Edgar Filing: KEYCORP /NEW/

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

June 30, 2013

Commission File Number 1-11302

LOGO

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 Number:

		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				911,352,637 Shares
Title of class				Outstanding at August 1, 2013

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page Number

	Consolidated Balance Sheets — June 30, 2013 (Unaudited), December 31, 2012, and June 30, 2012 (Unaudited)	5

	Consolidated Statements of Income (Unaudited) — Three and six months ended June 30, 2013 and 2012	6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three and six months ended June 30, 2013 and 2012	7

	Consolidated Statements of Changes in Equity (Unaudited) — Six months ended June 30, 2013 and 2012	8

	Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2013 and 2012	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	31

	Note 6. Securities	48

	Note 7. Derivatives and Hedging Activities	52

	Note 8. Mortgage Servicing Assets	60

	Note 9. Variable Interest Entities	61

	Note 10. Income Taxes	63

	Note 11. Acquisitions and Discontinued Operations	64

	Note 12. Securities Financing Activities	71

	Note 13. Employee Benefits	73

	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	74

	Note 15. Contingent Liabilities and Guarantees	75

	Note 16. Accumulated Other Comprehensive Income	78

	Note 17. Shareholders’ Equity	79



		Note 18. Line of Business Results	80

		Report of Independent Registered Public Accounting Firm	84

Item 2.		Management’s Discussion & Analysis of Financial Condition & Results of Operations	85

	Introduction		85
		Terminology	85
		Selected financial data	86
		Forward-looking statements	87
		Economic overview	88
		Long-term financial goals	89
		Strategic developments	90
		Demographics	91
		Supervision and regulation	92
		Regulatory reform developments	92
		Supervisory and company run-stress testing	92
		Enhanced prudential standards and early remediation requirements	92
		New regulatory capital rules	92
		New assessments, fees and other charges	94

	Highlights of Our Performance		94
		Financial performance	94
	Results of Operations		99
		Net interest income	99
		Noninterest income	103
		Trust and investment services income	105
		Investment banking and debt placement fees	105
		Operating lease income and other leasing gains	105
		Cards and payments	105
		Other income	105
		Noninterest expense	106
		Personnel	106
		Operating lease expense	107
		Intangible asset amortization	107
		Other expense	107
		Income taxes	107

	Line of Business Results		108
		Key Community Bank summary of operations	108
		Key Corporate Bank summary of operations	109
		Other Segments	110

	Financial Condition		111
		Loans and loans held for sale	111
		Commercial loan portfolio	111
		*Commercial, financial and agricultural*	111
		*Commercial real estate loans*	112
		*Commercial lease financing*	113
		Commercial loan modification and restructuring	113
		*Extensions*	115
		*Guarantors*	115
		Consumer loan portfolio	115
		Loans held for sale	116
		Loan sales	116
		Securities	117
		Securities available-for-sale	118


		Held-to-maturity securities	119
		Other investments	120
		Deposits and other sources of funds	120
		Capital	121
		CCAR and capital actions	121
		Dividends	121
		Common shares outstanding	121
		Capital adequacy	122
		Regulatory capital rules	123

	Risk Management		125
		Overview	125
		Market risk management	127
		Trading market risk	127
		*Management of trading risks*	127
		*Covered positions*	127
		*VaR and stressed VaR*	128
		*Internal capital adequacy*	129
		Nontrading market risk	129
		*Net interest income simulation analysis*	130
		*Economic value of equity modeling*	131
		*Management of interest rate exposure*	131
		Liquidity risk management	132
		Governance structure	132
		Factors affecting liquidity	132
		Managing liquidity risk	133
		Long-term liquidity strategy	133
		Sources of liquidity	133
		Liquidity programs	133
		Liquidity for KeyCorp	134
		Our liquidity position and recent activity	134
		Credit risk management	135
		Credit policy, approval and evaluation	135
		Allowance for loan and lease losses	136
		Net loan charge-offs	138
		Nonperforming assets	140
		Operational risk management	143

		Critical Accounting Policies and Estimates	143

		European Sovereign Debt Exposure	145
Item 3.		Quantitative and Qualitative Disclosure about Market Risk	146
Item 4.		Controls and Procedures	146

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	146
Item 1A.		Risk Factors	146
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	147
Item 6.		Exhibits	147
		Signature	148
		Exhibits

Throughout the Notes to Consolidated Financial Statements (Unaudited) and Management’s Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations 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, 2013		December 31, 2012		June 30, 2012

	(Unaudited)				(Unaudited)
ASSETS
Cash and due from banks	$	696	$	584	$	716
Short-term investments		3,582		3,940		2,216
Trading account assets		592		605		679
Securities available for sale		13,253		12,094		13,205
Held-to-maturity securities (fair value: $4,716, $3,992 and $4,396)		4,750		3,931		4,352
Other investments		1,037		1,064		1,186
Loans, net of unearned income of $901, $957 and $1,155		53,101		52,822		49,605
Less: Allowance for loan and lease losses		876		888		888

Net loans		52,225		51,934		48,717
Loans held for sale		402		599		656
Premises and equipment		900		965		931
Operating lease assets		303		288		318
Goodwill		979		979		917
Other intangible assets		149		171		15
Corporate-owned life insurance		3,362		3,333		3,285
Derivative assets		461		693		818
Accrued income and other assets (including $22 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		2,864		2,774		2,967
Discontinued assets (including $2,341 of consolidated education loan securitization trust VIEs (see Note 9) and $151 of loans in portfolio at fair value)^(a)		5,084		5,282		5,545

