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, 2015

Commission File Number 001-11302

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		848,305,592 Shares
Title of class		Outstanding at April 30, 2015

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets — March 31, 2015 (Unaudited), December 31, 2014, and March 31, 2014 (Unaudited)		5

	Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2015, and March 31, 2014		6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2015, and March 31, 2014		7

	Consolidated Statements of Changes in Equity (Unaudited) — Three months ended March 31, 2015, and March 31, 2014		8

	Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2015, and March 31, 2014		9

	Notes to Consolidated Financial Statements (Unaudited)

	Note 1. Basis of Presentation		10
	Note 2. Earnings Per Common Share		14
	Note 3. Loans and Loans Held for Sale		15
	Note 4. Asset Quality		17
	Note 5. Fair Value Measurements		32
	Note 6. Securities		47
	Note 7. Derivatives and Hedging Activities		51
	Note 8. Mortgage Servicing Assets		59
	Note 9. Variable Interest Entities		60
	Note 10. Income Taxes		62
	Note 11. Acquisitions and Discontinued Operations		63
	Note 12. Securities Financing Activities		71
	Note 13. Employee Benefits		73
	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries		74
	Note 15. Contingent Liabilities and Guarantees		75
	Note 16. Accumulated Other Comprehensive Income		77
	Note 17. Shareholders’ Equity		79
	Note 18. Line of Business Results		80

	Report of Independent Registered Public Accounting Firm		84


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

	Introduction	85
	Terminology	85
	Selected financial data	86
	Forward-looking statements	87
	Economic overview	88
	Long-term financial goals	89
	Strategic developments	89
	Demographics	90
	Supervision and regulation	91

	Highlights of Our Performance	92
	Financial performance	92

	Results of Operations	97
	Net interest income	97
	Noninterest income	100
	Noninterest expense	102
	Income taxes	103

	Line of Business Results	104
	Key Community Bank summary of operations	104
	Key Corporate Bank summary of operations	105
	Other Segments	106

	Financial Condition	107
	Loans and loans held for sale	107
	Securities	113
	Other investments	116
	Deposits and other sources of funds	116
	Capital	117

	Risk Management	121
	Overview	121
	Market risk management	122
	Liquidity risk management	127
	Credit risk management	130
	Operational and compliance risk management	137

	Critical Accounting Policies and Estimates	138

	European Sovereign and Non-Sovereign Debt Exposures	139

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	140
Item 4.	Controls and Procedures	140


	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	140
Item 1A.	Risk Factors	140
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	141
Item 6.	Exhibits	141
	Signature	142
	Exhibits	143

Throughout the Notes to Consolidated Financial Statements (Unaudited) and Management’s Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations as defined in Note 1 (“Basis of Presentation”) that begins on page 10.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


in millions, except per share data	March 31, 2015			December 31, 2014			March 31, 2014
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	506		$	653		$	409
Short-term investments		3,378			4,269			2,922
Trading account assets		789			750			840
Securities available for sale		13,120			13,360			12,359
Held-to-maturity securities (fair value: $5,003, $4,974, and $4,733)		5,005			5,015			4,826
Other investments		730			760			899
Loans, net of unearned income of $665, $682, and $776		57,953			57,381			55,445
Less: Allowance for loan and lease losses		794			794			834

Net loans		57,159			56,587			54,611
Loans held for sale		1,649			734			401
Premises and equipment		806			841			862
Operating lease assets		306			330			294
Goodwill		1,057			1,057			979
Other intangible assets		92			101			117
Corporate-owned life insurance		3,488			3,479			3,425
Derivative assets		731			609			427
Accrued income and other assets (including $1 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		3,144			2,952			3,004
Discontinued assets (including $187 of loans in portfolio at fair value)		2,246			2,324			4,427

Total assets	$	94,206		$	93,821		$	90,802

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	35,623		$	34,536		$	34,373
Savings deposits		2,413			2,371			2,513
Certificates of deposit ($100,000 or more)		1,982			2,040			2,849
Other time deposits		3,182			3,259			3,682

Total interest-bearing deposits		43,200			42,206			43,417
Noninterest-bearing deposits		27,948			29,228			23,244
Deposits in foreign office — interest-bearing		474			564			605

