Edgar Filing: KEYCORP /NEW/

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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

March 31, 2014

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		883,301,030 Shares
Title of class		Outstanding at April 28, 2014

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets — March 31, 2014 (Unaudited), December 31, 2013, and March 31, 2013 (Unaudited)	6

	Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2014, and 2013	7

	Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2014, and 2013	8

	Consolidated Statements of Changes in Equity (Unaudited) — Three months ended March 31, 2014, and 2013	9

	Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2014, and 2013	10

	Notes to Consolidated Financial Statements (Unaudited)	11

	Note 1. Basis of Presentation	11

	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	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	72


	Note 13. Employee Benefits	74

	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	75

	Note 15. Contingent Liabilities and Guarantees	76

	Note 16. Accumulated Other Comprehensive Income	79

	Note 17. Shareholders’ Equity	81

	Note 18. Line of Business Results	82

	Report of Independent Registered Public Accounting Firm	86

Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	87

	Introduction	87
	Terminology	87
	Selected financial data	88
	Forward-looking statements	89
	Economic overview	90
	Long-term financial goals	91
	Strategic developments	91
	Demographics	92
	Supervision and regulation	94
	Regulatory reform developments	94
	Enhanced prudential standards and early remediation requirements	94
	Debit card and interchange fees and routing	94
	Regulatory capital rules	94

	Highlights of Our Performance	96
	Financial performance	96
	Results of Operations	101
	Net interest income	101
	Noninterest income	105
	Trust and investment services income	105
	Investment banking and debt placement fees	106
	Service charges on deposit accounts	106
	Operating lease income and other leasing gains	106
	Cards and payments income	106
	Consumer mortgage income	106
	Mortgage servicing fees	106
	Other income	106
	Noninterest expense	106
	Personnel	107
	Operating lease expense	107
	Other expense	107
	Income taxes	108


		Line of Business Results		109
		Key Community Bank summary of operations		109
		Key Corporate Bank summary of operations		110
		Other Segments		111

		Financial Condition		112
		Loans and loans held for sale		112
		Commercial loan portfolio		112
		*Commercial, financial and agricultural*		112
		*Commercial real estate loans*		113
		*Commercial lease financing*		114
		Commercial loan modification and restructuring		114
		*Extensions*		115
		*Guarantors*		116
		Consumer loan portfolio		116
		Loans held for sale		117
		Loan sales		117
		Securities		118
		Securities available-for-sale		119
		Held-to-maturity securities		120
		Other investments		120
		Deposits and other sources of funds		121
		Capital		121
		CCAR and capital actions		121
		Dividends		121
		Common shares outstanding		121
		Capital adequacy		122

		Risk Management		125
		Overview		125
		Market risk management		126
		Trading market risk		126
		*Management of trading risks*		126
		*Covered positions*		126
		*VaR and stressed VaR*		127
		*Internal capital adequacy*		128
		Nontrading market risk		128
		*Net interest income simulation analysis*		129
		*Economic value of equity modeling*		130
		*Management of interest rate exposure*		130
		Liquidity risk management		131
		Governance structure		131
		Factors affecting liquidity		131
		Managing liquidity risk		132
		Long-term liquidity strategy		132
		Sources of liquidity		133
		Liquidity programs		133
		Liquidity for KeyCorp		133
		Our liquidity position and recent activity		133


	Credit risk management	134
	Credit policy, approval, and evaluation	134
	Allowance for loan and lease losses	135
	Net loan charge-offs	136
	Nonperforming assets	139
	Operational risk management	141
	Cybersecurity	142

	Critical Accounting Policies and Estimates	142

	European Sovereign Debt Exposure	143
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	144
Item 4.	Controls and Procedures	144

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	144
Item 1A.	Risk Factors	144
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	145
Item 6.	Exhibits	145
	Signature	146
	Exhibits	147

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 11.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets


in millions, except per share data	March 31, 2014			December 31, 2013			March 31, 2013
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	409		$	617		$	621
Short-term investments		2,922			5,590			3,081
Trading account assets		840			738			701
Securities available for sale		12,359			12,346			13,496
Held-to-maturity securities (fair value: $4,733, $4,617, and $3,779)		4,826			4,756			3,721
Other investments		899			969			1,059
Loans, net of unearned income of $776, $805, and $923		55,445			54,457			52,574
Less: Allowance for loan and lease losses		834			848			893

Net loans		54,611			53,609			51,681
Loans held for sale		401			611			434
Premises and equipment		862			885			930
Operating lease assets		294			305			309
Goodwill		979			979			979
Other intangible assets		117			127			159
Corporate-owned life insurance		3,425			3,408			3,352
Derivative assets		427			407			609
Accrued income and other assets (including $15 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		3,004			3,015			2,884
Discontinued assets (including $1,912 of consolidated education loan securitization trust VIEs (see Note 9) and $143 of loans in portfolio at fair value)^(a)		4,427			4,572			5,182

Total assets	$	90,802		$	92,934		$	89,198


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	34,373		$	33,952		$	32,700
Savings deposits		2,513			2,472			2,546
Certificates of deposit ($100,000 or more)		2,849			2,631			2,998
Other time deposits		3,682			3,648			4,324

Total interest-bearing deposits		43,417			42,703			42,568
Noninterest-bearing deposits		23,244			26,001			21,564
Deposits in foreign office — interest-bearing		605			558			522

Total deposits		67,266			69,262			64,654
Federal funds purchased and securities sold under repurchase agreements		1,417			1,534			1,950
Bank notes and other short-term borrowings		464			343			378
Derivative liabilities		408			414			524
Accrued expense and other liabilities		1,297			1,557			1,352
Long-term debt		7,712			7,650			7,785
Discontinued liabilities (including $1,816 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		1,819			1,854			2,176

Total liabilities		80,383			82,614			78,819

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		3,961			4,022			4,059
Retained earnings		7,793			7,606			7,065
Treasury stock, at cost (132,100,665, 126,245,538, and 94,388,605 shares)		(2,335	)		(2,281	)		(1,930	)
Accumulated other comprehensive income (loss)		(324	)		(352	)		(162	)