Total assets	$	90,639	$	89,236	$	86,523

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	32,689	$	32,380	$	28,957
Savings deposits		2,542		2,433		2,103
Certificates of deposit ($100,000 or more)		2,918		2,879		3,669
Other time deposits		4,089		4,575		5,385

Total interest-bearing		42,238		42,267		40,114
Noninterest-bearing		24,939		23,319		21,435
Deposits in foreign office — interest-bearing		544		407		618

Total deposits		67,721		65,993		62,167
Federal funds purchased and securities sold under repurchase agreements		1,647		1,609		1,716
Bank notes and other short-term borrowings		298		287		362
Derivative liabilities		456		584		763
Accrued expense and other liabilities		1,421		1,387		1,390
Long-term debt		6,666		6,847		7,521
Discontinued liabilities (including $2,139 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		2,169		2,220		2,428

Total liabilities		80,378		78,927		76,347

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		4,045		4,126		4,120
Retained earnings		7,214		6,913		6,595
Treasury stock, at cost (104,086,859, 91,201,285 and 71,496,550)		(2,020)		(1,952)		(1,796)
Accumulated other comprehensive income (loss)		(318)		(124)		(72)

Key shareholders’ equity		10,229		10,271		10,155
Noncontrolling interests		32		38		21

Total equity		10,261		10,309		10,176

Total liabilities and equity	$	90,639	$	89,236	$	86,523

(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	2013		2012		2013		2012

INTEREST INCOME
Loans	$	539	$	518	$	1,087	$	1,054
Loans held for sale		5		5		9		10
Securities available for sale		80		105		160		221
Held-to-maturity securities		20		17		38		29
Trading account assets		4		5		10		11
Short-term investments		1		2		3		3
Other investments		8		10		17		18

Total interest income		657		662		1,324		1,346
INTEREST EXPENSE
Deposits		42		71		87		148
Federal funds purchased and securities sold under repurchase agreements		—		1		1		2
Bank notes and other short-term borrowings		2		2		3		4
Long-term debt		32		50		69		101

Total interest expense		76		124		160		255

NET INTEREST INCOME		581		538		1,164		1,091
Provision (credit) for loan and lease losses		28		21		83		63

Net interest income (expense) after provision for loan and lease losses		553		517		1,081		1,028
NONINTEREST INCOME
Trust and investment services income		100		90		195		186
Investment banking and debt placement fees		84		73		163		134
Service charges on deposit accounts		71		70		140		138
Operating lease income and other leasing gains		19		58		42		110
Corporate services income		43		44		88		88
Cards and payments income		42		31		79		60
Corporate-owned life insurance income		31		30		61		60
Consumer mortgage income		6		9		13		18
Net gains (losses) from principal investing		7		24		15		59
Other income ^(a)		26		28		58		46

Total noninterest income		429		457		854		899
NONINTEREST EXPENSE
Personnel		406		377		797		749
Net occupancy		72		62		136		126
Computer processing		39		43		78		84
Business services and professional fees		37		51		72		88
Equipment		27		27		53		53
Operating lease expense		11		15		23		32
Marketing		11		17		17		30
FDIC assessment		8		8		16		16
Intangible asset amortization on credit cards		7		—		15		—
Other intangible asset amortization		3		1		7		2
Provision (credit) for losses on lending-related commitments		5		6		8		6
OREO expense, net		1		7		4		13
Other expense		84		79		166		173

Total noninterest expense		711		693		1,392		1,372

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		271		281		543		555
Income taxes		72		54		142		127

INCOME (LOSS) FROM CONTINUING OPERATIONS		199		227		401		428
Income (loss) from discontinued operations, net of taxes of $4, $9, $8, and $8 (see Note 11)		5		14		8		13

NET INCOME (LOSS)		204		241		409		441
Less: Net income (loss) attributable to noncontrolling interests		—		5		1		5

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	204	$	236	$	408	$	436

Income (loss) from continuing operations attributable to Key common shareholders	$	193	$	217	$	389	$	412
Net income (loss) attributable to Key common shareholders		198		231		397		425

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.23	$	.42	$	.44
Income (loss) from discontinued operations, net of taxes		.01		.01		.01		.01
Net income (loss) attributable to Key common shareholders ^(b)		.22		.24		.43		.45

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.23	$	.42	$	.43
Income (loss) from discontinued operations, net of taxes		.01		.01		.01		.01
Net income (loss) attributable to Key common shareholders ^(b)		.22		.24		.43		.45

Cash dividends declared per common share	$	.055	$	.05	$	.105	$	.08

Weighted-average common shares outstanding (000)		913,736		944,648		917,008		946,995
Weighted-average common shares and potential common shares outstanding (000) ^(c)		918,628		948,087		922,319		951,029

(a)	For the three months ended June 30, 2013 and 2012, we did not have any impairment losses related to securities.

(b)	EPS 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 June 30,				Six months ended June 30,
in millions	2013		2012		2013		2012

Net income (loss)	$	204	$	241	$	409	$	441
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($74), ($25), ($87) and ($31)		(125)		(42)		(147)		(53)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($18), ($2), ($23) and $5		(31)		(4)		(39)		8
Foreign currency translation adjustments, net of income taxes		(3)		(10)		(14)		(4)
Net pension and postretirement benefit costs, net of income taxes		3		3		6		5

Total other comprehensive income (loss), net of tax		(156)		(53)		(194)		(44)

Comprehensive income (loss)		48		188		215		397
Less: Comprehensive income attributable to noncontrolling interests		—		5		1		5

Comprehensive income (loss) attributable to Key	$	48	$	183	$	214	$	392

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		Capital Surplus		Retained Earnings		Treasury Stock, at Cost		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests

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 $5																8
Foreign currency translation adjustments, net of income taxes																(4)
Net pension and postretirement benefit costs, net of income taxes																5
Deferred compensation										8
Cash dividends declared on common shares ($.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
Net contribution from (distribution to) noncontrolling interests																		(1)

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


BALANCE AT DECEMBER 31, 2012		2,905		925,769	$	291	$	1,017	$	4,126	$	6,913	$	(1,952)	$	(124)	$	38
Net income (loss)												408						1
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($87)																(147)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($23)																(39)
Foreign currency translation adjustments, net of income taxes																(14)
Net pension and postretirement benefit costs, net of income taxes																6
Deferred compensation										8
Cash dividends declared on common shares ($.105 per share)												(96)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)												(11)
Common shares repurchased				(17,576)										(177)
Common shares reissued (returned) for stock options and other employee benefit plans				4,690						(89)				109
Net contribution from (distribution to) noncontrolling interests																		(7)

BALANCE AT JUNE 30, 2013		2,905		912,883	$	291	$	1,017	$	4,045	$	7,214	$	(2,020)	$	(318)	$	32

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2013		2012

OPERATING ACTIVITIES
Net income (loss)	$	409	$	441
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		83		63
Provision (credit) for losses on lending-related commitments		8		6
Provision (credit) for losses on LIHTC guaranteed funds		3		—
Depreciation, amortization and accretion expense, net		93		104
Stock-based compensation expense		19		27
FDIC (payments) net of FDIC expense		297		13
Deferred income taxes (benefit)		36		38
Proceeds from sales of loans held for sale		2,613		2,387
Originations of loans held for sale, net of repayments		(2,316)		(2,236)
Net losses (gains) on sales of loans held for sale		(64)		(54)
Net losses (gains) from principal investing		(15)		(59)
Net losses (gains) and writedown on OREO		4		12
Net losses (gains) on leased equipment		(8)		(63)
Net losses (gains) on sales of fixed assets		8		—
Net decrease (increase) in trading account assets		13		(57)
Other operating activities, net		(237)		(249)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		946		373
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired		573		—
Net decrease (increase) in short-term investments		357		1,303
Purchases of securities available for sale		(4,030)		(10)
Proceeds from sales of securities available for sale		27		—
Proceeds from prepayments and maturities of securities available for sale		2,612		2,733
Proceeds from prepayments and maturities of held-to-maturity securities		434		238
Purchases of held-to-maturity securities		(1,253)		(2,481)
Purchases of other investments		(20)		(39)
Proceeds from sales of other investments		11		3
Proceeds from prepayments and maturities of other investments		49		72
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(451)		(373)
Proceeds from sales of portfolio loans		77		135
Purchases of premises and equipment		(34)		60
Proceeds from sales of premises and equipment		8		1
Proceeds from sales of other real estate owned		14		45

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(1,626)		1,567
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		1,038		211
Net increase (decrease) in short-term borrowings		49		30
Net proceeds from issuance of long-term debt		1,008		29
Payments on long-term debt		(1,033)		(2,019)
Repurchase of Common Shares		(177)		(82)
Net proceeds from issuance of Common Shares		14		1
Cash dividends paid		(107)		(87)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		792		(1,917)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		112		23
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		584		693

CASH AND DUE FROM BANKS AT END OF PERIOD	$	696	$	716


Additional disclosures relative to cash flows:
Interest paid	$	159	$	249
Income taxes paid (refunded)		62		26
Noncash items:
Loans transferred to portfolio from held for sale	$	2	$	39
Loans transferred to held for sale from portfolio		38		65
Loans transferred to other real estate owned		14		21

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 “2012 Form 10-K” refer to our Form 10-K for the year ended December 31, 2012, 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.		LIHTC: Low-income housing tax credit.
AICPA: American Institute of Certified Public Accountants.		LILO: Lease in, lease out transaction.
ALCO: Asset/Liability Management Committee.		Moody’s: Moody’s Investor Services, Inc.
ALLL: Allowance for loan and lease losses.		N/A: Not applicable.
A/LM: Asset/liability management.		NASDAQ: The NASDAQ Stock Market LLC.
AOCI: Accumulated other comprehensive income (loss).		N/M: Not meaningful.
APBO: Accumulated postretirement benefit obligation.		NOW: Negotiable Order of Withdrawal.
Austin: Austin Capital Management, Ltd.		NPR: Notice of proposed rulemaking.
BHCA: Bank Holding Company Act of 1956, as amended.		NYSE: New York Stock Exchange.
BHCs: Bank holding companies.		OCC: Office of the Comptroller of the Currency.
CCAR: Comprehensive Capital Analysis and Review.		OCI: Other comprehensive income (loss).
CFPB: Bureau of Consumer Financial Protection.		OFR: Office of Financial Research of the U.S. Department of
CFTC: Commodities Futures Trading Commission.		Treasury.
CMO: Collateralized mortgage obligation.		OREO: Other real estate owned.
Common Shares: Common Shares, $1 par value.		OTTI: Other-than-temporary impairment.
CPP: Capital Purchase Program of the U.S. Treasury.		QSPE: Qualifying special purpose entity.
DIF: Deposit Insurance Fund of the FDIC.		PBO: Projected benefit obligation.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and		PCCR: Purchased credit card relationship.
Consumer Protection Act of 2010.		PCI: Purchased credit impaired.
ERISA: Employee Retirement Income Security Act of 1974.		S&P: Standard and Poor’s Ratings Services, a Division of The
ERM: Enterprise risk management.		McGraw-Hill Companies, Inc.
EVE: Economic value of equity.		SCAP: Supervisory Capital Assessment Program administered
FASB: Financial Accounting Standards Board.		by the Federal Reserve.
FDIA: Federal Deposit Insurance Act, as amended.		SEC: U.S. Securities & Exchange Commission.
FDIC: Federal Deposit Insurance Corporation.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
Federal Reserve: Board of Governors of the Federal Reserve		Perpetual Convertible Preferred Stock, Series A.
System.		SIFIs: Systemically important financial companies, including
FHFA: Federal Housing Finance Agency.		BHCs with total consolidated assets of at least $50 billion
FHLMC: Federal Home Loan Mortgage Corporation.		and nonbank financial companies designated by FSOC for
FINRA: Financial Industry Regulatory Authority.		supervision by the Federal Reserve.
FNMA: Federal National Mortgage Association.		SILO: Sale in, lease out transaction.
FOMC: Federal Open Market Committee of the Federal Reserve		SPE: Special purpose entity.
Board.		TDR: Troubled debt restructuring.
FSOC: Financial Stability Oversight Council.		TE: Taxable equivalent.
FVA: Fair value of pension plan assets.		U.S. Treasury: United States Department of the Treasury.
GAAP: U.S. generally accepted accounting principles.		VaR: Value at risk.
GNMA: Government National Mortgage Association.		VEBA: Voluntary Employee Beneficiary Association.
HUD: U.S. Department of Housing and Urban Development.		Victory: Victory Capital Management and/or
IRS: Internal Revenue Service.		Victory Capital Advisors.
ISDA: International Swaps and Derivatives Association.		VIE: Variable interest entity.
KAHC: Key Affordable Housing Corporation.		XBRL: eXtensible Business Reporting Language.
LIBOR: London Interbank Offered Rate.

