Edgar Filing: KEYCORP /NEW/

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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 September 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 x 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 x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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		896,671,849 Shares
Title of class		Outstanding at October 29, 2013

KEYCORP

TABLE OF CONTENTS


		Page Number

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		5

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

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

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

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

	Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 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		17

	Note 5. Fair Value Measurements		32

	Note 6. Securities		49

	Note 7. Derivatives and Hedging Activities		53

	Note 8. Mortgage Servicing Assets		61

	Note 9. Variable Interest Entities		63

	Note 10. Income Taxes		65

	Note 11. Acquisitions and Discontinued Operations		66

	Note 12. Securities Financing Activities		74

	Note 13. Employee Benefits		76

	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries		77

	Note 15. Contingent Liabilities and Guarantees		78

	Note 16. Accumulated Other Comprehensive Income		81

	Note 17. Shareholders’ Equity		82


	Note 18. Line of Business Results	83

	Report of Independent Registered Public Accounting Firm	87

Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	88

	Introduction	88
	Terminology	88
	Selected financial data	89
	Forward-looking statements	90
	Economic overview	91
	Long-term financial goals	92
	Strategic developments	93
	Demographics	93
	Supervision and regulation	95
	Regulatory reform developments	95
	Enhanced prudential standards and early remediation requirements	95
	Debit card and interchange fees and routing	95
	New regulatory capital rules	95
	Liquidity capital ratios	97
	New assessments, fees and other charges	97

	Highlights of Our Performance	97

	Financial performance	97
	Results of Operations	103
	Net interest income	103
	Noninterest income	106
	Trust and investment services income	108
	Investment banking and debt placement fees	108
	Operating lease income and other leasing gains	108
	Cards and payments income	108
	Other income	108
	Noninterest expense	109
	Personnel	109
	Operating lease expense	110
	Intangible asset amortization	110
	Other expense	110
	Income taxes	110

	Line of Business Results	111
	Key Community Bank summary of operations	111
	Key Corporate Bank summary of operations	112
	Other Segments	113

	Financial Condition	114
	Loans and loans held for sale	114
	Commercial loan portfolio	114
	*Commercial, financial and agricultural*	114
	*Commercial real estate loans*	115
	*Commercial lease financing*	116
	Commercial loan modification and restructuring	116
	*Extensions*	117
	*Guarantors*	118
	Consumer loan portfolio	118
	Loans held for sale	119
	Loan sales	119
	Securities	120


	Securities available-for-sale	121
	Held-to-maturity securities	122
	Other investments	123
	Deposits and other sources of funds	123
	Capital	124
	CCAR and capital actions	124
	Dividends	124
	Common shares outstanding	124
	Capital adequacy	125
	Regulatory capital rules	126

	Risk Management	128
	Overview	128
	Market risk management	130
	Trading market risk	130
	*Management of trading risks*	130
	*Covered positions*	130
	*VaR and stressed VaR*	131
	*Internal capital adequacy*	132
	Nontrading market risk	132
	*Net interest income simulation analysis*	133
	*Economic value of equity modeling*	134
	*Management of interest rate exposure*	134
	Liquidity risk management	135
	Governance structure	135
	Factors affecting liquidity	135
	Managing liquidity risk	136
	Long-term liquidity strategy	136
	Sources of liquidity	136
	Liquidity programs	136
	Liquidity for KeyCorp	137
	Our liquidity position and recent activity	137
	Credit risk management	138
	Credit policy, approval and evaluation	138
	Allowance for loan and lease losses	139
	Net loan charge-offs	141
	Nonperforming assets	143
	Operational risk management	146

	Critical Accounting Policies and Estimates	146

	European Sovereign Debt Exposure	148
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	149
Item 4.	Controls and Procedures	149