Key shareholders’ equity		10,403			10,303			10,340
Noncontrolling interests		16			17			39

Total equity		10,419			10,320			10,379

Total liabilities and equity	$	90,802		$	92,934		$	89,198

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended March 31,
dollars in millions, except per share amounts	2014			2013
INTEREST INCOME
Loans	$	519		$	548
Loans held for sale		4			4
Securities available for sale		72			80
Held-to-maturity securities		22			18
Trading account assets		6			6
Short-term investments		1			2
Other investments		6			9

Total interest income		630			667

INTEREST EXPENSE
Deposits		32			45
Federal funds purchased and securities sold under repurchase agreements		1			1
Bank notes and other short-term borrowings		2			1
Long-term debt		32			37

Total interest expense		67			84


NET INTEREST INCOME		563			583
Provision (credit) for loan and lease losses		6			55

Net interest income (expense) after provision for loan and lease losses		557			528

NONINTEREST INCOME
Trust and investment services income		98			95
Investment banking and debt placement fees		84			79
Service charges on deposit accounts		63			69
Operating lease income and other leasing gains		29			25
Corporate services income		42			45
Cards and payments income		38			37
Corporate-owned life insurance income		26			30
Consumer mortgage income		2			7
Mortgage servicing fees		15			8
Net gains (losses) from principal investing		24			8
Other income^(a)		14			22

Total noninterest income		435			425

NONINTEREST EXPENSE
Personnel		388			391
Net occupancy		64			64
Computer processing		38			39
Business services and professional fees		41			35
Equipment		24			26
Operating lease expense		10			12
Marketing		5			6
FDIC assessment		6			8
Intangible asset amortization		10			12
Provision (credit) for losses on lending-related commitments		(2	)		3
OREO expense, net		1			3
Other expense		77			82

Total noninterest expense		662			681

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		330			272
Income taxes		92			70

INCOME (LOSS) FROM CONTINUING OPERATIONS		238			202
Income (loss) from discontinued operations, net of taxes of $2 and $4 (see Note 11)		4			3

NET INCOME (LOSS)		242			205
Less: Net income (loss) attributable to noncontrolling interests		—			1

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	242		$	204


Income (loss) from continuing operations attributable to Key common shareholders	$	232		$	196
Net income (loss) attributable to Key common shareholders		236			199

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.26		$	.21
Income (loss) from discontinued operations, net of taxes		—			—
Net income (loss) attributable to Key common shareholders ^(b)		.27			.22

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.26		$	.21
Income (loss) from discontinued operations, net of taxes		—			—
Net income (loss) attributable to Key common shareholders ^(b)		.26			.21

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

Weighted-average common shares outstanding (000)		884,727			920,316
Weighted-average common shares and potential common shares outstanding (000)^(c)		891,890			926,051

(a)	For the three months ended March 31, 2014, and 2013, net securities gains (losses) totaled less than $1 million. For the three months ended March 31, 2014, and 2013, 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 March 31,
in millions	2014			2013
Net income (loss)	$	242		$	205
Other comprehensive income (loss), net of tax:

Net unrealized gains (losses) on securities available for sale, net of income taxes of $17 and ($13)		29			(22	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($1) and ($5)		(1	)		(8	)
Foreign currency translation adjustments, net of income taxes of ($4) and ($2)		(2	)		(11	)
Net pension and postretirement benefit costs, net of income taxes of $2 and $2		2			3

Total other comprehensive income (loss), net of tax		28			(38	)

Comprehensive income (loss)		270			167
Less: Comprehensive income attributable to noncontrolling interests		—			1

Comprehensive income (loss) attributable to Key	$	270		$	166

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, 2012		2,905		925,769		$	291	$	1,017	$	4,126		$	6,913		$	(1,952	)	$	(124	)	$	38
Net income (loss)														204									1
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($13)																				(22	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($5)																				(8	)
Foreign currency translation adjustments, net of income taxes of ($2)																				(11	)
Net pension and postretirement benefit costs, net of income taxes of $2																				3
Deferred compensation											4
Cash dividends declared on common shares ($.05 per share)														(47	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($1.9375 per share)														(5	)
Common shares repurchased				(6,790	)												(65	)
Common shares reissued (returned) for stock options and other employee benefit plans				3,602							(71	)					87

BALANCE AT MARCH 31, 2013		2,905		922,581		$	291	$	1,017	$	4,059		$	7,065		$	(1,930	)	$	(162	)	$	39

BALANCE AT DECEMBER 31, 2013		2,905		890,724		$	291	$	1,017	$	4,022		$	7,606		$	(2,281	)	$	(352	)	$	17

Net income (loss)														242									—
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $17																				29
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($1)																				(1	)
Foreign currency translation adjustments, net of income taxes of ($4)																				(2	)
Net pension and postretirement benefit costs, net of income taxes of $2																				2
Deferred compensation											(4	)
Cash dividends declared on common shares ($.055 per share)														(49	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($1.9375 per share)														(6	)
Common shares repurchased				(9,845	)												(130	)
Common shares reissued (returned) for stock options and other employee benefit plans				3,990							(57	)					76
Net contribution from (distribution to) noncontrolling interests																							(1	)

