Edgar Filing: KEYCORP /NEW/

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

June 30, 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		874,478,950 Shares
Title of class		Outstanding at July 31, 2014

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets — June 30, 2014 (Unaudited), December 31, 2013, and June 30, 2013 (Unaudited)	6

	Consolidated Statements of Income (Unaudited) — Three and six months ended June 30, 2014, and June 30, 2013	7

	Consolidated Statements of Comprehensive Income (Unaudited) — Three and six months ended June 30, 2014, and June 30, 2013	8

	Consolidated Statements of Changes in Equity (Unaudited) — Six months ended June 30, 2014, and June 30, 2013	9

	Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2014, and June 30, 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	49

	Note 7. Derivatives and Hedging Activities	53

	Note 8. Mortgage Servicing Assets	61

	Note 9. Variable Interest Entities	62

	Note 10. Income Taxes	64

	Note 11. Acquisitions and Discontinued Operations	65

	Note 12. Securities Financing Activities	73


	Note 13. Employee Benefits	75

	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	76

	Note 15. Contingent Liabilities and Guarantees	77

	Note 16 . Accumulated Other Comprehensive Income	80

	Note 17. Shareholders’ Equity	83

	Note 18. Line of Business Results	84

	Report of Independent Registered Public Accounting Firm	88

Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	89

	Introduction	89
	Terminology	89
	Selected financial data	90
	Forward-looking statements	91
	Economic overview	92
	Long-term financial goals	93
	Strategic developments	93
	Demographics	94
	Supervision and regulation	96
	Regulatory reform developments	96
	Debit card and interchange fees and routing	96
	Regulatory capital rules	96

	Highlights of Our Performance	98
	Financial performance	98
	Results of Operations	104
	Net interest income	104
	Noninterest income	107
	Trust and investment services income	109
	Investment banking and debt placement fees	109
	Service charges on deposit accounts	109
	Operating lease income and other leasing gains	109
	Cards and payments income	109
	Consumer mortgage income	109
	Mortgage servicing fees	110
	Other income	110
	Noninterest expense	110
	Personnel	111
	Operating lease expense	111
	Other expense	111
	Income taxes	111


		Line of Business Results		112
		Key Community Bank summary of operations		112
		Key Corporate Bank summary of operations		113
		Other Segments		114

		Financial Condition		115
		Loans and loans held for sale		115
		Commercial loan portfolio		115
		*Commercial, financial and agricultural*		115
		*Commercial real estate loans*		116
		*Commercial lease financing*		117
		Commercial loan modification and restructuring		117
		*Extensions*		118
		*Guarantors*		119
		Consumer loan portfolio		119
		Loans held for sale		120
		Loan sales		120
		Securities		121
		Securities available-for-sale		122
		Held-to-maturity securities		123
		Other investments		124
		Deposits and other sources of funds		124
		Capital		125
		CCAR and capital actions		125
		Dividends		125
		Common shares outstanding		125
		Capital adequacy		126

		Risk Management		129
		Overview		129
		Market risk management		130
		Trading market risk		130
		*Management of trading risks*		130
		*Covered positions*		130
		*VaR and stressed VaR*		131
		*Internal capital adequacy assessment*		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		137
		Liquidity programs		137
		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	140
	Nonperforming assets	143
	Operational risk management	145
	Cybersecurity	146

	Critical Accounting Policies and Estimates	146

	European Sovereign and Non-Sovereign Debt Exposures	147
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	148
Item 4.	Controls and Procedures	148

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	148
Item 1A.	Risk Factors	148
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	149
Item 6.	Exhibits	149
	Signature	150
	Exhibits	151

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	June 30, 2014			December 31, 2013			June 30, 2013
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	604		$	617		$	696
Short-term investments		3,176			5,590			3,582
Trading account assets		890			738			592
Securities available for sale		12,224			12,346			13,253
Held-to-maturity securities (fair value: $5,154, $4,617, and $4,716)		5,233			4,756			4,750
Other investments		899			969			1,037
Loans, net of unearned income of $709, $805, and $901		55,600			54,457			53,101
Less: Allowance for loan and lease losses		814			848			876

Net loans		54,786			53,609			52,225
Loans held for sale		435			611			402
Premises and equipment		844			885			900
Operating lease assets		306			305			303
Goodwill		979			979			979
Other intangible assets		108			127			149
Corporate-owned life insurance		3,438			3,408			3,362
Derivative assets		549			407			461
Accrued income and other assets (including $1 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		3,090			3,015			2,864
Discontinued assets (including $1,730 of consolidated education loan securitization trust VIEs (see Note 9) and $209 of loans in portfolio at fair value)^(a)		4,237			4,572			5,084

