Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

6. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.

Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty’s credit quality. We 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 ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:

¿ an independent review and approval of valuation models and assumptions;

¿ recurring detailed reviews of profit and loss; and

¿ a validation of valuation model components against benchmark data and similar products, where possible.

We review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies as more market-based data becomes available. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period.

Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”

Qualitative Disclosures of Valuation Techniques

Loans.  Most loans recorded as trading account assets are valued based on market spreads for identical assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.

Securities (trading and available for sale).  We own several types of securities, requiring a range of valuation methods:

¿ Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities.

¿ Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate collateralized mortgage obligations. Inputs to the pricing models include actual trade data (i.e., spreads, credit ratings and interest rates) for comparable assets, spread tables, matrices, high-grade scales, option-adjusted spreads and standard inputs, such as yields, benchmark securities, bids and offers.

¿ Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. In such cases, we use internal models based on certain assumptions to determine fair value. Level 3 instruments include certain commercial mortgage-backed securities. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which take into account expected default and recovery percentages, market research and discount rates commensurate with current market conditions.

The fair values of our 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 state and political subdivisions securities, inputs used by the third-party pricing service also include material event notices.

On a quarterly 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. 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 value of the assets are reviewed and adjusted quarterly. Periodically, a third-party appraisal is obtained for the investment 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 current geographic market lease rates, underwritten expenses, market lease terms and historical vacancy rates. Inputs are validated through the use of industry publications, third-party broker opinions and comparable property sales, where applicable.

Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to use 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.

Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair value of our indirect investments and related unfunded commitments at December 31, 2011:

December 31, 2011 in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Passive funds (a)	$	17	$	4
Co-managed funds (b)		19		6
Total	$	36	$	10

(a) We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to seven years.

(b) We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. We can sell or transfer our interest in any of these funds with the written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of three to six years.

Principal investments.  Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors). During the first half of 2011, employees who managed our various principal investments formed two independent entities that serve as investment managers of these investments going forward. Under this new arrangement, which was mutually agreeable to both parties, these individuals are no longer employees of Key. As a result of these changes, which were made during the second quarter of 2011, we deconsolidated an aggregate of $234 million of these direct and indirect investments.

Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.

Valuations of debt instruments are based on management’s knowledge of the current financial status of the company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the company’s payment history, adequacy of cash flows from operations and current operating results, including market multiples, and historical and forecast earnings before interest, taxation, depreciation and amortization. Inputs can also include seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected and the net liquidation value of collateral.

Valuations of equity instruments of private companies are based on current market conditions and the current financial status of the company. Significant unobservable inputs used in these valuations include adequacy of the company’s cash flows from operations, any significant change in the company’s performance since the prior valuation and any significant equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an active market for the identical security. If the instrument is restricted, the fair value is determined considering the number of shares traded daily, the number of the company’s total restricted shares and price volatility.

Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect 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. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us 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). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest.

For indirect investments, management makes adjustments as deemed appropriate to the net asset value and only if it is determined that it does not properly reflect fair value. In determining the need for an adjustment to net asset value, management performs an analysis of the private equity funds based on the independent fund manager’s valuations as well as management’s own judgment. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financials in accordance with GAAP or follows a practice of holding all investments at cost.

The following table presents the fair value of our indirect investments and related unfunded commitments at December 31, 2011:

December 31, 2011 in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Private equity funds (a)	$	468	$	123
Hedge fund(b)		5		—
Total	$	473	$	123

(a) Consists of buyout, venture capital and fund of funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to ten years.

(b) Consists of a fund invested in long and short positions of “stressed and distressed” fixed income-oriented securities, with the goal of producing attractive risk-adjusted returns. The investments can be redeemed quarterly with 45 days notice. However, the fund’s general partners may impose quarterly redemption limits that may delay receipt of requested redemptions.

Derivatives.  Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded. The majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity). These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps and credit default swaps. In addition, 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, as well as unobservable internally-derived assumptions, such as loss probabilities and proxy prices.

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 in the form of a default reserve. The credit component is determined by individual counterparty based on the probability of default, and considers master netting and collateral agreements. The default reserve is classified as Level 3.

Other assets and liabilities.  The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets, and bids and offers.

