Fair Value Measurements

9 Months Ended

Sep. 30, 2020

5. 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 6 (“Fair Value Measurements”) and Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” of our 2019 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at September 30, 2020, and December 31, 2019.


	September 30, 2020								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
in millions
ASSETS MEASURED ON A RECURRING BASIS
Short-term investments
U.S. Treasury Bills	—		$	1,000	—		$	1,000	—		$	—	—		$	—
Total short-term investments	—		1,000		—		1,000		—		—		—		—
Trading account assets:
U.S. Treasury, agencies and corporations	—		611		—		611		—		843		—		843
States and political subdivisions	—		52		—		52		—		30		—		30

Other mortgage-backed securities	—		13		$	27	40		—		78		—		78
Other securities	$	1	12		—		13		—		44		—		44
Total trading account securities	1		688		27		716		—		995		—		995
Commercial loans	—		17		—		17		—		45		—		45
Total trading account assets	1		705		27		733		—		1,040		—		1,040
Securities available for sale:
U.S. Treasury, agencies and corporations	—		4,464		—		4,464		—		334		—		334
States and political subdivisions	—		3		—		3		—		4		—		4
Agency residential collateralized mortgage obligations	—		13,732		—		13,732		—		12,783		—		12,783
Agency residential mortgage-backed securities	—		1,326		—		1,326		—		1,714		—		1,714
Agency commercial mortgage-backed securities	—		7,358		—		7,358		—		6,997		—		6,997
Other securities	—		—		12		12		—		—		$	11	11
Total securities available for sale	—		26,883		12		26,895		—		21,832		11		21,843
Other investments:
Principal investments:
Direct	—		—		1		1		—		—		1		1
Indirect (measured at NAV) (a)	—		—		—		60		—		—		—		68
Total principal investments	—		—		1		61		—		—		1		69
Equity investments:
Direct	—		—		12		12		—		—		12		12
Direct (measured at NAV) (a)	—		—		—		1		—		—		—		1
Indirect (measured at NAV) (a)	—		—		—		7		—		—		—		8
Total equity investments	—		—		12		20		—		—		12		21
Total other investments	—		—		13		81		—		—		13		90
Loans, net of unearned income (residential)	—		—		8		8		—		—		4		4
Loans held for sale (residential)	—		287		1		288		—		140		—		140
Derivative assets:
Interest rate	—		1,746		81		1,827		—		941		22		963
Foreign exchange	56		18		—		74		$	49	18		—		67
Commodity	—		462		—		462		—		208		—		208
Credit	—		1		2		3		—		—		1		1
Other	—		26		44		70		—		9		5		14
Derivative assets	56		2,253		127		2,436		49		1,176		28		1,253
Netting adjustments (b)	—		—		—		(490)		—		—		—		(473)
Total derivative assets	56		2,253		127		1,946		49		1,176		28		780
Accrued income and other assets	—		—		—		—		—		—		—		—
Total assets on a recurring basis at fair value	$	57	$	30,128	$	188	$	30,951	$	49	$	24,188	$	56	$	23,897
LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	289	$	529	—		$	818	$	19	$	686	—		$	705
Derivative liabilities:
Interest rate	—		306		—		306		—		253		—		253
Foreign exchange	51		17		—		68		43		17		—		60
Commodity	—		445		—		445		—		200		—		200
Credit	—		—		$	15	15		—		1		$	9	10
Other	—		13		—		13		—		10		—		10
Derivative liabilities	51		781		15		847		43		481		9		533
Netting adjustments (b)	—		—		—		(679)		—		—		—		(335)
Total derivative liabilities	51		781		15		168		43		481		9		198

Total liabilities on a recurring basis at fair value	$	340	$	1,310	$	15	$	986	$	62	$	1,167	$	9	$	903

(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 (includes trading account assets, securities available for sale, and U.S. Treasury Bills classified as short-term investments)	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: • Internally developed valuation techniques, principally discounted cash flow methods (income approach). • Revenue multiples of comparable public companies (market approach). For Level 3 securities, increases (decreases) in the discount rate and marketability discount used in the discounted cash flow models would have resulted in lower (higher) fair value measurements. Higher volatility factors would have further magnified changes in 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 September 30, 2020, 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 September 30, 2020, 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 September 30, 2020, as well as financial support provided for the three and nine months ended September 30, 2020, and September 30, 2019.