Total assets	$	91,798		$	92,934		$	90,639


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	33,637		$	33,952		$	32,689
Savings deposits		2,450			2,472			2,542
Certificates of deposit ($100,000 or more)		2,743			2,631			2,918
Other time deposits		3,505			3,648			4,089

Total interest-bearing deposits		42,335			42,703			42,238
Noninterest-bearing deposits		24,781			26,001			24,939
Deposits in foreign office — interest-bearing		683			558			544

Total deposits		67,799			69,262			67,721
Federal funds purchased and securities sold under repurchase agreements		1,213			1,534			1,647
Bank notes and other short-term borrowings		521			343			298
Derivative liabilities		451			414			456
Accrued expense and other liabilities		1,400			1,557			1,421
Long-term debt		8,213			7,650			6,666
Discontinued liabilities (including $1,677 of consolidated education loan securitization trust VIEs at fair value, see Note 9)^(a)		1,680			1,854			2,169

Total liabilities		81,277			82,614			80,378

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		3,987			4,022			4,045
Retained earnings		7,950			7,606			7,214
Treasury stock, at cost (140,147,398, 126,245,538, and 104,086,859 shares)		(2,452	)		(2,281	)		(2,020	)
Accumulated other comprehensive income (loss)		(289	)		(352	)		(318	)

Key shareholders’ equity		10,504			10,303			10,229
Noncontrolling interests		17			17			32

Total equity		10,521			10,320			10,261

Total liabilities and equity	$	91,798		$	92,934		$	90,639

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended June 30,					Six months ended June 30,
dollars in millions, except per share amounts	2014			2013		2014			2013
INTEREST INCOME
Loans	$	526		$	539	$	1,045		$	1,087
Loans held for sale		5			5		9			9
Securities available for sale		71			80		143			160
Held-to-maturity securities		23			20		45			38
Trading account assets		7			4		13			10
Short-term investments		1			1		2			3
Other investments		6			8		12			17

Total interest income		639			657		1,269			1,324

INTEREST EXPENSE
Deposits		31			42		63			87
Federal funds purchased and securities sold under repurchase agreements		—			—		1			1
Bank notes and other short-term borrowings		2			2		4			3
Long-term debt		33			32		65			69

Total interest expense		66			76		133			160


NET INTEREST INCOME		573			581		1,136			1,164
Provision (credit) for loan and lease losses		10			28		16			83

Net interest income (expense) after provision for loan and lease losses		563			553		1,120			1,081

NONINTEREST INCOME
Trust and investment services income		94			100		192			195
Investment banking and debt placement fees		99			84		183			163
Service charges on deposit accounts		66			71		129			140
Operating lease income and other leasing gains		35			22		64			47
Corporate services income		41			43		83			88
Cards and payments income		43			42		81			79
Corporate-owned life insurance income		28			31		54			61
Consumer mortgage income		2			6		4			13
Mortgage servicing fees		11			13		26			21
Net gains (losses) from principal investing		27			7		51			15
Other income^(a)		9			10		23			32

Total noninterest income		455			429		890			854

NONINTEREST EXPENSE
Personnel		389			406		777			797
Net occupancy		68			72		132			136
Computer processing		41			39		79			78
Business services and professional fees		41			37		82			72
Equipment		24			27		48			53
Operating lease expense		10			11		20			23
Marketing		13			11		18			17
FDIC assessment		6			8		12			16
Intangible asset amortization		9			10		19			22
Provision (credit) for losses on lending-related commitments		2			5		—			8
OREO expense, net		1			1		2			4
Other expense		85			84		162			166

Total noninterest expense		689			711		1,351			1,392

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		329			271		659			543
Income taxes		76			72		168			142

INCOME (LOSS) FROM CONTINUING OPERATIONS		253			199		491			401
Income (loss) from discontinued operations, net of taxes of ($16), $4, ($14), and $8 (see Note 11)		(28	)		5		(24	)		8

NET INCOME (LOSS)		225			204		467			409
Less: Net income (loss) attributable to noncontrolling interests		6			—		6			1

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	219		$	204	$	461		$	408


Income (loss) from continuing operations attributable to Key common shareholders	$	242		$	193	$	474		$	389
Net income (loss) attributable to Key common shareholders		214			198		450			397

