Edgar Filing: KEYCORP /NEW/

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 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				933,646,295 Shares
(Title of class)				(Outstanding at October 31, 2012)

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page Number

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

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

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

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

	Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2012 and 2011	9

	Notes to Consolidated Financial Statements (Unaudited)	10

	Note 1. Basis of Presentation	10

	Note 2. Earnings Per Common Share	14

	Note 3. Loans and Loans Held for Sale	15

	Note 4. Asset Quality	16

	Note 5. Fair Value Measurements	28

	Note 6. Securities	41

	Note 7. Derivatives and Hedging Activities	45

	Note 8. Mortgage Servicing Assets	53

	Note 9. Variable Interest Entities	54

	Note 10. Income Taxes	56

	Note 11. Acquisitions and Discontinued Operations	57

	Note 12. Contingent Liabilities and Guarantees	63

	Note 13. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	66

	Note 14. Employee Benefits	68

	Note 15. Shareholders’ Equity	69

	Note 16. Line of Business Results	70

	Report of Independent Registered Public Accounting Firm	75


Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	76

	Introduction	76
	Terminology	76
	Selected Financial Data	77
	Forward-looking statements	78
	Economic overview	79
	Long-term financial goals	79
	Strategic developments	80
	Demographics	81
	Supervision and regulation	83
	Regulatory reform developments	83
	Stress Testing	83
	Interchange fees	83
	Enhanced prudential standards and early remediation requirements	83
	U.S. implementation of Basel III	83

	Highlights of Our Performance	85

	Results of Operations	90
	Net interest income	90
	Noninterest income	93
	Trust and investment services income	95
	Operating lease income	95
	Investment banking and capital markets income (loss)	95
	Other income	96
	Noninterest expense	96
	Personnel	97
	Operating lease expense	97
	FDIC Assessment	97
	Other Expense	98
	Income taxes	98

	Line of Business Results	99
	Key Community Bank summary of operations	99
	Key Corporate Bank summary of operations	100
	Other Segments	102

	Financial Condition	103
	Loans and loans held for sale	103
	Commercial loan portfolio	103
	*Commercial, financial and agricultural*	103
	*Commercial real estate loans*	103
	*Commercial lease financing*	104
	Commercial loan modification and restructuring	104
	*Extensions*	106
	*Guarantors*	106
	Consumer loan portfolio	107
	Loans held for sale	108
	Loan sales	108
	Securities	109
	Securities available-for-sale	109
	Held-to-maturity securities	110
	Other investments	111
	Deposits and other sources of funds	111
	Capital	112
	Comprehensive capital assessment review and capital actions	112


	Repurchase of TARP CPP preferred stock, warrant and completion of equity and debt offerings	112
	Dividends	112
	Common shares outstanding	113
	Capital adequacy	113
	Basel III	114

Risk Management		116
	Overview	116
	Market risk management	117
	Interest rate risk management	117
	*Net interest income simulation analysis*	117
	*Economic value of equity modeling*	118
	*Management of interest rate exposure*	119
	Derivatives not designated in hedge relationships	119
	Liquidity risk management	119
	Governance structure	119
	Factors affecting liquidity	120
	Managing liquidity risk	120
	Long-term liquidity strategy	121
	Sources of liquidity	121
	Liquidity programs	121
	Liquidity for KeyCorp	121
	Our liquidity position and recent activity	122
	Credit risk management	122
	Credit policy, approval and evaluation	122
	Allowance for loan and lease losses	123
	Net loan charge-offs	126
	Nonperforming assets	128
	Operational risk management	131

	Critical Accounting Policies and Estimates	131

	European Sovereign Debt Exposure	133
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	134
Item 4.	Controls and Procedures	134

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	134
Item 1A.	Risk Factors	134
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	135
Item 6.	Exhibits	135
	Signature	136
	Exhibits	137

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	September 30, 2012		December 31, 2011		September 30, 2011

	(Unaudited)				(Unaudited)
ASSETS
Cash and due from banks	$	974	$	694	$	828
Short-term investments		2,208		3,519		4,766
Trading account assets		663		623		729
Securities available for sale		11,962		16,012		17,612
Held-to-maturity securities (fair value: $4,212, $2,133 and $1,186)		4,153		2,109		1,176
Other investments		1,106		1,163		1,210
Loans, net of unearned income of $980, $1,388 and $1,413		51,419		49,575		48,195
Less: Allowance for loan and lease losses		888		1,004		1,131