Total deposits		71,622			71,998			67,266
Federal funds purchased and securities sold under repurchase agreements		517			575			1,417
Bank notes and other short-term borrowings		608			423			464
Derivative liabilities		825			784			408
Accrued expense and other liabilities		1,308			1,621			1,297
Long-term debt		8,713			7,875			7,712
Discontinued liabilities		—			3			1,819

Total liabilities		83,593			83,279			80,383
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 2,900,234, 2,904,839, and 2,904,839 shares		290			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		3,910			3,986			3,961
Retained earnings		8,445			8,273			7,793
Treasury stock, at cost (166,049,974, 157,566,493, and 132,100,665 shares)		(2,780	)		(2,681	)		(2,335	)
Accumulated other comprehensive income (loss)		(279	)		(356	)		(324	)

Key shareholders’ equity		10,603			10,530			10,403
Noncontrolling interests		10			12			16

Total equity		10,613			10,542			10,419

Total liabilities and equity	$	94,206		$	93,821		$	90,802

(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 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	2015		2014
INTEREST INCOME
Loans	$	523	$	519
Loans held for sale		7		4
Securities available for sale		70		72
Held-to-maturity securities		24		22
Trading account assets		5		6
Short-term investments		2		1
Other investments		5		6

Total interest income		636		630
INTEREST EXPENSE
Deposits		26		32
Federal funds purchased and securities sold under repurchase agreements		—		1
Bank notes and other short-term borrowings		2		2
Long-term debt		37		32

Total interest expense		65		67

NET INTEREST INCOME		571		563
Provision for credit losses		35		4

Net interest income after provision for credit losses		536		559
NONINTEREST INCOME
Trust and investment services income		109		98
Investment banking and debt placement fees		68		84
Service charges on deposit accounts		61		63
Operating lease income and other leasing gains		19		29
Corporate services income		43		42
Cards and payments income		42		38
Corporate-owned life insurance income		31		26
Consumer mortgage income		3		2
Mortgage servicing fees		13		15
Net gains (losses) from principal investing		29		24
Other income^(a)		19		14

Total noninterest income		437		435
NONINTEREST EXPENSE
Personnel		389		388
Net occupancy		65		64
Computer processing		38		38
Business services and professional fees		33		41
Equipment		22		24
Operating lease expense		11		10
Marketing		8		5
FDIC assessment		8		6
Intangible asset amortization		9		10
OREO expense, net		2		1
Other expense		84		77

Total noninterest expense		669		664

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		304		330
Income taxes		74		92

INCOME (LOSS) FROM CONTINUING OPERATIONS		230		238
Income (loss) from discontinued operations, net of taxes of $3 and $2 (see Note 11)		5		4

NET INCOME (LOSS)		235		242
Less: Net income (loss) attributable to noncontrolling interests		2		—

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	233	$	242

Income (loss) from continuing operations attributable to Key common shareholders	$	222	$	232
Net income (loss) attributable to Key common shareholders		227		236
Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.26	$	.26
Income (loss) from discontinued operations, net of taxes		.01		—
Net income (loss) attributable to Key common shareholders ^(b)		.27		.27
Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.26	$	.26
Income (loss) from discontinued operations, net of taxes		.01		—
Net income (loss) attributable to Key common shareholders ^(b)		.26		.26
Cash dividends declared per common share	$	.065	$	.055
Weighted-average common shares outstanding (000)		848,580		884,727
Effect of convertible preferred stock		—		—
Effect of common share options and other stock awards		8,542		7,163

Weighted-average common shares and potential common shares outstanding (000)^(c)		857,122		891,890

(a)

For each of the three months ended March 31, 2015, and March 31, 2014, net securities gains (losses) totaled less than $1 million. For the three months ended March 31, 2015, impairment losses related to securities totaled less than $1 million. For the three months ended March 31, 2014, 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 March 31,
in millions	2015			2014
Net income (loss)	$	235		$	242
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $33 and $17		55			29
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $19 and ($1)		32			(1	)
Foreign currency translation adjustments, net of income taxes of ($8) and ($4)		(13	)		(2	)
Net pension and postretirement benefit costs, net of income taxes of $1 and $2		3			2

Total other comprehensive income (loss), net of tax		77			28

Comprehensive income (loss)		312			270
Less: Comprehensive income attributable to noncontrolling interests		2			—