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.28		$	.21	$	.54		$	.42
Income (loss) from discontinued operations, net of taxes		(.03	)		.01		(.03	)		.01
Net income (loss) attributable to Key common shareholders ^(b)		.24			.22		.51			.43

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.27		$	.21	$	.53		$	.42
Income (loss) from discontinued operations, net of taxes		(.03	)		.01		(.03	)		.01
Net income (loss) attributable to Key common shareholders ^(b)		.24			.22		.51			.43

Cash dividends declared per common share	$	.065		$	.055	$	.12		$	.105

Weighted-average common shares outstanding (000)		875,298			913,736		879,986			917,008
Effect of convertible preferred stock		20,602			—		—			—
Effect of common share options and other stock awards		6,237			4,892		6,698			5,311

Weighted-average common shares and potential common shares outstanding (000)^(c)		902,137			918,628		886,684			922,319

(a)	For each of the three months ended June 30, 2014, and June 30, 2013, net securities gains (losses) totaled less than $1 million. For the three months ended June 30, 2014, and June 30, 2013, we did not have any impairment losses related to securities.

(b)	EPS may not foot due to rounding.

(c)	Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended June 30,						Six months ended June 30,
in millions	2014			2013			2014			2013
Net income (loss)	$	225		$	204		$	467		$	409
Other comprehensive income (loss), net of tax:

Net unrealized gains (losses) on securities available for sale, net of income taxes of $17, ($74), $34, and ($87)		28			(125	)		57			(147	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $4, ($18), $3, and ($23)		5			(31	)		4			(39	)
Foreign currency translation adjustments, net of income taxes of $4, ($2), $0, and ($4)		(1	)		(3	)		(3	)		(14	)
Net pension and postretirement benefit costs, net of income taxes of $1, $2, $3, and $4		3			3			5			6

Total other comprehensive income (loss), net of tax		35			(156	)		63			(194	)

Comprehensive income (loss)		260			48			530			215
Less: Comprehensive income attributable to noncontrolling interests		6			—			6			1

Comprehensive income (loss) attributable to Key	$	254		$	48		$	524		$	214

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

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

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

Net income (loss)														461									6
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $34																				57
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $3																				4
Foreign currency translation adjustments, net of income taxes of $0																				(3	)
Net pension and postretirement benefit costs, net of income taxes of $3																				5
Deferred compensation											2
Cash dividends declared on common shares ($.12 per share)														(106	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($3.875 per share)														(11	)
Common shares repurchased				(17,669	)												(236	)
Common shares reissued (returned) for stock options and other employee benefit plans				3,768							(37	)					65
Net contribution from (distribution to) noncontrolling interests																							(6	)

BALANCE AT JUNE 30, 2014		2,905		876,823		$	291	$	1,017	$	3,987		$	7,950		$	(2,452	)	$	(289	)	$	17

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2014			2013
OPERATING ACTIVITIES
Net income (loss)	$	467		$	409
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		16			83
Provision (credit) for losses on lending-related commitments		—			8
Provision (credit) for losses on LIHTC guaranteed funds		(6	)		3
Depreciation, amortization and accretion expense, net		103			93
Increase in cash surrender value of corporate-owned life insurance		(48	)		(50	)
Stock-based compensation expense		21			19
FDIC reimbursement (payments), net of FDIC expense		—			297
Deferred income taxes (benefit)		9			36
Proceeds from sales of loans held for sale		1,570			2,609
Originations of loans held for sale, net of repayments		(1,359	)		(2,316	)
Net losses (gains) on sales of loans held for sale		(40	)		(60	)
Net losses (gains) from principal investing		(51	)		(15	)
Net losses (gains) and writedown on OREO		2			4
Net losses (gains) on leased equipment		(34	)		(8	)
Net losses (gains) on sales of fixed assets		1			8
Net decrease (increase) in trading account assets		(152	)		13
Other operating activities, net		(236	)		(208	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		263			925
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired		—			573
Net decrease (increase) in short-term investments		2,414			357
Purchases of securities available for sale		(1,175	)		(4,030	)
Proceeds from sales of securities available for sale		—			27
Proceeds from prepayments and maturities of securities available for sale		1,382			2,612
Proceeds from prepayments and maturities of held-to-maturity securities		391			434
Purchases of held-to-maturity securities		(869	)		(1,253	)
Purchases of other investments		(26	)		(20	)
Proceeds from sales of other investments		167			11
Proceeds from prepayments and maturities of other investments		1			49
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(1,269	)		(451	)
Proceeds from sales of portfolio loans		67			77
Proceeds from corporate-owned life insurance		18			21
Purchases of premises, equipment, and software		(30	)		(34	)
Proceeds from sales of premises and equipment		1			8
Proceeds from sales of other real estate owned		10			14

