Edgar Filing: KEYCORP /NEW/

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

Commission File Number 1-11302

LOGO

KeyCorp

(Exact name of registrant as specified in its charter)


Ohio		34-6542451
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


127 Public Square, Cleveland, Ohio		44114-1306
(Address of principal executive offices)		(Zip Code)

(216) 689-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Shares with a par value of $1 each		953,136,969 Shares
(Title of class)		(Outstanding at April 30, 2012)

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets — March 31, 2012 (Unaudited), December 31, 2011, and March 31, 2011 (Unaudited)		5

	Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2012 and 2011		6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2012 and 2011		7

	Consolidated Statements of Changes in Equity (Unaudited) — Three months ended March 31, 2012 and 2011		8

	Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2012 and 2011		9

	Notes to Consolidated Financial Statements (Unaudited)		10

	Note 1. Basis of Presentation		10

	Note 2. Earnings Per Common Share		13

	Note 3. Loans and Loans Held for Sale		14

	Note 4. Asset Quality		15

	Note 5. Fair Value Measurements		26

	Note 6. Securities		39

	Note 7. Derivatives and Hedging Activities		43

	Note 8. Mortgage Servicing Assets		50

	Note 9. Variable Interest Entities		51

	Note 10. Income Taxes		53

	Note 11. Acquisition and Discontinued Operations		54

	Note 12. Contingent Liabilities and Guarantees		60

	Note 13. Capital Securities Issued by Unconsolidated Subsidiaries		63

	Note 14. Employee Benefits		65

	Note 15. Shareholders’ Equity		66

	Note 16. Line of Business Results		67

	Report of Independent Registered Public Accounting Firm		71


Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	72

	Introduction	72
	Terminology	72
	Forward-looking statements	74
	Economic overview	75
	Long-term financial goals	75
	Strategic developments	76
	Demographics	76
	Supervision and regulation	78
	Regulatory reform developments	78
	Stress Testing	78
	Interchange fees	78
	Enhanced prudential standards and early remediation requirements	78

	Highlights of Our Performance	78

	Results of Operations	81
	Net interest income	81
	Noninterest income	85
	Trust and investment services income	86
	Operating lease income	86
	Investment banking and capital markets income (loss)	86
	Other income	87
	Noninterest expense	87
	Personnel	88
	Operating lease expense	88
	FDIC Assessment	88
	Other Expense	88
	Income taxes	88

	Line of Business Results	89
	Key Community Bank summary of operations	89
	Key Corporate Bank summary of operations	90
	Other Segments	91

	Financial Condition	92
	Loans and loans held for sale	92
	Commercial loan portfolio	92
	*Commercial, financial and agricultural*	92
	*Commercial real estate loans*	92
	*Commercial lease financing*	93
	Commercial loan modification and restructuring	93
	*Extensions*	95
	*Guarantors*	95
	Consumer loan portfolio	96
	Loans held for sale	96
	Loan sales	96
	Securities	97
	Securities available-for-sale	98
	Held-to-maturity securities	99
	Other investments	100
	Deposits and other sources of funds	100
	Capital	101
	Comprehensive capital assessment review and capital actions	101
	Repurchase of TARP CPP preferred stock, warrant and completion of equity and debt offerings	101


	Dividends	102
	Common shares outstanding	102
	Capital adequacy	102
	Basel III	104

	Risk Management	106
	Overview	106
	Market risk management	107
	Interest rate risk management	107
	*Net interest income simulation analysis*	107
	*Economic value of equity modeling*	108
	*Management of interest rate exposure*	109
	Derivatives not designated in hedge relationships	109
	Liquidity risk management	109
	Governance structure	110
	Factors affecting liquidity	110
	Managing liquidity risk	110
	Long-term liquidity strategy	111
	Sources of liquidity	111
	Liquidity programs	111
	Liquidity for KeyCorp	111
	Our liquidity position and recent activity	112
	Credit risk management	112
	Credit policy, approval and evaluation	112
	Allowance for loan and lease losses	113
	Net loan charge-offs	116
	Nonperforming assets	118
	Operational risk management	121

	Critical Accounting Policies and Estimates	121

	European Sovereign Debt Exposure	123
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	124
Item 4.	Controls and Procedures	124

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	124
Item 1A.	Risk Factors	124
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	125
Item 6.	Exhibits	125
	Signature	126
	Exhibits

Throughout the Notes to Consolidated Financial Statements (Unaudited) and Management’s Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations which are defined in Note 1 (“Basis of Presentation”), which begins on page 10.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


in millions, except per share data	March 31, 2012		December 31, 2011		March 31, 2011
	(Unaudited)				(Unaudited)
ASSETS
Cash and due from banks	$	416	$	694	$	540
Short-term investments		3,605		3,519		3,705
Trading account assets		614		623		1,041
Securities available for sale		14,633		16,012		19,448
Held-to-maturity securities (fair value: $3,052, $2,133 and $19)		3,019		2,109		19
Other investments		1,188		1,163		1,402
Loans, net of unearned income of $1,282, $1,388 and $1,498		49,226		49,575		48,552
Less: Allowance for loan and lease losses		944		1,004		1,372
Net loans		48,282		48,571		47,180
Loans held for sale		511		728		426
Premises and equipment		937		944		906
Operating lease assets		335		350		491
Goodwill		917		917		917
Other intangible assets		15		17		20
Corporate-owned life insurance		3,270		3,256		3,187
Derivative assets		830		945		1,005
Accrued income and other assets (including $87 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		3,091		3,077		3,758
Discontinued assets (including $2,747 of consolidated education loan securitization trust VIEs (see Note 9) and $74 of loans in portfolio at fair value)^(a)		5,768		5,860		6,393
Total assets	$	87,431	$	88,785	$	90,438