					Financial support provided
					Three months ended September 30,						Nine months ended September 30,
	September 30, 2020				2020				2019		2020			2019
in millions	Fair Value		Unfunded Commitments		Funded Commitments		Funded Other		Funded Commitments	Funded Other	Funded Commitments		Funded Other	Funded Commitments		Funded Other
INVESTMENT TYPE
Direct investments	$	1	—		—		$	—	—	—	—		—	—		—
Indirect investments (measured at NAV) (a)	60		$	18	$	1	—		—	—	$	1	—	$	2	—
Total	$	61	$	18	1		$	—	—	—	$	1	—	$	2	—

(a) 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 September 30, 2020, 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 (decreases) in the discount rate and marketability discount used in the discounted cash flow models would have resulted in lower (higher) fair value measurements. Higher volatility factors would have further magnified changes in 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. The election of the fair value option aligns the accounting for these assets with the related forward loan sale commitments. 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 Higher (lower) unobservable bid information would have resulted in higher (lower) fair value measurements.	Level 1, 2 and 3 (primarily Level 2)


Asset/liability class	Valuation technique	Valuation hierarchy classification(s)
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: • LIBOR and OIS curves, index pricing curves, foreign currency curves • Volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity) We have 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, including: • Credit spreads and interest rates The unobservable internally derived assumptions include: • Loss given default • Internal risk assessments of customers 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, for sold risk participation agreements, 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. (For purchased risk participation agreements, higher loss probabilities and lower credit ratings would positively affect the fair value.) 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 • Investor supplied prices for similar securities • The probability of the loan closing (i.e. the "pull-through" amount, a significant unobservable input). Increases (decreases) in the probability of the loan closing would have resulted in higher (lower) fair value measurements. 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

Changes in Level 3 Fair Value Measurements

The following table shows the components of the change in the fair values of our Level 3 financial instruments measured at fair value on a recurring basis for the three and nine months ended September 30, 2020, and September 30, 2019.


in millions	Beginning of Period Balance		Gains (Losses) Included in Other 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
Nine months ended September 30, 2020
Trading account assets
Other mortgage-backed securities	—		—		—			—		$	(9)	—	—		$	36	(d)	—			$	27	—
Securities available for sale
Other securities	$	11	$	1	—			—		—		—	—		—			—			12		—
Other investments
Principal investments
Direct (a)	1		—		—			—		—		—	—		—			—			1		—

Equity investments
Direct (a)	12		—		—			—		—		—	—		—			—			12		—
Loans held for sale (residential)	—		—		—			—		(10)		—	$	11	—			—			1		—
Loans, net of unearned income (residential)	4		—		—			—		(2)		—	6		—			—			8		—
Derivative instruments (b)
Interest rate	22		—		$	18	(c)	$	14	(5)		—	—		98		(d)	$	(66)	(d)	81		—
Credit	(8)		—		(6)		(c)	1		—		—	—		—			—			(13)		—
Other (e)	5		—		—			—		—		—	39		—			—			44		—
Three months ended September 30, 2020
Trading account assets
Other mortgage-backed securities	$	36	—		—			—		$	(9)	—	—		—			—			$	27	—
Securities available for sale
Other securities	12		$	—	—			—		—		—	—		—			—			12		—
Other investments
Principal investments
Direct (a)	1		—		—			—		—		—	—		—			—			1		—

Equity investments
Direct (a)	12		—		—			—		—		—	—		—			—			12		—
Loans held for sale (residential)	—		—		—			—		—		—	$	1	—			—			1		—
Loans, net of unearned income (residential)	5		—		—			—		—		—	3		—			—			8		—
Derivative instruments (b)
Interest rate	52		—		$	(3)	(c)	$	2	(4)		—	—		$	36	(d)	$	(2)	(d)	81		—
Credit	(17)		—		4		(c)	—				—	—		—						(13)		—
Other (e)	46		—		5			—		—		—	(7)		—			—			44		—