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,082			(1,605	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		(1,463	)		1,038
Net increase (decrease) in short-term borrowings		(143	)		49
Net proceeds from issuance of long-term debt		608			1,008
Payments on long-term debt		(26	)		(1,033	)
Repurchase of common shares		(236	)		(177	)
Net proceeds from issuance of common shares		19			14
Cash dividends paid		(117	)		(107	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,358	)		792

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(13	)		112
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		617			584

CASH AND DUE FROM BANKS AT END OF PERIOD	$	604		$	696

Additional disclosures relative to cash flows:
Interest paid	$	133		$	159
Income taxes paid (refunded)		82			62
Noncash items:
Reduction of secured borrowing and related collateral	$	32			—
Loans transferred to portfolio from held for sale		10		$	2
Loans transferred to held for sale from portfolio		5			38
Loans transferred to other real estate owned		9			14

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.		LIHTC: Low-income housing tax credit.
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.
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.		PCI: Purchased credit impaired.
ERM: Enterprise risk management.		S&P: Standard and Poor’s Ratings Services, a Division of The
EVE: Economic value of equity.		McGraw-Hill Companies, Inc.
FASB: Financial Accounting Standards Board.		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 institutions, including
FHLMC: Federal Home Loan Mortgage Corporation.		BHCs with total consolidated assets of at least $50 billion
FNMA: Federal National Mortgage Association.		and nonbank financial companies designated by FSOC for
FOMC: Federal Open Market Committee of the Federal Reserve		supervision by the Federal Reserve.
Board.		TDR: Troubled debt restructuring.
FSOC: Financial Stability Oversight Council.		TE: Taxable-equivalent.
GAAP: U.S. generally accepted accounting principles.		U.S. Treasury: United States Department of the Treasury.
GNMA: Government National Mortgage Association.		VaR: Value at risk.
ISDA: International Swaps and Derivatives Association.		VEBA: Voluntary Employee Beneficiary Association.
KAHC: Key Affordable Housing Corporation.		Victory: Victory Capital Management and/or
KEF: Key Equipment Finance.		Victory Capital Advisors.
KREEC: Key Real Estate Equity Capital, Inc.		VIE: Variable interest entity.
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 (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 June 30, 2014

Stock-based compensation. In June 2014, the FASB issued new accounting guidance that clarifies how to account for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a retrospective method or a 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.

Transfers and servicing of financial assets. In June 2014, the FASB issued new accounting guidance that applies secured borrowing accounting to repurchase-to-maturity transactions and linked repurchase financings and expands disclosure requirements. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and needs to be implemented using a cumulative-effect approach to transactions outstanding as of the effective date with no adjustment to prior periods. The disclosure related to certain sales transactions will be presented for interim and annual periods beginning after December 15, 2014 (March 31, 2015, for us). The disclosure for secured borrowings will be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015 (June 30, 2015, for us). Early adoption is not permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Revenue recognition. In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) and can be implemented using either a retrospective method or a cumulative-effect approach. Early adoption is not permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

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.

Our basic and diluted earnings per common share are calculated as follows:


	Three months ended June 30,					Six months ended June 30,
dollars in millions, except per share amounts	2014			2013		2014			2013
EARNINGS
Income (loss) from continuing operations	$	253		$	199	$	491		$	401
Less: Net income (loss) attributable to noncontrolling interests		6			—		6			1

Income (loss) from continuing operations attributable to Key		247			199		485			400
Less: Dividends on Series A Preferred Stock		5			6		11			11

Income (loss) from continuing operations attributable to Key common shareholders		242			193		474			389
Income (loss) from discontinued operations, net of taxes^(a)		(28	)		5		(24	)		8

Net income (loss) attributable to Key common shareholders	$	214		$	198	$	450		$	397

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		875,298			913,736		879,986			917,008
Effect of convertible preferred stock		20,602			—		—			—
Effect of common share options and other stock awards		6,237			4,892		6,698			5,311

Weighted-average common shares and potential common shares outstanding (000)^(b)		902,137			918,628		886,684			922,319

EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.28		$	.21	$	.54		$	.42
Income (loss) from discontinued operations, net of taxes^(a)		(.03	)		.01		(.03	)		.01
Net income (loss) attributable to Key common shareholders^(c)		.24			.22		.51			.43

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.27		$	.21	$	.53		$	.42
Income (loss) from discontinued operations, net of taxes^(a)		(.03	)		.01		(.03	)		.01
Net income (loss) attributable to Key common shareholders — assuming dilution^(c)		.24			.22		.51			.43

(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)	Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.

