateral-dependent impaired loan are reflected in the ALLL. Impaired loans with a specifically allocated allowance based on a cash flow analysis or the value of the underlying collateral are classified as Level 3 assets. Impaired loans 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 assets. We 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. | Level 2 and 3
Commercial loans held for sale | Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Valuation inputs include: • Non-binding bids for the respective loans or similar loans • Recent sales transactions • Internal models that emulate recent securitizations | Level 2 and 3
Direct financing leases and operating lease assets held for sale | Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, including: • Swap rates and bond ratings • Our own assumptions about the exit market for the leases • Details about the individual leases in the portfolio 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 for which the sale is considered probable, may be classified as Level 2. The validity of these quotes is supported by historical and continued dealings with institutions that have fulfilled the nonbinding quote in the past. Valuations of lease and operating lease assets held for sale that employ our own assumptions are classified as Level 3 assets. Inputs utilized include changes in the value of leased items and internal credit ratings. In an inactive market, we value assets held for sale through discounted cash flows models that utilize the current buy rate as the discount rate. Buy rates are based on the credit premium inherent in the relevant bond index and the the appropriate swap rate on the measurement date. | Level 2 and 3
Asset/liability class | Valuation technique | Valuation hierarchy classification(s)
OREO and other repossessed personal property(a) | OREO and other repossessed properties are valued based on: • Appraisals and third-party price opinions, less estimated selling costs Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded initially as held for sale at fair value less estimated selling costs at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis. | Level 2 and 3
LIHTC, HTC, and NMTC investments(a) | LIHTC, HTC and NMTC operating partnerships are subject to quarterly impairment testing. This evaluation involves measuring the present value of future tax benefits and comparing that value against the current carrying value of the investment. Expected future tax benefit schedules are provided by the partnerships’ general partners on a quarterly basis. These future benefits are discounted to their present value using discounted cash flow modeling that incorporates an appropriate risk premium. LIHTC and HTC investments are impaired when it is more likely than not that the carrying amount of the investment will not be realized. | Level 3
Other equity investments | We have other investments in equity securities that do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share. We have elected to measure these securities at cost less impairment plus or minus adjustments due to observable orderly transactions. Impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. At each reporting period, we assess if these investments continue to qualify for this measurement alternative. At December 31, 2019, the carrying amount of equity investments recorded under this method was $134 million. Impairments of less than $1 million were recorded for the year ended December 31, 2019. | Level 3
Mortgage Servicing Rights(a) | Refer to Note 9. Mortgage Servicing Assets | Level 3
(a) | Asset classes included in “Accrued income and other assets” on the Consolidated Balance Sheets
Quantitative Information about Level 3 Fair Value Measurements The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at December 31, 2019, and December 31, 2018, along with the valuation techniques used, are shown in the following table:
December 31, 2019 | Level 3 Asset (Liability) | Valuation Technique | Significant Unobservable Input | Range (Weighted-Average) (b), (c)
dollars in millions
Recurring |  |  |  |
Securities available-for-sale: |  |  |  |
Other securities | $ | 11 |  | Discounted cash flows | Discount rate | N/A (16.10%)
|  |  | Marketability discount | N/A (30.00%)
|  |  | Volatility factor | N/A (43.00%)
Other investments:(a) |  |  |  |
Equity investments |  |  |  |
Direct | 12 |  | Discounted cash flows | Discount rate | 13.91 - 17.24% (15.61%)
|  |  | Marketability discount | N/A (30.00%)
|  |  | Volatility factor | N/A (47.00%)
Loans, net of unearned income (residential) | 4 |  | Market comparable pricing | Comparability factor | 79.00 - 98.00% (91.05%)
Derivative instruments: |  |  |  |
Interest rate | 22 |  | Discounted cash flows | Probability of default | .02 - 100% (5.40%)
|  |  | Internal risk rating | 1 - 19 (9.168)
|  |  | Loss given default | 0 - 1 (.492)
Credit (assets) | 1 |  | Discounted cash flows | Probability of default | .02 - 100% (4.2%)
|  |  | Internal risk rating | 1 - 19 (10.13)
|  |  | Loss given default | 0 - 1 (.498)
Credit (liabilities) | (9 | ) | Discounted cash flows | Probability of default | .02 - 100% (12.24%)
|  |  | Internal risk rating | 1 - 19 (8.058)
|  |  | Loss given default | 0 - 1 (.411)
Other(d) | 5 |  | Discounted cash flows | Loan closing rates | 37.71 - 99.69% (79.33%)
Nonrecurring |  |  |  |
Impaired loans | 76 |  | Fair value of underlying collateral | Discount rate | 0 - 60.00% (10.00%)
Accrued income and other assets:(e) |  |  |  |
OREO | 5 |  | Appraised value | Appraised value | N/M
December 31, 2018 | Fair Value of Level 3 Assets | Valuation Technique | Significant Unobservable Input | Range (Weighted-Average)
dollars in millions
Nonrecurring |  |  |  |
Impaired loans | $ | 42 |  | Fair value of underlying collateral | Discount | 20.00 - 40.00% (21.00%)
(a) | Principal investments, direct is excluded from this table as the balance at December 31, 2019, is insignificant (less than $1 million).