BALANCE AT MARCH 31, 2014		2,905		884,869		$	291	$	1,017	$	3,961		$	7,793		$	(2,335	)	$	(324	)	$	16

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended March 31,
in millions	2014			2013
OPERATING ACTIVITIES
Net income (loss)	$	242		$	205
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		6			55
Provision (credit) for losses on lending-related commitments		(2	)		3
Provision (credit) for losses on LIHTC guaranteed funds		(6	)		—
Depreciation, amortization and accretion expense, net		52			44
Increase in cash surrender value of corporate-owned life insurance		(24	)		(25	)
Stock-based compensation expense		11			10
FDIC reimbursement (payments), net of FDIC expense		(1	)		7
Deferred income taxes (benefit)		40			32
Proceeds from sales of loans held for sale		611			1,287
Originations of loans held for sale, net of repayments		(383	)		(1,075	)
Net losses (gains) on sales of loans held for sale		(15	)		(29	)
Net losses (gains) from principal investing		(24	)		(8	)
Net losses (gains) and writedown on OREO		1			3
Net losses (gains) on leased equipment		(14	)		(7	)
Net losses (gains) on sales of fixed assets		—			3
Net decrease (increase) in trading account assets		(102	)		(96	)
Other operating activities, net		(236	)		(178	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		156			231
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments		2,668			859
Purchases of securities available for sale		(618	)		(2,755	)
Proceeds from sales of securities available for sale		—			3
Proceeds from prepayments and maturities of securities available for sale		650			1,315
Proceeds from prepayments and maturities of held-to-maturity securities		180			210
Purchases of held-to-maturity securities		(250	)		—
Purchases of other investments		(17	)		(11	)
Proceeds from sales of other investments		122			3
Proceeds from prepayments and maturities of other investments		2			20
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(1,029	)		136
Proceeds from sales of portfolio loans		21			57
Proceeds from corporate-owned life insurance		6			6
Purchases of premises, equipment, and software		(11	)		(12	)
Proceeds from sales of premises and equipment		1			8
Proceeds from sales of other real estate owned		5			5

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,730			(156	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		(1,996	)		(1,339	)
Net increase (decrease) in short-term borrowings		4			433
Net proceeds from issuance of long-term debt		78			1,007
Payments on long-term debt		(10	)		(30	)
Repurchase of common shares		(130	)		(65	)
Net proceeds from issuance of common shares		15			8
Cash dividends paid		(55	)		(52	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(2,094	)		(38	)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(208	)		37
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		617			584

CASH AND DUE FROM BANKS AT END OF PERIOD	$	409		$	621

Additional disclosures relative to cash flows:
Interest paid	$	103		$	110
Income taxes paid (refunded)		10			25
Noncash items:
Secured borrowing less lease reductions	$	6			—
Loans transferred to portfolio from held for sale		2		$	1
Loans transferred to held for sale from portfolio		5			20
Loans transferred to other real estate owned		3			7

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 “2013 Form 10-K” refer to our Form 10-K for the year ended December 31, 2013, 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).


AICPA: American Institute of Certified Public Accountants.		Moody’s: Moody’s Investor Services, Inc.
ALCO: Asset/Liability Management Committee.		MSRs: Mortgage servicing rights.
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.		NPLs: Nonperforming loans.
BHCs: Bank holding companies.		NPR: Notice of proposed rulemaking.
CCAR: Comprehensive Capital Analysis and Review.		NYSE: New York Stock Exchange.
CMBS: Commercial mortgage-backed securities.		OCC: Office of the Comptroller of the Currency.
CMO: Collateralized mortgage obligation.		OCI: Other comprehensive income (loss).
Common shares: KeyCorp common shares, $1 par value.		OREO: Other real estate owned.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and		OTTI: Other-than-temporary impairment.
Consumer Protection Act of 2010.		QSPE: Qualifying special purpose entity.
EPS: Earnings per share.		PBO: Projected benefit obligation.
ERISA: Employee Retirement Income Security Act of 1974.		PCCR: Purchased credit card relationship.
ERM: Enterprise risk management.		PCI: Purchased credit impaired.
EVE: Economic value of equity.		S&P: Standard and Poor’s Ratings Services, a Division of The
FASB: Financial Accounting Standards Board.		McGraw-Hill Companies, Inc.
FDIC: Federal Deposit Insurance Corporation.		SEC: U.S. Securities & Exchange Commission.
Federal Reserve: Board of Governors of the Federal Reserve		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
System.		Perpetual Convertible Preferred Stock, Series A.
FHLMC: Federal Home Loan Mortgage Corporation.		SIFIs: Systemically important financial institutions, including
FNMA: Federal National Mortgage Association.		BHCs with total consolidated assets of at least $50 billion
FOMC: Federal Open Market Committee of the Federal Reserve		and nonbank financial companies designated by FSOC for
Board.		supervision by the Federal Reserve.
FSOC: Financial Stability Oversight Council.		TDR: Troubled debt restructuring.
GAAP: U.S. generally accepted accounting principles.		TE: Taxable equivalent.
GNMA: Government National Mortgage Association.		U.S. Treasury: United States Department of the Treasury.
ISDA: International Swaps and Derivatives Association.		VaR: Value at risk.
KAHC: Key Affordable Housing Corporation.		VEBA: Voluntary Employee Beneficiary Association.
KEF: Key Equipment Finance.		Victory: Victory Capital Management and/or
KREEC: Key Real Estate Equity Capital, Inc.		Victory Capital Advisors.
LIBOR: London Interbank Offered Rate.		VIE: Variable interest entity.
LIHTC: Low-income housing tax credit.		XBRL: eXtensible Business Reporting Language.

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

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

We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (principal investing entities and Real Estate Capital line of business) 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 2013 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 2014

Presentation of unrecognized tax benefits. In July 2013, the FASB issued new accounting guidance that requires unrecognized tax benefits to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. This accounting guidance was applied prospectively to unrecognized tax benefits that existed at the effective date. It was effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide additional information regarding the presentation of our unrecognized tax benefits in Note 10 (“Income Taxes”).

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 was effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide the disclosures required by this new accounting guidance in Note 5 (“Fair Value Measurements”).

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 was 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.