Comprehensive income (loss) attributable to Key	$	310		$	270

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Equity (Unaudited)


	Key Shareholders’ Equity
	Preferred			Common																	Accumulated
	Shares			Shares														Treasury			Other
dollars in millions, except per	Outstanding			Outstanding			Preferred			Common		Capital			Retained			Stock,			Comprehensive			Noncontrolling
share amounts	(000)			(000)			Stock			Shares		Surplus			Earnings			at Cost			Income (Loss)			Interests
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

BALANCE AT DECEMBER 31, 2014		2,905			859,403		$	291		$	1,017	$	3,986		$	8,273		$	(2,681	)	$	(356	)	$	12
Net income (loss)																233									2
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $33																						55
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $19																						32
Foreign currency translation adjustments, net of income taxes of ($8)																						(13	)
Net pension and postretirement benefit costs, net of income taxes of $1																						3
Deferred compensation													5
Cash dividends declared on common shares ($.065 per share)																(55	)
Cash dividends declared on Noncumulative Series A
Preferred Stock ($1.9375 per share)																(6	)
Common shares repurchased					(14,087	)													(197	)
Common shares exchanged for Series A Preferred Stock		(5	)		33			(1	)										1
Common shares reissued (returned) for stock options and other employee benefit plans					5,571								(81	)					97
Net contribution from (distribution to) noncontrolling interests																									(4	)

BALANCE AT MARCH 31, 2015		2,900			850,920		$	290		$	1,017	$	3,910		$	8,445		$	(2,780	)	$	(279	)	$	10

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended March 31,
in millions	2015			2014
OPERATING ACTIVITIES
Net income (loss)	$	235		$	242
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for credit losses		35			4
Provision (credit) for losses on LIHTC guaranteed funds		—			(6	)
Depreciation, amortization and accretion expense, net		50			52
Increase in cash surrender value of corporate-owned life insurance		(25	)		(24	)
Stock-based compensation expense		13			11
Deferred income taxes (benefit)		50			40
Proceeds from sales of loans held for sale		1,225			611
Originations of loans held for sale, net of repayments		(2,109	)		(383	)
Net losses (gains) on sales of loans held for sale		(20	)		(15	)
Net losses (gains) from principal investing		(29	)		(24	)
Net losses (gains) on leased equipment		(3	)		(14	)
Net decrease (increase) in trading account assets		(39	)		(102	)
Other operating activities, net		(485	)		(236	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(1,102	)		156
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments, excluding acquisitions		891			2,668
Purchases of securities available for sale		(403	)		(618	)
Proceeds from prepayments and maturities of securities available for sale		724			650
Proceeds from prepayments and maturities of held-to-maturity securities		266			180
Purchases of held-to-maturity securities		(257	)		(250	)
Purchases of other investments		(13	)		(17	)
Proceeds from sales of other investments		32			122
Proceeds from prepayments and maturities of other investments		4			2
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(727	)		(1,029	)
Proceeds from sales of portfolio loans		47			21
Proceeds from corporate-owned life insurance		15			6
Purchases of premises, equipment, and software		(3	)		(11	)
Proceeds from sales of premises and equipment		—			1
Proceeds from sales of other real estate owned		6			5

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		582			1,730
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		(376	)		(1,996	)
Net increase (decrease) in short-term borrowings		127			4
Net proceeds from issuance of long-term debt		1,000			78
Payments on long-term debt		(129	)		(10	)
Repurchase of common shares		(197	)		(130	)
Net proceeds from reissuance of common shares		9			15
Cash dividends paid		(61	)		(55	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		373			(2,094	)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(147	)		(208	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		653			617

CASH AND DUE FROM BANKS AT END OF PERIOD	$	506		$	409

Additional disclosures relative to cash flows:
Interest paid	$	89		$	103
Income taxes paid (refunded)		19			10
Noncash items:
Reduction of secured borrowing and related collateral	$	72		$	6
Loans transferred to portfolio from held for sale		—			2
Loans transferred to held for sale from portfolio		10			5
Loans transferred to other real estate owned		7			3