Net loans		50,531		48,571		47,064
Loans held for sale		628		728		479
Premises and equipment		942		944		924
Operating lease assets		290		350		393
Goodwill		979		917		917
Other intangible assets		182		17		18
Corporate-owned life insurance		3,309		3,256		3,227
Derivative assets		771		945		940
Accrued income and other assets (including $59 of consolidated
LIHTC guaranteed funds VIEs, see Note 9)^(a)		2,871		3,077		2,946
Discontinued assets (including $2,542 of consolidated education loan securitization trust VIEs (see Note 9) and $71 of loans in portfolio at fair value)^(a)		5,381		5,860		6,033

Total assets	$	86,950	$	88,785	$	89,262

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	30,573	$	27,954	$	27,548
Savings deposits		2,393		1,962		1,968
Certificates of deposit ($100,000 or more)		3,226		4,111		4,457
Other time deposits		4,941		6,243		6,695

Total interest-bearing		41,133		40,270		40,668
Noninterest-bearing		22,486		21,098		19,803
Deposits in foreign office — interest-bearing		569		588		561

Total deposits		64,188		61,956		61,032
Federal funds purchased and securities sold under repurchase agreements		1,746		1,711		1,728
Bank notes and other short-term borrowings		388		337		519
Derivative liabilities		657		1,026		1,141
Accrued expense and other liabilities		1,238		1,763		1,556
Long-term debt		6,119		9,520		10,717
Discontinued liabilities (including $2,335 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		2,335		2,550		2,651

Total liabilities		76,671		78,863		79,344
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		4,118		4,194		4,191
Retained earnings		6,762		6,246		6,079
Treasury stock, at cost (80,775,030, 63,962,113 and 64,161,618)		(1,868)		(1,815)		(1,820)
Accumulated other comprehensive income (loss)		(69)		(28)		143

Key shareholders’ equity		10,251		9,905		9,901
Noncontrolling interests		28		17		17

Total equity		10,279		9,922		9,918

Total liabilities and equity	$	86,950	$	88,785	$	89,262

(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 September 30,				Nine months ended September 30,
dollars in millions, except per share amounts	2012		2011		2012		2011

INTEREST INCOME
Loans	$	538	$	543	$	1,592	$	1,664
Loans held for sale		5		3		15		10
Securities available for sale		93		140		314		455
Held-to-maturity securities		21		2		50		3
Trading account assets		4		5		15		21
Short-term investments		1		3		4		5
Other investments		9		9		27		33

Total interest income		671		705		2,017		2,191

INTEREST EXPENSE
Deposits		60		95		208		305
Federal funds purchased and securities sold under repurchase agreements		1		1		3		4
Bank notes and other short-term borrowings		1		3		5		9
Long-term debt		37		57		138		163

Total interest expense		99		156		354		481

NET INTEREST INCOME		572		549		1,663		1,710
Provision (credit) for loan and lease losses		109		10		172		(38)

Net interest income (expense) after provision for loan and lease losses		463		539		1,491		1,748

NONINTEREST INCOME
Trust and investment services income		106		107		317		330
Service charges on deposit accounts		74		74		212		211
Operating lease income		17		30		59		97
Letter of credit and loan fees		52		55		162		157
Corporate-owned life insurance income		26		31		86		86
Net securities gains (losses)^(a)		—		—		—		1
Electronic banking fees		18		33		54		96
Gains on leased equipment		46		7		109		16
Insurance income		13		13		36		42
Net gains (losses) from loan sales		39		18		93		48
Net gains (losses) from principal investing		11		34		70		86
Investment banking and capital markets income (loss)		38		25		118		110
Other income		104		56		185		114

Total noninterest income		544		483		1,501		1,394

NONINTEREST EXPENSE
Personnel		411		382		1,185		1,133
Net occupancy		65		65		191		192
Operating lease expense		13		23		45		76
Computer processing		43		40		127		124
Business services and professional fees		49		47		138		129
FDIC assessment		7		7		23		45
OREO expense, net		1		1		14		8
Equipment		27		26		80		78
Marketing		18		16		48		36
Provision (credit) for losses on lending-related commitments		(8)		(1)		(2)		(17)
Intangible asset amortization on credit cards		6		—		6		—
Other intangible asset amortization		3		1		5		3
Other expense		99		85		291		266

Total noninterest expense		734		692		2,151		2,073

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		273		330		841		1,069
Income taxes		52		95		184		300

INCOME (LOSS) FROM CONTINUING OPERATIONS		221		235		657		769
Income (loss) from discontinued operations, net of taxes of $-, ($11), $3 and ($23) (see Note 11)		—		(17)		5		(37)