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 was effective prospectively for reporting periods beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Accounting Guidance Pending Adoption at March 31, 2014

Discontinued operations. In April 2014, the FASB issued new accounting guidance that revises the criteria for determining when disposals should be reported as discontinued operations and modifies the disclosure requirements. This accounting guidance will be effective prospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Investments in qualified affordable housing projects. In January 2014, the FASB issued new accounting guidance that modifies the conditions that must be met to make an election to account for investments in qualified affordable housing projects using the proportional amortization method. This accounting guidance will be effective retrospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Troubled debt restructurings. In January 2014, the FASB issued new accounting guidance that clarifies the definition of when an in substance repossession or foreclosure occurs for purposes of creditor reclassification of residential real estate collateralized consumer mortgage loans by derecognizing the loan and recognizing the collateral asset. This accounting guidance will be effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and can be implemented using either a modified retrospective method or prospective method. Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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 March 31, 2014, weighted-average common shares and potential common shares outstanding included approximately 7 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 March 31,
dollars in millions, except per share amounts	2014		2013
EARNINGS
Income (loss) from continuing operations	$	238	$	202
Less: Net income (loss) attributable to noncontrolling interests		—		1

Income (loss) from continuing operations attributable to Key		238		201
Less: Dividends on Series A Preferred Stock		6		5

Income (loss) from continuing operations attributable to Key common shareholders		232		196
Income (loss) from discontinued operations, net of taxes^(a)		4		3

Net income (loss) attributable to Key common shareholders	$	236	$	199

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		884,727		920,316
Effect of dilutive convertible preferred stock, common share options and other stock awards (000)		7,163		5,735

Weighted-average common shares and potential common shares outstanding (000)		891,890		926,051

EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.26	$	.21
Income (loss) from discontinued operations, net of taxes^(a)		—		—
Net income (loss) attributable to Key common shareholders^(b)		.27		.22

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.26	$	.21
Income (loss) from discontinued operations, net of taxes^(a)		—		—
Net income (loss) attributable to Key common shareholders — assuming dilution^(b)		.26		.21

(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	March 31, 2014		December 31, 2013		March 31, 2013
Commercial, financial and agricultural^(a)	$	26,224	$	24,963	$	23,412
Commercial real estate:
Commercial mortgage		7,877		7,720		7,544
Construction		1,007		1,093		1,057

Total commercial real estate loans		8,884		8,813		8,601
Commercial lease financing^(b)		4,396		4,551		4,796

Total commercial loans		39,504		38,327		36,809
Residential — prime loans:
Real estate — residential mortgage		2,183		2,187		2,176
Home equity:
Key Community Bank		10,281		10,340		9,809
Other		315		334		401

Total home equity loans		10,596		10,674		10,210

Total residential — prime loans		12,779		12,861		12,386
Consumer other — Key Community Bank		1,436		1,449		1,353
Credit cards		698		722		693
Consumer other:
Marine		965		1,028		1,254
Other		63		70		79

Total consumer other		1,028		1,098		1,333

Total consumer loans		15,941		16,130		15,765

Total loans^{(c) (d)}	$	55,445	$	54,457	$	52,574

(a)	March 31, 2014, December 31, 2013, and March 31, 2013, loan balances include $95 million, $94 million, and $93 million of commercial credit card balances, respectively.

(b)

March 31, 2014, and December 31, 2013, commercial lease financing includes receivables of $124 million and $58 million, respectively, held as collateral for a secured borrowing. Principal reductions are based on the cash payments received from these related receivables. We expect to record additional commercial lease financing receivables held as collateral for a secured borrowing through the second quarter of 2014. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”) beginning on page 200 of our 2013 Form 10-K.

(c)

March 31, 2014, total loans include purchased loans of $159 million, of which $16 million were PCI loans. December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. March 31, 2013, total loans include purchased loans of $204 million, of which $22 million were PCI loans.

(d)	Excluded at March 31, 2014, December 31, 2013, and March 31, 2013, are loans in the amount of $4.4 billion, $4.5 billion, and $5.1 billion related to the discontinued operations of the education lending business, respectively.

Our loans held for sale are summarized as follows:


in millions	March 31, 2014		December 31, 2013		March 31, 2013
Commercial, financial and agricultural	$	44	$	278	$	180
Real estate — commercial mortgage		333		307		196
Commercial lease financing		8		9		9
Real estate — residential mortgage		16		17		49

Total loans held for sale	$	401	$	611	$	434

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


in millions	March 31, 2014			December 31, 2013			March 31, 2013
Balance at beginning of the period	$	611		$	699		$	599
New originations		645			1,669			1,075
Transfers from held to maturity, net		3			1			19
Loan sales		(596	)		(1,750	)		(1,257	)
Loan draws (payments), net		(262	)		(8	)		—
Transfers to OREO / valuation adjustments		—			—			(2	)

Balance at end of period	$	401		$	611		$	434

4. Asset Quality

We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by management.

Our nonperforming assets and past due loans were as follows:


in millions	March 31, 2014		December 31, 2013		March 31, 2013
Total nonperforming loans^(a)	$	449	$	508	$	650
Nonperforming loans held for sale		1		1		23
OREO		12		15		21
Other nonperforming assets		7		7		11

Total nonperforming assets	$	469	$	531	$	705

Nonperforming assets from discontinued operations — education lending^(b)	$	20	$	25	$	15

Restructured loans included in nonperforming loans	$	178	$	214	$	178
Restructured loans with an allocated specific allowance^(c)		51		71		52
Specifically allocated allowance for restructured loans^(d)		32		35		30
Accruing loans past due 90 days or more	$	89	$	71	$	83
Accruing loans past due 30 through 89 days		267		318		368

(a)	March 31, 2014, December 31, 2013, and March 31, 2013, loan balances exclude $16 million, $16 million, and $22 million of PCI loans, respectively.

(b)	Includes restructured loans of approximately $15 million, $13 million, and $4 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.

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

(d)	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 all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $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 March 31, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $23 million and $16 million, respectively. Changes in the accretable yield during the first quarter of 2014 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at March 31, 2014.

At March 31, 2014, the approximate carrying amount of our commercial nonperforming loans outstanding represented 53% of their original contractual amount, total nonperforming loans outstanding represented 70% of their original contractual amount owed, and nonperforming assets in total were carried at 68% of their original contractual amount.

At March 31, 2014, our twenty largest nonperforming loans totaled $75 million, representing 17% of total loans on nonperforming status. At March 31, 2013, the twenty largest nonperforming loans totaled $194 million, representing 30% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $4 million for the three months ended March 31, 2014, and $23 million for the year ended December 31, 2013.

