5. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to 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 or our own 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 recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable. Various Working Groups that report to the Fair Value Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note and in Note 11 (“Acquisitions and Discontinued Operations”). Formal documentation of the fair valuation methodologies is prepared by the lines of business and support areas as appropriate. The documentation details the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation inputs.

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” beginning on page 118 of our 2014 Form 10-K.

Qualitative Disclosures of Valuation Techniques

Loans. Most loans recorded as trading account assets are valued based on market spreads for similar 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 CMOs. Inputs to the pricing models include: standard inputs, such as yields, benchmark securities, bids, and offers; actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets; spread tables; matrices; high-grade scales; and option-adjusted spreads.

•

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. To determine fair value in such cases, depending on the complexity of the valuations required, we use internal models based on certain assumptions or a third-party valuation service. At September 30, 2015, our Level 3 instruments consist of two convertible preferred securities. Our Strategy group is responsible for reviewing the valuation model and determining the fair value of these investments on a quarterly basis. The securities are valued using a cash flow analysis of the associated private company issuers. The valuations of the securities are negatively impacted by projected net losses of the associated private companies and positively impacted by projected net gains.

The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices.

On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:

•

review documentation received from our third-party pricing service regarding the inputs used in their valuations and determine a level assessment for each category of securities;

•

substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and

•

substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings.

Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods. The portion of our Real Estate Capital line of business involved with private equity and mezzanine investments is accounted for as an investment company in accordance with the applicable accounting guidance, whereby all investments are recorded at fair value.

Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then adjusted to fair value based on current market conditions using the discounted cash flow method based on the expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. There were no significant direct equity and mezzanine investments at September 30, 2015.

Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. The calculation to determine the investment’s fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. For more information about the Volcker Rule, see the discussion under the heading “Other Regulatory Developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation” beginning on page 16 of our 2014 Form 10-K.

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 September 30, 2015. We did not provide any financial support to investees related to our direct and indirect investments for the nine months ended September 30, 2015, and September 30, 2014.


September 30, 2015			Unfunded
in millions	Fair Value		Commitments
INVESTMENT TYPE
Indirect investments
Passive funds^(a)	$	9	$	1

Total	$	9	$	1

(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 four years. The purpose of KREEC’s funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements.

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) and indirect investments (investments made through funds that include other investors). Our principal investing entities 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. This process is a coordinated and documented effort by the Principal Investing Entities Deal Team (individuals from one of the independent investment managers who oversee these instruments), accounting staff, and the Investment Committee (individual employees and a former employee of Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.

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.

Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Team’s knowledge of the current financial status of the subject 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 EBITDA. Inputs can also include the 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, which are prepared on a quarterly basis, are based on current market conditions and the current financial status of each company. A valuation analysis is performed to value each investment. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and reviewed and approved by the Chief Administrative Officer of one of the independent investment managers. 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. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

For indirect investments, management may make adjustments it deems appropriate to the net asset value if it is determined that the net asset value 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 financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.

The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at September 30, 2015, as well as financial support provided for the three and nine months ended September 30, 2015, and September 30, 2014:


					Financial support provided
					Three months ended September 30,								Nine months ended September 30,
	September 30, 2015				2015				2014				2015				2014
	Fair		Unfunded		Funded		Funded		Funded		Funded		Funded		Funded		Funded		Funded
in millions	Value		Commitments		Commitments		Other		Commitments		Other		Commitments		Other		Commitments		Other
INVESTMENT TYPE
Direct investments^(a)	$	66		—		—	$	—		—		—		—	$	2		—	$	2
Indirect investments^(b)		271	$	53	$	2		—	$	3		—	$	7		—	$	10		—

Total	$	337	$	53	$	2	$	—	$	3		—	$	7	$	2	$	10	$	2

(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. We estimate that the underlying investments of the funds will be liquidated over a period of one to nine years. 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.

Other. We have one indirect equity investment in the form of limited partnership units of less than five percent. The investment is classified as Level 3 asset since our significant inputs are not observable in the marketplace. This investment is 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 an ownership interest in partners’ capital to which a proportionate share of net asset is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital account as reported by the general partner of the partnership in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of this investment. As of September 30, 2015, management has not committed to a plan to sell this investment. Therefore, the investment continues to be valued using the net asset value per share methodology.