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	29,124	$	27,954	$	26,177
Savings deposits		2,075		1,962		1,964
Certificates of deposit ($100,000 or more)		3,984		4,111		5,314
Other time deposits		5,848		6,243		7,597
Total interest-bearing		41,031		40,270		41,052
Noninterest-bearing		19,606		21,098		16,495
Deposits in foreign office — interest-bearing		857		588		3,263
Total deposits		61,494		61,956		60,810
Federal funds purchased and securities sold under repurchase agreements		1,846		1,711		2,232
Bank notes and other short-term borrowings		324		337		685
Derivative liabilities		754		1,026		1,106
Accrued expense and other liabilities		1,450		1,763		1,931
Long-term debt		8,898		9,520		11,048
Discontinued liabilities (including $2,542 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		2,549		2,550		2,929
Total liabilities		77,315		78,863		80,741
EQUITY
Preferred stock, $1 par value, authorized 25,000,000 shares:
7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839 and 2,904,839 shares		291		291		291
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905, 1,016,969,905 and 1,016,969,905 shares		1,017		1,017		1,017
Common stock warrant		—		—		87
Capital surplus		4,116		4,194		4,167
Retained earnings		6,411		6,246		5,721
Treasury stock, at cost (60,868,267, 63,962,113 and 63,043,642)		(1,717)		(1,815)		(1,823)
Accumulated other comprehensive income (loss)		(19)		(28)		(35)
Key shareholders’ equity		10,099		9,905		9,425
Noncontrolling interests		17		17		272
Total equity		10,116		9,922		9,697
Total liabilities and equity	$	87,431	$	88,785	$	90,438

(a)	The assets of the VIEs can only be used by the particular VIE and there is no recourse to Key with respect to the liabilities of the consolidated LIHTC or education loan securitization trust VIEs.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended March 31,
dollars in millions, except per share amounts	2012		2011
INTEREST INCOME
Loans	$	536	$	570
Loans held for sale		5		4
Securities available for sale		116		166
Held-to-maturity securities		12		—
Trading account assets		6		7
Short-term investments		1		1
Other investments		8		12
Total interest income		684		760

INTEREST EXPENSE
Deposits		77		110
Federal funds purchased and securities sold under repurchase agreements		1		1
Bank notes and other short-term borrowings		2		3
Long-term debt		51		49
Total interest expense		131		163

NET INTEREST INCOME		553		597
Provision (credit) for loan and lease losses		42		(40)
Net interest income (expense) after provision for loan and lease losses		511		637

NONINTEREST INCOME
Trust and investment services income		109		110
Service charges on deposit accounts		68		68
Operating lease income		22		35
Letter of credit and loan fees		54		55
Corporate-owned life insurance income		30		27
Net securities gains (losses)^(a)		—		(1)
Electronic banking fees		17		30
Gains on leased equipment		27		4
Insurance income		12		15
Net gains (losses) from loan sales		22		19
Net gains (losses) from principal investing		35		35
Investment banking and capital markets income (loss)		43		43
Other income		33		17
Total noninterest income		472		457

NONINTEREST EXPENSE
Personnel		385		371
Net occupancy		64		65
Operating lease expense		17		28
Computer processing		41		42
Business services and professional fees		38		38
FDIC assessment		8		29
OREO expense, net		6		10
Equipment		26		26
Marketing		13		10
Provision (credit) for losses on lending-related commitments		—		(4)
Other expense		105		86
Total noninterest expense		703		701
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		280		393
Income taxes		75		111
INCOME (LOSS) FROM CONTINUING OPERATIONS		205		282
Income (loss) from discontinued operations, net of taxes of ($3) and ($6) (see Note 11)		(5)		(11)
NET INCOME (LOSS)		200		271
Less: Net income (loss) attributable to noncontrolling interests		—		8
NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	200	$	263

Income (loss) from continuing operations attributable to Key common shareholders	$	199	$	184
Net income (loss) attributable to Key common shareholders		194		173

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.21
Income (loss) from discontinued operations, net of taxes		(.01)		(.01)
Net income (loss) attributable to Key common shareholders		.20		.20

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.21
Income (loss) from discontinued operations, net of taxes		(.01)		(.01)
Net income (loss) attributable to Key common shareholders ^(c)		.20		.19

Cash dividends declared per common share	$	.03	$	.01

Weighted-average common shares outstanding (000) ^(b)		949,342		881,894
Weighted-average common shares and potential common shares outstanding (000)		953,971		887,836

(a)	For the three months ended March 31, 2012 and 2011, we did not have any impairment losses related to securities.

(b)	Assumes conversion of stock options and/or Preferred Series A, as applicable.