NET INCOME (LOSS)		221		218		662		732
Less: Net income (loss) attributable to noncontrolling interests		2		1		7		12

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	219	$	217	$	655	$	720

Income (loss) from continuing operations attributable to Key common shareholders	$	214	$	229	$	634	$	656
Net income (loss) attributable to Key common shareholders		214		212		639		619

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23	$	.24	$	.67	$	.71
Income (loss) from discontinued operations, net of taxes		—		(.02)		.01		(.04)
Net income (loss) attributable to Key common shareholders ^(b)		.23		.22		.68		.67
Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23	$	.24	$	.67	$	.71
Income (loss) from discontinued operations, net of taxes		—		(.02)		.01		(.04)
Net income (loss) attributable to Key common shareholders ^(b)		.23		.22		.67		.67
Cash dividends declared per common share	$	.05	$	.03	$	.13	$	.07
Weighted-average common shares outstanding (000) ^(c)		936,223		948,702		943,378		926,298
Weighted-average common shares and potential common shares outstanding (000)		940,764		950,686		947,582		930,449

(a)	For the three months ended September 30, 2012 and 2011, we did not have any impairment losses related to securities.

(b)	Earnings per share may not foot due to rounding.

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
in millions	2012		2011		2012		2011

Net income (loss)	$	221	$	218	$	662	$	732
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($17), $32, ($48), and $93		(28)		54		(81)		157
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $12, ($7), $17, and ($3)		20		(13)		28		(6)
Foreign currency translation adjustments		9		(8)		5		5
Net pension and postretirement benefit costs, net of income taxes		2		1		7		4

Other comprehensive income (loss), net of tax:		224		252		621		892
Net contribution from (distribution to) noncontrolling interests		5		(13)		4		(252)

Total comprehensive income (loss) attributable to Key	$	229	$	239	$	625	$	640

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
Correction of an error in cumulative effective adjustment														(30)	^(a)
Net income (loss)														720							12
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $93																			157
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $(3)																			(6)
Net distribution to noncontrolling interests																					(252)
Foreign currency translation adjustments																			5
Net pension and postretirement benefit costs, net of income taxes																			4
Deferred compensation												(2)
Cash dividends declared on common shares ($.07 per share)														(67)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($5.8125 per share)														(17)
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				1,579								(68)					84
Other						1

BALANCE AT SEPTEMBER 30, 2011		2,905		952,808	$	291	$	1,017		—	$	4,191	$	6,079		$	(1,820)	$	143	$	17


BALANCE AT DECEMBER 31, 2011		2,905		953,008	$	291	$	1,017		—	$	4,194	$	6,246		$	(1,815)	$	(28)	$	17
Net income (loss)														655							7
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $(48)																			(81)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $17																			28
Net contribution from noncontrolling interests																					4
Foreign currency translation adjustments																			5
Net pension and postretirement benefit costs, net of income taxes																			7
Deferred compensation												10
Cash dividends declared on common shares ($.13 per share)														(123)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($5.8125 per share)														(16)
Common shares repurchased				(20,107)													(163)
Common shares reissued (returned) for stock options and other employee benefit plans				3,294								(86)					110

BALANCE AT SEPTEMBER 30, 2012		2,905		936,195	$	291	$	1,017		—	$	4,118	$	6,762		$	(1,868)	$	(69)	$	28

(a)	Corrected the cumulative effective adjustment made to beginning retained earnings on January 1, 2010 related to the consolidation of the student loan securitization trusts in discontinued operations. See Note 11 (“Acquisitions and Discontinued Operations”) for more information.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended September 30,
in millions	2012		2011

OPERATING ACTIVITIES
Net income (loss)	$	662		$ 732
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		172		(38)
Depreciation, amortization, and accretion, net		178		208
FDIC (payments) net of FDIC expense		19		41
Deferred income taxes (benefit)		36		(261)
Net losses (gains) and writedown on OREO		12		6
Provision (credit) for customer derivative losses		5		(12)
Net losses (gains) from loan sales		(93)		(48)
Net losses (gains) from principal investing		(70)		(86)
Provision (credit) for losses on lending-related commitments		2		(17)
(Gains) losses on leased equipment		(109)		(16)
Net securities losses (gains)		—		(1)
Net decrease (increase) in loans held for sale excluding loan transfers from continuing operations		23		66
Net decrease (increase) in trading account assets		(40)		256
Other operating activities, net		(141)		1,045