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 2012 Form 10-K.

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

Offsetting Derivative Positions

In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash 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 2013

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 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013, for us). The adoption of this accounting guidance did not 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. In January 2013, the FASB issued new accounting guidance that clarified the scope of the guidance to include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing transactions. This accounting guidance was 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). Information about our offsetting and related arrangements is provided in Note 12 (“Securities Financing Activities”).

Reporting of amounts reclassified out of AOCI. In February 2013, the FASB issued new accounting guidance that requires reclassifications of amounts out of AOCI to be reported in a new format. It does not require the reporting of any information that is not currently required to be disclosed under existing GAAP. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2012 (effective January 1, 2013, for us). The disclosures required by this accounting guidance are provided in Note 16 (“Accumulated Other Comprehensive Income”).

Accounting Guidance Pending Adoption at June 30, 2013

Benchmark interest rate. In July 2013, the FASB issued new accounting guidance allowing entities to designate the Federal Funds Effective Swap Rate (which is the Overnight Index Swap rate, or OIS rate, in the U.S.) as a benchmark interest rate, in addition to U.S. Treasury and LIBOR rates, for hedge accounting purposes. This new accounting guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 (effective July 17, 2013, for us). Note 7 (“Derivatives and Hedging Activities”) provides information regarding our use of derivatives and hedge accounting.

Presentation of unrecognized tax benefits. In July 2013, the FASB issued new accounting guidance that requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. This accounting guidance will be applied prospectively to unrecognized tax benefits that exist at the effective date. It will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (effective January 1, 2014, for us). Early adoption and/or retrospective application are permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Investment companies. In June 2013, the FASB issued new accounting guidance that modifies the criteria used in defining an investment company. It also sets forth certain measurement and disclosure requirements for an investment company. This accounting guidance will be effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013 (effective January 1, 2014, for us). Early application is prohibited. We are currently evaluating the impact this accounting guidance may have on our financial condition or results of operations.

Liquidation basis of accounting. In April 2013, the FASB issued new accounting guidance that specifies when and how an entity should prepare its financial statements using the liquidation basis of accounting when liquidation is imminent as defined in the guidance and describes the related disclosures that should be made. This new accounting guidance will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein (effective January 1, 2014, for us). Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.

Reporting of cumulative translation adjustments upon the derecognition of certain investments. In March 2013, the FASB issued new accounting guidance that addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This accounting guidance will be effective prospectively for reporting periods beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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	2013		2012		2013		2012

EARNINGS
Income (loss) from continuing operations	$	199	$	227	$	401	$	428
Less: Net income (loss) attributable to noncontrolling interests		—		5		1		5

Income (loss) from continuing operations attributable to Key		199		222		400		423
Less: Dividends on Series A Preferred Stock		6		5		11		11

Income (loss) from continuing operations attributable to Key common shareholders		193		217		389		412
Income (loss) from discontinued operations, net of taxes^(a)		5		14		8		13

Net income (loss) attributable to Key common shareholders	$	198	$	231	$	397	$	425


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		913,736		944,648		917,008		946,995
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)		4,892		3,439		5,311		4,034

Weighted-average common shares and potential common shares outstanding (000)		918,628		948,087		922,319		951,029


EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.21	$	.23	$	.42	$	.44
Income (loss) from discontinued operations, net of taxes ^(a)		.01		.01		.01		.01
Net income (loss) attributable to Key common shareholders^(b)		.22		.24		.43		.45

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.21	$	.23	$	.42	$	.43
Income (loss) from discontinued operations, net of taxes ^(a)		.01		.01		.01		.01
Net income (loss) attributable to Key common shareholders — assuming dilution ^(b)		.22		.24		.43		.45

(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. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations see Note 11. (“Acquisitions and Discontinued Operations”).

(b)	EPS may not foot due to rounding.

