Edgar Filing: KEYCORP /NEW/

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 June 30, 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 incorporation or organization)				(I.R.S. Employer 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):


Large accelerated filer þ		Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

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				943,463,119 Shares
(Title of class)				(Outstanding at July 31, 2012)

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page Number

	Consolidated Balance Sheets — June 30, 2012 (Unaudited), December 31, 2011, and June 30, 2011 (Unaudited)		5

	Consolidated Statements of Income (Unaudited) — Three and six months ended June 30, 2012 and 2011		6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three and six months ended June 30, 2012 and 2011		7

	Consolidated Statements of Changes in Equity (Unaudited) — Six months ended June 30, 2012 and 2011		8

	Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 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. Trust Preferred 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		72


Item 2.	Management’s Discussion & Analysis of Financial Condition
	& Results of Operations	73

	Introduction	73
	Terminology	73
	Selected Financial Data	74
	Forward-looking statements	75
	Economic overview	76
	Long-term financial goals	76
	Strategic developments	77
	Demographics	78
	Supervision and regulation	80
	Regulatory reform developments	80
	Stress Testing	80
	Interchange fees	80
	Enhanced prudential standards and early remediation requirements	80
	U.S. implementation of Basel III	80

	Highlights of Our Performance	81

	Results of Operations	85
	Net interest income	85
	Noninterest income	89
	Trust and investment services income	91
	Operating lease income	91
	Investment banking and capital markets income (loss)	91
	Other income	92
	Noninterest expense	92
	Personnel	93
	Operating lease expense	93
	FDIC Assessment	93
	Other Expense	93
	Income taxes	94

	Line of Business Results	95
	Key Community Bank summary of operations	95
	Key Corporate Bank summary of operations	96
	Other Segments	97

	Financial Condition	98
	Loans and loans held for sale	98
	Commercial loan portfolio	98
	*Commercial, financial and agricultural*	98
	*Commercial real estate loans*	98
	*Commercial lease financing*	99
	Commercial loan modification and restructuring	99
	*Extensions*	101
	*Guarantors*	101
	Consumer loan portfolio	102
	Loans held for sale	103
	Loan sales	103
	Securities	103
	Securities available-for-sale	104
	Held-to-maturity securities	105
	Other investments	106
	Deposits and other sources of funds	106
	Capital	107
	Comprehensive capital assessment review and capital actions	107


	Repurchase of TARP CPP preferred stock, warrant and completion of equity and debt offerings	108
	Dividends	108
	Common shares outstanding	108
	Capital adequacy	109
	Basel III	110

	Risk Management	112
	Overview	112
	Market risk management	113
	Interest rate risk management	113
	*Net interest income simulation analysis*	113
	*Economic value of equity modeling*	114
	*Management of interest rate exposure*	115
	Derivatives not designated in hedge relationships	115
	Liquidity risk management	115
	Governance structure	116
	Factors affecting liquidity	116
	Managing liquidity risk	116
	Long-term liquidity strategy	117
	Sources of liquidity	117
	Liquidity programs	117
	Liquidity for KeyCorp	117
	Our liquidity position and recent activity	118
	Credit risk management	118
	Credit policy, approval and evaluation	118
	Allowance for loan and lease losses	119
	Net loan charge-offs	122
	Nonperforming assets	124
	Operational risk management	127

	Critical Accounting Policies and Estimates	127

	European Sovereign Debt Exposure	129
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	130
Item 4.	Controls and Procedures	130

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	130
Item 1A.	Risk Factors	130
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	131
Item 6.	Exhibits	131
	Signature	132
	Exhibits	133

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 as defined in Note 1 (“Basis of Presentation”), that begins on page 10.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


in millions, except per share data	June 30, 2012		December 31, 2011		June 30, 2011

	(Unaudited)				(Unaudited)
ASSETS
Cash and due from banks	$	717	$	694	$	853
Short-term investments		2,216		3,519		4,563
Trading account assets		679		623		769
Securities available for sale		13,205		16,012		18,680
Held-to-maturity securities (fair value: $4,396, $2,133 and $19)		4,352		2,109		19
Other investments		1,186		1,163		1,195
Loans, net of unearned income of $1,155, $1,388 and $1,460		49,605		49,575		47,840
Less: Allowance for loan and lease losses		888		1,004		1,230