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 December 31, 2011 and 2010:

December 31, 2011 in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Short-term investments:
Securities purchased under resale agreements		—	$	236		—	$	236
Trading account assets:
U.S. Treasury, agencies and corporations		—		353		—		353
States and political subdivisions		—		81		—		81
Collateralized mortgage obligations		—		19		—		19
Other mortgage-backed securities		—		27	$	35		62
Other securities	$	79		29		—		108
Total trading account securities		79		509		35		623
Commercial loans		—		—		—		—
Total trading account assets		79		509		35		623
Securities available for sale:
States and political subdivisions		—		63		—		63
Collateralized mortgage obligations		—		15,162		—		15,162
Other mortgage-backed securities		—		778		—		778
Other securities		9		—		—		9
Total securities available for sale		9		16,003		—		16,012
Other investments:
Principal investments:
Direct		11		—		225		236
Indirect		—		—		473		473
Total principal investments		11		—		698		709
Equity and mezzanine investments:
Direct		—		—		15		15
Indirect		—		—		36		36
Total equity and mezzanine investments		—		—		51		51
Total other investments		11		—		749		760
Derivative assets:
Interest rate		—		1,915		38		1,953
Foreign exchange		86		65		—		151
Energy and commodity		—		253		—		253
Credit		—		30		7		37
Equity		—		3		—		3
Derivative assets		86		2,266		45		2,397
Netting adjustments(a)		—		—		—		(1,452	)
Total derivative assets		86		2,266		45		945
Accrued income and other assets		7		105		—		112
Total assets on a recurring basis at fair value	$	192	$	19,119	$	829	$	18,688
LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	292		—	$	292
Bank notes and other short-term borrowings:
Short positions		—		337		—		337
Derivative liabilities:
Interest rate		—		1,398		—		1,398
Foreign exchange	$	79		209		—		288
Energy and commodity		—		252	$	1		253
Credit		—		34		28		62
Equity		—		3		—		3
Derivative liabilities		79		1,896		29		2,004
Netting adjustments(a)		—		—		—		(978	)
Total derivative liabilities		79		1,896		29		1,026
Accrued expense and other liabilities		23		22		—		45
Total liabilities on a recurring basis at fair value	$	102	$	2,547	$	29	$	1,700

(a) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with 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 collateral. Total derivative assets and liabilities include these netting adjustments.

December 31, 2010 in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Short term investments:
Securities purchased under resale agreements		—	$	373		—	$	373
Trading account assets:
U.S. Treasury, agencies and corporations		—		501		—		501
States and political subdivisions		—		66		—		66
Collateralized mortgage obligations		—		34		—		34
Other mortgage-backed securities		—		137	$	1		138
Other securities	$	145		69		21		235
Total trading account securities		145		807		22		974
Commercial loans		—		11		—		11
Total trading account assets		145		818		22		985
Securities available for sale:
U.S. Treasury, agencies and corporations		—		8		—		8
States and political subdivisions		—		172		—		172
Collateralized mortgage obligations		—		20,665		—		20,665
Other mortgage-backed securities		—		1,069		—		1,069
Other securities		13		6		—		19
Total securities available for sale		13		21,920		—		21,933
Other investments:
Principal investments:
Direct		—		—		372		372
Indirect		—		—		526		526
Total principal investments		—		—		898		898
Equity and mezzanine investments:
Direct		—		—		20		20
Indirect		—		—		30		30
Total equity and mezzanine investments		—		—		50		50
Total other investments		—		—		948		948
Derivative assets:
Interest rate		—		1,691		75		1,766
Foreign exchange		92		88		—		180
Energy and commodity		—		317		1		318
Credit		—		27		12		39
Equity		—		1		—		1
Derivative assets		92		2,124		88		2,304
Netting adjustments (a)		—		—		—		(1,298	)
Total derivative assets		92		2,124		88		1,006
Accrued income and other assets		1		76		—		77
Total assets on a recurring basis at fair value	$	251	$	25,311	$	1,058	$	25,322
LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	572		—	$	572
Bank notes and other short-term borrowings:
Short positions		—		395		—		395
Derivative liabilities:
Interest rate		—		1,335		—		1,335
Foreign exchange	$	82		323		—		405
Energy and commodity		—		335		—		335
Credit		—		30	$	1		31
Equity		—		1		—		1
Derivative liabilities		82		2,024		1		2,107
Netting adjustments (a)		—		—		—		(965	)
Total derivative liabilities		82		2,024		1		1,142
Accrued expense and other liabilities		—		66		—		66
Total liabilities on a recurring basis at fair value	$	82	$	3,057	$	1	$	2,175

(a) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with 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 collateral. Total derivative assets and liabilities include these netting adjustments.

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, 2011 and 2010. We mitigate the credit risk, interest rate risk and risk of loss related to many of these Level 3 instruments by using securities and derivative positions classified as Level 1 or Level 2. Level 1 and Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of our risk management activities.