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 “2014 Form 10-K” refer to our Form 10-K for the year ended December 31, 2014, 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.		NYSE: New York Stock Exchange.
BHCs: Bank holding companies.		OCC: Office of the Comptroller of the Currency.
CCAR: Comprehensive Capital Analysis and Review.		OCI: Other comprehensive income (loss).
CMBS: Commercial mortgage-backed securities.		OREO: Other real estate owned.
CMO: Collateralized mortgage obligation.		OTTI: Other-than-temporary impairment.
Common shares: KeyCorp common shares, $1 par value.		QSPE: Qualifying special purpose entity.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and		PBO: Projected benefit obligation.
Consumer Protection Act of 2010.		PCI: Purchased credit impaired.
EPS: Earnings per share.		S&P: Standard and Poor’s Ratings Services, a Division of The
ERM: Enterprise risk management.		McGraw-Hill Companies, Inc.
EVE: Economic value of equity.		SEC: U.S. Securities & Exchange Commission.
FASB: Financial Accounting Standards Board.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
FDIC: Federal Deposit Insurance Corporation.		Perpetual Convertible Preferred Stock, Series A.
Federal Reserve: Board of Governors of the Federal Reserve		SIFIs: Systemically important financial institutions, including
System.		BHCs with total consolidated assets of at least $50 billion
FHLMC: Federal Home Loan Mortgage Corporation.		and nonbank financial companies designated by FSOC for
FSOC: Financial Stability Oversight Council.		supervision by the Federal Reserve.
GAAP: U.S. generally accepted accounting principles.		TDR: Troubled debt restructuring.
GNMA: Government National Mortgage Association.		TE: Taxable-equivalent.
ISDA: International Swaps and Derivatives Association.		U.S. Treasury: United States Department of the Treasury.
KAHC: Key Affordable Housing Corporation.		VaR: Value at risk.
KEF: Key Equipment Finance.		VEBA: Voluntary Employee Beneficiary Association.
KREEC: Key Real Estate Equity Capital, Inc.		Victory: Victory Capital Management and/or
LIBOR: London Interbank Offered Rate.		Victory Capital Advisors.
LIHTC: Low-income housing tax credit.		VIE: Variable interest entity.

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 2014 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 2015

Troubled debt restructurings. In August 2014, the FASB issued new accounting guidance that clarifies how to account for certain government-guaranteed mortgage loans upon foreclosure. This accounting guidance was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or a prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not 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 was effective for interim and annual reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and was implemented using a cumulative-effect approach to transactions outstanding as of the effective date with no adjustment to prior periods. 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 was not permitted. The adoption of this accounting guidance did not have a material effect 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 was effective prospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. The adoption of this accounting guidance did not 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 or the practical expedient method to the proportional amortization method. This accounting guidance was effective retrospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. We elected to amortize our LIHTCs under the practical

expedient method to the proportional amortization method. As our LIHTCs were previously accounted for under the effective yield method and related amortization expense was previously classified as income taxes in our Consolidated Statements of Income, 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 our LIHTCs in Note 9 (“Variable Interest Entities”).

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 was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide the disclosure related to consumer residential mortgages required by this new accounting guidance in Note 4 (“Asset Quality”).

Accounting Guidance Pending Adoption at March 31, 2015

Cloud computing fees. In April 2015, the FASB issued new accounting guidance that clarifies a customer’s accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. 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 prospective method or a retrospective 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.

Imputation of interest. In April 2015, the FASB issued new accounting guidance that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a retrospective 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.

Consolidation. In February 2015, the FASB issued new accounting guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance amends the current accounting guidance to address limited partnerships and similar legal entities, certain investment funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and early adoption is permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Derivatives and hedging. In November 2014, the FASB issued new accounting guidance that clarifies how current guidance should be interpreted when evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. An entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, when evaluating the nature of a host contract. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and 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.

Going concern. In August 2014, the FASB issued new accounting guidance that requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. Disclosure is required when conditions or events raise substantial doubt about an entity’s ability to continue as a going concern. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, 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.

Consolidation. In August 2014, the FASB issued new accounting guidance that clarifies how to measure the financial assets and the financial liabilities of a consolidated collateralized financing entity. 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 cumulative-effect approach. 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.

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.