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


in millions	June 30, 2013		December 31, 2012		June 30, 2012

Commercial, financial and agricultural^(a)	$	23,715	$	23,242	$	20,916
Commercial real estate:
Commercial mortgage		7,474		7,720		7,409
Construction		1,060		1,003		1,172

Total commercial real estate loans		8,534		8,723		8,581
Commercial lease financing		4,774		4,915		5,106

Total commercial loans		37,023		36,880		34,603
Residential — prime loans:
Real estate — residential mortgage		2,176		2,174		2,016
Home equity:
Key Community Bank		10,173		9,816		9,601
Other		375		423		479

Total home equity loans		10,548		10,239		10,080

Total residential — prime loans		12,724		12,413		12,096
Consumer other — Key Community Bank		1,424		1,349		1,263
Credit cards		701		729		—
Consumer other:
Marine		1,160		1,358		1,542
Other		69		93		101

Total consumer other		1,229		1,451		1,643

Total consumer loans		16,078		15,942		15,002

Total loans ^{(b) (c)}	$	53,101	$	52,822	$	49,605

(a)	June 30, 2013 and December 31, 2012 loan balances include $96 million and $90 million of commercial credit card balances, respectively.

(b)	Excluded at June 30, 2013, December 31, 2012, and June 30, 2012, are loans in the amount of $5.0 billion, $5.2 billion and $5.5 billion, respectively, related to the discontinued operations of the education lending business.

(c)	June 30, 2013 loan balance includes purchased loans of $187 million of which $19 million were PCI loans. December 31, 2012 loan balance includes purchased loans of $217 million of which $23 million were PCI loans.

Our loans held for sale are summarized as follows:


in millions	June 30, 2013		December 31, 2012		June 30, 2012

Commercial, financial and agricultural	$	22	$	29	$	18
Real estate — commercial mortgage		318		477		523
Real estate — construction		—		—		12
Commercial lease financing		14		8		13
Real estate — residential mortgage		48		85		90

Total loans held for sale	$	402	$	599	$	656

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


in millions	June 30, 2013		December 31, 2012		June 30, 2012

Balance at beginning of the period	$	434	$	628	$	511
New originations		1,241		1,686		1,308
Transfers from held to maturity, net		17		38		7
Loan sales		(1,292)		(1,747)		(1,165)
Loan draws (payments), net		—		(4)		(4)
Transfers to OREO / valuation adjustments		2		(2)		(1)

Balance at end of period	$	402	$	599	$	656

4. Asset Quality

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

Our nonperforming assets and past due loans were as follows:


in millions	June 30, 2013		December 31, 2012		June 30, 2012

Total nonperforming loans^{(a), (b)}	$	652	$	674	$	657
Nonperforming loans held for sale		14		25		38
OREO		18		22		28
Other nonperforming assets		9		14		28

Total nonperforming assets	$	693	$	735	$	751

Nonperforming assets from discontinued operations - education lending^(c)	$	19	$	20	$	18


Restructured loans included in nonperforming loans^(a)	$	195	$	249	$	163
Restructured loans with an allocated specific allowance^(d)		65		114		71
Specifically allocated allowance for restructured loans^(e)		30		33		34

Accruing loans past due 90 days or more	$	80	$	78	$	131
Accruing loans past due 30 through 89 days		251		424		362

(a)	December 31, 2012 loan balance includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed, as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.

(b)	June 30, 2013 and December 31, 2012, loan balance exclude $19 million and $23 million of PCI loans, respectively.

(c)	Includes approximately $8 million and $3 million of restructured loans at June 30, 2013 and December 31, 2012, respectively. There were no additional restructured loans at June 30, 2012. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.

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

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

At June 30, 2013, the outstanding unpaid principal balance and carrying value of all PCI loans was $27 million and $19 million, respectively. Changes in the accretable yield during 2013 included accretion of $1 million and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 2013.

At June 30, 2013, the approximate carrying amount of our commercial nonperforming loans outstanding represented 63% of their original contractual amount, total nonperforming loans outstanding represented 76% of their original contractual amount owed, and nonperforming assets in total were carried at 74% of their original contractual amount.

At June 30, 2013, our twenty largest nonperforming loans totaled $191 million, representing 29% of total loans on nonperforming status from continuing operations. At June 30, 2012, the twenty largest nonperforming loans totaled $220 million, representing 33% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $13 million for the six months ended June 30, 2013, and $25 million for the year ended December 31, 2012.

The following tables set forth a further breakdown of individually impaired loans as of June 30, 2013, December 31, 2012 and June 30, 2012:


June 30, 2013 in millions	Recorded Investment		^(a)	Unpaid Principal Balance		^(b)	Specific Allowance		Average Recorded Investment

With no related allowance recorded:
Commercial, financial and agricultural	$	89		$	140			—	$	91
Commercial real estate:
Commercial mortgage		88			138			—		88
Construction		50			157			—		49

Total commercial real estate loans		138			295			—		137

Total commercial loans with no related allowance recorded		227			435			—		228

Real estate — residential mortgage		16			16			—		16

Home equity:
Key Community Bank		69			69			—		66
Other		2			2			—		2

Total home equity loans		71			71			—		68
Consumer other:
Marine		3			3			—		3

Total consumer other		3			3			—		3

Total consumer loans		90			90			—		87

Total loans with no related allowance recorded		317			525			—		315

With an allowance recorded:
Commercial, financial and agricultural		22			31		$	6		18
Commercial real estate:
Commercial mortgage		5			6			2		7
Construction		2			12			—		1

Total commercial real estate loans		7			18			2		8

Total commercial loans with an allowance recorded		29			49			8		26


Real estate — residential mortgage		20			20			5		19

Home equity:
Key Community Bank		30			30			9		28
Other		10			10			1		10

Total home equity loans		40			40			10		38

Consumer other — Key Community Bank		3			3			1		3
Credit cards		4			4			—		4
Consumer other:
Marine		50			50			10		49
Other		1			1			—		1