Net loans		48,717		48,571		46,610
Loans held for sale		656		728		381
Premises and equipment		931		944		919
Operating lease assets		318		350		453
Goodwill		917		917		917
Other intangible assets		15		17		19
Corporate-owned life insurance		3,285		3,256		3,208
Derivative assets		818		945		900
Accrued income and other assets (including $91 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		2,978		3,077		2,968
Discontinued assets (including $2,611 of consolidated education loan securitization trust VIEs (see Note 9) and $73 of loans in portfolio at fair value)^(a)		5,533		5,860		6,328


Total assets	$	86,523	$	88,785	$	88,782

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	28,957	$	27,954	$	26,277
Savings deposits		2,103		1,962		1,973
Certificates of deposit ($100,000 or more)		3,669		4,111		4,939
Other time deposits		5,385		6,243		7,167

Total interest-bearing		40,114		40,270		40,356
Noninterest-bearing		21,435		21,098		19,318
Deposits in foreign office — interest-bearing		618		588		736

Total deposits		62,167		61,956		60,410
Federal funds purchased and securities sold under repurchase agreements		1,716		1,711		1,668
Bank notes and other short-term borrowings		362		337		511
Derivative liabilities		763		1,026		991
Accrued expense and other liabilities		1,417		1,763		1,518
Long-term debt		7,521		9,520		10,997
Discontinued liabilities (including $2,401 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		2,401		2,550		2,950

Total liabilities		76,347		78,863		79,045

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
Capital surplus		4,120		4,194		4,191
Retained earnings		6,595		6,246		5,926
Treasury stock, at cost (71,496,550, 63,962,113 and 63,147,538)		(1,796)		(1,815)		(1,815)
Accumulated other comprehensive income (loss)		(72)		(28)		109

Key shareholders’ equity		10,155		9,905		9,719
Noncontrolling interests		21		17		18

Total equity		10,176		9,922		9,737


Total liabilities and equity	$	86,523	$	88,785	$	88,782

(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 June 30,					Six months ended June 30,
dollars in millions, except per share amounts		2012		2011			2012		2011

INTEREST INCOME
Loans	$		518	$	551	$		1,054	$	1,121
Loans held for sale			5		3			10		7
Securities available for sale			105		149			221		315
Held-to-maturity securities			17		1			29		1
Trading account assets			5		9			11		16
Short-term investments			2		1			3		2
Other investments			10		12			18		24

Total interest income			662		726			1,346		1,486

INTEREST EXPENSE
Deposits			71		100			148		210
Federal funds purchased and securities sold under repurchase agreements			1		2			2		3
Bank notes and other short-term borrowings			2		3			4		6
Long-term debt			50		57			101		106

Total interest expense			124		162			255		325

NET INTEREST INCOME			538		564			1,091		1,161
Provision (credit) for loan and lease losses			21		(8)			63		(48)

Net interest income (expense) after provision for loan and lease losses			517		572			1,028		1,209

NONINTEREST INCOME
Trust and investment services income			102		113			211		223
Service charges on deposit accounts			70		69			138		137
Operating lease income			20		32			42		67
Letter of credit and loan fees			56		47			110		102
Corporate-owned life insurance income			30		28			60		55
Net securities gains (losses)^(a)			—		2			—		1
Electronic banking fees			19		33			36		63
Gains on leased equipment			36		5			63		9
Insurance income			11		14			23		29
Net gains (losses) from loan sales			32		11			54		30
Net gains (losses) from principal investing			24		17			59		52
Investment banking and capital markets income (loss)			37		42			80		85
Other income			48		41			81		58

Total noninterest income			485		454			957		911

NONINTEREST EXPENSE
Personnel			389		380			774		751
Net occupancy			62		62			126		127
Operating lease expense			15		25			32		53
Computer processing			43		42			84		84
Business services and professional fees			51		44			89		82
FDIC assessment			8		9			16		38
OREO expense, net			7		(3)			13		7
Equipment			27		26			53		52
Marketing			17		10			30		20
Provision (credit) for losses on lending-related commitments			6		(12)			6		(16)
Other expense			89		97			194		183