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 and Overnight Index Swap (OIS) 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 internal risk ratings of customers. These derivatives are priced monthly by our MRM group using a credit valuation adjustment methodology. Swap details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, 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.

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 credit valuation adjustment. The credit component is determined by individual counterparty based on the probability of default and considers master netting and collateral agreements. The credit valuation adjustment is classified as Level 3. Our MRM group is responsible for the valuation policies and procedures related to this credit valuation adjustment. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and corporate accounting personnel. On a quarterly basis, MRM prepares the credit valuation adjustment calculation, which includes a detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast to ensure that the credit valuation adjustment recorded at period end is sufficient.

Other assets and liabilities. The value of our short positions is driven by the valuation of the underlying securities. 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 September 30, 2015, December 31, 2014, and September 30, 2014.


September 30, 2015
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	694		—	$	694
States and political subdivisions		—		35		—		35
Collateralized mortgage obligations		—		—		—		—
Other mortgage-backed securities		—		46		—		46
Other securities	$	4		23		—		27

Total trading account securities		4		798		—		802
Commercial loans		—		9		—		9

Total trading account assets		4		807		—		811
Securities available for sale:
States and political subdivisions		—		15		—		15
Collateralized mortgage obligations		—		12,003		—		12,003
Other mortgage-backed securities		—		2,330		—		2,330
Other securities		11		—	$	17		28

Total securities available for sale		11		14,348		17		14,376
Other investments:
Principal investments:
Direct		—		—		66		66
Indirect		—		—		271		271

Total principal investments		—		—		337		337
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		9		9

Total equity and mezzanine investments		—		—		9		9
Other		—		—		4		4

Total other investments		—		—		350		350
Derivative assets:
Interest rate		—		1,097		22		1,119
Foreign exchange		120		10		—		130
Commodity		—		482		—		482
Credit		—		4		3		7

Derivative assets		120		1,593		25		1,738
Netting adjustments ^(a)		—		—		—		(945	)

Total derivative assets		120		1,593		25		793
Accrued income and other assets		—		2		—		2

Total assets on a recurring basis at fair value	$	135	$	16,750	$	392	$	16,332

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions		—	$	677		—	$	677
Derivative liabilities:
Interest rate		—		656		—		656
Foreign exchange	$	102		10		—		112
Commodity		—		469		—		469
Credit		—		5		—		5

Derivative liabilities		102		1,140		—		1,242
Netting adjustments ^(a)		—		—		—		(566	)

Total derivative liabilities		102		1,140		—		676
Accrued expense and other liabilities		—		2		—		2

Total liabilities on a recurring basis at fair value	$	102	$	1,819		—	$	1,355

(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 cash collateral. Total derivative assets and liabilities include these netting adjustments.


December 31, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	555		—	$	555
States and political subdivisions		—		38		—		38
Collateralized mortgage obligations		—		—		—		—
Other mortgage-backed securities		—		124		—		124
Other securities	$	2		29		—		31

Total trading account securities		2		746		—		748
Commercial loans		—		2		—		2

Total trading account assets		2		748		—		750
Securities available for sale:
States and political subdivisions		—		23		—		23
Collateralized mortgage obligations		—		11,270		—		11,270
Other mortgage-backed securities		—		2,035		—		2,035
Other securities		22		—	$	10		32

Total securities available for sale		22		13,328		10		13,360
Other investments:
Principal investments:
Direct		2		—		102		104
Indirect		—		—		302		302

Total principal investments		2		—		404		406
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		10		10

Total equity and mezzanine investments		—		—		10		10
Other		—		—		4		4

Total other investments		2		—		418		420
Derivative assets:
Interest rate		—		924		13		937
Foreign exchange		91		2		—		93
Commodity		—		608		—		608
Credit		—		2		3		5

Derivative assets		91		1,536		16		1,643
Netting adjustments ^(a)		—		—		—		(1,034	)

Total derivative assets		91		1,536		16		609
Accrued income and other assets		—		—		—		—

Total assets on a recurring basis at fair value	$	117	$	15,612	$	444	$	15,139

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions		—	$	423		—	$	423
Derivative liabilities:
Interest rate		—		644		—		644
Foreign exchange	$	77		4		—		81
Commodity		—		594		—		594
Credit		—		6	$	1		7

Derivative liabilities		77		1,248		1		1,326
Netting adjustments ^(a)		—		—		—		(542	)