Total consumer other		51			51			10		50

Total consumer loans		118			118			26		114

Total loans with an allowance recorded		147			167			34		140

Total	$	464		$	692		$	34	$	455

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

With no related allowance recorded:
Commercial, financial and agricultural	$	32		$	64			—	$	60
Commercial real estate:
Commercial mortgage		89			142			—		95
Construction		48			182			—		39

Total commercial real estate loans		137			324			—		134

Total commercial loans with no related allowance recorded		169			388			—		194

Real estate — residential mortgage		21			21			—		10

Home equity:
Key Community Bank		65			65			—		33
Other		3			3			—		1

Total home equity loans		68			68			—		34

Total consumer loans		89			89			—		44

Total loans with no related allowance recorded		258			477			—		238

With an allowance recorded:
Commercial, financial and agricultural		33			42		$	12		48
Commercial real estate:
Commercial mortgage		7			7			1		51
Construction		—			—			—		6

Total commercial real estate loans		7			7			1		57

Total commercial loans with an allowance recorded		40			49			13		105


Real estate — residential mortgage		17			17			1		8

Home equity:
Key Community Bank		22			22			11		11
Other		9			9			1		5

Total home equity loans		31			31			12		16

Consumer other — Key Community Bank		2			2			2		1
Credit cards		2			2			—		1
Consumer other:
Marine		60			60			7		30
Other		1			1			—		1

Total consumer other		61			61			7		31

Total consumer loans		113			113			22		57

Total loans with an allowance recorded		153			162			35		162

Total	$	411		$	639		$	35	$	400

(a)

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


June 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	$	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

Home equity:
Key Community Bank		—			—			—		—
Other		—			—			—		—

Total home equity loans		—			—			—		—

Consumer other — Key Community Bank		—			—			—		—
Credit cards		—			—			—		—
Consumer other:
Marine		—			—			—		—
Other		—			—			—		—

Total consumer other		—			—			—		—

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
Commercial lease financing		—			—			—		—

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
Credit cards		—			—			—		—
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)

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

For the three months ended June 30, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $1 million and $2 million, respectively.

At June 30, 2013, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $311 million, compared to $320 million at December 31, 2012, and $274 million at June 30, 2012. We added $72 million in restructured loans during the first six months of 2013, which were offset by $81 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2013, follows:


June 30, 2013 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		43	$	53	$	24
Commercial real estate:
Real estate — commercial mortgage		15		58		21
Real estate — construction		6		19		5

Total commercial real estate loans		21		77		26

Total commercial loans		64		130		50
Real estate — residential mortgage		381		23		23
Home equity:
Key Community Bank		1,683		89		87
Other		262		8		8

Total home equity loans		1,945		97		95
Consumer other — Key Community Bank		54		2		2
Credit cards		506		3		3
Consumer other:
Marine		360		41		21
Other		48		2		1

Total consumer other		408		43		22

Total consumer loans		3,294		168		145

Total nonperforming TDRs		3,358		298		195

Prior-year accruing^(a)
Commercial, financial and agricultural		87		10		5
Commercial real estate:
Real estate — commercial mortgage		4		22		15
Real estate — construction		1		23		32

Total commercial real estate loans		5		45		47

Total commercial loans		92		55		52
Real estate — residential mortgage		118		12		12
Home equity:
Key Community Bank		134		14		14
Other		178		5		5

Total home equity loans		312		19		19
Consumer other — Key Community Bank		26		1		1
Credit cards		309		2		2
Consumer other:
Marine		243		29		28
Other		49		2		2

Total consumer other		292		31		30

Total consumer loans		1,057		65		64

Total prior-year accruing TDRs		1,149		120		116

Total TDRs		4,507	$	418	$	311

(a)	All TDRs that were restructured prior to January 1, 2013, and are fully accruing.

A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2012, follows:


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

LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		82	$	76	$	39
Commercial real estate:
Real estate — commercial mortgage		15		62		25
Real estate — construction		8		53		33

Total commercial real estate loans		23		115		58

Total commercial loans		105		191		97
Real estate — residential mortgage		372		28		28
Home equity:
Key Community Bank		1,577		87		82
Other		322		9		8

Total home equity loans		1,899		96		90
Consumer other — Key Community Bank		28		1		1
Credit cards		405		3		3
Consumer other:
Marine		251		30		29
Other		34		1		1

Total consumer other		285		31		30

Total consumer loans		2,989		159		152

Total nonperforming TDRs		3,094		350		249

Prior-year accruing^(a)
Commercial, financial and agricultural		122		12		6
Commercial real estate:
Real estate — commercial mortgage		4		22		15

Total commercial real estate loans		4		22		15

Total commercial loans		126		34		21
Real estate — residential mortgage		101		10		10
Home equity:
Key Community Bank		76		5		5
Other		84		3		3

Total home equity loans		160		8		8
Consumer other — Key Community Bank		16		—		—
Consumer other:
Marine		117		31		31
Other		43		1		1

Total consumer other		160		32		32

Total consumer loans		437		50		50

Total prior-year accruing TDRs		563		84		71

Total TDRs		3,657	$	434	$	320

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

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


June 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		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 make up the allowance for loan and lease losses in either the amount of a charge-off or the loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 11 (“Acquisitions and Discontinued Operations”).

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. There were 127 consumer loan TDRs with a combined recorded investment of $5 million that have experienced payment defaults during the three months ended June 30, 2013 compared to 240 consumer TDRs with a combined recorded investment of $14 million during the three months ended March 31, 2013 from modifications resulting in TDR status during 2012. There were no significant payment defaults during the first six months of 2013 arising from commercial loans that were designated as TDRs during 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. Our concession types are primarily interest rate reductions, forgiveness of principal and other modifications. Other loan term modifications for consumer TDRs include concessions made due to updated regulatory guidance issued in the third quarter of 2012.