Total noninterest expense			714		680			1,417		1,381

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			288		346			568		739
Income taxes			57		94			132		205

INCOME (LOSS) FROM CONTINUING OPERATIONS			231		252			436		534
Income (loss) from discontinued operations, net of taxes of $6, ($6), $3 and ($12) (see Note 11)			10		(9)			5		(20)

NET INCOME (LOSS)			241		243			441		514
Less: Net income (loss) attributable to noncontrolling interests			5		3			5		11

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$		236	$	240	$		436	$	503


Income (loss) from continuing operations attributable to Key common shareholders	$		221	$	243	$		420	$	427
Net income (loss) attributable to Key common shareholders			231		234			425		407

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$		.23	$	.26	$		.44	$	.47
Income (loss) from discontinued operations, net of taxes			.01		(.01)			.01		(.02)
Net income (loss) attributable to Key common shareholders			.24		.25			.45		.44

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$		.23	$	.26	$		.44	$	.46
Income (loss) from discontinued operations, net of taxes			.01		(.01)			.01		(.02)
Net income (loss) attributable to Key common shareholders ^(c)			.24		.25			.45		.44

Cash dividends declared per common share	$		.05	$	.03	$		.08	$	.04
Weighted-average common shares outstanding (000) ^(b)			944,648		947,565			946,995		914,911
Weighted-average common shares and potential common shares outstanding (000)			948,087		952,133			951,029		920,162

(a)	For the three months ended June 30, 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 June 30,					Six months ended June 30,
in millions		2012		2011			2012		2011

Net income (loss)	$		241	$	243	$		441	$	514
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($25), $73, ($31), and $61			(42)		123			(53)		103
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($2), $9, $5, and $4			(4)		15			8		7
Foreign currency translation adjustments			(10)		4			(4)		13
Net pension and postretirement benefit costs, net of income taxes			3		2			5		3

Other comprehensive income (loss), net of tax:			188		387			397		640
Net contribution to (distribution from) noncontrolling interests			4		(254)			4		(239)

Total comprehensive income (loss) attributable to Key	$		192	$	133	$		401	$	401

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)														503						11
Net unrealized gains (losses) on securities available for sale, net of income taxes of $61																		103
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $4																		7
Net distribution to noncontrolling interests																				(250)
Foreign currency translation adjustments																		13
Net pension and postretirement benefit costs, net of income taxes																		3
Deferred compensation												(2)
Cash dividends declared on common shares ($.04 per share)														(38)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)														(12)
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)														(31)
Series B Preferred Stock - TARP redemption		(25)				(2,451)								(49)
Repurchase of common stock warrant										(87)		17
Amortization of discount on Series B Preferred Stock						4								(4)
Common shares issuance				70,621				71				533
Common shares reissued for stock options and other employee benefit plans				2,593								(68)				89
Other						1

BALANCE AT JUNE 30, 2011		2,905		953,822	$	291	$	1,017		—	$	4,191	$	5,926	$	(1,815)	$	109	$	18


BALANCE AT DECEMBER 31, 2011		2,905		953,008	$	291	$	1,017		—	$	4,194	$	6,246	$	(1,815)	$	(28)	$	17
Net income (loss)														436						5
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($31)																		(53)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $5																		8
Net distribution from noncontrolling interests																				(1)
Foreign currency translation adjustments																		(4)
Net pension and postretirement benefit costs, net of income taxes																		5
Deferred compensation												8
Cash dividends declared on common shares ($.08 per share)														(76)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)														(11)
Common shares repurchased				(10,468)												(82)
Common shares reissued (returned) for stock options and other employee benefit plans				2,933								(82)				101

BALANCE AT JUNE 30, 2012		2,905		945,473	$	291	$	1,017		—	$	4,120	$	6,595	$	(1,796)	$	(72)	$	21

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2012		2011

OPERATING ACTIVITIES
Net income (loss)	$	441	$	514
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		63		(48)
Depreciation and amortization expense		119		143
FDIC (payments) net of FDIC expense		13		35
Deferred income taxes (benefit)		38		157
Net losses (gains) and writedown on OREO		12		5
Provision (credit) for customer derivative losses		1		(12)
Net losses (gains) from loan sales		(54)		(30)
Net losses (gains) from principal investing		(59)		(52)
Provision (credit) for losses on lending-related commitments		6		(16)
(Gains) losses on leased equipment		(63)		(9)
Net securities losses (gains)		—		(1)
Net decrease (increase) in loans held for sale excluding loan transfers from continuing operations		(5)		140
Net decrease (increase) in trading account assets		(57)		216
Other operating activities, net		(220)		412