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		656		1,875
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired		866		—
Net decrease (increase) in short-term investments		1,311		(3,422)
Purchases of securities available for sale		(232)		(624)
Proceeds from sales of securities available for sale		1		1,662
Proceeds from prepayments and maturities of securities available for sale		4,159		3,532
Proceeds from prepayments and maturities of held-to-maturity securities		437		11
Purchases of held-to-maturity securities		(2,481)		(1,170)
Purchases of other investments		(48)		(125)
Proceeds from sales of other investments		17		57
Proceeds from prepayments and maturities of other investments		134		63
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(1,226)		1,257
Proceeds from loan sales		114		111
Purchases of premises and equipment		(93)		(102)
Proceeds from sales of premises and equipment		1		1
Proceeds from sales of other real estate owned		55		112

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		3,015		1,363
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		184		422
Net increase (decrease) in short-term borrowings		86		(949)
Net proceeds from issuance of long-term debt		20		1,021
Payments on long-term debt		(3,381)		(1,086)
Repurchase of Treasury Shares		(163)		—
Net proceeds from issuance of common shares		—		604
Net proceeds from reissuance of common shares		2		—
Series B Preferred Stock - TARP redemption		—		(2,500)
Repurchase of common stock warrant		—		(70)
Cash dividends paid		(139)		(130)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(3,391)		(2,688)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		280		550
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		694		278

CASH AND DUE FROM BANKS AT END OF PERIOD	$	974	$	828


Additional disclosures relative to cash flows:
Interest paid	$	302	$	445
Income taxes paid (refunded)		39		(314)
Noncash items:
Assets acquired	$	1,194		—
Liabilities assumed		2,059		—
Loans transferred to portfolio from held for sale	$	93		—
Loans transferred to held for sale from portfolio		16	$	78
Loans transferred to other real estate owned		32		34

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: The NASDAQ Stock Market LLC.
ALCO: Asset/Liability Management Committee.		N/M: Not meaningful.
ALLL: Allowance for loan and lease losses.		NOW: Negotiable Order of Withdrawal.
A/LM: Asset/liability management.		NPR: Notice of proposed rulemaking.
AOCI: Accumulated other comprehensive income (loss).		NYSE: New York Stock Exchange.
APBO: Accumulated postretirement benefit obligation.		OCC: Office of the Comptroller of the Currency.
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.		PCI: Purchased credit impaired.
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 System.		Perpetual Preferred Stock, Series B issued to the U.S. Treasury 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 (“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.

Acquisitions

On July 13, 2012, we acquired 37 branches in Western New York and recorded approximately $2 billion of assets acquired and deposits assumed at their estimated fair values as of the acquisition date. Fair value adjustments to assets acquired and liabilities assumed will be amortized in accordance with the applicable accounting guidance over periods consistent with the average life, useful life and/or contractual term of the related assets and liabilities. The core deposit intangible will be amortized over a seven-year period using an accelerated amortization method reflective of the manner in which the related benefit attributable to the deposits will be recognized. In a second closing of this acquisition on September 14, 2012, we acquired approximately $69 million of credit card assets and assumed a related reward liability of $1 million. The fair values of these assets and the liability including the purchased credit card relationship intangible asset are still being determined.

On August 1, 2012, we acquired approximately $718 million (based on estimated fair value at acquisition date) in Key-branded credit card assets from Elan Financial Services, Inc. These assets and the related purchased credit card relationship intangible asset were recorded at acquisition date fair value. The intangible asset related to this acquisition will be amortized over an eight-year period using an accelerated amortization method reflective of the manner in which the related benefit attributable to the credit card assets will be recognized.

Additional information regarding these acquisitions is provided in Note 11.

Purchased Loans

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. Fair value of these loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those cash flows. PCI loans are generally accounted for on a pool basis, with pools formed based on the common characteristics of the loans, such as loan collateral type or loan product type. Each pool is accounted for as a single asset with one composite interest rate and an aggregate expectation of cash flows.

Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable amount,” is accreted into interest income over the life of the loans in each pool using the effective yield method. Accordingly, PCI loans are not subject to classification as nonaccrual (and nonperforming) in the same manner as originated loans. Rather, acquired PCI loans are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to contractual interest payments at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable amount,” includes estimates of both the impact of prepayments and future credit losses expected to be incurred over the life of the loans in each pool.