(c)	EPS may not foot due to rounding.

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


in millions	June 30, 2014		December 31, 2013		June 30, 2013
Commercial, financial and agricultural^(a)	$	26,327	$	24,963	$	23,715
Commercial real estate:
Commercial mortgage		7,946		7,720		7,474
Construction		1,047		1,093		1,060

Total commercial real estate loans		8,993		8,813		8,534
Commercial lease financing^(b)		4,241		4,551		4,774

Total commercial loans		39,561		38,327		37,023
Residential — prime loans:
Real estate — residential mortgage		2,189		2,187		2,176
Home equity:
Key Community Bank		10,379		10,340		10,173
Other		300		334		375

Total home equity loans		10,679		10,674		10,548

Total residential — prime loans		12,868		12,861		12,724
Consumer other — Key Community Bank		1,514		1,449		1,424
Credit cards		718		722		701
Consumer other:
Marine		888		1,028		1,160
Other		51		70		69

Total consumer other		939		1,098		1,229

Total consumer loans		16,039		16,130		16,078

Total loans^{(c) (d)}	$	55,600	$	54,457	$	53,101

(a)	Loan balances include $94 million, $94 million, and $96 million of commercial credit card balances at June 30, 2014, December 31, 2013, and June 30, 2013, respectively.

(b)

Commercial lease financing includes receivables of $375 million and $58 million held as collateral for a secured borrowing at June 30, 2014, and December 31, 2013, respectively. 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 half 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)

At June 30, 2014, total loans include purchased loans of $151 million, of which $15 million were PCI loans. At December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. At June 30, 2013, total loans include purchased loans of $187 million, of which $19 million were PCI loans.

(d)	Total loans exclude loans of $4.2 billion at June 30, 2014, $4.5 billion at December 31, 2013, and $5.0 billion at June 30, 2013, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:


in millions	June 30, 2014		December 31, 2013		June 30, 2013
Commercial, financial and agricultural	$	181	$	278	$	22
Real estate — commercial mortgage		221		307		318
Commercial lease financing		10		9		14
Real estate — residential mortgage		23		17		48

Total loans held for sale	$	435	$	611	$	402

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


in millions	June 30, 2014			December 31, 2013			June 30, 2013
Balance at beginning of the period	$	401		$	699		$	434
New originations		978			1,669			1,241
Transfers from held to maturity, net		(8	)		1			17
Loan sales		(934	)		(1,750	)		(1,292	)
Loan draws (payments), net		(2	)		(8	)		—
Transfers to OREO / valuation adjustments		—			—			2

Balance at end of period	$	435		$	611		$	402

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	June 30, 2014		December 31, 2013		June 30, 2013
Total nonperforming loans^(a)	$	396	$	508	$	652
Nonperforming loans held for sale		1		1		14
OREO		12		15		18
Other nonperforming assets		1		7		9

Total nonperforming assets	$	410	$	531	$	693

Nonperforming assets from discontinued operations — education lending^(b)	$	19	$	25	$	19

Restructured loans included in nonperforming loans	$	142	$	214	$	195
Restructured loans with an allocated specific allowance^(c)		59		71		65
Specifically allocated allowance for restructured loans^(d)		30		35		30
Accruing loans past due 90 days or more	$	83	$	71	$	80
Accruing loans past due 30 through 89 days		274		318		251

(a)	Loan balances exclude $15 million, $16 million, and $19 million of PCI loans at June 30, 2014, December 31, 2013, and June 30, 2013, respectively.

(b)	Includes restructured loans of approximately $18 million, $13 million, and $8 million at June 30, 2014, December 31, 2013, and June 30, 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 June 30, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $22 million and $15 million, respectively. Changes in the accretable yield during 2014 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 2014.

At June 30, 2014, the approximate carrying amount of our commercial nonperforming loans outstanding represented 58% of their original contractual amount, total nonperforming loans outstanding represented 73% of their original contractual amount owed, and nonperforming assets in total were carried at 73% of their original contractual amount.