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		235		1,454
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments		1,303		(3,219)
Purchases of securities available for sale		(10)		(619)
Proceeds from sales of securities available for sale		—		1,587
Proceeds from prepayments and maturities of securities available for sale		2,733		2,448
Proceeds from prepayments and maturities of held-to-maturity securities		238		—
Purchases of held-to-maturity securities		(2,481)		(2)
Purchases of other investments		(39)		(104)
Proceeds from sales of other investments		3		43
Proceeds from prepayments and maturities of other investments		72		41
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(217)		1,775
Proceeds from loan sales		135		94
Purchases of premises and equipment		(53)		(74)
Proceeds from sales of premises and equipment		1		—
Proceeds from sales of other real estate owned		45		94

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,730		2,064
FINANCING ACTIVITIES
Net increase (decrease) in deposits		211		(200)
Net increase (decrease) in short-term borrowings		30		(1,017)
Net proceeds from issuance of long-term debt		4		1,020
Payments on long-term debt		(2,019)		(684)
Repurchase of Treasury Shares		(82)		—
Net proceeds from issuance of common shares		—		604
Net proceeds from reissuance of common shares		1		—
Series B Preferred Stock - TARP redemption		—		(2,500)
Repurchase of common stock warrant		—		(70)
Cash dividends paid		(87)		(96)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,942)		(2,943)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		23		575
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		694		278

CASH AND DUE FROM BANKS AT END OF PERIOD	$	717	$	853


Additional disclosures relative to cash flows:
Interest paid	$	249	$	317
Income taxes paid (refunded)		26		(319)
Noncash items:
Loans transferred to portfolio from held for sale	$	93		—
Loans transferred to held for sale from portfolio		16	$	54
Loans transferred to other real estate owned		21		23

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

On August 1, 2012, we announced certain new strategic actions to further strengthen our consumer and commercial payments businesses. We have acquired Key-branded credit card assets from Elan Financial Services and will begin to self-issue credit cards. The acquired credit card portfolio of approximately 400,000 consumer and business accounts is comprised of current and former Key clients and has approximately $725 million in credit card assets. We also announced that we entered into a new third party processing agreement with Elavon, Inc. This new agreement continues the legacy arrangement with Elavon while providing Key the opportunity to more fully integrate merchant processing services into our overall payment solutions for business clients. This new arrangement with Elavon is expected to become effective in the first half of 2013.

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 changed 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 clarified the FASB’s intent about the application of existing fair value measurement requirements. It was 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. As required by this accounting guidance, additional information regarding the classification is provided in Note 5 (“Fair Value Measurements”).

Presentation of comprehensive income. In June 2011, the FASB issued new accounting guidance that required 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 did not change any of the components currently recognized in net income or comprehensive income. It was 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. As required by this accounting guidance, Consolidated Statements of Comprehensive Income (Unaudited) are now included as part of our financial statements.

Testing goodwill for impairment. In September 2011, the FASB issued new accounting guidance that simplified how an entity tests goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. This accounting guidance was 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 was effective for new transactions and transactions 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 June 30, 2012

Testing indefinite-lived intangible assets for impairment. In July 2012, the FASB issued new accounting guidance that simplifies how an entity tests indefinite-lived intangible assets other than goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether further testing for impairment of indefinite-lived intangible assets other than goodwill is required. This accounting guidance will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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 June 30,				Six months ended June 30,
dollars in millions, except per share amounts		2012		2011		2012		2011

EARNINGS
Income (loss) from continuing operations		$	231	$	252	$	436	$	534
Less:	Net income (loss) attributable to noncontrolling interests		5		3		5		11

Income (loss) from continuing operations attributable to Key			226		249		431		523
Less:	Dividends on Series A Preferred Stock		5		6		11		12
	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			221		243		420		427
Income (loss) from discontinued operations, net of taxes^(a)			10		(9)		5		(20)