The following tables set forth a further breakdown of individually impaired loans as of March 31, 2014, December 31, 2013, and March 31, 2013:


			Unpaid				Average
March 31, 2014	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	33	$	60		—	$	33
Commercial real estate:
Commercial mortgage		23		28		—		22
Construction		7		17		—		27

Total commercial real estate loans		30		45		—		49

Total commercial loans		63		105		—		82

Real estate — residential mortgage		26		26		—		26

Home equity:
Key Community Bank		70		70		—		69
Other		2		2		—		2

Total home equity loans		72		72		—		71
Consumer other:
Marine		2		2		—		3

Total consumer other		2		2		—		3

Total consumer loans		100		100		—		100

Total loans with no related allowance recorded		163		205		—		182

With an allowance recorded:
Commercial, financial and agricultural		7		10	$	2		12
Commercial real estate:
Commercial mortgage		2		2		1		4
Construction		—		—		—		1

Total commercial real estate loans		2		2		1		5

Total commercial loans		9		12		3		17


Real estate — residential mortgage		28		28		5		28

Home equity:
Key Community Bank		36		36		16		36
Other		11		11		2		11

Total home equity loans		47		47		18		47

Consumer other — Key Community Bank		3		3		—		3
Credit cards		4		4		1		4
Consumer other:
Marine		49		49		7		49
Other		1		1		—		1

Total consumer other		50		50		7		50

Total consumer loans		132		132		31		132

Total loans with an allowance recorded		141		144		34		149

Total	$	304	$	349	$	34	$	331

(a)	The Recorded Investment 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.


			Unpaid				Average
December 31, 2013	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	33	$	69		—	$	33
Commercial real estate:
Commercial mortgage		21		25		—		55
Construction		48		131		—		48

Total commercial real estate loans		69		156		—		103

Total commercial loans		102		225		—		136

Real estate — residential mortgage		27		27		—		24

Home equity:
Key Community Bank		67		67		—		66
Other		2		2		—		2

Total home equity loans		69		69		—		68

Consumer other:
Marine		3		3		—		2

Total consumer other		3		3		—		2

Total consumer loans		99		99		—		94

Total loans with no related allowance recorded		201		324		—		230

With an allowance recorded:
Commercial, financial and agricultural		17		20	$	8		25
Commercial real estate:
Commercial mortgage		6		6		2		7
Construction		2		12		—		1

Total commercial real estate loans		8		18		2		8

Total commercial loans		25		38		10		33


Real estate — residential mortgage		29		29		9		23

Home equity:
Key Community Bank		35		35		10		29
Other		10		11		1		9

Total home equity loans		45		46		11		38

Consumer other — Key Community Bank		3		3		1		2
Credit cards		5		5		1		3
Consumer other:
Marine		49		49		10		55
Other		1		1		—		1

Total consumer other		50		50		10		56

Total consumer loans		132		133		32		122

Total loans with an allowance recorded		157		171		42		155

Total	$	358	$	495	$	42	$	385

(a)	The Recorded Investment 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.


			Unpaid				Average
March 31, 2013	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	93	$	131		—	$	63
Commercial real estate:
Commercial mortgage		87		140		—		88
Construction		48		175		—		48

Total commercial real estate loans		135		315		—		136

Total commercial loans		228		446		—		199

Real estate — residential mortgage		15		15		—		18

Home equity:
Key Community Bank		64		64		—		65
Other		2		2		—		2

Total home equity loans		66		66		—		67

Consumer other:
Marine		3		3		—		1

Total consumer other		3		3		—		1

Total consumer loans		84		84		—		86

Total loans with no related allowance recorded		312		530		—		285

With an allowance recorded:
Commercial, financial and agricultural		15		23	$	8		24
Commercial real estate:
Commercial mortgage		9		9		3		8
Construction		—		9		—		—

Total commercial real estate loans		9		18		3		8

Total commercial loans		24		41		11		32


Real estate — residential mortgage		18		18		1		18

Home equity:
Key Community Bank		26		25		14		24
Other		10		10		—		10

Total home equity loans		36		35		14		34

Consumer other — Key Community Bank		3		3		1		2
Credit cards		4		4		1		3
Consumer other:
Marine		47		47		5		53
Other		1		1		1		1

Total consumer other		48		48		6		54

Total consumer loans		109		108		23		111

Total loans with an allowance recorded		133		149		34		143

Total	$	445	$	679	$	34	$	428

(a)	The Recorded Investment 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.

For the three months ended March 31, 2014, and 2013, interest income recognized on the outstanding balances of accruing impaired loans totaled $2 million and $2 million, respectively.

At March 31, 2014, aggregate restructured loans (accrual and nonaccrual loans) totaled $294 million, compared to $338 million at December 31, 2013, and $294 million at March 31, 2013. We added $30 million in restructured loans during the first three months of 2014, which were offset by $74 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of March 31, 2014, follows:


			Pre-modification		Post-modification
			Outstanding		Outstanding
March 31, 2014	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		28	$	58	$	33
Commercial real estate:
Real estate — commercial mortgage		11		40		14
Real estate — construction		5		16		2

Total commercial real estate loans		16		56		16

Total commercial loans		44		114		49
Real estate — residential mortgage		687		42		42
Home equity:
Key Community Bank		1,190		73		69
Other		132		4		4

Total home equity loans		1,322		77		73
Consumer other — Key Community Bank		33		1		1
Credit cards		10		—		—
Consumer other:
Marine		210		14		12
Other		41		1		1

Total consumer other		251		15		13

Total consumer loans		2,303		135		129

Total nonperforming TDRs		2,347		249		178

Prior-year accruing ^(a)
Commercial, financial and agricultural		42		7		4
Commercial real estate:
Real estate — commercial mortgage		4		18		8

Total commercial real estate loans		4		18		8

Total commercial loans		46		25		12
Real estate — residential mortgage		111		12		12
Home equity:
Key Community Bank		708		40		37
Other		312		9		8

Total home equity loans		1,020		49		45
Consumer other — Key Community Bank		51		2		2
Credit cards		785		5		5
Consumer other:
Marine		430		62		39
Other		68		2		1

Total consumer other		498		64		40

Total consumer loans		2,465		132		104

Total prior-year accruing TDRs		2,511		157		116

Total TDRs		4,858	$	406	$	294

(a)	All TDRs that were restructured prior to January 1, 2014, and are fully accruing.