At June 30, 2014, our twenty largest nonperforming loans totaled $55 million, representing 14% of total loans on nonperforming status. At June 30, 2013, the twenty largest nonperforming loans totaled $191 million, representing 29% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $8 million for the six months ended June 30, 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 June 30, 2014, December 31, 2013, and June 30, 2013:


			Unpaid				Average
June 30, 2014	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	12	$	18		—	$	23
Commercial real estate:
Commercial mortgage		23		28		—		23
Construction		6		17		—		6

Total commercial real estate loans		29		45		—		29

Total commercial loans		41		63		—		52

Real estate — residential mortgage		25		25		—		26

Home equity:
Key Community Bank		66		66		—		68
Other		2		2		—		2

Total home equity loans		68		68		—		70
Consumer other:
Marine		2		2		—		2

Total consumer other		2		2		—		2

Total consumer loans		95		95		—		98

Total loans with no related allowance recorded		136		158		—		150

With an allowance recorded:
Commercial, financial and agricultural		5		7	$	3		6
Commercial real estate:
Commercial mortgage		2		3		1		2
Construction		—		—		—		—

Total commercial real estate loans		2		3		1		2

Total commercial loans		7		10		4		8


Real estate — residential mortgage		29		29		5		28

Home equity:
Key Community Bank		37		37		15		36
Other		11		11		3		11

Total home equity loans		48		48		18		47

Consumer other — Key Community Bank		3		3		—		3
Credit cards		4		4		—		4
Consumer other:
Marine		48		48		5		49
Other		1		1		—		1

Total consumer other		49		49		5		50

Total consumer loans		133		133		28		132

Total loans with an allowance recorded		140		143		32		140

Total	$	276	$	301	$	32	$	290

(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
June 30, 2013	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	89	$	140		—	$	91
Commercial real estate:
Commercial mortgage		88		138		—		88
Construction		50		157		—		49

Total commercial real estate loans		138		295		—		137

Total commercial loans		227		435		—		228

Real estate — residential mortgage		16		16		—		16

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

Total home equity loans		71		71		—		68

Consumer other:
Marine		3		3		—		3

Total consumer other		3		3		—		3

Total consumer loans		90		90		—		87

Total loans with no related allowance recorded		317		525		—		315

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

Total commercial real estate loans		7		18		2		8

Total commercial loans		29		49		8		26


Real estate — residential mortgage		20		20		5		19

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

Total home equity loans		40		40		10		38

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

Total consumer other		51		51		10		50

Total consumer loans		118		118		26		114

Total loans with an allowance recorded		147		167		34		140

Total	$	464	$	692	$	34	$	455

(a)	The Recorded Investment 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 six months ended June 30, 2014, and June 30, 2013, interest income recognized on the outstanding balances of accruing impaired loans totaled $4 million and $3 million, respectively.

At June 30, 2014, aggregate restructured loans (accrual and nonaccrual loans) totaled $266 million, compared to $338 million at December 31, 2013, and $311 million at June 30, 2013. We added $43 million in restructured loans during the first six months of 2014, which were offset by $115 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2014, follows:


			Pre-modification		Post-modification
			Outstanding		Outstanding
June 30, 2014	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		24	$	20	$	10
Commercial real estate:
Real estate — commercial mortgage		11		40		14
Real estate — construction		3		15		2

Total commercial real estate loans		14		55		16

Total commercial loans		38		75		26
Real estate — residential mortgage		521		34		34
Home equity:
Key Community Bank		1,086		68		64
Other		126		4		3

Total home equity loans		1,212		72		67
Consumer other — Key Community Bank		33		1		1
Credit cards		60		—		—
Consumer other:
Marine		207		15		13
Other		36		1		1

Total consumer other		243		16		14

Total consumer loans		2,069		123		116

Total nonperforming TDRs		2,107		198		142

Prior-year accruing^(a)
Commercial, financial and agricultural		32		7		3
Commercial real estate:
Real estate — commercial mortgage		4		17		9

Total commercial real estate loans		4		17		9

Total commercial loans		36		24		12
Real estate — residential mortgage		287		21		21
Home equity:
Key Community Bank		759		43		39
Other		322		10		8

Total home equity loans		1,081		53		47
Consumer other — Key Community Bank		54		2		2
Credit cards		653		5		3
Consumer other:
Marine		428		60		37
Other		73		2		2

Total consumer other		501		62		39

Total consumer loans		2,576		143		112

Total prior-year accruing TDRs		2,612		167		124

Total TDRs		4,719	$	365	$	266

(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 June 30, 2013, follows:


			Pre-modification		Post- modification
			Outstanding		Outstanding
June 30, 2013	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		43	$	53	$	24
Commercial real estate:
Real estate — commercial mortgage		15		58		21
Real estate — construction		6		19		5

Total commercial real estate loans		21		77		26

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

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

Total consumer other		408		43		22

Total consumer loans		3,294		168		145

Total nonperforming TDRs		3,358		298		195

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

Total commercial real estate loans		5		45		47

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

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

Total consumer other		292		31		30

Total consumer loans		1,057		65		64

Total prior-year accruing TDRs		1,149		120		116

Total TDRs		4,507	$	418	$	311

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

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 three months ended June 30, 2014, there were no significant commercial loan TDRs, and 107 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults from modifications resulting in TDR status during 2013. During the three months ended June 30, 2013, there were no significant commercial loan TDRs, and 127

consumer loan TDRs with a combined recorded investment of $5 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.


in millions	June 30, 2014		December 31, 2013		June 30, 2013
Commercial loans:
Interest rate reduction	$	27	$	95	$	88
Forgiveness of principal		5		5		6
Other		6		7		8

Total	$	38	$	107	$	102


Consumer loans:
Interest rate reduction	$	139	$	130	$	104
Forgiveness of principal		4		5		5
Other		85		96		100

Total	$	228	$	231	$	209


Total commercial and consumer TDRs^(a)	$	266	$	338	$	311
Total loans		55,600		54,457		53,101

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $1 million, $15 million, and $25 million at June 30, 2014, December 31, 2013, and June 30, 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 June 30, 2014, approximately $54.8 billion, or 98.6%, of our total loans were current. At June 30, 2014, total past due loans and nonperforming loans of $753 million represented approximately 1.4% of total loans.

The following aging analysis of past due and current loans as of June 30, 2014, December 31, 2013, and June 30, 2013, provides further information regarding Key’s credit exposure.


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
June 30, 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	$	26,212	$	52	$	11	$	15	$	37	$	115		—	$	26,327
Commercial real estate:
Commercial mortgage		7,855		18		15		19		38		90	$	1		7,946
Construction		1,029		2		2		5		9		18		—		1,047

Total commercial real estate loans		8,884		20		17		24		47		108		1		8,993
Commercial lease financing		4,186		32		4		4		15		55		—		4,241

Total commercial loans	$	39,282	$	104	$	32	$	43	$	99	$	278	$	1	$	39,561


Real estate — residential mortgage	$	2,061	$	16	$	6	$	4	$	89	$	115	$	13	$	2,189
Home equity:
Key Community Bank		10,115		46		22		17		178		263		1		10,379
Other		281		5		2		1		11		19		—		300

Total home equity loans		10,396		51		24		18		189		282		1		10,679
Consumer other — Key Community Bank		1,493		9		4		6		2		21		—		1,514
Credit cards		698		6		4		9		1		20		—		718
Consumer other:
Marine		855		13		3		2		15		33		—		888
Other		47		1		1		1		1		4		—		51

Total consumer other		902		14		4		3		16		37		—		939

Total consumer loans	$	15,550	$	96	$	42	$	40	$	297	$	475	$	14	$	16,039


Total loans	$	54,832	$	200	$	74	$	83	$	396	$	753	$	15	$	55,600


							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
June 30, 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	$	23,512	$	37	$	9	$	11	$	146	$	203		—	$	23,715
Commercial real estate:
Commercial mortgage		7,307		16		5		38		106		165	$	2		7,474
Construction		1,031		3		—		—		26		29		—		1,060

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

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


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

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

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

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


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

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 $15 million and $19 million of PCI loans at June 30, 2014, and June 30, 2013, respectively, based on bond rating, regulatory classification, and payment activity as of June 30, 2014, and June 30, 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


June 30,
in millions
	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING^{(b), (c)}	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
AAA — AA	$	364	$	275	$	3	$	1	$	1	$	1	$	712	$	485	$	1,080	$	762
A		1,091		618		1		74		1		1		382		1,011		1,475		1,704
BBB — BB		23,534		21,355		7,412		6,600		907		871		2,968		3,046		34,821		31,872
B		545		560		287		364		99		23		99		145		1,030		1,092
CCC — C		793		907		242		433		39		164		80		87		1,154		1,591

Total	$	26,327	$	23,715	$	7,945	$	7,472	$	1,047	$	1,060	$	4,241	$	4,774	$	39,560	$	37,021