Net income (loss) attributable to Key common shareholders		$	231	$	234	$	425	$	407


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)			944,648		947,565		946,995		914,911
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)			3,439		4,568		4,034		5,251

Weighted-average common shares and potential common shares outstanding (000)			948,087		952,133		951,029		920,162


EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders		$	.23	$	.26	$	.44	$	.47
Income (loss) from discontinued operations, net of taxes ^(a)			.01		(.01)		.01		(.02)
Net income (loss) attributable to Key common shareholders^(c)			.24		.25		.45		.44

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution		$	.23	$	.26	$	.44	$	.46
Income (loss) from discontinued operations, net of taxes ^(a)			.01		(.01)		.01		(.02)
Net income (loss) attributable to Key common shareholders — assuming dilution ^(c)			.24		.25		.45		.44

(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 income from discontinued operations for the quarter ended June 30, 2012, and the six months ended June 30, 2012, 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:


	June 30,		December 31,		June 30,
in millions	2012		2011		2011

Commercial, financial and agricultural	$	20,386	$	19,378	$	16,883
Commercial real estate:
Commercial mortgage		7,409		8,037		8,069
Construction		1,172		1,312		1,631

Total commercial real estate loans		8,581		9,349		9,700
Commercial lease financing		5,636		6,055		6,105

Total commercial loans		34,603		34,782		32,688
Residential — prime loans:
Real estate — residential mortgage		2,016		1,946		1,838
Home equity:
Key Community Bank		9,601		9,229		9,431
Other		479		535		595

Total home equity loans		10,080		9,764		10,026

Total residential — prime loans		12,096		11,710		11,864
Consumer other — Key Community Bank		1,263		1,192		1,157
Consumer other:
Marine		1,542		1,766		1,989
Other		101		125		142

Total consumer other		1,643		1,891		2,131

Total consumer loans		15,002		14,793		15,152

Total loans ^(a)	$	49,605	$	49,575	$	47,840

(a)	Excluded at June 30, 2012, December 31, 2011, and June 30, 2011, are loans in the amount of $5.5 billion, $5.8 billion and $6.3 billion, respectively, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:


	June 30,		December 31,		June 30,
in millions	2012		2011		2011

Commercial, financial and agricultural	$	18	$	19	$	80
Real estate — commercial mortgage		523		567		198
Real estate — construction		12		35		39
Commercial lease financing		13		12		6
Real estate — residential mortgage		90		95		58

Total loans held for sale	$	656	$	728	$	381


Our quarterly summary of changes in loans held for sale as follows:
	June 30,		December 31,		June 30,
in millions	2012		2011		2011

Balance at beginning of the period	$	511	$	479	$	426
New originations		1,308		1,235		914
Transfers from held to maturity, net		7		19		16
Loan sales		(1,165)		(932)		(1,039)
Loan draws (payments), net		(4)		(72)		73
Transfers to OREO / valuation adjustments		(1)		(1)		(9)

Balance at end of perod	$	656	$	728	$	381

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:


	June 30,		December 31,		June 30,
in millions	2012		2011		2011

Total nonperforming loans^(a)	$	657	$	727	$	842
Nonperforming loans held for sale		38		46		42
OREO		28		65		52
Other nonperforming assets		28		21		14

Total nonperforming assets	$	751	$	859	$	950


Restructured loans included in nonperforming loans^(b)	$	163	$	191	$	144
Restructured loans with an allocated specific allowance^(c)		71		50		19
Specifically allocated allowance for restructured loans^(d)		34		10		5

Accruing loans past due 90 days or more	$	131	$	164	$	118
Accruing loans past due 30 through 89 days		362		441		465

(a)

Includes $36 million of performing home equity second liens at June 30, 2012, that are: subordinate to first liens that are 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January, 2012. This policy related to the classification of second lien home equity loans was implemented prospectively, and therefore prior periods were not presented.

(b)

A loan is “restructured” (i.e., TDRs) 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.

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

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

At June 30, 2012, the approximate carrying amount of our commercial nonperforming loans outstanding represented 59% of their original contractual amount, total nonperforming loans outstanding represented 70% of their original contractual amount owed, and nonperforming assets in total were carried at 64% of their original contractual amount.