Subsequent to acquisition of loans determined to be PCI loans, actual cash collections are monitored relative to management’s expectations, and revised cash flow expectations are prepared, as necessary. These revised expectations involve updates, as necessary, of the key assumptions used in the initial estimate of fair value. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool.

A purchased loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party or foreclosure of the collateral. In the event of a sale of the loan, a gain or loss on sale is recognized and reported within noninterest income based on the difference between the sales proceeds and the carrying amount of the loan. In the case of a foreclosure an individual loan is removed from the pool based on comparing the amount received from its resolution (fair value of the underlying collateral less costs to sell). Any difference between this amount and the loan carrying value is absorbed by the nonaccretable difference established for the entire pool. For loans resolved by payment in full, there is no adjustment of the nonaccretable difference since there is no difference between the amount received at resolution and the outstanding balance of the loan. In these cases, the remaining accretable amount balance is unaffected and any material change in remaining effective yield caused by the removal of the loan from the pool is addressed in connection with the subsequent cash flow re-assessment for the pool. PCI loans subject to modification are not removed from the pool even if those loans would otherwise be deemed TDRs as the pool, and not the individual loan, represents the unit of account.

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 September 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 September 30,				Nine months ended September 30,
dollars in millions, except per share amounts	2012		2011		2012		2011

EARNINGS
Income (loss) from continuing operations	$	221	$	235	$	657	$	769
Less: Net income (loss) attributable to noncontrolling interests		2		1		7		12

Income (loss) from continuing operations attributable to Key		219		234		650		757
Less: Dividends on Series A Preferred Stock		5		5		16		17
Cash dividends on Series B Preferred Stock		—		—		—		31
Amortization of discount on Series B Preferred Stock^(b)		—		—		—		53

Income (loss) from continuing operations attributable to Key common shareholders		214		229		634		656
Income (loss) from discontinued operations, net of taxes^(a)		—		(17)		5		(37)

Net income (loss) attributable to Key common shareholders	$	214	$	212	$	639	$	619


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		936,223		948,702		943,378		926,298
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)		4,541		1,984		4,204		4,151

Weighted-average common shares and potential common shares outstanding (000)		940,764		950,686		947,582		930,449


EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.23	$	.24	$	.67	$	.71
Income (loss) from discontinued operations, net of taxes ^(a)		—		(.02)		.01		(.04)
Net income (loss) attributable to Key common shareholders^(c)		.23		.22		.68		.67

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.23	$	.24	$	.67	$	.71
Income (loss) from discontinued operations, net of taxes ^(a)		—		(.02)		.01		(.04)
Net income (loss) attributable to Key common shareholders — assuming dilution ^(c)		.23		.22		.67		.67

(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 nine months ended September 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:


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

Commercial, financial and agricultural^(a)	$	21,979	$	19,759	$	17,848
Commercial real estate:
Commercial mortgage		7,529		8,037		7,958
Construction		1,067		1,312		1,456

Total commercial real estate loans		8,596		9,349		9,414
Commercial lease financing		4,960		5,674		5,957

Total commercial loans		35,535		34,782		33,219
Residential — prime loans:
Real estate — residential mortgage		2,138		1,946		1,875
Home equity:
Key Community Bank		9,768		9,229		9,347
Other		409		535		565

Total home equity loans		10,177		9,764		9,912

Total residential — prime loans		12,315		11,710		11,787
Consumer other — Key Community Bank		1,313		1,192		1,187
Credit cards		710		—		—
Consumer other:
Marine		1,448		1,766		1,871
Other		98		125		131

Total consumer other		1,546		1,891		2,002

Total consumer loans		15,884		14,793		14,976

Total loans ^{(b) (c)}	$	51,419	$	49,575	$	48,195

(a)	September 30, 2012 loan balance includes $88 million of commercial credit card balances.

(b)	Excluded at September 30, 2012, December 31, 2011, and September 30, 2011, are loans in the amount of $5.3 billion, $5.8 billion and $6.0 billion, respectively, related to the discontinued operations of the education lending business.

(c)	September 30, 2012 includes purchased loans of $231 million of which $25 million were PCI loans.