in millions	Beginning of Period Balance		Gains (Losses) Included in Other 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
Nine months ended September 30, 2019
Securities available for sale
Other securities	$	20	$	15	—			—		—		—	—		—			$	(24)		$	11	—
Other investments
Principal investments
Direct (a)	1		—		—			—		—		—	—		—			—			1		—
Equity investments
Direct (a)	7		—		$	(1)		—		—		—	—		$	1		—			7		—
Loans held for sale (residential)	—		—		—			—		$	(1)	—	$	2	—			—			1		—
Loans, net of unearned income (residential)	3		—		—			—		—		—	—		—			—			3		—
Derivative instruments (b)
Interest rate	5		—		4		(c)	—		—		—	—		2		(d)	(8)		(d)	3		—
Credit	—		—		(5)		(c)	$	(1)	1		—	—		—			—			(5)		—
Other (e)	3		—		—			—		—		—	3		—			—			6		—
Three months ended September 30, 2019
Securities available for sale
Other securities	$	11	$	—	—			—		—		—	—		—			—			$	11	—
Other investments
Principal investments
Direct (a)	1		—		—			—		—		—	—		—			—			1		—
Equity investments
Direct (a)	7		—		—			—		—		—	—		—			—			7		—
Loans held for sale (residential)	—		—		—			—		—		—	$	1	—			—			1		—
Loans, net of unearned income (residential)	3		—		—			—		—		—	—		—			—			3		—
Derivative instruments (b)
Interest rate	4		—		$	1	(c)	—		—		—	—		—			$	(2)	(d)	3		—
Credit	(1)		—		(5)		(c)	—		$	1	—	—		—			—			(5)		—
Other (e)	6		—		—			—		—		—	—		—			—			6		—

(a)Realized and unrealized gains and losses on principal investments and other equity investments are reported in “other income” on the income statement.

(b)Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.

(c)Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.

(d)Certain instruments 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.

(e)Amounts represent Level 3 interest rate lock commitments.

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 September 30, 2020, and December 31, 2019.

The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2020, and December 31, 2019:


	September 30, 2020							December 31, 2019
in millions	Level 1	Level 2		Level 3		Total		Level 1	Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Collateral-dependent loans	—	$	—	$	89	$	89	—	—		$	76	$	76


Accrued income and other assets	—	—		103		103		—	$	118	51		169
Total assets on a nonrecurring basis at fair value	—	$	—	$	192	$	192	—	$	118	$	127	$	245

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)
Collateral-dependent loans	When a loan is collateral-dependent, the fair value of the loan is determined based on the fair value of the underlying collateral.	Level 3
Commercial loans and student loans held for sale	Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans and student 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 Leases for which we receive a current nonbinding bid, and for which the sale is considered probable, may be classified as Level 2. Valuations of lease and operating lease assets held for sale that employ our own assumptions are classified as Level 3 assets. The inputs based on our own assumptions include changes in the value of leased items and internal credit ratings.	Level 2 and 3
OREO, other repossessed personal property, and right-of-use assets(a)	OREO, other repossessed properties, and right-of-use assets 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.	Level 2 and 3


Asset/liability class	Valuation technique	Valuation hierarchy classification(s)
LIHTC, HTC, and NMTC investments(a)	Valuation of LIHTC, HTC and NMTC involves measuring the present value of future tax benefits and comparing that value against the current carrying value of the investment. Expected future tax 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 September 30, 2020, and December 31, 2019, the carrying amount of equity investments under this method was $158 million and $134 million, respectively. No impairment was recorded for the three or nine months ended September 30, 2020.	Level 3
Mortgage Servicing Assets(a)	Refer to Note 8. 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 September 30, 2020, and December 31, 2019, along with the valuation

techniques used, are shown in the following table:

Level 3 Asset (Liability)

Valuation

Technique

Significant

Unobservable Input

Range (Weighted-Average) (b), (c)

dollars in millions

September 30, 2020

December 31, 2019

September 30, 2020

December 31, 2019

Recurring

Trading account assets:

Other mortgage-backed securities

—

Discounted cash flows

Discount rate

3.10% - 4.11% (3.25%)

N/A

Conditional prepayment rate

N/A (9.00)

N/A

Constant default rate

N/A (0.75)

N/A

Loss severity

N/A (50.00%)

N/A

Securities available-for-sale:

Other securities

Discounted cash flows

Discount rate

N/A (15.09%)

N/A (16.10%)

Marketability discount

N/A (30.00%)

Volatility factor

N/A (44.00%)

N/A (43.00%)

Other investments:(a)