(c)	EPS may not foot due to rounding.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended March 31,
in millions	2012		2011
Net income (loss)	$	200	$	271
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($6) and ($12)		(11)		(20)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $7 and ($5)		12		(8)
Foreign currency translation adjustments		6		9
Net pension and postretirement benefit costs, net of income taxes		2		1
Other comprehensive income (loss), net of tax:		209		253
Net contribution to (distribution from) noncontrolling interests		—		15
Total comprehensive income (loss) attributable to Key	$	209	$	268

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Equity (Unaudited)


	Key Shareholders’ Equity
dollars in millions, except per share amounts	Preferred Shares Outstanding (000)		Common Shares Outstanding (000)		Preferred Stock		Common Shares		Common Stock Warrant		Capital Surplus		Retained Earnings		Treasury Stock, at Cost		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests
BALANCE AT DECEMBER 31, 2010		2,930		880,608	$	2,737	$	946	$	87	$	3,711	$	5,557	$	(1,904)	$	(17)	$	257
Net income (loss)														263
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($12)																		(20)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($5)																		(8)
Net distribution to noncontrolling interests																				15
Foreign currency translation adjustments																		9
Net pension and postretirement benefit costs, net of income taxes																		1
Deferred compensation												(5)
Cash dividends declared on common shares ($.01 per share)														(9)
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)														(6)
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)														(31)
Series B Preferred Stock - TARP redemption		(25)				(2,451)								(49)
Amortization of discount on Series B Preferred Stock						4								(4)
Common shares issuance				70,621				71				529
Common shares reissued for stock options and other employee benefit plans				2,697								(68)				81
Other						1
BALANCE AT MARCH 31, 2011		2,905		953,926	$	291	$	1,017	$	87	$	4,167	$	5,721	$	(1,823)	$	(35)	$	272


BALANCE AT DECEMBER 31, 2011		2,905		953,008	$	291	$	1,017		—	$	4,194	$	6,246	$	(1,815)	$	(28)	$	17
Net income (loss)														200
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($6)																		(11)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $7																		12
Foreign currency translation adjustments																		6
Net pension and postretirement benefit costs, net of income taxes																		2
Deferred compensation												4
Cash dividends declared on common shares ($.03 per share)														(29)
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)														(6)
Common shares reissued for stock options and other employee benefit plans				3,094								(82)				98
BALANCE AT MARCH 31, 2012		2,905		956,102	$	291	$	1,017		—	$	4,116	$	6,411	$	(1,717)	$	(19)	$	17

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended March 31,
in millions	2012		2011
OPERATING ACTIVITIES
Net income (loss)	$	200	$	271
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		42		(40)
Depreciation and amortization expense		60		74
FDIC (payments) net of FDIC expense		7		27
Deferred income taxes (benefit)		28		96
Net losses (gains) and writedown on OREO		6		10
Provision (credit) for customer derivative losses		(1)		(11)
Net losses (gains) from loan sales		(22)		(19)
Net losses (gains) from principal investing		(35)		(35)
Provision (credit) for losses on lending-related commitments		—		(4)
(Gains) losses on leased equipment		(27)		(4)
Net securities losses (gains)		—		1
Net decrease (increase) in loans held for sale excluding loan transfers from continuing operations		198		80
Net decrease (increase) in trading account assets		9		(56)
Other operating activities, net		(402)		22
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		63		412
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments		(86)		(2,361)
Purchases of securities available for sale		(2)		(613)
Proceeds from sales of securities available for sale		—		1,578
Proceeds from prepayments and maturities of securities available for sale		1,364		1,486
Proceeds from prepayments and maturities of held-to-maturity securities		96		—
Purchases of held-to-maturity securities		(1,005)		(2)
Purchases of other investments		(16)		(45)
Proceeds from sales of other investments		2		14
Proceeds from prepayments and maturities of other investments		24		21
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		202		1,234
Proceeds from loan sales		41		75
Purchases of premises and equipment		(26)		(30)
Proceeds from sales of other real estate owned		12		35
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		606		1,392
FINANCING ACTIVITIES
Net increase (decrease) in deposits		(462)		200
Net increase (decrease) in short-term borrowings		122		(279)
Net proceeds from issuance of long-term debt		—		1,000
Payments on long-term debt		(572)		(502)
Net proceeds from issuance of common stock		—		600
Series B Preferred Stock - TARP redemption		—		(2,500)
Cash dividends paid		(35)		(61)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(947)		(1,542)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(278)		262
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		694		278
CASH AND DUE FROM BANKS AT END OF PERIOD	$	416	$	540


Additional disclosures relative to cash flows:
Interest paid	$	101	$	134
Income taxes paid (refunded)		3		(267)
Noncash items:
Loans transferred to portfolio from held for sale	$	19		—
Loans transferred to held for sale from portfolio		—	$	39
Loans transferred to other real estate owned		15		12

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

As used in these Notes, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorp’s subsidiary, KeyBank National Association.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion & Analysis of Financial Condition & Results of Operations. You may find it helpful to refer back to this page as you read this report.

References to our “2011 Annual Report on Form 10-K” refer to our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) or on our website (www.key.com/ir).