At June 30, 2012, our twenty largest nonperforming loans totaled $220 million, representing 33% of total loans on nonperforming status from continuing operations. At June 30, 2011, the twenty largest nonperforming loans totaled $276 million, representing 33% of total loans on nonperforming status.

The amount by which nonperforming loans and loans held for sale reduced expected interest income was $12 million for the six months ended June 30, 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 June 30, 2012, December 31, 2011 and June 30, 2011:


				Unpaid					Average
June 30, 2012	Recorded			Principal			Specific		Recorded
in millions	Investment		^(a)	Balance		^(b)	Allowance		Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	59		$	142			—	$	68
Commercial real estate:
Commercial mortgage		112			199			—		113
Construction		51			204			—		49

Total commercial real estate loans		163			403			—		162

Total commercial loans with no related allowance recorded		222			545			—		230

Real estate — residential mortgage		1			1			—		1

Total consumer loans		1			1			—		1

Total loans with no related allowance recorded		223			546			—		231

With an allowance recorded:
Commercial, financial and agricultural		43			53		$	12		46
Commercial real estate:
Commercial mortgage		56			98			15		63
Construction		4			4			3		4

Total commercial real estate loans		60			102			18		67

Total commercial loans with an allowance recorded		103			155			30		113


Real estate — residential mortgage		16			17			2		8

Home equity:
Key Community Bank		11			11			3		6
Other		6			6			1		3

Total home equity loans		17			17			4		9

Consumer other — Key Community Bank		2			2			1		1
Consumer other:
Marine		50			50			11		25
Other		—			—			—		—

Total consumer other		50			50			11		25

Total consumer loans		85			86			18		43

Total loans with an allowance recorded		188			241			48		156

Total	$	411		$	787		$	48	$	387

(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.


				Unpaid					Average
December 31, 2011	Recorded			Principal			Specific		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

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.


				Unpaid					Average
June 30, 2011	Recorded			Principal			Specific		Recorded
in millions	Investment		^(a)	Balance		^(b)	Allowance		Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	116		$	217			—	$	89
Commercial real estate:
Commercial mortgage		123			207			—		143
Construction		83			226			—		124

Total commercial real estate loans		206			433			—		267

Total loans with no related allowance recorded		322			650			—		356

With an allowance recorded:
Commercial, financial and agricultural		43			71		$	14		66
Commercial real estate:
Commercial mortgage		89			174			21		88
Construction		34			73			11		39

Total commercial real estate loans		123			247			32		127
Commercial lease financing		—			—			—		6

Total loans with an allowance recorded		166			318			46		199

Total	$	488		$	968		$	46	$	555

(a)

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

For the six months ended June 30, 2012 and 2011, interest income recognized on the outstanding balances of accruing impaired loans totaled $2 million for each period presented.

At June 30, 2012, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $274 million, compared to $276 million at December 31, 2011, and $252 million at June 30, 2011. We added $109 million in restructured loans during the first six months of 2012, which were partially offset by $111 million in payments and charge-offs.

A further breakdown of restructured loans (TDRs) included in nonperforming loans by loan category as of June 30, 2012, follows:


				Pre-modification			Post-modification
				Outstanding			Outstanding
June 30, 2012	Number			Recorded			Recorded
dollars in millions	of loans			Investment			Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		95	$		108	$		59
Commercial real estate:
Real estate — commercial mortgage		16			47			31
Real estate — construction		11			60			43

Total commercial real estate loans		27			107			74

Total commercial loans		122			215			133
Real estate — residential mortgage		56			7			7
Home equity:
Key Community Bank		50			4			4
Other		74			2			1

Total home equity loans		124			6			5
Consumer other — Key Community Bank		11			1			1
Consumer other:
Marine		139			17			17
Other		11			1			—

Total consumer other		150			18			17

Total consumer loans		341			32			30

Total nonperforming TDRs		463			247			163

Prior-year accruing^(a)
Commercial, financial and agricultural		115			8			6
Commercial real estate:
Real estate — commercial mortgage		7			71			48
Real estate — construction		1			15			1

Total commercial real estate loans		8			86			49

Total commercial loans		123			94			55
Real estate — residential mortgage		111			11			11
Home equity:
Key Community Bank		88			7			7
Other		101			3			3

Total home equity loans		189			10			10
Consumer other — Key Community Bank		20			1			—
Consumer other:
Marine		135			34			33
Other		53			2			2

Total consumer other		188			36			35

Total consumer loans		508			58			56

Total prior-year accruing TDRs		631			152			111

Total TDRs		1,094	$		399	$		274

(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 and consumer 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. 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 six 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 $4

million as of June 30, 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.