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


dollars in millions	June 30, 2013		December 31, 2012		June 30, 2012

Commercial loans:
Interest rate reduction	$	88	$	104	$	155
Forgiveness of principal		6		7		13
Other modification of loan terms		8		7		20

Total	$	102	$	118	$	188


Consumer loans:
Interest rate reduction	$	104	$	122	$	81
Forgiveness of principal		5		6		5
Other modification of loan terms		100		74		—

Total	$	209	$	202	$	86


Total commercial and consumer TDRs^(a)	$	311	$	320	$	274
Total loans		53,101		52,822		49,605

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $25 million, $32 million, and $45 million at June 30, 2013, December 31, 2012, and June 30, 2012, 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 120 of our 2012 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. Beginning in the second quarter of 2012, any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. This policy was implemented prospectively, and, therefore, prior periods were not restated or re-presented. Credit card loans on which payments are past due for 90 days are placed on nonaccrual status.

At June 30, 2013, approximately $52.1 billion, or 98.1%, of our total loans are current. At June 30, 2013, total past due loans and nonperforming loans of $983 million represent approximately 1.9% of total loans.

The following aging analysis as of June 30, 2013, December 31, 2012, and June 30, 2012, of past due and current loans provides further information regarding Key's credit exposure.


June 30, 2013 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		Purchased Credit Impaired		Total Loans

LOAN TYPE
Commercial, financial and agricultural	$	23,512	$	37	$	9	$	11	$	146	$	203		—	$	23,715
Commercial real estate:
Commercial mortgage		7,307		16		5		38		106		165	$	2		7,474
Construction		1,031		3		—		—		26		29		—		1,060

Total commercial real estate loans		8,338		19		5		38		132		194		2		8,534
Commercial lease financing		4,734		14		7		5		14		40		—		4,774

Total commercial loans	$	36,584	$	70	$	21	$	54	$	292	$	437	$	2	$	37,023


Real estate — residential mortgage	$	2,037	$	20	$	7	$	3	$	94	$	124	$	15	$	2,176
Home equity:
Key Community Bank		9,877		51		25		13		205		294		2		10,173
Other		347		7		3		2		16		28		—		375

Total home equity loans		10,224		58		28		15		221		322		2		10,548
Consumer other — Key Community Bank		1,403		9		3		6		3		21		—		1,424
Credit cards		680		6		4		—		11		21		—		701
Consumer other:
Marine		1,106		18		5		1		30		54		—		1,160
Other		65		2		—		1		1		4		—		69

Total consumer other		1,171		20		5		2		31		58		—		1,229

Total consumer loans	$	15,515	$	113	$	47	$	26	$	360	$	546	$	17	$	16,078


Total loans	$	52,099	$	183	$	68	$	80	$	652	$	983	$	19	$	53,101



December 31, 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	$	23,030	$	56	$	34	$	22	$	99	$	211	$	1	$	23,242
Commercial real estate:
Commercial mortgage		7,556		21		11		9		120		161		3		7,720
Construction		943		1		2		1		56		60		—		1,003

Total commercial real estate loans		8,499		22		13		10		176		221		3		8,723
Commercial lease financing		4,772		88		31		8		16		143		—		4,915

Total commercial loans	$	36,301	$	166	$	78	$	40	$	291	$	575	$	4	$	36,880


Real estate — residential mortgage	$	2,023	$	16	$	10	$	6	$	103	$	135	$	16	$	2,174
Home equity:
Key Community Bank		9,506		54		26		17		210		307		3		9,816
Other		387		9		4		2		21		36		—		423

Total home equity loans		9,893		63		30		19		231		343		3		10,239
Consumer other — Key Community Bank		1,325		9		5		8		2		24		—		1,349
Credit cards		706		7		5		—		11		23		—		729
Consumer other:
Marine		1,288		23		9		4		34		70		—		1,358
Other		87		2		1		1		2		6		—		93

Total consumer other		1,375		25		10		5		36		76		—		1,451

Total consumer loans	$	15,322	$	120	$	60	$	38	$	383	$	601	$	19	$	15,942


Total loans	$	51,623	$	286	$	138	$	78	$	674	$	1,176	$	23	$	52,822

(a)	Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.


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

LOAN TYPE
Commercial, financial and agricultural	$	20,678	$	60	$	13	$	24	$	141	$	238	$	20,916
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		5,051		22		8		7		18		55		5,106

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

The prevalent risk characteristic for 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 $19 million of PCI loans at June 30, 2013, based on bond rating, regulatory classification and payment activity as of June 30, 2013, and 2012 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)}	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012

AAA — AA	$	275	$	165	$	1		—	$	1	$	1	$	485	$	605	$	762	$	771
A		618		680		74	$	64		1		1		1,011		992		1,704		1,737
BBB — BB		21,355		18,182		6,600		5,925		871		791		3,046		3,179		31,872		28,077
B		560		868		364		553		23		58		145		197		1,092		1,676
CCC — C		907		1,021		433		867		164		321		87		133		1,591		2,342

Total	$	23,715	$	20,916	$	7,472	$	7,409	$	1,060	$	1,172	$	4,774	$	5,106	$	37,021	$	34,603

(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	2013		2012

Pass	$	12,374	$	11,831
Substandard		333		265

Total	$	12,707	$	12,096

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


June 30,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012

Performing	$	1,421	$	1,261	$	690		—	$	1,130	$	1,523	$	68	$	100	$	3,309	$	2,884
Nonperforming		3		2		11		—		30		19		1		1		45		22

Total	$	1,424	$	1,263	$	701		—	$	1,160	$	1,542	$	69	$	101	$	3,354	$	2,906

(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. Beginning in the second quarter of 2012, any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure or for which 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” on page 120 of our 2012 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, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

Although 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. 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. Credit card loans are charged off when payments are 180 days past due. All other consumer loans are charged off when payments are 120 days past due.