ABO: Accumulated benefit obligation.		Moody’s: Moody’s Investors Service, Inc.
AICPA: American Institute of Certified Public Accountants.		N/A: Not applicable.
ALCO: Asset/Liability Management Committee.		NASDAQ: National Association of Securities Dealers
ALLL: Allowance for loan and lease losses.		Automated Quotation System.
A/LM: Asset/liability management.		N/M: Not meaningful.
AOCI: Accumulated other comprehensive income (loss).		NOW: Negotiable Order of Withdrawal.
APBO: Accumulated postretirement benefit obligation.		NYSE: New York Stock Exchange.
Austin: Austin Capital Management, Ltd.		OCI: Other comprehensive income (loss).
BHCs: Bank holding companies.		OREO: Other real estate owned.
CCAR: Comprehensive Capital Analysis and Review.		OTTI: Other-than-temporary impairment.
CMO: Collateralized mortgage obligation.		QSPE: Qualifying special purpose entity.
Common Shares: Common Shares, $1 par value.		PBO: Projected Benefit Obligation.
CPP: Capital Purchase Program of the U.S. Treasury.		S&P: Standard and Poor’s Ratings Services, a Division of The
DIF: Deposit Insurance Fund.		McGraw-Hill Companies, Inc.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and		SCAP: Supervisory Capital Assessment Program administered
Consumer Protection Act of 2010.		by the Federal Reserve.
ERISA: Employee Retirement Income Security Act of 1974.		SEC: U.S. Securities & Exchange Commission.
ERM: Enterprise risk management.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
EVE: Economic value of equity.		Perpetual Convertible Preferred Stock, Series A.
FASB: Financial Accounting Standards Board.		Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative
FDIC: Federal Deposit Insurance Corporation.		Perpetual Preferred Stock, Series B issued to the U.S. Treasury
Federal Reserve: Board of Governors of the Federal Reserve		under the CPP.
System.		SILO: Sale in, lease out transaction.
FHLMC: Federal Home Loan Mortgage Corporation.		SPE: Special purpose entity.
FNMA: Federal National Mortgage Association.		TAG: Transaction Account Guarantee program of the FDIC.
FVA: Fair Value of pension plan assets.		TARP: Troubled Asset Relief Program.
GAAP: U.S. generally accepted accounting principles.		TDR: Troubled debt restructuring.
GNMA: Government National Mortgage Association.		TE: Taxable equivalent.
IRS: Internal Revenue Service.		TLGP: Temporary Liquidity Guarantee Program of the FDIC.
ISDA: International Swaps and Derivatives Association.		U.S. Treasury: United States Department of the Treasury.
KAHC: Key Affordable Housing Corporation.		VAR: Value at risk.
LIBOR: London Interbank Offered Rate.		VEBA: Voluntary Employee Beneficiary Association.
LIHTC: Low-income housing tax credit.		VIE: Variable interest entity.
LILO: Lease in, lease out transaction.		XBRL: eXtensible Business Reporting Language.

The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts have been reclassified to conform to current reporting practices.

The consolidated financial statements include any voting rights entities in which we have a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity’s economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments. See Note 9 (“Variable Interest Entities”) for information on our involvement with VIEs.

We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.

We believe that the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2011 Annual Report on Form 10-K. See Note 11 (“Acquisitions and Discontinued Operations”) for further information regarding an error correction that was made during the third quarter of 2011.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.

Offsetting Derivative Positions

In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 7 (“Derivatives and Hedging Activities”).

Accounting Guidance Adopted in 2012

Fair value measurement. In May 2011, the FASB issued accounting guidance that changes the wording used to describe many of the current accounting requirements for measuring fair value and disclosing information about fair value measurements. This accounting guidance clarifies the FASB’s intent about the application of existing fair value measurement requirements. It is effective for the interim and annual periods beginning on or after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Presentation of comprehensive income. In June 2011, the FASB issued new accounting guidance that requires all nonowner changes in shareholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new accounting guidance does not change any of the components currently recognized in net income or comprehensive income. It is effective for public entities for interim and annual periods beginning after December 15, 2011 (effective January 1, 2012, for us) as well as interim and annual periods thereafter. New consolidated Statements of Comprehensive Income (Unaudited) are now included as part of our financial statements as required by this accounting guidance.

Testing goodwill for impairment. In September 2011, the FASB issued new accounting guidance that simplifies how an entity will test goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. This accounting guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Repurchase agreements. In April 2011, the FASB issued accounting guidance that changed the accounting for repurchase agreements and other similar arrangements by eliminating the collateral maintenance requirement when assessing effective control in these transactions. This change could result in more of these transactions being accounted for as secured borrowings instead of sales. This accounting guidance is effective for new transactions and transactions that are modified on or after the first interim or annual period beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations since we do not account for these types of arrangements as sales.

Accounting Guidance Pending Adoption at March 31, 2012

Offsetting disclosures. In December 2011, the FASB issued new accounting guidance that requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to understand the effect of those arrangements on the entity’s financial position. This new accounting guidance will be effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods (effective January 1, 2013 for us).

2. Earnings Per Common Share

Our basic and diluted earnings per Common Share are calculated as follows:


	Three months ended March 31,
dollars in millions, except per share amounts	2012		2011

EARNINGS
Income (loss) from continuing operations	$	205	$	282
Less: Net income (loss) attributable to noncontrolling interests		—		8

Income (loss) from continuing operations attributable to Key		205		274
Less: Dividends on Series A Preferred Stock		6		6
Cash dividends on Series B Preferred Stock ^(b)		—		31
Amortization of discount on Series B Preferred Stock^(b)		—		53

Income (loss) from continuing operations attributable to Key common shareholders		199		184
Income (loss) from discontinued operations, net of taxes^(a)		(5)		(11)

Net income (loss) attributable to Key common shareholders	$	194	$	173


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		949,342		881,894
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)		4,629		5,942

Weighted-average common shares and potential common shares outstanding (000)		953,971		887,836


EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.21
Income (loss) from discontinued operations, net of taxes ^(a)		(.01)		(.01)
Net income (loss) attributable to Key common shareholders^(c)		.20		.20

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.21	$	.21
Income (loss) from discontinued operations, net of taxes ^(a)		(.01)		(.01)
Net income (loss) attributable to Key common shareholders — assuming dilution ^(c)		.20		.19

(a)

In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. As a result of these decisions, we have accounted for these businesses as discontinued operations. The loss from discontinued operations for the periods ended March 31, 2012 and March 31, 2011, was primarily attributable to fair value adjustments related to the education lending securitization trusts.

(b)	Includes a $49 million deemed dividend recorded in the first quarter of 2011 related to the repurchase of the $2.5 billion Series B Preferred Stock.