Total derivative liabilities		77		1,248		1		784
Accrued expense and other liabilities		—		—		—		—

Total liabilities on a recurring basis at fair value	$	77	$	1,671	$	1	$	1,207

(a)


September 30, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	596		—	$	596
States and political subdivisions		—		24		—		24
Collateralized mortgage obligations		—		—		—		—
Other mortgage-backed securities		—		186		—		186
Other securities	$	13		145		—		158

Total trading account securities		13		951		—		964
Commercial loans		—		1		—		1

Total trading account assets		13		952		—		965
Securities available for sale:
States and political subdivisions		—		27		—		27
Collateralized mortgage obligations		—		10,009		—		10,009
Other mortgage-backed securities		—		2,177		—		2,177
Other securities		22		—	$	10		32

Total securities available for sale		22		12,213		10		12,245
Other investments:
Principal investments:
Direct		—		—		115		115
Indirect		—		—		353		353

Total principal investments		—		—		468		468
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		13		13

Total equity and mezzanine investments		—		—		13		13
Other		—		—		4		4

Total other investments		—		—		485		485
Derivative assets:
Interest rate		—		827		19		846
Foreign exchange		73		8		—		81
Commodity		—		95		—		95
Credit		—		1		3		4

Derivative assets		73		931		22		1,026
Netting adjustments ^(a)		—		—		—		(613	)

Total derivative assets		73		931		22		413
Accrued income and other assets		—		—		—		—

Total assets on a recurring basis at fair value	$	108	$	14,096	$	517	$	14,108

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	6	$	490		—	$	496
Derivative liabilities:
Interest rate		—		616		—		616
Foreign exchange		55		9		—		64
Commodity		—		89	$	1		90
Credit		—		7		—		7

Derivative liabilities		55		721		1		777
Netting adjustments ^(a)		—		—		—		(393	)

Total derivative liabilities		55		721		1		384
Accrued expense and other liabilities		—		—		—		—

Total liabilities on a recurring basis at fair value	$	61	$	1,211	$	1	$	880

(a)

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 three and nine months ended September 30, 2015, and September 30, 2014. 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.


in millions	Beginning of Period Balance		Gains (Losses) Included in Earnings			Purchases		Sales			Settlements			Transfers into Level 3^(d)			Transfers out of Level 3^(d)			End of Period Balance ^(f)		Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2015
Securities available for sale
Other securities	$	10		—		$	7		—			—			—			—		$	17		—
Other investments
Principal investments
Direct		102	$	20	^(b)		5	$	(61	)		—			—			—			66		—
Indirect		302		33	^(b)		6		(70	)		—			—			—			271	$	(23	)^(b)
Equity and mezzanine investments
Direct		—		2	^(b)		—		(2	)		—			—			—			—		2	^(b)
Indirect		10		6	^(b)		—		(7	)		—			—			—			9		6	^(b)
Other		4		—			—		—			—			—			—			4		—
Derivative instruments^(a)
Interest rate		13		5	^(c)		1		—			—		$	10	^(e)	$	(7	)^(e)		22		—
Commodity		—		—			—		—			—			—			—			—		—
Credit		2		(7	) ^(c)		—		8			—			—			—			3		—
Three months ended September 30, 2015
Securities available for sale
Other securities	$	10		—		$	7		—			—			—			—		$	17		—
Other investments
Principal investments
Direct		70	$	4	^(b)		3	$	(11	)		—			—			—			66	$	3	^(b)
Indirect		282		8	^(b)		2		(21	)		—			—			—			271		(8	)^(b)
Equity and mezzanine investments
Direct		—		—			—		—			—			—			—			—		—
Indirect		9		—			—		—			—			—			—			9		—
Other		4		—			—		—			—			—			—			4		—
Derivative instruments^(a)
Interest rate		16		6	^(c)		—		—			—		$	2	^(e)	$	(2	)^(e)		22		—
Commodity		—		—			—		—			—			—			—			—		—
Credit		3		(3	)^(c)		—		8		$	(5	)		—			—			3		—