At June 30, 2013, the ALLL was $876 million, or 1.65% of loans, compared to $888 million, or 1.79% of loans, at June 30, 2012. At June 30, 2013, the ALLL was 134.36% of nonperforming loans, compared to 135.16% at June 30, 2012.

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	2013		2012		2013		2012

Balance at beginning of period — continuing operations	$	893	$	944	$	888	$	1,004
Charge-offs		(74)		(131)		(164)		(263)
Recoveries		29		54		70		85

Net loans and leases charged off		(45)		(77)		(94)		(178)
Provision for loan and lease losses from continuing operations		28		21		83		63
Foreign currency translation adjustment		—		—		(1)		(1)

Balance at end of period — continuing operations	$	876	$	888	$	876	$	888

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


in millions	December 31, 2012		Provision			Charge-offs		Recoveries		June 30, 2013

Commercial, financial and agricultural	$	327	$	35		$	(29)	$	19	$	352
Real estate — commercial mortgage		198		(10)			(16)		10		182
Real estate — construction		41		(13)			(2)		8		34
Commercial lease financing		55		6			(8)		8		61

Total commercial loans		621		18			(55)		45		629
Real estate — residential mortgage		30		13			(10)		—		33
Home equity:
Key Community Bank		105		19			(36)		6		94
Other		25		—			(12)		3		16

Total home equity loans		130		19			(48)		9		110
Consumer other — Key Community Bank		38		7			(16)		4		33
Credit cards		26		21			(16)		2		33
Consumer other:
Marine		39		4			(17)		9		35
Other		4		—			(2)		1		3

Total consumer other:		43		4			(19)		10		38

Total consumer loans		267		64			(109)		25		247

Total ALLL — continuing operations		888		82	^(a)		(164)		70		876
Discontinued operations		55		5			(28)		9		41

Total ALLL — including discontinued operations	$	943	$	87		$	(192)	$	79	$	917

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


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.

Our ALLL decreased by $12 million, or 1%, since the second quarter of 2012. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably over the past four quarters. The quality of new loan originations and decreasing NPLs and net charge-offs has resulted in a reduction in our general allowance. Our general allowance encompasses the application of expected loss rates to our existing loans with similar risk characteristics, an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends showed continued improvement during 2012 and into 2013. We attribute this improvement to a moderate level of loan growth, more favorable conditions in the capital markets, improvement in client income statements, and continued run off in our exit loan portfolio.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $464 million, with a corresponding allowance of $34 million at June 30, 2013. Loans outstanding collectively evaluated for impairment totaled $52.6 billion, with a corresponding allowance of $842 million at June 30, 2013. At June 30, 2013, PCI loans evaluated for impairment totaled $19 million, with a corresponding allowance of less than $1 million. There was no provision for loan and lease losses on these PCI loans during the quarter ended June 30, 2013.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2013, follows:


	Allowance						Outstanding
June 30, 2013 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired

Commercial, financial and agricultural	$	6	$	346		—	$	23,715		$	111	$	23,604		—
Commercial real estate:
Commercial mortgage		2		180		—		7,474			93		7,379	$	2

Construction		—		34		—		1,060			52		1,008		—

Total commercial real estate loans		2		214		—		8,534			145		8,387		2
Commercial lease financing		—		61		—		4,774			—		4,774		—

Total commercial loans		8		621		—		37,023			256		36,765		2
Real estate — residential mortgage		5		28		—		2,176			35		2,126		15
Home equity:
Key Community Bank		9		85		—		10,173			99		10,072		2
Other		1		15		—		375			13		362		—

Total home equity loans		10		100		—		10,548			112		10,434		2
Consumer other — Key Community Bank		—		33		—		1,424			3		1,421		—
Credit cards		—		33		—		701			4		697		—
Consumer other:
Marine		10		25		—		1,160			53		1,107		—
Other		1		2		—		69			1		68		—

Total consumer other		11		27		—		1,229			54		1,175		—

Total consumer loans		26		221		—		16,078			208		15,853		17

Total ALLL — continuing operations		34		842		—		53,101			464		52,618		19
Discontinued operations		2		39		—		4,992	^(a)		8		4,984		—

Total ALLL — including discontinued operations	$	36	$	881		—	$	58,093		$	472	$	57,602	$	19

(a)	Amount includes $2.5 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2012, follows:


	Allowance						Outstanding
December 31, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired

Commercial, financial and agricultural	$	12	$	314		—	$	23,242	$	65	$	23,176	$	1
Commercial real estate:
Commercial mortgage		1		198		—		7,720		96		7,621		3

Construction		—		41		—		1,003		48		955		—

Total commercial real estate loans		1		239		—		8,723		144		8,576		3
Commercial lease financing		—		55		—		4,915		—		4,915		—

Total commercial loans		13		608		—		36,880		209		36,667		4
Real estate — residential mortgage		1		29	$	1		2,174		38		2,120		16
Home equity:
Key Community Bank		11		94		—		9,816		87		9,726		3
Other		1		24		—		423		12		411		—

Total home equity loans		12		118		—		10,239		99		10,137		3
Consumer other — Key Community Bank		2		36		—		1,349		2		1,347		—
Credit cards		—		26		—		729		2		727		—
Consumer other:
Marine		7		32		—		1,358		60		1,298		—
Other		—		3		—		93		1		92

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