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

(b)	Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

(c)	Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications^{(a), (b)}


June 30,
in millions
	Residential — Prime
GRADE	2014		2013
Pass	$	12,554	$	12,374
Substandard		300		333

Total	$	12,854	$	12,707

Credit Risk Profile Based on Payment Activity^(a)


June 30,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
Performing	$	1,512	$	1,421	$	717	$	690	$	873	$	1,130	$	50	$	68	$	3,152	$	3,309
Nonperforming		2		3		1		11		15		30		1		1		19		45

Total	$	1,514	$	1,424	$	718	$	701	$	888	$	1,160	$	51	$	69	$	3,171	$	3,354

(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 June 30, 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 June 30, 2014, the ALLL was $814 million, or 1.46% of loans, compared to $876 million, or 1.65% of loans, at June 30, 2013. At June 30, 2014, the ALLL was 205.6% of nonperforming loans, compared to 134.4% at June 30, 2013.

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


	Three months ended June 30,						Six months ended June 30,
in millions	2014			2013			2014			2013
Balance at beginning of period — continuing operations	$	834		$	893		$	848		$	888
Charge-offs		(56	)		(74	)		(113	)		(164	)
Recoveries		26			29			63			70

Net loans and leases charged off		(30	)		(45	)		(50	)		(94	)
Provision for loan and lease losses from continuing operations		10			28			16			83
Foreign currency translation adjustment		—			—			—			(1	)

Balance at end of period — continuing operations	$	814		$	876		$	814		$	876

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


in millions	December 31, 2013		Provision			Charge-offs			Recoveries		June 30, 2014
Commercial, financial and agricultural	$	362	$	13		$	(23	)	$	21	$	373
Real estate — commercial mortgage		165		(5	)		(3	)		2		159
Real estate — construction		32		(11	)		(2	)		15		34
Commercial lease financing		62		(3	)		(5	)		6		60

Total commercial loans		621		(6	)		(33	)		44		626
Real estate — residential mortgage		37		(9	)		(5	)		2		25
Home equity:
Key Community Bank		84		9			(20	)		4		77
Other		11		1			(6	)		3		9

Total home equity loans		95		10			(26	)		7		86
Consumer other — Key Community Bank		29		8			(16	)		3		24
Credit cards		34		13			(18	)		1		30
Consumer other:
Marine		29		1			(14	)		5		21
Other		3		(1	)		(1	)		1		2

Total consumer other:		32		—			(15	)		6		23

Total consumer loans		227		22			(80	)		19		188

Total ALLL — continuing operations		848		16			(113	)		63		814
Discontinued operations		39		9			(24	)		8		32

Total ALLL — including discontinued operations	$	887	$	25		$	(137	)	$	71	$	846


in millions	December 31, 2012		Provision			Charge-offs			Recoveries		June 30, 2013
Commercial, financial and agricultural	$	327	$	35		$	(29	)	$	19	$	352
Real estate — commercial mortgage		198		(10	)		(16	)		10		182
Real estate — construction		41		(13	)		(2	)		8		34
Commercial lease financing		55		6			(8	)		8		61

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

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

Total consumer other:		43		4			(19	)		10		38

Total consumer loans		267		64			(109	)		25		247

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

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

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

Our ALLL from continuing operations decreased by $62 million, or 7.1%, from the second 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 levels of criticized, classified, and nonperforming loans 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 $276 million, with a corresponding allowance of $32 million at June 30, 2014. Loans outstanding collectively evaluated for impairment totaled $55.3 billion, with a corresponding allowance of $781 million at June 30, 2014. At June 30, 2014, PCI loans evaluated for impairment totaled $15 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the six months ended June 30, 2014. At June 30, 2013, the loans outstanding individually evaluated for impairment totaled $464 million, with a corresponding allowance of $34 million. Loans outstanding collectively evaluated for impairment totaled $52.6 billion, with a corresponding allowance of $842 million at June 30, 2013. At June 30, 2013, PCI loans evaluated for impairment totaled $19 million, with a corresponding allowance of less than $1 million. There was a credit for loan and lease losses on these PCI loans of $1 million during the six months ended June 30, 2013.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2014, follows:

Allowance

Outstanding

Individually

Collectively

Purchased

Individually

Collectively

Purchased

June 30, 2014

Evaluated for

Credit

Evaluated for

Credit

in millions

Impairment

Impaired

Loans

Impairment

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company