	Trading Account Assets															Other Investments																				Derivative Instruments													(a)
	Other Mortgage- Backed Securities					Other Securities					Commercial Loans					Principal Investments										Equity and Mezzanine Investments										Interest Rate					Energy and Commodity					Credit
in millions																Direct					Indirect					Direct					Indirect
Balance at December 31, 2009	$	29				$	423				$	19				$	538				$	497				$	26				$	31				$	99					—				$	9
Gains (losses) included in earnings		2		(b	)		(3	)	(b	)		(2	)	(b	)		(1	)	(c	)		67		(c	)		9		(c	)		(7	)	(c	)		9		(b	)		(1	)	(b	)		(6	)		(b	)
Purchases, sales, issuances and settlements		(30	)				(399	)				(7	)				(157	)				(38	)				(21	)				6					(18	)				(1	)				8
Net transfers into (out of) Level 3		—					—					(10	)				(8	)				—					6					—					(15	)				3					—
Balance at December 31, 2010	$	1				$	21					—				$	372				$	526				$	20				$	30				$	75				$	1				$	11
Gains (losses) included in earnings		—		(b	)		2		(b	)		—		(b	)		(2	)	(c	)		70		(c	)		20		(c	)		—		(c	)		53		(b	)		(1	)	(b	)		(40	)		(b	)
Purchases		—					—					—					39					66					—					14					12					(1	)				—
Sales		—					—					—					(52	)				(80	)				—					—					(44	)				—					(1	)
Issuances		—					—					—					—					—					—					—					—					—					—
Settlements		—					(23	)				—					—					—					(25	)				(5	)				—					—					9
Transfers into Level 3		34					—					—					—					—					—					—					13					—					—
Transfers out of Level 3		—					—					—					(132	)	(d	)		(109	)	(d	)		—					(3	)				(71	)				—					—
Balance at December 31, 2011	$	35					—					—				$	225				$	473				$	15				$	36				$	38				$	(1	)			$	(21	)
Unrealized gains (losses) included in 2010 earnings	$	(4	)	(b	)	$	(3	)	(b	)	$	2		(b	)	$	(22	)	(c	)	$	47		(c	)	$	90		(c	)	$	(7	)	(c	)		—		(b	)		—		(b	)		—			(b	)
Unrealized gains (losses) included in 2011 earnings		—		(b	)	$	2		(b	)		—		(b	)	$	11		(c	)	$	45		(c	)	$	38		(c	)	$	(3	)	(c	)		—		(b	)		—		(b	)		—			(b	)

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

(b) Realized and unrealized gains and losses on trading account assets and derivative instruments are reported in “investment banking and capital markets income (loss)” on the income statement.

(c) Realized and unrealized gains and losses on principal investments are reported in “net gains (losses) from principal investing” on the income statement. Realized and unrealized gains and losses on private equity and mezzanine investments are reported in “investment banking and capital markets income (loss)” on the income statement.

(d) Transfers out of Level 3 for principal investments include investments of $234 million that were deconsolidated during the second quarter of 2011 when employees who managed our various principal investments left Key and formed two independent entities that serve as investment managers of these investments.

Assets 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. The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2011 and 2010:

	December 31, 2011								December 31, 2010
in millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	149	$	149		—		—	$	219	$	219
Loans held for sale (a)		—		—		15		15		—		—		15		15
Direct financing leases and operating lease assets held for sale		—		—		—		—		—		—		—		—
Goodwill and other intangible assets		—		—		—		—		—		—		—		—
Accrued income and other assets		—	$	19		25		44		—	$	39		23		62
Total assets on a nonrecurring basis at fair value		—	$	19	$	189	$	208		—	$	39	$	257	$	296

(a) During 2011, we transferred $28 million of commercial and consumer loans and leases from held-for-sale status to the held-to-maturity portfolio at their current fair value.

Impaired loans.  We typically 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. 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. Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure and changes in collateral values. The fair value of the 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 allowance for loan and lease losses. Impaired loans with a specifically allocated allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets, while those 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. Current market conditions, including updated collateral values, and reviews of our borrowers’ financial condition influenced the inputs used in our internal valuation analysis, resulting in write-downs of impaired loans during 2011.

Loans held for sale.  Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determined that adjustments were necessary to record some of the portfolios at the lower of cost or fair value in accordance with GAAP. Loans held for sale portfolios adjusted to fair value totaled $15 million at December 31, 2011 and 2010. Current market conditions, including updated collateral values, and reviews of our borrowers’ financial condition influenced the inputs used in our internal models and other valuation methodologies, resulting in these adjustments.