Equity investments

Direct

Discounted cash flows

Discount rate

13.39 - 16.42% (14.93%)

13.91 - 17.24% (15.61%)

Marketability discount

N/A (30.00%)

Volatility factor

N/A (55.00%)

N/A (47.00%)

Loans held for sale (residential)

—

Market comparable pricing

Comparability factor

N/A (91.38%)

N/A

Loans, net of unearned income (residential)

Market comparable pricing

Comparability factor

79.00-98.37% (94.73%)

79.00 - 98.00% (91.05%)

Derivative instruments:

Interest rate

Discounted cash flows

Probability of default

.02 - 100% (11.50%)

.02 - 100% (5.40%)

Internal risk rating

1 - 19 (9.284)

1 - 19 (9.168)

Loss given default

0 - 1 (.471)

0 - 1 (.492)

Credit (assets)

Discounted cash flows

Probability of default

.02 - 100% (8.20%)

.02 - 100% (4.2%)

Internal risk rating

1 - 19 (10.581)

1 - 19 (10.13)

Loss given default

0 - 1 (.490)

0 - 1 (.498)

Credit (liabilities)

(15)

(9)

Discounted cash flows

Probability of default

.02 - 100% (16.08%)

.02 - 100% (12.24%)

Internal risk rating

1 - 19 (7.980)

1 - 19 (8.058)

Loss given default

0 - 1 (.397)

0 - 1 (.411)

Other(d)

Discounted cash flows

Loan closing rates

29.12 - 99.69 % (76.23%)

37.71 - 99.69% (79.33%)

Nonrecurring

Collateral-dependent loans

Fair value of collateral

Discount rate

0 - 95.00% (26.00%)

0 - 60.00% (10.00%)

Accrued income and other assets:

OREO and other Level 3 assets (e)

Appraised value

N/M

(a)Principal investments, direct is excluded from this table as the balance at September 30, 2020, and 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 $101 million and $46 million pertaining to mortgage servicing assets at September 30, 2020, and December 31, 2019, respectively. 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 September 30, 2020, and December 31, 2019, are shown in the following tables. Assets and liabilities are further arranged by measurement category.


	September 30, 2020
			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)	733		$	1	705		$	27	—		—			733
Other investments (b)	620		—		—		552		$	68	—			620
Loans, net of unearned income (residential) (d)	8		—		—		8		—		—			8
Loans held for sale (residential) (b)	288		—		287		1		—		—			288
Derivative assets - trading (b)	1,841		56		2,182		127		—		$	(524)	(f)	1,841
Fair value - OCI
Securities available for sale (b)	26,895		—		26,883		$	12	—		—			26,895
Derivative assets - hedging (b)(g)	105		—		71		—		—		34		(f)	105
Amortized cost
Held-to-maturity securities (c)	8,384		—		8,842		—		—		—			8,842
Loans, net of unearned income (d)	101,343		—		—		99,826		—		—			99,826
Loans held for sale (b)	1,436		—		—		1,436		—		—			1,436
Other
Short-term investments - U.S. Treasury Bills (b)	$	1,000	—		$	1,000	—		—		—			$	1,000
Cash and other short-term investments (a)	14,104		14,104		—		—		—		—			14,104
LIABILITIES (by measurement category)
Fair value - net income
Derivative liabilities - trading (b)	$	166	$	51	$	775	15		—		$	(675)	(f)	$	166
Fair value - OCI
Derivative liabilities - hedging (b)(g)	2		—		6		—		—		(4)		(f)	2
Amortized cost
Time deposits (e)	6,795		—		6,826		—		—		—			6,826
Short-term borrowings (a)	1,031		289		742		—		—		—			1,031
Long-term debt (e)	12,685		12,852		733		—		—		—			13,585
Other
Deposits with no stated maturity (a)	129,951		—		129,951		—		—		—			129,951


	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
Short-term investments - U.S. Treasury Bills (b)	—		—		—		—		—		—			—
Cash and other 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

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 (“1. Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging” beginning on page 105 of our 2019 Form 10-K.

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 $701 million ($593 million at fair value) at September 30, 2020, and $855 million ($729 million at fair value) at December 31, 2019;

•Portfolio loans at fair value of $2 million at September 30, 2020, and $2 million at December 31, 2019.

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.

- 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 + Details