A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2013, follows:


			Pre-modification		Post-modification
			Outstanding		Outstanding
December 31, 2013	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		33	$	72	$	34
Commercial real estate:
Real estate — commercial mortgage		11		41		14
Real estate — construction		6		19		4

Total commercial real estate loans		17		60		18

Total commercial loans		50		132		52
Real estate — residential mortgage		676		43		43
Home equity:
Key Community Bank		1,708		91		86
Other		227		6		6

Total home equity loans		1,935		97		92
Consumer other — Key Community Bank		49		2		1
Credit cards		629		5		4
Consumer other:
Marine		360		24		21
Other		50		1		1

Total consumer other		410		25		22

Total consumer loans		3,699		172		162

Total nonperforming TDRs		3,749		304		214

Prior-year accruing^(a)
Commercial, financial and agricultural		50		7		3
Commercial real estate:
Real estate — commercial mortgage		4		18		10
Real estate — construction		1		23		42

Total commercial real estate loans		5		41		52

Total commercial loans		55		48		55
Real estate — residential mortgage		119		12		12
Home equity:
Key Community Bank		161		17		17
Other		212		7		6

Total home equity loans		373		24		23
Consumer other — Key Community Bank		31		1		1
Credit cards		240		2		1
Consumer other:
Marine		272		51		31
Other		54		1		1

Total consumer other		326		52		32

Total consumer loans		1,089		91		69

Total prior-year accruing TDRs		1,144		139		124

Total TDRs		4,893	$	443	$	338

(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 March 31, 2013, follows:


			Pre-modification		Post- modification
			Outstanding		Outstanding
March 31, 2013	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		48	$	58	$	25
Commercial real estate:
Real estate — commercial mortgage		17		61		23
Real estate — construction		6		30		4

Total commercial real estate loans		23		91		27

Total commercial loans		71		149		52
Real estate — residential mortgage		347		21		21
Home equity:
Key Community Bank		1,479		75		74
Other		229		6		6

Total home equity loans		1,708		81		80
Consumer other — Key Community Bank		59		2		2
Credit cards		360		2		2
Consumer other:
Marine		302		41		20
Other		36		1		1

Total consumer other		338		42		21

Total consumer loans		2,812		148		126

Total nonperforming TDRs		2,883		297		178

Prior-year accruing ^(a)
Commercial, financial and agricultural		106		11		5
Commercial real estate:
Real estate — commercial mortgage		4		22		15
Real estate — construction		1		23		29

Total commercial real estate loans		5		45		44

Total commercial loans		111		56		49
Real estate — residential mortgage		121		12		12
Home equity:
Key Community Bank		147		15		15
Other		190		6		5

Total home equity loans		337		21		20
Consumer other — Key Community Bank		24		1		1
Credit cards		308		2		2
Consumer other:
Marine		263		30		30
Other		57		2		2

Total consumer other		320		32		32

Total consumer loans		1,110		68		67

Total prior-year accruing TDRs		1,221		124		116

Total TDRs		4,104	$	421	$	294

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

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e., individually evaluated) and may impact the ALLL through a charge-off or increased 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. During the first three months of 2014, two commercial loan TDRs with a combined recorded investment of $11 million and 157 consumer loan TDRs with a combined recorded investment of $4 million experienced payment defaults from modifications resulting in TDR status during 2013. During the first three months of 2013, there were no significant commercial loan TDRs, and 240

consumer loan TDRs with a combined recorded investment of $14 million that experienced payment defaults from modifications resulting in TDR status during 2012. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL.

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 the borrower’s financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. The commercial TDR other concession category includes modification of loan terms, covenants, or conditions. The consumer TDR other concession category primarily includes those borrowers that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed.

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


	March 31,		December 31,		March 31,
in millions	2014		2013		2013
Commercial loans:
Interest rate reduction	$	49	$	95	$	85
Forgiveness of principal		5		5		10
Other		7		7		6

Total	$	61	$	107	$	101


Consumer loans:
Interest rate reduction	$	142	$	130	$	95
Forgiveness of principal		5		5		6
Other		86		96		92

Total	$	233	$	231	$	193


Total commercial and consumer TDRs^(a)	$	294	$	338	$	294
Total loans		55,445		54,457		52,574

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $2 million, $15 million, and $33 million at March 31, 2014, December 31, 2013, and March 31, 2013, 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” beginning on page 117 of our 2013 Form 10-K.

At March 31, 2014, approximately $54.6 billion, or 98.5%, of our total loans were current. At March 31, 2014, total past due loans and nonperforming loans of $805 million represented approximately 1.5% of total loans.

The following aging analysis of past due and current loans as of March 31, 2014, December 31, 2013, and March 31, 2013, provides further information regarding Key’s credit exposure.


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
March 31, 2014			Days Past		Days Past		Days Past		Nonperforming		Nonperforming		Credit		Total
in millions	Current		Due		Due		Due		Loans		Loans		Impaired		Loans
LOAN TYPE
Commercial, financial and agricultural	$	26,071	$	67	$	8	$	18	$	60	$	153		—	$	26,224
Commercial real estate:
Commercial mortgage		7,806		9		7		17		37		70	$	1		7,877
Construction		987		3		5		1		11		20		—		1,007

Total commercial real estate loans		8,793		12		12		18		48		90		1		8,884
Commercial lease financing		4,338		15		12		13		18		58		—		4,396

Total commercial loans	$	39,202	$	94	$	32	$	49	$	126	$	301	$	1	$	39,504


Real estate — residential mortgage	$	2,043	$	13	$	6	$	3	$	105	$	127	$	13	$	2,183
Home equity:
Key Community Bank		10,010		45		25		11		188		269		2		10,281
Other		296		5		2		1		11		19		—		315