Valuations of performing commercial mortgage and construction loans held for sale are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates.

Valuations of nonperforming commercial mortgage and construction loans held for sale are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, we use third-party appraisals, adjusted for current market conditions. Since valuations are based on unobservable data, these loans have been classified as Level 3 assets.

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, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. Leases also may be valued using current nonbinding bids when they are available. These leases are classified as Level 2 assets. In a distressed market where market data is not available, an estimate of the fair value of the leased asset may be used to value the lease, resulting in a Level 3 classification.

Goodwill and other intangible assets.  On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of the goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally. Inputs used include market-available data, such as industry, historical and expected growth rates, and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified goodwill as Level 3. For additional information on the results of recent goodwill impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”).

The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions. Accordingly, these assets are classified as Level 3. Our primary assumptions include attrition rates, alternative costs of funds and rates paid on deposits. For additional information on the results of other intangible assets impairment testing, see Note 10.

Other assets.  OREO and other repossessed properties are valued based on inputs such as 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 the lower of the loan balance or fair value 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. Mortgage servicing assets are valued based on inputs such as prepayment speeds, earn rates, credit default rates, discount rates and servicing advances. We classify these assets as Level 3.

Fair Value Disclosures of Financial Instruments

The carrying amount and fair value of our financial instruments at December 31, 2011 and 2010 are shown in the following table:

	December 31, 2011				December 31, 2010
in millions	Carrying Amount		Fair Value		Carrying Amount		Fair Value
ASSETS
Cash and short-term investments (a)	$	4,213	$	4,213	$	1,622	$	1,622
Trading account assets (e)		623		623		985		985
Securities available for sale (e)		16,012		16,012		21,933		21,933
Held-to-maturity securities (b)		2,109		2,133		17		17
Other investments (e)		1,163		1,163		1,358		1,358
Loans, net of allowance (c)		48,571		47,561		48,503		46,140
Loans held for sale (e)		728		728		467		467
Mortgage servicing assets (d)		173		245		196		284
Derivative assets (e)		945		945		1,006		1,006
LIABILITIES
Deposits with no stated maturity (a)	$	51,014	$	51,014	$	45,598	$	45,598
Time deposits (d)		10,942		11,253		15,012		15,502
Short-term borrowings (a)		2,048		2,048		3,196		3,196
Long-term debt (d)		9,520		9,792		10,592		10,611
Derivative liabilities(e)		1,026		1,026		1,142		1,142

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) 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 they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.

(c) 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.

(d) Fair values of mortgage servicing assets, time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.

(e) 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 Measured at Fair Value on a Nonrecurring Basis” in this note.

We use valuation methods based on exit market prices in accordance with applicable accounting guidance. We determine fair value based on assumptions pertaining to the factors a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2011, the fair values of our loan portfolios improved, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change significantly. If a nonexit price methodology were used for valuing our loan portfolio for continuing operations, it would result in a premium of .1%. 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.

Education lending business.  The discontinued education lending business consists of assets and liabilities (recorded at fair value) in the securitization trusts, which were consolidated as of January 1, 2010 in accordance with new consolidation accounting guidance, as well as loans in portfolio (recorded at fair value), loans in portfolio (recorded at carrying value with appropriate valuation reserves) and loans held for sale (prior to the second quarter of 2011), all of which are outside the trusts. The fair value of loans held for sale was identical to the aggregate carrying amount of the loans. All of these loans were excluded from the table above as follows:

¿ loans at carrying value, net of allowance, of $2.9 billion ($2.5 billion at fair value) at December 31, 2011 and $3.2 billion ($2.8 billion at fair value) at December 31, 2010;

¿ portfolio loans at fair value of $76 million at December 31, 2011 that were acquired from one of the education lending securitization trusts on September 27, 2011, pursuant to the legal terms of the trust;

¿ loans held for sale of $15 million at December 31, 2010. There were no loans held for sale at December 31, 2011; and

¿ loans in the trusts at fair value of $2.7 billion at December 31, 2011 and $3.1 billion at December 31, 2010.

Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $2.5 billion in fair value at December 31, 2011 and $3.0 billion in fair value at December 31, 2010, are also excluded from the above table. Additional information regarding the consolidation of the education lending securitization trusts is provided in Note 13 (“Acquisition, Divestiture and Discontinued Operations”).

Residential real estate mortgage loans.  Residential real estate mortgage loans with carrying amounts of $1.9 billion at December 31, 2011 and $1.8 billion at December 31, 2010 are included in “Loans, net of allowance” in the above table.

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.