(b) | The weighted average of significant unobservable inputs is calculated using a weighting relative to fair value.
(c) | For significant unobservable inputs with no range, a single figure is reported to denote the single quantitative factor used.
(d) | Amounts represent interest rate lock commitments.
(e) | Excludes $46 million pertaining to mortgage servicing assets measured at fair value as of December 31, 2019. Refer to Note 8 (“Mortgage Servicing Assets”) for significant unobservable inputs pertaining to these assets.
Fair Value Disclosures of Financial Instruments The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at December 31, 2019, and December 31, 2018, are shown in the following table.
| December 31, 2019
|  | Fair Value
in millions | Carrying Amount | Level 1 | Level 2 | Level 3 | Measured at NAV | Netting Adjustment |  | Total
ASSETS (by measurement category) |  |  |  |  |  |  |  |
Fair value - net income |  |  |  |  |  |  |  |
Trading account assets (b) | $ | 1,040 |  | — |  | $ | 1,040 |  | — |  | — |  | — |  |  | $ | 1,040 |
Other investments (b) | 605 |  | — |  | — |  | $ | 528 |  | $ | 77 |  | — |  |  | 605 |
Loans, net of unearned income (residential) (d) | 4 |  | — |  | — |  | 4 |  | — |  | — |  |  | 4 |
Loans held for sale (residential) (b) | 140 |  | — |  | 140 |  | — |  | — |  | — |  |  | 140 |
Derivative assets - trading (b) | 715 |  | $ | 49 |  | 985 |  | 28 |  | — |  | $ | (347 | ) | (f) | 715 |
Fair value - OCI |  |  |  |  |  |  |  |
Securities available for sale (b) | 21,843 |  | — |  | 21,832 |  | 11 |  | — |  | — |  |  | 21,843 |
Derivative assets - hedging (b) (g) | 65 |  | — |  | 191 |  | — |  | — |  | (126 | ) | (f) | 65 |
Amortized cost |  |  |  |  |  |  |  |
Held-to-maturity securities (c) | 10,067 |  | — |  | 10,116 |  | — |  | — |  | — |  |  | 10,116 |
Loans, net of unearned income (d) | 93,742 |  | — |  | — |  | 92,641 |  | — |  | — |  |  | 92,641 |
Loans held for sale (b) | 1,194 |  | — |  | — |  | 1,194 |  | — |  | — |  |  | 1,194 |
Other |  |  |  |  |  |  |  |
Cash and short-term investments (a) | 2,004 |  | 2,004 |  | — |  | — |  | — |  | — |  |  | 2,004 |
LIABILITIES (by measurement category) |  |  |  |  |  |  |  |
Fair value - net income |  |  |  |  |  |  |  |
Derivative liabilities - trading (b) | 194 |  | 43 |  | 461 |  | 9 |  | — |  | (319 | ) | (f) | 194 |
Fair value - OCI |  |  |  |  |  |  |  |
Derivative liabilities - hedging (b) (g) | 4 |  | — |  | 20 |  | — |  | — |  | (16 | ) | (f) | 4 |
Amortized cost |  |  |  |  |  |  |  |
Time deposits (e) | 11,652 |  | — |  | 11,752 |  | — |  | — |  | — |  |  | 11,752 |
Short-term borrowings (a) | 1,092 |  | 19 |  | 1,073 |  | — |  | — |  | — |  |  | 1,092 |
Long-term debt (e) | 12,448 |  | 12,694 |  | 249 |  | — |  | — |  | — |  |  | 12,943 |
Other |  |  |  |  |  |  |  |
Deposits with no stated maturity (a) | 100,218 |  | — |  | 100,218 |  | — |  | — |  | — |  |  | 100,218 |
| December 31, 2018
|  | Fair Value
in millions | Carrying Amount | Level 1 | Level 2 | Level 3 | Measured at NAV | Netting Adjustment |  | Total
ASSETS (by measurement category) |  |  |  |  |  |  |  |
Fair value - net income |  |  |  |  |  |  |  |
Trading account assets (b) | $ | 849 |  | — |  | $ | 849 |  | — |  | — |  | — |  |  | $ | 849 |
Other investments (b) | 666 |  | — |  | 1 |  | $ | 559 |  | $ | 106 |  | — |  |  | 666 |
Loans, net of unearned income (residential) (d) | 3 |  | — |  | — |  | 3 |  | — |  | — |  |  | 3 |
Loans held for sale (residential) (b) | 54 |  | — |  | 54 |  | — |  | — |  | — |  |  | 54 |
Derivative assets - trading (b) | 462 |  | $ | 68 |  | 736 |  | 8 |  | — |  | $ | (350 | ) | (f) | 462 |
Fair value - OCI |  |  |  |  |  |  |  |
Securities available for sale (b) | 19,428 |  | — |  | 19,408 |  | 20 |  | — |  | — |  |  | 19,428 |