	June 30,			December 31,			June 30,
dollars in millions	2012			2011			2011

Interest rate reduction	$	155		$	177		$	175
Forgiveness of principal		13			23			10
Other modification of loan terms		20			8			6

Total	$	188		$	208		$	191


Total commercial and consumer TDRs^(a)	$	274		$	276		$	252
Total commercial TDRs to total commercial loans		.54	%		.60	%		.58	%
Total commercial TDRs to total loans		.38			.42			.40
Total commercial loans	$	34,603		$	34,782		$	32,688
Total loans		49,605			49,575			47,840

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $45 million, $25 million, and $45 million at June 30, 2012, December 31, 2011, and June 30, 2011, respectively.

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest for our commercial and consumer loan portfolios 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. Pursuant to regulatory guidance issued in January 2012, the above-mentioned policy for nonperforming loans was revised effective for the second quarter of 2012. As of June 30, 2012, any second lien home equity loan with an associated first lien that is: 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. This policy was implemented prospectively, and, therefore, prior periods were not presented.

At June 30, 2012, approximately $48.5 billion, or 98%, of our total loans are current. At June 30, 2012, total past due loans and nonperforming loans of $1.2 billion represent approximately 2% of total loans.

The following aging analysis as of June 30, 2012 and 2011, of past due and current loans provides further information regarding Key’s credit exposure.


			30-59		60-89		90 and Greater				Total Past Due and
June 30, 2012			Days Past		Days Past		Days Past		Nonperforming		Nonperforming		Total
in millions	Current		Due		Due		Due		Loans^(a)		Loans		Loans

LOAN TYPE
Commercial, financial and agricultural	$	20,148	$	60	$	13	$	24	$	141	$	238	$	20,386
Commercial real estate:
Commercial mortgage		7,182		15		16		24		172		227		7,409
Construction		1,033		12		24		35		68		139		1,172

Total commercial real estate loans		8,215		27		40		59		240		366		8,581
Commercial lease financing		5,581		22		8		7		18		55		5,636

Total commercial loans	$	33,944	$	109	$	61	$	90	$	399	$	659	$	34,603


Real estate — residential mortgage	$	1,895	$	24	$	10	$	9	$	78	$	121	$	2,016
Home equity:
Key Community Bank		9,361		56		26		17		141		240		9,601
Other		445		10		4		3		17		34		479

Total home equity loans		9,806		66		30		20		158		274		10,080
Consumer other — Key Community Bank		1,237		13		4		7		2		26		1,263
Consumer other:
Marine		1,478		31		10		4		19		64		1,542
Other		95		2		2		1		1		6		101

Total consumer other		1,573		33		12		5		20		70		1,643

Total consumer loans	$	14,511	$	136	$	56	$	41	$	258	$	491	$	15,002


Total loans	$	48,455	$	245	$	117	$	131	$	657	$	1,150	$	49,605

(a)

Includes $36 million of performing home equity second liens at June 30, 2012, that are subordinate to first liens that are 120 days or more past due; in foreclosure; or when the first mortgage delinquency is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January 2012.


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

LOAN TYPE
Commercial, financial and agricultural	$	16,599	$	35	$	17	$	19	$	213	$	284	$	16,883
Commercial real estate:
Commercial mortgage		7,743		34		51		11		230		326		8,069
Construction		1,437		11		24		28		131		194		1,631

Total commercial real estate loans		9,180		45		75		39		361		520		9,700
Commercial lease financing		5,983		20		40		21		41		122		6,105

Total commercial loans	$	31,762	$	100	$	132	$	79	$	615	$	926	$	32,688


Real estate — residential mortgage	$	1,713	$	24	$	14	$	8	$	79	$	125	$	1,838
Home equity:
Key Community Bank		9,216		66		32		16		101		215		9,431
Other		559		13		7		5		11		36		595