Total home equity loans		10,306		50		27		12		199		288		2		10,596
Consumer other — Key Community Bank		1,415		8		5		6		2		21		—		1,436
Credit cards		671		7		4		15		1		27		—		698
Consumer other:
Marine		928		12		6		4		15		37		—		965
Other		59		2		1		—		1		4		—		63

Total consumer other		987		14		7		4		16		41		—		1,028

Total consumer loans	$	15,422	$	92	$	49	$	40	$	323	$	504	$	15	$	15,941


Total loans	$	54,624	$	186	$	81	$	89	$	449	$	805	$	16	$	55,445


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
December 31, 2013			Days Past		Days Past		Days Past		Nonperforming		Nonperforming		Credit		Total
in millions	Current		Due		Due		Due		Loans		Loans		Impaired		Loans
LOAN TYPE
Commercial, financial and agricultural	$	24,823	$	39	$	8	$	16	$	77	$	140		—	$	24,963
Commercial real estate:
Commercial mortgage		7,638		20		7		17		37		81	$	1		7,720
Construction		1,068		10		—		1		14		25		—		1,093

Total commercial real estate loans		8,706		30		7		18		51		106		1		8,813
Commercial lease financing		4,463		32		33		4		19		88		—		4,551

Total commercial loans	$	37,992	$	101	$	48	$	38	$	147	$	334	$	1	$	38,327


Real estate — residential mortgage	$	2,038	$	19	$	5	$	4	$	107	$	135	$	14	$	2,187
Home equity:
Key Community Bank		10,038		51		31		14		205		301		1		10,340
Other		308		6		4		1		15		26		—		334

Total home equity loans		10,346		57		35		15		220		327		1		10,674
Consumer other — Key Community Bank		1,426		8		5		7		3		23		—		1,449
Credit cards		698		11		5		4		4		24		—		722
Consumer other:
Marine		979		15		6		2		26		49		—		1,028
Other		65		2		1		1		1		5		—		70

Total consumer other		1,044		17		7		3		27		54		—		1,098

Total consumer loans	$	15,552	$	112	$	57	$	33	$	361	$	563	$	15	$	16,130


Total loans	$	53,544	$	213	$	105	$	71	$	508	$	897	$	16	$	54,457


			30-59		60-89		90 and Greater				Total Past Due and		Purchased
March 31, 2013			Days Past		Days Past		Days Past		Nonperforming		Nonperforming		Credit		Total
in millions	Current		Due		Due		Due		Loans		Loans		Impaired		Loans
LOAN TYPE
Commercial, financial and agricultural	$	23,134	$	35	$	74	$	26	$	142	$	277	$	1	$	23,412
Commercial real estate:
Commercial mortgage		7,368		35		14		11		114		174		2		7,544
Construction		1,024		5		—		1		27		33		—		1,057

Total commercial real estate loans		8,392		40		14		12		141		207		2		8,601
Commercial lease financing		4,728		34		11		11		12		68		—		4,796

Total commercial loans	$	36,254	$	109	$	99	$	49	$	295	$	552	$	3	$	36,809


Real estate — residential mortgage	$	2,037	$	15	$	5	$	7	$	96	$	123	$	16	$	2,176
Home equity:
Key Community Bank		9,512		51		28		17		199		295		2		9,809
Other		371		7		3		2		18		30		—		401

Total home equity loans		9,883		58		31		19		217		325		2		10,210
Consumer other — Key Community Bank		1,331		8		4		6		3		21		1		1,353
Credit cards		668		8		4		—		13		25		—		693
Consumer other:
Marine		1,202		18		7		2		25		52		—		1,254
Other		76		1		1		—		1		3		—		79

Total consumer other		1,278		19		8		2		26		55		—		1,333

Total consumer loans	$	15,197	$	108	$	52	$	34	$	355	$	549	$	19	$	15,765


Total loans	$	51,451	$	217	$	151	$	83	$	650	$	1,101	$	22	$	52,574

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 loan risk rating grades assigned for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios.

Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically reevaluated thereafter. 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 in 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 $16 million and $22 million of PCI loans at March 31, 2014, and 2013, respectively, based on bond rating, regulatory classification, and payment activity as of March 31, 2014, and 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


March 31,
in millions
	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING^{(b), (c)}	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
AAA — AA	$	500	$	222	$	1		—	$	1	$	1	$	805	$	548	$	1,307	$	771
A		1,010		522		57	$	75		1		1		448		950		1,516		1,548
BBB — BB		23,361		21,120		7,267		6,529		826		866		2,964		3,043		34,418		31,558
B		551		672		337		426		84		23		101		165		1,073		1,286
CCC — C		802		875		214		512		95		166		78		90		1,189		1,643

Total	$	26,224	$	23,411	$	7,876	$	7,542	$	1,007	$	1,057	$	4,396	$	4,796	$	39,503	$	36,806

(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)}


March 31,
in millions
	Residential — Prime
GRADE	2014		2013
Pass	$	12,445	$	12,029
Substandard		319		339

Total	$	12,764	$	12,368

Credit Risk Profile Based on Payment Activity^(a)


March 31,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
Performing	$	1,434	$	1,349	$	697	$	680	$	950	$	1,229	$	62	$	78	$	3,143	$	3,336
Nonperforming		2		3		1		13		15		25		1		1		19		42

Total	$	1,436	$	1,352	$	698	$	693	$	965	$	1,254	$	63	$	79	$	3,162	$	3,378

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

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

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 118 of our 2013 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 of $2.5 million and greater, 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 the individual impairment for commercial loans and TDRs 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. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Non-Chapter 7 consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the loan’s effective interest rate. 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 March 31, 2014, 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, we have not changed the accounting policies or methodology that we use 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. Most consumer loans are charged off when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans, and similar unsecured products, are charged off when payments are 180 days past due.

At March 31, 2014, the ALLL was $834 million, or 1.50% of loans, compared to $893 million, or 1.70% of loans, at March 31, 2013. At March 31, 2014, the ALLL was 185.7% of nonperforming loans, compared to 137.4% at March 31, 2013.