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	149
Item 1A.	Risk Factors	149
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	150
Item 6.	Exhibits	150
	Signature	151
	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	September 30, 2013			December 31, 2012			September 30, 2012
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	748		$	584		$	973
Short-term investments		3,535			3,940			2,208
Trading account assets		806			605			663
Securities available for sale		12,606			12,094			11,962
Held-to-maturity securities (fair value: $4,730, $3,992 and $4,212)		4,835			3,931			4,153
Other investments		1,007			1,064			1,106
Loans, net of unearned income of $827, $957 and $980		53,597			52,822			51,419
Less: Allowance for loan and lease losses		868			888			888

Net loans		52,729			51,934			50,531
Loans held for sale		699			599			628
Premises and equipment		890			965			942
Operating lease assets		293			288			290
Goodwill		979			979			979
Other intangible assets		137			171			182
Corporate-owned life insurance		3,384			3,333			3,309
Derivative assets		475			693			771
Accrued income and other assets (including $24 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		2,747			2,774			2,853
Discontinued assets (including $2,158 of consolidated education loan securitization trust VIEs (see Note 9) and $148 of loans in portfolio at fair value)^(a)		4,838			5,282			5,400

Total assets	$	90,708		$	89,236		$	86,950


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	33,132		$	32,380		$	30,573
Savings deposits		2,489			2,433			2,393
Certificates of deposit ($100,000 or more)		2,698			2,879			3,226
Other time deposits		3,833			4,575			4,941

Total interest-bearing		42,152			42,267			41,133
Noninterest-bearing		25,778			23,319			22,486
Deposits in foreign office — interest-bearing		605			407			569

Total deposits		68,535			65,993			64,188
Federal funds purchased and securities sold under repurchase agreements		1,455			1,609			1,746
Bank notes and other short-term borrowings		466			287			388
Derivative liabilities		450			584			657
Accrued expense and other liabilities		1,375			1,387			1,205
Long-term debt		6,154			6,847			6,119
Discontinued liabilities (including $2,037 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		2,037			2,220			2,368

Total liabilities		80,472			78,927			76,671

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		4,029			4,126			4,118
Retained earnings		7,431			6,913			6,762
Treasury stock, at cost (119,148,654, 91,201,285 and 80,775,030)		(2,193	)		(1,952	)		(1,868	)
Accumulated other comprehensive income (loss)		(369	)		(124	)		(69	)

Key shareholders’ equity		10,206			10,271			10,251
Noncontrolling interests		30			38			28

Total equity		10,236			10,309			10,279

Total liabilities and equity	$	90,708		$	89,236		$	86,950

(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	2013			2012			2013		2012
INTEREST INCOME
Loans	$	532		$	538		$	1,619	$	1,592
Loans held for sale		5			5			14		15
Securities available for sale		76			93			236		314
Held-to-maturity securities		22			21			60		50
Trading account assets		5			4			15		15
Short-term investments		1			1			4		4
Other investments		6			9			23		27

Total interest income		647			671			1,971		2,017

INTEREST EXPENSE
Deposits		37			60			124		208
Federal funds purchased and securities sold under repurchase agreements		1			1			2		3
Bank notes and other short-term borrowings		2			1			5		5
Long-term debt		29			37			98		138

Total interest expense		69			99			229		354


NET INTEREST INCOME		578			572			1,742		1,663
Provision (credit) for loan and lease losses		28			109			111		172

Net interest income (expense) after provision for loan and lease losses		550			463			1,631		1,491

NONINTEREST INCOME
Trust and investment services income		100			94			295		280
Investment banking and debt placement fees		86			83			249		217
Service charges on deposit accounts		73			74			213		212
Operating lease income and other leasing gains		43			66			85		176
Corporate services income		44			39			132		127
Cards and payments income		43			37			122		97
Corporate-owned life insurance income		26			26			87		86
Consumer mortgage income		3			11			16		29
Net gains (losses) from principal investing		17			11			32		70
Other income ^(a)		24			77			82		123