(c)	EPS may not foot due to rounding.

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


	March 31,		December 31,		March 31,
in millions	2012		2011		2011
Commercial, financial and agricultural	$	19,787	$	19,378	$	16,440
Commercial real estate:
Commercial mortgage		7,807		8,037		8,806
Construction		1,273		1,312		1,845

Total commercial real estate loans		9,080		9,349		10,651
Commercial lease financing		5,755		6,055		6,207

Total commercial loans		34,622		34,782		33,298
Residential — prime loans:
Real estate — residential mortgage		1,967		1,946		1,803
Home equity:
Key Community Bank		9,153		9,229		9,421
Other		507		535		627

Total home equity loans		9,660		9,764		10,048

Total residential — prime loans		11,627		11,710		11,851
Consumer other — Key Community Bank		1,212		1,192		1,141
Consumer other:
Marine		1,654		1,766		2,112
Other		111		125		150

Total consumer other		1,765		1,891		2,262

Total consumer loans		14,604		14,793		15,254

Total loans ^(a)	$	49,226	$	49,575	$	48,552

(a)	Excludes loans in the amount of $5.7 billion, $5.8 billion and $6.3 billion at March 31, 2012, December 31, 2011, and March 31, 2011, respectively, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:


	March 31,		December 31,		March 31,
in millions	2012		2011		2011

Commercial, financial and agricultural	$	28	$	19	$	19
Real estate — commercial mortgage		362		567		287
Real estate — construction		15		35		61
Commercial lease financing		30		12		7
Real estate — residential mortgage		76		95		52

Total loans held for sale ^(a)	$	511	$	728	$	426

(a)	Excludes loans in the amount of $14 million at March 31, 2011, related to the discontinued operations of the education lending business. There were no loans held for sale in the discontinued operations of the education lending business at March 31, 2012 and December 31, 2011.

Our summary of changes in loans held for sale follows:


	March 31,		December 31,		March 31,
in millions	2012		2011		2011

Balance at beginning of the period	$	728	$	479	$	467
New originations		935		1,235		980
Transfers from held to maturity, net		19		19		32
Loan sales		(1,168)		(932)		(991)
Loan draws (payments), net		(3)		(72)		(62)
Transfers to OREO / valuation adjustments		—		(1)		—

Balance at end of perod	$	511	$	728	$	426

4. Asset Quality

We manage our exposure to credit risk by closely monitoring loan performance trends and general economic conditions. A key indicator of the potential for future credit losses is the level of nonperforming assets and past due loans.

Our nonperforming assets and past due loans were as follows:


	March 31,		December 31,		March 31,
in millions	2012		2011		2011

Total nonperforming loans	$	666	$	727	$	885
Nonperforming loans held for sale		24		46		86
OREO		61		65		97
Other nonperforming assets		16		21		21

Total nonperforming assets	$	767	$	859	$	1,089



Restructured loans included in nonperforming loans^(a)	$	184	$	191	$	136
Restructured loans with an allocated specific allowance ^(b)		47		50		29
Specifically allocated allowance for restructured loans ^(c)		18		10		9


Accruing loans past due 90 days or more	$	169	$	164	$	153
Accruing loans past due 30 through 89 days		420		441		474

(a)

A loan is “restructured” (i.e., troubled debt restructurings) when the borrower is experiencing financial difficulty and we grant a concession that we would not otherwise have considered to improve the collectability of the loan. Typical concessions include reducing the interest rate, extending the maturity date or reducing the principal balance.

(b)	Included in individually impaired loans allocated a specific allowance.

(c)	Included in allowance for individually evaluated impaired loans.

At March 31, 2012, the approximate carrying amount of our commercial nonperforming loans outstanding represented 58% of their original contractual amount, total nonperforming loans outstanding represented 68% of their original contractual amount owed, and nonperforming assets in total were carried at 63% of their original contractual amount.

At March 31, 2012, our twenty largest nonperforming loans totaled $215 million, representing 32% of total loans on nonperforming status from continuing operations. At March 31, 2011, the twenty largest nonperforming loans totaled $284 million representing 32% of total loans on nonperforming status.

The amount by which nonperforming loans and loans held for sale reduced expected interest income was $6 million for the three months ended March 31, 2012, and $31 million for the year ended December 31, 2011.

The following tables set forth a further breakdown of individually impaired loans as of March 31, 2012, December 31, 2011 and March 31, 2011:


March 31, 2012	Recorded			Unpaid Principal			Specific		Average Recorded
in millions	Investment		^(a)	Balance		^(b)	Allowance		Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	77		$	189			—	$	83
Commercial real estate:
Commercial mortgage		113			252			—		106
Construction		47			164			—		39

Total commercial real estate loans		160			416			—		145

Total commercial loans with no related allowance recorded		237			605			—		228

With an allowance recorded:
Commercial, financial and agricultural		49			60		$	19		55
Commercial real estate:
Commercial mortgage		69			111			16		83
Construction		4			4			3		8

Total commercial real estate loans		73			115			19		91

Total commercial loans with an allowance recorded		122			175			38		146

Total	$	359		$	780		$	38	$	374

(a)

The Recorded Investment in impaired loans represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

(b)	The Unpaid Principal Balance represents the customer’s legal obligation to us.