in millions	Beginning of Period Balance		Gains (Losses) Included in Earnings			Purchases			Sales			Settlements		Transfers into Level 3^(d)			Transfers out of Level 3^(d)			End of Period Balance^(f)			Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2014
Securities available for sale
Other securities		—		—		$	10			—			—		—			—		$	10			—
Other investments
Principal investments
Direct	$	141	$	9	^(b)		1		$	(36	)		—		—			—			115		$	18	^(b)
Indirect		413		49	^(b)		8			(117	)		—		—			—			353			8	^(b)
Equity and mezzanine investments
Direct		—		—			—			—			—		—			—			—			—
Indirect		23		(1	)^(b)		—			(9	)		—		—			—			13			(1	)^(b)
Other		4		—			—			—			—		—			—			4			—
Derivative instruments^(a)
Interest rate		25		2	^(c)		3			(2	)		—	$	7	^(e)	$	(16	)^(e)		19			—
Commodity		—		—			(1	)		—			—		1	^(e)		(1	)^(e)		(1	)		—
Credit		3		(7	)^(c)		—			—		$	7		—			—			3			—
Three months ended September 30, 2014
Securities available for sale
Other securities		—		—		$	10			—			—		—			—		$	10			—
Other investments
Principal investments
Direct	$	146	$	(2	)^(b)		—		$	(29	)		—		—			—			115		$	(2	)^(b)
Indirect		399		9	^(b)		3			(58	)		—		—			—			353			(4	)^(b)
Equity and mezzanine investments
Direct		—		—			—			—			—		—			—			—			—
Indirect		16		—			—			(3	)		—		—			—			13			—
Other		4		—			—			—			—		—			—			4			—
Derivative instruments^(a)
Interest rate		20		—			—			—			—	$	2	^(e)	$	(3	)^(e)		19			—
Commodity		1		—			(1	)		—			—		—			(1	)^(e)		(1	)		—
Credit		3		(2	)^(c)		—			—		$	2		—			—			3			—

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

(b)	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 losses on other and private equity and mezzanine investments are reported in “other income” on the income statement.

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

(d)	Our policy is to recognize transfers into and transfers out of Level 3 as of the end of the reporting period.

(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.

(f)	There were no issuances for the nine-month periods ended September 30, 2015, and September 30, 2014.

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, 2015, December 31, 2014, and September 30, 2014. The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2015, December 31, 2014, and September 30, 2014:


	September 30, 2015
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	3	$	3
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—		—		6		6

Total assets on a nonrecurring basis at fair value		—		—	$	9	$	9


	December 31, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	5	$	5
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—		—		7		7

Total assets on a nonrecurring basis at fair value		—		—	$	12	$	12


	September 30, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	6	$	6
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—		—		4		4

Total assets on a nonrecurring basis at fair value		—		—	$	10	$	10

(a)	During the first nine months of 2015, we transferred $24 million of commercial and consumer loans and leases at their current fair value from held-for-sale status to the held-to-maturity portfolio, compared to $11 million during 2014, and $10 million during the first nine months of 2014.

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. 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. 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.

The evaluations for impairment are prepared by the responsible relationship managers in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. The Asset Recovery Group is part of the Risk Management Group and reports to our Chief Credit Officer. These evaluations are performed in conjunction with the quarterly ALLL process.

Loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter’s review are re-evaluated, and if their values have changed materially, the underlying information (loan balance and in most cases, collateral value) is compared. Material differences are evaluated for reasonableness, and the relationship managers and their senior managers consider these differences and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis based on current borrower developments, market conditions, and collateral values.

The following two internal methods are used to value impaired loans:

•

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 ALLL.

Impairment valuations are back-tested each quarter, based on a look-back of actual incurred losses on closed deals previously evaluated for impairment. The overall percent variance of actual net loan charge-offs on closed deals compared to the specific allocations on such deals is considered in determining each quarter’s specific allocations.

Loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no loans held for sale adjusted to fair value at September 30, 2015, December 31, 2014, or September 30, 2014.

Market inputs, including updated collateral values, and reviews of each borrower’s financial condition influenced the inputs used in our internal models and other valuation methodologies. The valuations are prepared by the responsible relationship managers or analysts in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. Actual gains or losses realized on the sale of various loans held for sale provide a back-testing mechanism for determining whether our valuations of these loans held for sale that are adjusted to fair value are appropriate.

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. These internal models also rely on our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we classify 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 are classified as Level 3 assets.

Direct financing leases and operating lease assets held for sale. Our KEF Accounting and Capital Markets groups are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF Capital Markets group reports to the President of the KEF line of business. A weekly report is distributed to both groups that lists all equipment finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.