Total noninterest income		459			518			1,313		1,417

NONINTEREST EXPENSE
Personnel		414			399			1,211		1,148
Net occupancy		66			65			202		191
Computer processing		38			42			116		126
Business services and professional fees		37			48			109		136
Equipment		25			27			78		80
Operating lease expense		14			13			37		45
Marketing		16			18			33		48
FDIC assessment		7			7			23		23
Intangible asset amortization on credit cards		8			6			23		6
Other intangible asset amortization		4			3			11		5
Provision (credit) for losses on lending-related commitments		3			(8	)		11		(2	)
OREO expense, net		1			1			5		14
Other expense		83			91			249		264

Total noninterest expense		716			712			2,108		2,084

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		293			269			836		824
Income taxes		59			51			201		178

INCOME (LOSS) FROM CONTINUING OPERATIONS		234			218			635		646
Income (loss) from discontinued operations, net of taxes of $21, $1, $29, and $9 (see Note 11)		37			3			45		16

NET INCOME (LOSS)		271			221			680		662
Less: Net income (loss) attributable to noncontrolling interests		(1	)		2			—		7

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	272		$	219		$	680	$	655


Income (loss) from continuing operations attributable to Key common shareholders	$	229		$	211		$	618	$	623
Net income (loss) attributable to Key common shareholders		266			214			663		639

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.25		$	.23		$	.68	$	.66
Income (loss) from discontinued operations, net of taxes		.04			—			.05		.02
Net income (loss) attributable to Key common shareholders ^(b)		.29			.23			.73		.68

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.25		$	.22		$	.67	$	.66
Income (loss) from discontinued operations, net of taxes		.04			—			.05		.02
Net income (loss) attributable to Key common shareholders ^(b)		.29			.23			.72		.67

Cash dividends declared per common share	$	.055		$	.05		$	.16	$	.13

Weighted-average common shares outstanding (000)		901,904			936,223			911,918		943,378
Weighted-average common shares and potential common shares outstanding (000) ^(c)		928,854			940,764			917,579		947,582

(a)	For the three months ended September 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 Series A Preferred Stock, 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	2013			2012			2013			2012
Net income (loss)	$	271		$	221		$	680		$	662
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($48), ($17), ($135) and ($48)		(81	)		(28	)		(228	)		(81	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $6, $12, ($17) and $17		10			20			(29	)		28
Foreign currency translation adjustments, net of income taxes		2			9			(12	)		5
Net pension and postretirement benefit costs, net of income taxes		18			2			24			7

Total other comprehensive income (loss), net of tax		(51	)		3			(245	)		(41	)

Comprehensive income (loss)		220			224			435			621
Less: Comprehensive income attributable to noncontrolling interests		(1	)		2			—			7

Comprehensive income (loss) attributable to Key	$	221		$	222		$	435		$	614

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)														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 $17																				28
Foreign currency translation adjustments, net of income taxes																				5
Net pension and postretirement benefit costs, net of income taxes																				7
Deferred compensation											10
Cash dividends declared on common shares ($.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
Net contribution from (distribution to) noncontrolling interests																							4

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

BALANCE AT DECEMBER 31, 2012		2,905		925,769		$	291	$	1,017	$	4,126		$	6,913		$	(1,952	)	$	(124	)	$	38
Net income (loss)														680									—
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($135)																				(228	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($17)																				(29	)
Foreign currency translation adjustments, net of income taxes																				(12	)
Net pension and postretirement benefit costs, net of income taxes																				24
Deferred compensation											3
Cash dividends declared on common shares ($.16 per share)														(145	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share)														(17	)
Common shares repurchased				(33,940	)												(375	)
Common shares reissued (returned) for stock options and other employee benefit plans				5,992							(100	)					134
Net contribution from (distribution to) noncontrolling interests																							(8	)