December 31, 2011	Recorded			Unpaid Principal			Specific		Average Recorded
in millions	Investment		^(a)	Balance		^(b)	Allowance		Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	88		$	195			—	$	75
Commercial real estate:
Commercial mortgage		100			240			—		131
Construction		30			113			—		98

Total commercial real estate loans		130			353			—		229

Total loans with no related allowance recorded		218			548			—		304

With an allowance recorded:
Commercial, financial and agricultural		62			70		$	26		75
Commercial real estate:
Commercial mortgage		96			115			21		91
Construction		12			18			4		29

Total commercial real estate loans		108			133			25		120
Commercial lease financing		—			—			—		6

Total loans with an allowance recorded		170			203			51		201

Total	$	388		$	751		$	51	$	505

(a)

(b)	The Unpaid Principal Balance represents the customer’s legal obligation to us.


March 31, 2011	Recorded			Unpaid Principal			Specific		Average Recorded
in millions	Investment		^(a)	Balance		^(b)	Allowance		Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	84		$	178			—	$	72
Commercial real estate:
Commercial mortgage		156			298			—		159
Construction		121			408			—		144

Total commercial real estate loans		277			706			—		303

Total loans with no related allowance recorded		361			884			—		375

With an allowance recorded:
Commercial, financial and agricultural		63			117		$	25		76
Commercial real estate:
Commercial mortgage		62			115			13		74
Construction		7			11			1		26

Total commercial real estate loans		69			126			14		100
Commercial lease financing		—			—			—		6

Total loans with an allowance recorded		132			243			39		182

Total	$	493		$	1,127		$	39	$	557

(a)

(b)	The Unpaid Principal Balance represents the customer’s legal obligation to us.

For the three months ended March 31, 2012 and 2011, interest income recognized on the outstanding balances of accruing impaired loans totaled $1 million respectively.

At March 31, 2012, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $293 million, compared to $276 million at December 31, 2011 and $242 million at March 31, 2011. We added $56 million in restructured loans during the first three months of 2012, partially offset by $39 million in payments and charge-offs.

A further breakdown of restructured loans (TDRs) included in nonperforming loans by loan category as of March 31, 2012, follows:


March 31, 2012 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		102	$	105	$	64
Commercial real estate:
Real estate — commercial mortgage		16		102		64
Real estate — construction		8		35		19

Total commercial real estate loans		24		137		83

Total commercial loans		126		242		147
Real estate — residential mortgage		43		5		5
Home equity:
Key Community Bank		27		3		3
Other		32		1		1

Total home equity loans		59		4		4
Consumer other — Key Community Bank		2		—		—
Consumer other:
Marine		48		28		28
Other		6		—		—

Total consumer other		54		28		28

Total consumer loans		158		37		37

Total nonperforming TDRs		284		279		184

Prior-year accruing^(a)
Commercial, financial and agricultural		176		20		11
Commercial real estate:
Real estate — commercial mortgage		7		75		57
Real estate — construction		1		15		2

Total commercial real estate loans		8		90		59

Total commercial loans		184		110		70
Real estate — residential mortgage		113		12		12
Home equity:
Key Community Bank		88		7		7
Other		104		3		3

Total home equity loans		192		10		10
Consumer other — Key Community Bank		19		—		—
Consumer other:
Marine		140		15		15
Other		51		2		2

Total consumer other		191		17		17

Total consumer loans		515		39		39

Total prior-year accruing TDRs		699		149		109

Total TDRs		983	$	428	$	293

(a)	All TDRs that were restructured prior to January 1, 2012 and are fully accruing.

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession to the borrower without commensurate financial, structural or legal consideration. All commercial loan TDRs, regardless of size, are evaluated for impairment individually to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. Consumer loan TDRs are assigned a loss rate that reflects the current assessment of that category of consumer loans to determine the appropriate allowance level. The financial effects of TDRs are reflected in the components that comprise the allowance for loan and lease losses in either the amount of charge-offs or loan loss provision and appropriately impact the ultimate allowance level.

Commercial and consumer loan TDRs are considered subsequently defaulted at 90 days past due and when they are greater than 60 days past due, respectively, for principal and interest payments. There were no significant commercial or consumer

loans that were designated as TDRs during calendar year 2011, for which there was a payment default during the first three months of 2012.

Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our client’s financial needs. A majority of our concessions granted to borrowers are in the form of interest rate reductions. Other concession types include forgiveness of principal and other modifications of loan terms. Consumer loan concessions include Home Affordable Modification Program (“HAMP”) loans of approximately $3 million as of March 31, 2012. These loan concessions have successfully completed the required trial period under HAMP and as a result have been permanently modified and are included in consumer TDRs.

The following table shows the concession types for our commercial accruing and nonaccruing TDRs.


dollars in millions	March 31, 2012			December 31, 2011			March 31, 2011

Interest rate reduction	$	184		$	177		$	165
Forgiveness of principal		11			23			10
Other modification of loan terms		22			8			7

Total	$	217		$	208		$	182


Total commercial and consumer TDRs^(a)	$	293		$	276		$	242
Total commercial TDRs to total commercial loans		.63	%		.60	%		.55	%
Total commercial TDRs to total loans		.44			.42			.37
Total commercial loans	$	34,622		$	34,782		$	33,298
Total loans		49,226			49,575			48,552

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $24 million, $25 million, and $44 million at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.

Our policies for our commercial and consumer loan portfolios for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” on page 117 of our 2011 Annual Report on Form 10-K.

At March 31, 2012, approximately $48.0 billion, or 97%, of our total loans are current. At March 31, 2012, total past due loans and nonperforming loans of $1.3 billion represent approximately 3% of total loans.

The following aging analysis as of March 31, 2012 and 2011, of past due and current loans provides further information regarding Key’s credit exposure.