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. 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 the sale is considered probable, may be classified as Level 2. The validity of these quotes is supported by historical and continued dealings with these institutions that have fulfilled the nonbinding quote in the past. 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. In an inactive market, the market value of the assets held for sale is determined as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.

Goodwill and other intangible assets. On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. However, we did not choose to utilize a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2014. 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. We use a third-party valuation services provider to perform the annual, and if necessary, any interim, Step 1 valuation process, and to perform a Step 2 analysis, if needed, on our reporting units. Annual and any interim valuations prepared by the third-party valuation services provider are reviewed by the appropriate individuals within Key to ensure that the assumptions used in preparing the analysis are appropriate and properly supported. For additional information on the results of recent goodwill impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”) beginning on page 173 of our 2014 Form 10-K.

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 lines of business, with oversight from our Accounting group, are responsible for routinely, at least quarterly, assessing whether impairment indicators are present. All indicators that signal impairment may exist are appropriately considered in this analysis. An impairment loss is only recognized for a held-and-used long-lived asset if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value.

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 beginning on page 173 of our 2014 Form 10-K.

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 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.

•

Commercial Real Estate Valuation Process: When a loan is reclassified from loan status to OREO because we took possession of the collateral, the Asset Recovery Group Loan Officer, in consultation with our OREO group, obtains a broker price opinion or a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value of the underlying collateral less estimated selling costs becomes the carrying value of the OREO asset. In addition to valuations from independent third-party sources, our OREO group also writes down the carrying balance of OREO assets once a bona fide offer is contractually accepted, where the accepted price is lower than the current balance of the particular OREO asset. The fair value of OREO property is re-evaluated every 90 days, and the OREO asset is adjusted as necessary.

•

Consumer Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures in this area. The current vendor partner provides monthly reporting of all broker price opinion evaluations, appraisals, and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 180 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate.

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, 2015, December 31, 2014, and September 30, 2014, along with the valuation techniques used, are shown in the following table:


September 30, 2015 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	66	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple		N/A (5.40	)
Equity instruments of private companies				EBITDA multiple (where applicable)		5.40 - 6.50 (6.40	)
Equity instruments of public companies			Market approach	Discount		N/A (6.00	)
Nonrecurring
Impaired loans		3	Fair value of underlying collateral	Discount		00.00 - 50.00% (14.00%	)
Goodwill		1,060	Discounted cash flow and market data	Earnings multiple of peers		11.40 - 15.90 (12.92	)
				Equity multiple of peers		1.20 - 1.22 (1.21	)
				Control premium		10.00 - 30.00% (19.70%	)
				Weighted-average cost of capital		13.00 - 14.00% (13.52%	)

December 31, 2014 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	102	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple		5.40 - 6.00 (5.50	)
Equity instruments of private companies				EBITDA multiple (where applicable)		5.50 - 6.20 (5.80	)
				Revenue multiple (where applicable)		4.30 - 4.30 (4.30	)
Nonrecurring
Impaired loans		5	Fair value of underlying collateral	Discount		10.00 - 64.00% (62.00%	)
Goodwill		1,057	Discounted cash flow and market data	Earnings multiple of peers		11.40 - 15.90 (12.92	)
				Equity multiple of peers		1.20 - 1.22 (1.21	)
				Control premium		10.00 - 30.00% (19.70%	)
				Weighted-average cost of capital		13.00 - 14.00% (13.52%	)

September 30, 2014 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	115	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple		6.00 - 6.40 (6.30	)
Equity instruments of private companies				EBITDA multiple (where applicable)		5.50 - 6.00 (5.70	)
				Revenue multiple (where applicable)		4.30 - 4.30 (4.30	)
Nonrecurring
Impaired loans		6	Fair value of underlying collateral	Discount		10.00 - 90.00% (24.00%	)
Goodwill		1,051	Discounted cash flow and market data	Earnings multiple of peers		10.10 - 14.40 (11.59	)
				Equity multiple of peers		1.17 - 1.29 (1.24	)
				Control premium		N/A (35.00%	)
				Weighted-average cost of capital		N/A (13.00%	)

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, 2015, December 31, 2014, and September 30, 2014, are shown in the following table.