Our loans held for sale are summarized as follows:


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

Commercial, financial and agricultural	$	13	$	19	$	29
Real estate — commercial mortgage		484		567		325
Real estate — construction		10		35		20
Commercial lease financing		4		12		26
Real estate — residential mortgage		117		95		79

Total loans held for sale	$	628	$	728	$	479

Our quarterly summary of changes in loans held for sale as follows:


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

Balance at beginning of the period	$	656	$	479	$	381
New originations		1,280		1,235		853
Transfers from held to maturity, net		13		19		23
Loan sales		(1,311)		(932)		(759)
Loan draws (payments), net		(9)		(72)		1
Transfers to OREO / valuation adjustments		(1)		(1)		(20)

Balance at end of period	$	628	$	728	$	479

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:


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

Total nonperforming loans^(a)(b)	$	653	$	727	$	788
Nonperforming loans held for sale		19		46		42
OREO		29		65		63
Other nonperforming assets		17		21		21

Total nonperforming assets	$	718	$	859	$	914

Nonperforming assets from discontinued operation - education lending^(f)	$	22	$	23	$	22


Restructured loans included in nonperforming loans ^(a)(c)	$	217	$	191	$	178
Restructured loans with an allocated specific allowance^(d)		78		50		27
Specifically allocated allowance for restructured loans^(e)		31		10		5

Accruing loans past due 90 days or more	$	89	$	164	$	118
Accruing loans past due 30 through 89 days		354		441		478

(a)	September 30, 2012 includes $38 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in recently updated regulatory guidance. Such loans have been designated as nonperforming and TDRs.

(b)	September 30, 2012 excludes $25 million of PCI loans acquired in July 2012.

(c)

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

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

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

(f)	Includes approximately $3 million of restructured loans at September 30, 2012. See Note 11 for further discussion.

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. At the date of acquisition, the estimated gross contractual amount receivable of PCI loans totaled $41 million. The estimated cash flows not expected to be collected (i,e, nonaccretable amount) was $11 million and the accretable amount was approximately $5 million. The difference between the fair value and the cash flows expected to be collected from the purchased loans is accreted to interest income over the remaining term of the loans. Accordingly, these loans are not subject to classification as non-accrual (and nonperforming) in the same manner as originated loans. Rather, purchased loans are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to the contractual interest payments at the loan level.

At September 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 67% of their original contractual amount.

At September 30, 2012, our twenty largest nonperforming loans totaled $202 million, representing 31% of total loans on nonperforming status from continuing operations. At September 30, 2011, the twenty largest nonperforming loans totaled $265 million, representing 34% of total loans on nonperforming status.

The amount by which nonperforming loans and loans held for sale reduced expected interest income was $18 million for the nine months ended September 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 September 30, 2012, December 31, 2011 and September 30, 2011:


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

With no related allowance recorded:
Commercial, financial and agricultural	$	57		$	118			—	$	58
Commercial real estate:
Commercial mortgage		106			182			—		109
Construction		42			203			—		47

Total commercial real estate loans		148			385			—		156

Total commercial loans with no related allowance recorded		205			503			—		214

Real estate — residential mortgage		—			—			—		1

Home equity:
Key Community Bank		45			45			—		23
Other		2			2			—		1

Total home equity loans		47			47			—		24

Consumer other — Key Community Bank		1			1			—		1
Consumer other:
Marine		4			4			—		2

Total consumer other		4			4			—		2

Total consumer loans		52			52			—		28

Total loans with no related allowance recorded		257			555			—		242

With an allowance recorded:
Commercial, financial and agricultural		35			45		$	12		39
Commercial real estate:
Commercial mortgage		31			32			7		44
Construction		—			—			—		2

Total commercial real estate loans		31			32			7		46

Total commercial loans with an allowance recorded		66			77			19		85


Real estate — residential mortgage		18			18			1		17

Home equity:
Key Community Bank		20			20			10		16
Other		8			8			1		7

Total home equity loans		28			28			11		23

Consumer other — Key Community Bank		2			2			1		2
Consumer other:
Marine		56			56			7		53
Other		1			1			—		1

Total consumer other		57			57			7		54

Total consumer loans		105			105			20		96

Total loans with an allowance recorded		171			182			39		181

Total	$	428		$	737		$	39	$	423

(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 in millions		Recorded Investment	^(a)		Unpaid Principal Balance	^(b)		Specific Allowance		Average Recorded 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.


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

With no related allowance recorded:
Commercial, financial and agricultural	$	91		$	202			—	$	104
Commercial real estate:
Commercial mortgage		139			292			—		131
Construction		58			203			—		71

Total commercial real estate loans		197			495			—		202

Total commercial loans with an allowance recorded		288			697			—		306
Home equity — Key Community Bank		2			2			—		1

Total loans with no related allowance recorded		290			699			—		307

With an allowance recorded:
Commercial, financial and agricultural		53			61		$	20		48
Commercial real estate:
Commercial mortgage		78			90			14		84
Construction		20			20			10		27

Total commercial real estate loans		98			110			24		111

Total loans with an allowance recorded		151			171			44		159

Total	$	441		$	870		$	44	$	466

(a)

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

For the nine months ended September 30, 2012 and 2011, interest income recognized on the outstanding balances of accruing impaired loans totaled $4 million for each period presented.