BALANCE AT SEPTEMBER 30, 2013		2,905		897,821		$	291	$	1,017	$	4,029		$	7,431		$	(2,193	)	$	(369	)	$	30

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended September 30,
in millions	2013			2012
OPERATING ACTIVITIES
Net income (loss)	$	680		$	662
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		111			172
Provision (credit) for losses on lending-related commitments		11			(2	)
Provision (credit) for losses on LIHTC guaranteed funds		4			—
Depreciation, amortization and accretion expense, net		147			162
Stock-based compensation expense		27			38
FDIC (payments) net of FDIC expense		296			19
Deferred income taxes (benefit)		(4	)		36
Proceeds from sales of loans held for sale		3,821			3,737
Originations of loans held for sale, net of repayments		(3,779	)		(3,507	)
Net losses (gains) on sales of loans held for sale		(91	)		(93	)
Net losses (gains) from principal investing		(32	)		(70	)
Net losses (gains) and writedown on OREO		5			12
Net losses (gains) on leased equipment		(36	)		(109	)
Net losses (gains) on sales of fixed assets		9			—
Net decrease (increase) in trading account assets		(201	)		(40	)
Other operating activities, net		52			(369	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,020			648
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired		817			866
Proceeds from sale of Victory		72			—
Gain on sale of Victory		(92	)		—
Net decrease (increase) in short-term investments		405			1,311
Purchases of securities available for sale		(4,628	)		(232	)
Proceeds from sales of securities available for sale		29			1
Proceeds from prepayments and maturities of securities available for sale		3,725			4,159
Proceeds from prepayments and maturities of held-to-maturity securities		667			437
Purchases of held-to-maturity securities		(1,572	)		(2,481	)
Purchases of other investments		(30	)		(48	)
Proceeds from sales of other investments		39			17
Proceeds from prepayments and maturities of other investments		82			134
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(1,077	)		(1,342	)
Proceeds from sales of portfolio loans		150			207
Purchases of premises and equipment		(60	)		(101	)
Proceeds from sales of premises and equipment		8			1
Proceeds from sales of other real estate owned		19			55

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(1,446	)		2,984
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		1,605			184
Net increase (decrease) in short-term borrowings		26			86
Net proceeds from issuance of long-term debt		1,013			59
Payments on long-term debt		(1,540	)		(3,381	)
Repurchase of Common Shares		(375	)		(163	)
Net proceeds from reissuance of Common Shares		22			2
Tax benefits in excess of reorganized compensation costs for share-based payment		1			—
Cash dividends paid		(162	)		(139	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		590			(3,352	)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		164			280
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		584			693

CASH AND DUE FROM BANKS AT END OF PERIOD	$	748		$	973

Additional disclosures relative to cash flows:
Interest paid	$	271		$	302
Income taxes paid (refunded)		114			39
Noncash items:
Assets acquired	$	41		$	1,194
Liabilities assumed		—			2,059
Loans transferred to portfolio from held for sale		2			41
Loans transferred to held for sale from portfolio		53			80
Loans transferred to other real estate owned		16			32

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.		MSRs: Mortgage servicing rights.
A/LM: Asset/liability management.		N/A: Not applicable.
AOCI: Accumulated other comprehensive income (loss).		NASDAQ: The NASDAQ Stock Market LLC.
APBO: Accumulated postretirement benefit obligation.		N/M: Not meaningful.
Austin: Austin Capital Management, Ltd.		NOW: Negotiable Order of Withdrawal.
BHCA: Bank Holding Company Act of 1956, as amended.		NPR: Notice of proposed rulemaking.
BHCs: Bank holding companies.		NYSE: New York Stock Exchange.
CCAR: Comprehensive Capital Analysis and Review.		OCC: Office of the Comptroller of the Currency.
CFPB: Bureau of Consumer Financial Protection.		OCI: Other comprehensive income (loss).
CFTC: Commodities Futures Trading Commission.		OFR: Office of Financial Research of the U.S. Department of
CMBS: Commercial mortgage-backed securities.		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

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 was 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.

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”).

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”).