	September 30, 2015
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	2,434	$	2,434		—		—		—		$	2,434
Trading account assets ^(b)		811		4	$	807		—		—			811
Securities available for sale ^(b)		14,376		11		14,348	$	17		—			14,376
Held-to-maturity securities ^(c)		4,936		—		4,940		—		—			4,940
Other investments ^(b)		691		—		—		691		—			691
Loans, net of allowance ^(d)		59,295		—		—		57,497		—			57,497
Loans held for sale^(b)		916		—		—		916		—			916
Derivative assets^(b)		793		120		1,593		25	$	(945	)^(f)		793
LIABILITIES
Deposits with no stated maturity ^(a)	$	65,624		—	$	65,624		—		—		$	65,624
Time deposits ^(e)		5,449	$	427		5,075		—		—			5,502
Short-term borrowings ^(a)		1,084		—		677		—		—			677
Long-term debt^(e)		10,310		10,146		463		—		—			10,609
Derivative liabilities^(b)		676		102		1,140		—	$	(566	)^(f)		676

	December 31, 2014
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	4,922	$	4,922		—		—		—		$	4,922
Trading account assets ^(b)		750		2	$	748		—		—			750
Securities available for sale ^(b)		13,360		22		13,328	$	10		—			13,360
Held-to-maturity securities ^(c)		5,015		—		4,974		—		—			4,974
Other investments ^(b)		760		2		—		758		—			760
Loans, net of allowance ^(d)		56,587		—		—		54,993		—			54,993
Loans held for sale^(b)		734		—		—		734		—			734
Derivative assets^(b)		609		91		1,536		16	$	(1,034	)^(f)		609
LIABILITIES
Deposits with no stated maturity ^(a)	$	66,135		—	$	66,135		—		—		$	66,135
Time deposits ^(e)		5,863	$	564		5,361		—		—			5,925
Short-term borrowings ^(a)		998		—		998		—		—			998
Long-term debt^(e)		7,875		7,625		626		—		—			8,251
Derivative liabilities^(b)		784		77		1,248	$	1	$	(542	)^(f)		784

	September 30, 2014
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	2,993	$	2,993		—		—		—		$	2,993
Trading account assets ^(b)		965		13	$	952		—		—			965
Securities available for sale ^(b)		12,245		22		12,213	$	10		—			12,245
Held-to-maturity securities ^(c)		4,997		—		4,911		—		—			4,911
Other investments ^(b)		822		—		—		822		—			822
Loans, net of allowance ^(d)		55,351		—		—		53,996		—			53,996
Loans held for sale ^(b)		784		—		—		784		—			784
Mortgage servicing assets^(e)		308		—		—		370		—			370
Derivative assets^(b)		413		73		931		22	$	(613	)^(f)		413
LIABILITIES
Deposits with no stated maturity ^(a)	$	62,028		—	$	62,028		—		—		$	62,028
Time deposits ^(e)		6,428	$	556		5,937		—		—			6,493
Short-term borrowings ^(a)		1,653		6		1,647		—		—			1,653
Long-term debt^(e)		7,172		6,854		1,202		—		—			8,056
Derivative liabilities^(b)		384		55		721	$	1	$	(393	)^(f)		384

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

(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 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)

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 that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2014 and the first nine months of 2015, the fair values of our loan portfolios have generally remained stable, 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. 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 loans in portfolio (recorded at carrying value with appropriate valuation reserves) and loans in portfolio held for sale (recorded at fair value). Prior periods included assets and liabilities (recorded at fair value) in the securitization trusts and loans in portfolio (recorded at fair value) that were outside the trusts. All of these loans were excluded from the table above as follows:

•

Loans at carrying value, net of allowance, of $1.9 billion ($1.5 billion at fair value) at September 30, 2015, $2.1 billion ($1.8 billion at fair value) at December 31, 2014, and $2.1 billion ($1.9 billion at fair value) at September 30, 2014;

•

Portfolio loans held for sale at fair value of $169 million at September 30, 2015; and

•

Portfolio loans at fair value of $191 million at December 31, 2014, and $201 million at September 30, 2014.

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.

On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts to a third party. With that transaction, in accordance with the applicable accounting guidance, we deconsolidated the securitization trusts and removed the trust assets and liabilities from our balance sheet at September 30, 2014. Additional information regarding the sale of the residual interests and deconsolidation of the securitization trusts is provided in Note 11.

Residential real estate mortgage loans. Residential real estate mortgage loans with carrying amounts of $2.3 billion at September 30, 2015, and $2.2 billion at both December 31, 2014, and September 30, 2014, are included in “Loans, net of allowance” in the previous 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.