Total home equity loans		9,775		79		39		21		112		251		10,026
Consumer other — Key Community Bank		1,129		14		4		7		3		28		1,157
Consumer other:
Marine		1,898		42		14		3		32		91		1,989
Other		138		2		1		—		1		4		142

Total consumer other		2,036		44		15		3		33		95		2,131

Total consumer loans	$	14,653	$	161	$	72	$	39	$	227	$	499	$	15,152


Total loans	$	46,415	$	261	$	204	$	118	$	842	$	1,425	$	47,840

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 rating 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 June 30, 2012, and June 30, 2011, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


June 30,
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	$	100		—	$	2	$	1	$	3	$	605	$	655	$	771	$	760
A		680		671	$	64		63		1		1		992		1,245		1,737		1,980
BBB — BB		17,652		13,546		5,925		5,553		791		747		3,709		3,590		28,077		23,436
B		868		955		553		941		58		262		197		343		1,676		2,501
CCC — C		1,021		1,611		867		1,510		321		618		133		272		2,342		4,011

Total	$	20,386	$	16,883	$	7,409	$	8,069	$	1,172	$	1,631	$	5,636	$	6,105	$	34,603	$	32,688

(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) (b)


June 30,
in millions

	Residential — Prime
GRADE	2012		2011

Pass	$	11,831	$	11,644
Substandard		265		220

Total	$	12,096	$	11,864

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


June 30,	Consumer — Key Community Bank				Consumer — Marine				Consumer — Other				Total
in millions	2012		2011		2012		2011		2012		2011		2012		2011

Performing	$	1,261	$	1,154	$	1,523	$	1,957	$	100	$	141	$	2,884	$	3,252
Nonperforming		2		3		19		32		1		1		22		36
Total	$	1,263	$	1,157	$	1,542	$	1,989	$	101	$	142	$	2,906	$	3,288

(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. As of June 30, 2012, any second lien home equity loan with an associated first lien: that is 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan in accordance with regulatory guidance issued in January 2012.

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 and consumer loan 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 recorded investment 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. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at June 30, 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 June 30, 2012, the ALLL was $888 million, or 1.79% of loans, compared to $1.2 billion, or 2.57% of loans, at June 30, 2011. At June 30, 2012, the ALLL was 135.16% of nonperforming loans compared to 146.08% at June 30, 2011.

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


		Three months ended June 30,					Six months ended June 30,
in millions		2012		2011			2012		2011

Balance at beginning of period — continuing operations	$		944	$	1,372	$		1,004	$	1,604
Charge-offs			(131)		(177)			(263)		(409)
Recoveries			54		43			85		82

Net loans charged off			(77)		(134)			(178)		(327)
Provision for loan and lease losses from continuing operations			21		(8)			63		(48)
Foreign currency translation adjustment			—		—			(1)		1

Balance at end of period — continuing operations	$		888	$	1,230	$		888	$	1,230

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


in millions	December 31, 2011		Provision			Charge-offs		Recoveries		June 30, 2012

Commercial, financial and agricultural	$	334	$	(12)		$	(49)	$	31	$	304
Real estate — commercial mortgage		272		8			(46)		16		250
Real estate — construction		63		6			(16)		2		55
Commercial lease financing		78		—			(20)		10		68

Total commercial loans		747		2			(131)		59		677
Real estate — residential mortgage		37		—			(13)		2		26
Home equity:
Key Community Bank		103		21			(48)		4		80
Other		29		9			(17)		3		24

Total home equity loans		132		30			(65)		7		104
Consumer other — Key Community Bank		41		10			(20)		3		34
Consumer other:
Marine		46		15			(30)		13		44
Other		1		5			(4)		1		3

Total consumer other:		47		20			(34)		14		47

Total consumer loans		257		60			(132)		26		211

Total ALLL — continuing operations		1,004		62	^(a)		(263)		85		888
Discontinued operations		104		6			(39)		8		79

Total ALLL — including discontinued operations	$	1,108	$	68		$	(302)	$	93	$	967

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

in millions

December 31,
2010

Provision

Charge-offs

Recoveries

June 30,
2011

Commercial, fina

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