Accounting Guidance Pending Adoption at September 30, 2013

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

Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each common share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each common share outstanding during the reporting periods adjusted to include the effects of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for the conversion of our convertible Series A Preferred Stock, stock options, and other stock-based awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. For diluted earnings per share, net income available to common shareholders can be affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the amount of preferred dividends associated with our Series A Preferred Stock. For the three months ended September 30, 2013, weighted-average common shares and potential common shares outstanding included 20.6 million shares associated with the conversion of our Series A Preferred Stock and 6.4 million shares associated with common share options and other stock awards.

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	2013			2012		2013		2012
EARNINGS
Income (loss) from continuing operations	$	234		$	218	$	635	$	646
Less: Net income (loss) attributable to noncontrolling interests		(1	)		2		—		7

Income (loss) from continuing operations attributable to Key		235			216		635		639
Less: Dividends on Series A Preferred Stock		6			5		17		16

Income (loss) from continuing operations attributable to Key common shareholders		229			211		618		623
Income (loss) from discontinued operations, net of taxes^(a)		37			3		45		16

Net income (loss) attributable to Key common shareholders	$	266		$	214	$	663	$	639

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		901,904			936,223		911,918		943,378
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)		26,950			4,541		5,661		4,204

Weighted-average common shares and potential common shares outstanding (000)		928,854			940,764		917,579		947,582

EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.25		$	.23	$	.68	$	.66
Income (loss) from discontinued operations, net of taxes ^(a)		.04			—		.05		.02
Net income (loss) attributable to Key common shareholders^(b)		.29			.23		.73		.68

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.25		$	.22	$	.67	$	.66
Income (loss) from discontinued operations, net of taxes ^(a)		.04			—		.05		.02
Net income (loss) attributable to Key common shareholders — assuming dilution ^(b)		.29			.23		.72		.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. 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	September 30, 2013		December 31, 2012		September 30, 2012
Commercial, financial and agricultural^(a)	$	24,317	$	23,242	$	21,979
Commercial real estate:
Commercial mortgage		7,544		7,720		7,529
Construction		1,058		1,003		1,067

Total commercial real estate loans		8,602		8,723		8,596
Commercial lease financing		4,550		4,915		4,960

Total commercial loans		37,469		36,880		35,535
Residential — prime loans:
Real estate — residential mortgage		2,198		2,174		2,138
Home equity:
Key Community Bank		10,285		9,816		9,768
Other		353		423		409	^(d)

Total home equity loans		10,638		10,239		10,177

Total residential — prime loans		12,836		12,413		12,315
Consumer other — Key Community Bank		1,440		1,349		1,313
Credit cards		698		729		710
Consumer other:
Marine		1,083		1,358		1,448
Other		71		93		98

Total consumer other		1,154		1,451		1,546

Total consumer loans		16,128		15,942		15,884

Total loans ^{(b) (c)}	$	53,597	$	52,822	$	51,419

(a)	September 30, 2013, December 31, 2012, and September 30, 2012 loan balances include $96 million, $90 million, and $88 million of commercial credit card balances, respectively.

(b)	Excluded at September 30, 2013, December 31, 2012, and September 30, 2012, are loans in the amount of $4.7 billion, $5.2 billion, and $5.3 billion, respectively, related to the discontinued operations of the education lending business.

(c)

September 30, 2013 loan balance includes purchased loans of $176 million of which $18 million were PCI loans. December 31, 2012 loan balance includes purchased loans of $217 million of which $23 million were PCI loans. September 30, 2012 loan balance includes purchased loans of $231 million of which $25 million were PCI loans.

(d)	This loan category was impacted by $45 million in net loan charge-offs taken during the third quarter of 2012 related to updated regulatory guidance.