March 31, 2012 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	19,559	$	25	$	16	$	19	$	168	$	228	$	19,787
Commercial real estate:
Commercial mortgage		7,532		7		11		82		175		275		7,807
Construction		1,170		19		7		11		66		103		1,273

Total commercial real estate loans		8,702		26		18		93		241		378		9,080

Commercial lease financing		5,570		126		22		15		22		185		5,755

Total commercial loans	$	33,831	$	177	$	56	$	127	$	431	$	791	$	34,622


Real estate — residential mortgage	$	1,852	$	20	$	8	$	5	$	82	$	115	$	1,967
Home equity:
Key Community Bank		8,941		53		34		16		109		212		9,153
Other		476		9		6		4		12		31		507

Total home equity loans		9,417		62		40		20		121		243		9,660

Consumer other — Key Community Bank		1,189		9		4		9		1		23		1,212
Consumer other:
Marine		1,576		30		11		7		30		78		1,654
Other		106		2		1		1		1		5		111

Total consumer other		1,682		32		12		8		31		83		1,765

Total consumer loans	$	14,140	$	123	$	64	$	42	$	235	$	464	$	14,604


Total loans	$	47,971	$	300	$	120	$	169	$	666	$	1,255	$	49,226



March 31, 2011 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	16,138	$	46	$	13	$	22	$	221	$	302	$	16,440
Commercial real estate:
Commercial mortgage		8,459		36		37		29		245		347		8,806
Construction		1,623		40		14		22		146		222		1,845

Total commercial real estate loans		10,082		76		51		51		391		569		10,651

Commercial lease financing		6,054		53		21		37		42		153		6,207

Total commercial loans	$	32,274	$	175	$	85	$	110	$	654	$	1,024	$	33,298


Real estate — residential mortgage	$	1,676	$	22	$	12	$	9	$	84	$	127	$	1,803
Home equity:
Key Community Bank		9,211		60		34		17		99		210		9,421
Other		591		11		7		5		13		36		627

Total home equity loans		9,802		71		41		22		112		246		10,048

Consumer other — Key Community Bank		1,115		10		5		8		3		26		1,141
Consumer other:
Marine		2,030		34		14		3		31		82		2,112
Other		144		3		1		1		1		6		150

Total consumer other		2,174		37		15		4		32		88		2,262

Total consumer loans	$	14,767	$	140	$	73	$	43	$	231	$	487	$	15,254


Total loans	$	47,041	$	315	$	158	$	153	$	885	$	1,511	$	48,552

The risk characteristic prevalent to both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the assigned loan risk rating grades for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios. This risk rating stratification assists in the determination of the ALLL. Loan grades are assigned at the time of origination, verified by credit risk management and periodically reevaluated thereafter.

Most extensions of credit are subject to loan grading or scoring. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure and collateral, including credit risk mitigants, affect the expected recovery assessment.

Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating categories. Payment activity and the regulatory classifications of pass and substandard are indicators of the credit quality of our consumer loan portfolios.

Credit quality indicators for our commercial and consumer loan portfolios based on bond rating, regulatory classification and payment activity as of March 31, 2012 and 2011, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


March 31,
in millions

	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING ^{(b) (c)}	2012		2011		2012		2011		2012		2011		2012		2011		2012		2011

AAA — AA	$	165	$	95	$	3	$	2	$	3		—	$	599	$	645	$	770	$	742
A		785		712		62		84		1	$	5		1,156		1,246		2,004		2,047
BBB — BB		16,801		12,646		6,007		6,045		788		801		3,623		3,655		27,219		23,147
B		848		1,125		568		954		165		309		236		365		1,817		2,753
CCC — C		1,188		1,862		1,167		1,721		316		730		141		296		2,812		4,609

Total	$	19,787	$	16,440	$	7,807	$	8,806	$	1,273	$	1,845	$	5,755	$	6,207	$	34,622	$	33,298




(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b) Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

(c) Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications^(a)

March 31,

in millions

Residential — Prime

GRADE

2012

2011

Pass

11,399

11,624

Substandard

228

227

Total

11,627

11,851



Credit Risk Profile Based on Payment Activity^{(a) (b)}

March 31,	Consumer — Key Community Bank				Consumer — Marine				Consumer — Other				Total
in millions	2012		2011		2012		2011		2012		2011		2012		2011

Performing	$	1,211	$	1,138	$	1,624	$	2,081	$	110	$	149	$	2,945	$	3,368
Nonperforming		1		3		30		31		1		1		32		35

Total	$	1,212	$	1,141	$	1,654	$	2,112	$	111	$	150	$	2,977	$	3,403

(a)	Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b)	Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days, and substandard = 90 days and greater plus nonperforming loans.

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 117 of our 2011 Annual Report on Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. For all commercial TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the

probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the carrying amount of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral or the loan’s observable market price. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. Consumer loan TDRs are assigned a loss rate that reflects the current assessment of that category of consumer loans to determine the appropriate ALLL level. The ALLL at March 31, 2012 represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

While quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, there have been no changes to the accounting policies or methodology we used to estimate the ALLL.

Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Our charge-off policy for most consumer loans is similar but takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due.

At March 31, 2012, the ALLL was $944 million, or 1.92% of loans, compared to $1.4 billion, or 2.83% of loans, at March 31, 2011. At March 31, 2012, the ALLL was 141.74% of nonperforming loans compared to 155.03% at March 31, 2011.