Derivative assets - hedging (b) (g) | 69 |  | 2 |  | 50 |  | — |  | — |  | 17 |  | (f) | 69 |
Amortized cost |  |  |  |  |  |  |  |
Held-to-maturity securities (c) | 11,519 |  | — |  | 11,122 |  | — |  | — |  | — |  |  | 11,122 |
Loans, net of unearned income (d) | 88,666 |  | — |  | — |  | 86,224 |  | — |  | — |  |  | 86,224 |
Loans held for sale (b) | 1,173 |  | — |  | — |  | 1,173 |  | — |  | — |  |  | 1,173 |
Other |  |  |  |  |  |  |  |
Cash and short-term investments (a) | 3,240 |  | 3,240 |  | — |  | — |  | — |  | — |  |  | 3,240 |
LIABILITIES (by measurement category) |  |  |  |  |  |  |  |
Fair value - net income |  |  |  |  |  |  |  |
Derivative liabilities - trading (b) | 395 |  | 58 |  | 675 |  | — |  | — |  | (338 | ) | (f) | 395 |
Fair value - OCI |  |  |  |  |  |  |  |
Derivative liabilities - hedging (b) (g) | (9 | ) | — |  | (10 | ) | — |  | — |  | 1 |  | (f) | (9 | )
Amortized cost |  |  |  |  |  |  |  |
Time deposits (e) | 13,245 |  | — |  | 13,331 |  | — |  | — |  | — |  |  | 13,331 |
Short-term borrowings (a) | 863 |  | 14 |  | 849 |  | — |  | — |  | — |  |  | 863 |
Long-term debt (e) | 13,732 |  | 12,576 |  | $ | 1,211 |  | — |  | — |  | — |  |  | 13,787 |
Other |  |  |  |  |  |  |  |
Deposits with no stated maturity (a) | 94,064 |  | — |  | 94,064 |  | — |  | — |  | — |  |  | 94,064 |
Valuation Methods and Assumptions
(a) | Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.
(b) | Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” in this Note. Investments accounted for under the cost method (or cost less impairment adjusted for observable price changes for certain equity investments) are classified as Level 3 assets. These investments are not actively traded in an open market as sales for these types of investments are rare. The carrying amount of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary (or due to observable orderly transactions of the same issuer for equity investments eligible for the cost less impairment measurement alternative). These adjustments are included in “other income” on the income statement.
(c) | Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure that they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.
(d) | The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.
(e) | Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.
(f) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
(g) | Derivative assets-hedging and derivative liabilities-hedging includes both cash flow and fair value hedges. Additional information regarding our accounting policies for cash flow and fair value hedges is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging.”
We determine fair value based on assumptions pertaining to the factors that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2018 and 2019, the fair values of our loan portfolios generally remained stable, primarily due to sustained liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole. Discontinued assets - education lending business. Our discontinued assets include government-guaranteed and private education loans originated through our education lending business that was discontinued in September 2009. This portfolio consists of loans recorded at carrying value with appropriate valuation reserves and loans in portfolio recorded at fair value. All of these loans were excluded from the table above as follows:
• | Loans at carrying value, net of allowance, of $855 million ($729 million at fair value) at December 31, 2019, and $1.1 billion ($890 million at fair value) at December 31, 2018; and
• | Portfolio loans at fair value of $2 million at December 31, 2019, and $2 million at December 31, 2018.
These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available. Short-term financial instruments. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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