Our loans held for sale are summarized as follows:


	September 30,		December 31,		September 30,
in millions	2013		2012		2012
Commercial, financial and agricultural	$	68	$	29	$	13
Real estate — commercial mortgage		608		477		484
Real estate — construction		—		—		10
Commercial lease financing		—		8		4
Real estate — residential mortgage		23		85		117

Total loans held for sale	$	699	$	599	$	628

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


in millions	September 30, 2013			December 31, 2012			September 30, 2012
Balance at beginning of the period	$	402		$	628		$	656
New originations		1,467			1,686			1,280
Transfers from held to maturity, net		15			38			13
Loan sales		(1,181	)		(1,747	)		(1,311	)
Loan draws (payments), net		(4	)		(4	)		(9	)
Transfers to OREO / valuation adjustments		—			(2	)		(1	)

Balance at end of period	$	699		$	599		$	628

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	September 30, 2013		December 31, 2012		September 30, 2012
Total nonperforming loans^{(a), (b)}	$	541	$	674	$	653
Nonperforming loans held for sale		13		25		19
OREO		15		22		29
Other nonperforming assets		10		14		17

Total nonperforming assets	$	579	$	735	$	718


Nonperforming assets from discontinued operations — education lending^(c)	$	23	$	20	$	22

Restructured loans included in nonperforming loans^(a)	$	228	$	249	$	217
Restructured loans with an allocated specific allowance^(d)		104		114		78
Specifically allocated allowance for restructured loans^(e)		46		33		31

Accruing loans past due 90 days or more	$	90	$	78	$	89
Accruing loans past due 30 through 89 days		288		424		354

(a)

December 31, 2012 and September 30, 2012 loan balance includes $72 million and $38 million of current, paying as originally agreed, secured loans respectively, 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)	September 30, 2013, December 31, 2012 and September 30, 2012 loan balances exclude $18 million, $23 million and $25 million of PCI loans, respectively.

(c)	Includes approximately $11 million, $3 million and $3 million of restructured loans at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. 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 September 30, 2013, the outstanding unpaid principal balance and carrying value of all PCI loans was $25 million and $18 million, respectively. Changes in the accretable yield during 2013 included accretion of $1 million and net reclassifications of $1 million, resulting in an ending balance of $5 million at September 30, 2013.

At September 30, 2013, the approximate carrying amount of our commercial nonperforming loans outstanding represented 61% of their original contractual amount, total nonperforming loans outstanding represented 74% of their original contractual amount owed, and nonperforming assets in total were carried at 72% of their original contractual amount.

At September 30, 2013, our twenty largest nonperforming loans totaled $119 million, representing 22% of total loans on nonperforming status from continuing operations. At September 30, 2012, the twenty largest nonperforming loans totaled $202 million, representing 31% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $18 million for the nine months ended September 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 September 30, 2013, December 31, 2012 and September 30, 2012:


September 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	$	58	$	116		—	$	74
Commercial real estate:
Commercial mortgage		43		80		—		66
Construction		41		124		—		45

Total commercial real estate loans		84		204		—		111

Total commercial loans with no related allowance recorded		142		320		—		185

Real estate — residential mortgage		16		16		—		16

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

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

Total consumer other		3		3		—		3

Total consumer loans		90		90		—		90

Total loans with no related allowance recorded		232		410		—		275

With an allowance recorded:
Commercial, financial and agricultural		50		51	$	17		36
Commercial real estate:
Commercial mortgage		3		3		1		4
Construction		3		13		—		2

Total commercial real estate loans		6		16		1		6

Total commercial loans with an allowance recorded		56		67		18		42


Real estate — residential mortgage		20		20		6		20

Home equity:
Key Community Bank		33		33		10		32
Other		11		11		2		10

Total home equity loans		44		44		12		42

Consumer other — Key Community Bank		3		3		—		3
Credit cards		6		6		1		5
Consumer other:
Marine		49		49		10		50
Other		1		1		—		1

Total consumer other		50		50		10		51

Total consumer loans		123		123		29		121

Total loans with an allowance recorded		179		190		47		163

Total	$	411	$	600	$	47	$	438

(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.


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)

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

For the nine months ended September 30, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $5 million and $4 million, respectively.

At September 30, 2013, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $349 million, compared to $320 million at December 31, 2012, and $323 million at September 30, 2012. We added $143 million in restructured loans during the first nine months of 2013, which were offset by $114 million in payments and charge-offs.