A summary of the allowance for loan and lease losses for the periods indicated is presented in the table below:


	Three months ended March 31,
in millions	2012		2011

Balance at beginning of period — continuing operations	$	1,004	$	1,604
Charge-offs		(132)		(232)
Recoveries		31		39

Net loans charged off		(101)		(193)
Provision for loan and lease losses from continuing operations		42		(40)
Foreign currency translation adjustment		(1)		1

Balance at end of period — continuing operations	$	944	$	1,372

The changes in the ALLL by loan category for the periods indicated are as follows:


in millions	December 31, 2011		Provision				Charge-offs		Recoveries		March 31, 2012

Commercial, financial and agricultural	$	334	$	(3)			$	(26)	$	11	$	316
Real estate — commercial mortgage		272		12				(23)		2		263
Real estate — construction		63		3				(11)		1		56
Commercial lease financing		78		(10)				(4)		4		68

Total commercial loans		747		2				(64)		18		703
Real estate — residential mortgage		37		4				(6)		1		36
Home equity:
Key Community Bank		103		14				(25)		2		94
Other		29		6				(8)		1		28

Total home equity loans		132		20				(33)		3		122
Consumer other — Key Community Bank		41		5				(10)		1		37
Consumer other:
Marine		46		9				(17)		7		45
Other		1		1				(2)		1		1

Total consumer other:		47		10				(19)		8		46

Total consumer loans		257		39				(68)		13		241

Total ALLL — continuing operations		1,004		41	^(a	⁾		(132)		31		944
Discontinued operations		104		5				(23)		4		90

Total ALLL — including discontinued operations	$	1,108	$	46			$	(155)	$	35	$	1,034

(a)	Includes $1 million of foreign currency translation adjustment.


in millions	December 31, 2010		Provision			Charge-offs		Recoveries		March 31, 2011
Commercial, financial and agricultural	$	485	$	(34)		$	(42)	$	10	$	419
Real estate — commercial mortgage		416		13			(46)		3		386
Real estate — construction		145		2			(35)		5		117
Commercial lease financing		175		(32)			(17)		6		132
Total commercial loans		1,221		(51)			(140)		24		1,054
Real estate — residential mortgage		49		—			(10)		1		40
Home equity:
Key Community Bank		120		15			(25)		1		111
Other		57		2			(15)		1		45
Total home equity loans		177		17			(40)		2		156
Consumer other — Key Community Bank		57		3			(12)		2		50
Consumer other:
Marine		89		(2)			(27)		8		68
Other		11		(6)			(3)		2		4
Total consumer other:		100		(8)			(30)		10		72
Total consumer loans		383		12			(92)		15		318
Total ALLL — continuing operations		1,604		(39)	^(a)		(232)		39		1,372
Discontinued operations		114		32			(38)		3		111
Total ALLL — including discontinued operations	$	1,718	$	(7)		$	(270)	$	42	$	1,483

(a)	Includes $1 million of foreign currency translation adjustment.

Our ALLL decreased by $428 million, or 31%, since the first quarter of 2011. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably over the past five quarters. Our asset quality metrics have showed continued improvement and, therefore, resulted in favorable risk rating migration and a reduction in our general allowance. Our general allowance encompasses the application of expected loss rates to our existing loans with similar risk characteristics and an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends improved during 2011 and into 2012. We attribute this improvement to a more moderate level of lending activity, more favorable conditions in the capital markets, improvement in client income statements and continued run off in our exit loan portfolio.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $359 million, with a corresponding allowance of $38 million at March 31, 2012. Loans outstanding collectively evaluated for impairment totaled $48.9 billion, with a corresponding allowance of $906 million at March 31, 2012.

A breakdown of the individual and collective allowance for loan and lease losses and the corresponding loan balances as of March 31, 2012 follows:


	Allowance^(a)				Outstanding^(a)
March 31, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial, financial and agricultural	$	19	$	297	$	19,787		$	125	$	19,662
Commercial real estate:
Commercial mortgage		16		247		7,807			182		7,625
Construction		3		53		1,273			52		1,221
Total commercial real estate loans		19		300		9,080			234		8,846
Commercial lease financing		—		68		5,755			—		5,755
Total commercial loans		38		665		34,622			359		34,263
Real estate — residential mortgage		—		36		1,967			—		1,967
Home equity:
Key Community Bank		—		94		9,153			—		9,153
Other		—		28		507			—		507
Total home equity loans		—		122		9,660			—		9,660
Consumer other — Key Community Bank		—		37		1,212			—		1,212
Consumer other:
Marine		—		45		1,654			—		1,654
Other		—		1		111			—		111
Total consumer other		—		46		1,765			—		1,765
Total consumer loans		—		241		14,604			—		14,604
Total ALLL — continuing operations		38		906		49,226			359		48,867
Discontinued operations		—		90		5,715	^(b)		—		5,715
Total ALLL — including discontinued operations	$	38	$	996	$	54,941		$	359	$	54,582

(a)	There were no loans acquired with deteriorated credit quality at March 31, 2012.

(b)	Amount includes $2.8 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective allowance for loan and lease losses and the corresponding loan balances as of March 31, 2011 follows:


	Allowance^(a)				Outstanding^(a)
March 31, 2011 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial, financial and agricultural	$	25	$	394	$	16,440	$	143	$	16,297
Commercial real estate:
Commercial mortgage		13		373		8,806		218		8,588
Construction		1		116		1,845		128		1,717
Total commercial real estate loans		14		489		10,651		346		10,305
Commercial lease financing		—		132		6,207		2		6,205
Total commercial loans		39		1,015		33,298		491		32,807
Real estate — residential mortgage		—		40		1,803		—		1,803
Home equity:
Key Community Bank

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company