At September 30, 2012, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $323 million, compared to $276 million at December 31, 2011, and $277 million at September 30, 2011. We added $192 million in restructured loans during the nine months ended of 2012, which were partially offset by $144 million in payments and charge-offs.

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


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

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		91	$	107	$	54
Commercial real estate:
Real estate — commercial mortgage		18		47		29
Real estate — construction		8		53		30

Total commercial real estate loans		26		100		59

Total commercial loans		117		207		113
Real estate — residential mortgage		70		7		7
Home equity:
Key Community Bank		1,804		89		58
Other		486		11		7

Total home equity loans		2,290		100		65
Consumer other — Key Community Bank		125		2		2
Consumer other:
Marine		491		33		28
Other		91		2		2

Total consumer other		582		35		30

Total consumer loans		3,067		144		104

Total nonperforming TDRs		3,184		351		217

Prior-year accruing^(a)
Commercial, financial and agricultural		152		15		7
Commercial real estate:
Real estate — commercial mortgage		7		71		45
Real estate — construction		1		15		—

Total commercial real estate loans		8		86		45

Total commercial loans		160		101		52
Real estate — residential mortgage		108		11		11
Home equity:
Key Community Bank		86		6		6
Other		95		3		3

Total home equity loans		181		9		9
Consumer other — Key Community Bank		20		—		—
Consumer other:
Marine		126		32		32
Other		51		2		2

Total consumer other		177		34		34

Total consumer loans		486		54		54

Total prior-year accruing TDRs		646		155		106

Total TDRs		3,830	$	506	$	323

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

A further breakdown of restructured loans (TDRs) included in nonperforming loans by loan category as of September 30, 2011, follows:


September 30, 2011 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		11	$	84	$	46
Commercial real estate:
Real estate — commercial mortgage		12		74		69
Real estate — construction		6		50		18

Total commercial real estate loans		18		124		87
Commercial lease financing		182		24		11

Total commercial loans		211		232		144
Real estate — residential mortgage		73		7		7
Home equity:
Key Community Bank		30		2		1
Other		29		1		1

Total home equity loans		59		3		2
Consumer other — Key Community Bank		7		—		—
Consumer other:
Marine		43		26		25
Other		18		—		—

Total consumer other		61		26		25

Total consumer loans		200		36		34

Total nonperforming TDRs		411		268		178

Prior-year accruing^(a)
Commercial, financial and agricultural		1		8		5
Commercial real estate:
Real estate — commercial mortgage		4		57		32
Real estate — construction		3		39		19

Total commercial real estate loans		7		96		51
Commercial lease financing		167		17		13

Total commercial loans		175		121		69
Real estate — residential mortgage		56		9		9
Home equity:
Key Community Bank		64		6		6
Other		71		3		2

Total home equity loans		135		9		8
Consumer other — Key Community Bank		14		—		—
Consumer other:
Marine		109		13		11
Other		34		2		2

Total consumer other		143		15		13

Total consumer loans		348		33		30

Total prior-year accruing TDRs		523		154		99

Total TDRs		934	$	422	$	277

(a)	All TDRs that were restructured prior to January 1, 2011 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. Additional information regarding TDRs for discontinued operations is provided in Note 11 (“Acquisitions and Discontinued Operations”).

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 nine 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 September 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.

As of September 30, 2012, $38 million of performing secured loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower were reclassified as TDRs. Regardless of delinquency status, these loans were transferred at the collateral’s fair market value less selling costs, classified as nonaccrual, and are included in nonperforming loans.

The following table shows the concession types for our commercial accruing and nonaccruing TDRs and other selected financial data.


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

Interest rate reduction	$	145		$	177		$	195
Forgiveness of principal		7			23			12
Other modification of loan terms		14			8			6

Total	$	166		$	208		$	213


Total commercial and consumer TDRs ^(a)	$	323		$	276		$	277
Total commercial TDRs to total commercial loans		.47	%		.60	%		.64	%
Total commercial TDRs to total loans		.32			.42			.44
Total commercial loans	$	35,535		$	34,782		$	33,219
Total loans		51,419			49,575			48,195

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $47 million, $25 million, and $39 million at September 30, 2012, December 31, 2011, and September 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. Credit card loans on which payments are past due for 90 days are placed on nonaccrual status.