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


September 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		39	$	96	$	63
Commercial real estate:
Real estate — commercial mortgage		14		51		17
Real estate — construction		6		19		4

Total commercial real estate loans		20		70		21

Total commercial loans		59		166		84
Real estate — residential mortgage		401		24		24
Home equity:
Key Community Bank		1,677		89		85
Other		237		6		6

Total home equity loans		1,914		95		91
Consumer other — Key Community Bank		40		2		1
Credit cards		689		5		5
Consumer other:
Marine		346		42		22
Other		46		1		1

Total consumer other		392		43		23

Total consumer loans		3,436		169		144

Total nonperforming TDRs		3,495		335		228

Prior-year accruing^(a)
Commercial, financial and agricultural		68		9		4
Commercial real estate:
Real estate — commercial mortgage		3		17		12
Real estate — construction		1		23		35

Total commercial real estate loans		4		40		47

Total commercial loans		72		49		51
Real estate — residential mortgage		118		13		13
Home equity:
Key Community Bank		162		18		17
Other		214		6		6

Total home equity loans		376		24		23
Consumer other — Key Community Bank		32		1		1
Credit cards		267		2		2
Consumer other:
Marine		276		32		30
Other		56		1		1

Total consumer other		332		33		31

Total consumer loans		1,125		73		70

Total prior-year accruing TDRs		1,197		122		121

Total TDRs		4,692	$	457	$	349

(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 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.

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 138 consumer loan TDRs with a combined recorded investment of $7 million that have experienced payment defaults during the three months ended September 30, 2013 compared to 127 consumer TDRs with a combined recorded investment of $5 million during the three months ended June 30, 2013 from modifications resulting in TDR status during 2012. There were no significant payment defaults during the first nine 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 determined to have been made as defined in 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	September 30, 2013		December 31, 2012		September 30, 2012
Commercial loans:
Interest rate reduction	$	104	$	104	$	145
Forgiveness of principal		5		7		7
Other modification of loan terms		26		7		14

Total	$	135	$	118	$	166


Consumer loans:
Interest rate reduction	$	110	$	122	$	92
Forgiveness of principal		5		6		7
Other modification of loan terms		99		74		58

Total	$	214	$	202	$	157


Total commercial and consumer TDRs^(a)	$	349	$	320	$	323
Total loans		53,597		52,822		51,419

(a)	Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $26 million, $32 million, and $47 million at September 30, 2013, December 31, 2012, and September 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 represented. As of September 30, 2013, in order to be consistent with other unsecured product treatment, the credit card loans nonaccrual policy was revised from 90 day past due status to placement on nonaccrual (and charge off) at 180 days past due.

At September 30, 2013, approximately $52.7 billion, or 98.3%, of our total loans are current. At September 30, 2013, total past due loans and nonperforming loans of $919 million represent approximately 1.7% of total loans.

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


September 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	$	24,161	$	33	$	9	$	12	$	102	$	156		—	$	24,317
Commercial real estate:
Commercial mortgage		7,429		22		2		31		58		113	$	2		7,544
Construction		1,038		3		—		—		17		20		—		1,058

Total commercial real estate loans		8,467		25		2		31		75		133		2		8,602
Commercial lease financing		4,472		41		7		8		22		78		—		4,550

Total commercial loans	$	37,100	$	99	$	18	$	51	$	199	$	367	$	2	$	37,469


Real estate — residential mortgage	$	2,045	$	22	$	9	$	10	$	98	$	139	$	14	$	2,198
Home equity:
Key Community Bank		9,994		50		29		12		198		289		2		10,285
Other		327		8		3		2		13		26		—		353

Total home equity loans		10,321		58		32		14		211		315		2		10,638
Consumer other — Key Community Bank		1,419		8		5		6		2		21		—		1,440
Credit cards		675		7		4		8		4		23		—		698
Consumer other:
Marine		1,034		17		6		1		25		49		—		1,083
Other		66		2		1		—		2		5		—		71

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