A summary of the ALLL for the periods indicated is presented in the table below:


	Three months ended March 31,
in millions	2014			2013
Balance at beginning of period — continuing operations	$	848		$	888
Charge-offs		(57	)		(90	)
Recoveries		37			41

Net loans and leases charged off		(20	)		(49	)
Provision for loan and lease losses from continuing operations		6			55
Foreign currency translation adjustment		—			(1	)

Balance at end of period — continuing operations	$	834		$	893

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


in millions	December 31, 2013		Provision			Charge-offs			Recoveries		March 31, 2014
Commercial, financial and agricultural	$	362	$	13		$	(12	)	$	10	$	373
Real estate — commercial mortgage		165		(3	)		(2	)		1		161
Real estate — construction		32		(7	)		(2	)		14		37
Commercial lease financing		62		1			(3	)		2		62

Total commercial loans		621		4			(19	)		27		633
Real estate — residential mortgage		37		(8	)		(3	)		1		27
Home equity:
Key Community Bank		84		3			(10	)		3		80
Other		11		2			(3	)		1		11

Total home equity loans		95		5			(13	)		4		91
Consumer other — Key Community Bank		29		2			(8	)		2		25
Credit cards		34		4			(6	)		—		32
Consumer other:
Marine		29		(2	)		(7	)		3		23
Other		3		1			(1	)		—		3

Total consumer other:		32		(1	)		(8	)		3		26

Total consumer loans		227		2			(38	)		10		201

Total ALLL — continuing operations		848		6			(57	)		37		834
Discontinued operations		39		4			(13	)		4		34

Total ALLL — including discontinued operations	$	887	$	10		$	(70	)	$	41	$	868


in millions	December 31, 2012		Provision			Charge-offs			Recoveries		March 31, 2013
Commercial, financial and agricultural	$	327	$	13		$	(14	)	$	12	$	338
Real estate — commercial mortgage		198		3			(13	)		5		193
Real estate — construction		41		(13	)		(1	)		8		35
Commercial lease financing		55		9			(6	)		4		62

Total commercial loans		621		12			(34	)		29		628
Real estate — residential mortgage		30		10			(6	)		—		34
Home equity:
Key Community Bank		105		17			(18	)		2		106
Other		25		(3	)		(6	)		2		18

Total home equity loans		130		14			(24	)		4		124
Consumer other — Key Community Bank		38		2			(9	)		2		33
Credit cards		26		14			(8	)		—		32
Consumer other:
Marine		39		2			(8	)		5		38
Other		4		—			(1	)		1		4

Total consumer other:		43		2			(9	)		6		42

Total consumer loans		267		42			(56	)		12		265

Total ALLL — continuing operations		888		54	^(a)		(90	)		41		893
Discontinued operations		55		6			(16	)		4		49

Total ALLL — including discontinued operations	$	943	$	60		$	(106	)	$	45	$	942

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

Our ALLL decreased by $59 million, or 6.6%, from the first quarter of 2013 primarily because of the improvement in the credit quality of our loan portfolios. The quality of new loan originations as well as decreasing NPLs and net loan charge-offs has also resulted in a reduction in our general allowance. Our general allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Our delinquency trends declined during 2013 and into 2014 due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio, reflecting our effort to maintain a moderate enterprise risk tolerance.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $304 million, with a corresponding allowance of $34 million at March 31, 2014. Loans outstanding collectively evaluated for impairment totaled $55.1 billion, with a corresponding allowance of $799 million at March 31, 2014. At March 31, 2014, PCI loans evaluated for impairment totaled $16 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the quarter ended March 31, 2014.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of March 31, 2014, follows:


	Allowance						Outstanding
	Individually		Collectively		Purchased					Individually		Collectively			Purchased
March 31, 2014	Evaluated for		Evaluated for		Credit					Evaluated for		Evaluated for			Credit
in millions	Impairment		Impairment		Impaired		Loans			Impairment		Impairment			Impaired
Commercial, financial and agricultural	$	2	$	371		—	$	26,224		$	40	$	26,184			—
Commercial real estate:
Commercial mortgage		1		160		—		7,877			25		7,851		$	1
Construction		—		37		—		1,007			6		1,001			—

Total commercial real estate loans		1		197		—		8,884			31		8,852			1
Commercial lease financing		—		62		—		4,396			—		4,396			—

Total commercial loans		3		630		—		39,504			71		39,432			1
Real estate — residential mortgage		4		22	$	1		2,183			54		2,116			13
Home equity:
Key Community Bank		16		64		—		10,281			105		10,174			2
Other		2		9		—		315			13		302			—

Total home equity loans		18		73		—		10,596			118		10,476			2
Consumer other — Key Community Bank		—		25		—		1,436			4		1,432			—
Credit cards		1		31		—		698			4		694			—
Consumer other:
Marine		7		16		—		965			52		913			—
Other		1		2		—		63			1		62			—

Total consumer other		8		18		—		1,028			53		975			—

Total consumer loans		31		169		1		15,941			233		15,693			15

Total ALLL — continuing operations		34		799		1		55,445			304		55,125			16
Discontinued operations		1		33		—		4,382	^(a)		15		4,367	^(a)		—

Total ALLL — including discontinued operations	$	35	$	832	$	1	$	59,827		$	319	$	59,492		$	16

(a)	Amount includes $2.0 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, 2013, follows:


	Allowance						Outstanding
	Individually		Collectively		Purchased				Individually		Collectively		Purchased
December 31, 2013	Evaluated for		Evaluated for		Credit				Evaluated for		Evaluated for		Credit
in millions	Impairment		Impairment		Impaired		Loans		Impairment		Impairment		Impaired
Commercial, financial and agricultural	$	8	$	354		—	$	24,963	$	50	$	24,913		—
Commercial real estate:
Commercial mortgage		2		163		—		7,720		27		7,692	$	1
Construction		—		32		—		1,093		50		1,043		—

Total commercial real estate loans		2		195		—		8,813		77		8,735		1
Commercial lease financing		—		62		—		4,551		—		4,551		—

Total commercial loans		10		611		—		38,327		127		38,199		1
Real estate — residential mor

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