At September 30, 2012, approximately $50.3 billion, or 98%, of our total loans are current. At September 30, 2012, total past due loans and nonperforming loans of $1.1 billion represent approximately 2% of total loans.

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


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

LOAN TYPE
Commercial, financial and agricultural	$	21,766	$	46	$	19	$	15	$	132	$	212	$	1	$	21,979
Commercial real estate:
Commercial mortgage		7,344		19		3		26		134		182		3		7,529
Construction		993		5		3		13		53		74		—		1,067

Total commercial real estate loans		8,337		24		6		39		187		256		3		8,596
Commercial lease financing		4,881		48		11		2		18		79		—		4,960

Total commercial loans	$	34,984	$	118	$	36	$	56	$	337	$	547	$	4	$	35,535


Real estate — residential mortgage	$	1,997	$	22	$	13	$	6	$	83	$	124	$	17	$	2,138
Home equity:
Key Community Bank		9,492		57		30		15		171		273		3		9,768
Other		374		9		5		3		18		35		—		409

Total home equity loans		9,866		66		35		18		189		308		3		10,177
Consumer other — Key Community Bank		1,290		9		4		6		3		22		1		1,313
Credit cards		692		6		4		—		8		18		—		710
Consumer other:
Marine		1,377		29		9		2		31		71		—		1,448
Other		92		2		1		1		2		6		—		98

Total consumer other		1,469		31		10		3		33		77		—		1,546

Total consumer loans	$	15,314	$	134	$	66	$	33	$	316	$	549	$	21	$	15,884


Total loans	$	50,298	$	252	$	102	$	89	$	653	$	1,096	$	25	$	51,419

(a)	Includes $38 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in recently updated regulatory guidance. Such loans have been designated as nonperforming and TDRs.


September 30, 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	$	17,576	$	40	$	20	$	24	$	188	$	272	$	17,848
Commercial real estate:
Commercial mortgage		7,612		101		3		5		237		346		7,958
Construction		1,345		5		5		8		93		111		1,456

Total commercial real estate loans		8,957		106		8		13		330		457		9,414
Commercial lease financing		5,812		57		23		34		31		145		5,957

Total commercial loans	$	32,345	$	203	$	51	$	71	$	549	$	874	$	33,219


Real estate — residential mortgage	$	1,747	$	20	$	11	$	9	$	88	$	128	$	1,875
Home equity:
Key Community Bank		9,125		63		35		22		102		222		9,347
Other		529		13		7		4		12		36		565

Total home equity loans		9,654		76		42		26		114		258		9,912
Consumer other — Key Community Bank		1,159		11		5		8		4		28		1,187
Consumer other:
Marine		1,781		36		19		3		32		90		1,871
Other		125		3		1		1		1		6		131

Total consumer other		1,906		39		20		4		33		96		2,002

Total consumer loans	$	14,466	$	146	$	78	$	47	$	239	$	510	$	14,976


Total loans	$	46,811	$	349	$	129	$	118	$	788	$	1,384	$	48,195

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 excluding $25 million of purchased credit impaired loans, based on bond rating, regulatory classification and payment activity as of September 30, 2012 and September 30, 2011 are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


September 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	$	166	$	109	$	1	$	2	$	1	$	3	$	465	$	639	$	633	$	753
A		755		655		63		62		1		1		1,107		1,272		1,926		1,990
BBB — BB		19,229		14,928		6,137		5,747		759		762		3,087		3,509		29,212		24,946
B		940		807		585		726		38		132		188		306		1,751		1,971
CCC — C		888		1,349		740		1,421		268		558		113		231		2,009		3,559

Total	$	21,978	$	17,848	$	7,526	$	7,958	$	1,067	$	1,456	$	4,960	$	5,957	$	35,531	$	33,219

(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)


September 30, in millions

	Residential — Prime
GRADE	2012		2011

Pass	$	11,999	$	11,550
Substandard		296		237

Total	$	12,295	$	11,787

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


September 30,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2012		2011		2012		2011		2012		2011		2012		2011		2012		2011

Performing	$	1,309	$	1,183	$	702		—	$	1,417	$	1,839	$	96	$	130	$	3,524	$	3,152
Nonperforming		3		4		8		—		31		32		2		1		44		37
Total	$	1,312	$	1,187	$	710		—	$	1,448	$	1,871	$	98	$	131	$	3,568	$	3,189

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