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, 2017 (effective January 1, 2018, for us) and can be implemented using either a retrospective method or a cumulative-effect approach. Early adoption is not permitted. We have elected to implement this new accounting guidance using a cumulative-effect approach. Our preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations. There are many aspects of this new accounting guidance that are still being interpreted, and therefore, the results of our materiality analysis may change based on the conclusions reached as to the application of the new guidance.

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 March 31,
dollars in millions, except per share amounts	2015		2014
EARNINGS
Income (loss) from continuing operations	$	230	$	238
Less: Net income (loss) attributable to noncontrolling interests		2		—

Income (loss) from continuing operations attributable to Key		228		238
Less: Dividends on Series A Preferred Stock		6		6

Income (loss) from continuing operations attributable to Key common shareholders		222		232
Income (loss) from discontinued operations, net of taxes^(a)		5		4

Net income (loss) attributable to Key common shareholders	$	227	$	236

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		848,580		884,727
Effect of convertible preferred stock		—		—
Effect of common share options and other stock awards		8,542		7,163

Weighted-average common shares and potential common shares outstanding (000)^(b)		857,122		891,890

EARNINGS PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.26	$	.26
Income (loss) from discontinued operations, net of taxes^(a)		.01		—
Net income (loss) attributable to Key common shareholders^(c)		.27		.27
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.26	$	.26
Income (loss) from discontinued operations, net of taxes^(a)		.01		—
Net income (loss) attributable to Key common shareholders — assuming dilution^(c)		.26		.26

(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	March 31, 2015		December 31, 2014		March 31, 2014
Commercial, financial and agricultural^(a)	$	28,783	$	27,982	$	26,224
Commercial real estate:
Commercial mortgage		8,162		8,047		7,877
Construction		1,142		1,100		1,007

Total commercial real estate loans		9,304		9,147		8,884
Commercial lease financing^(b)		4,064		4,252		4,396

Total commercial loans		42,151		41,381		39,504
Residential — prime loans:
Real estate — residential mortgage		2,231		2,225		2,183
Home equity:
Key Community Bank		10,270		10,366		10,281
Other		253		267		315

Total home equity loans		10,523		10,633		10,596

Total residential — prime loans		12,754		12,858		12,779
Consumer other — Key Community Bank		1,547		1,560		1,436
Credit cards		727		754		698
Consumer other:
Marine		730		779		965
Other		44		49		63

Total consumer other		774		828		1,028

Total consumer loans		15,802		16,000		15,941

Total loans^{(c) (d)}	$	57,953	$	57,381	$	55,445

(a)	Loan balances include $87 million, $88 million, and $95 million of commercial credit card balances at March 31, 2015, December 31, 2014, and March 31, 2014, respectively.

(b)

Commercial lease financing includes receivables held as collateral for a secured borrowing of $230 million, $302 million, and $124 million at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”) beginning on page 202 of our 2014 Form 10-K.

(c)

At March 31, 2015, total loans include purchased loans of $130 million, of which $12 million were PCI loans. At December 31, 2014, total loans include purchased loans of $138 million, of which $13 million were PCI loans. At March 31, 2014, total loans include purchased loans of $159 million, of which $16 million were PCI loans.

(d)	Total loans exclude loans of $2.2 billion at March 31, 2015, $2.3 billion at December 31, 2014, and $4.4 billion at March 31, 2014, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:


in millions	March 31, 2015		December 31, 2014		March 31, 2014
Commercial, financial and agricultural	$	183	$	63	$	44
Real estate — commercial mortgage		1,408		638		333
Commercial lease financing		14		15		8
Real estate — residential mortgage		44		18		16

Total loans held for sale	$	1,649	$	734	$	401

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


in millions	March 31, 2015			December 31, 2014			March 31, 2014
Balance at beginning of the period	$	734		$	784		$	611
New originations		2,130			2,465			645
Transfers from (to) held to maturity, net		10			2			3
Loan sales		(1,204	)		(2,516	)		(596	)
Loan draws (payments), net		(21	)		(1	)		(262	)

Balance at end of period	$	1,649		$	734		$	401

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, 2015		December 31, 2014		March 31, 2014
Total nonperforming loans^{(a), (b)}	$	437	$	418	$	449
Nonperforming loans held for sale		—		—		1
OREO^(c)		20		18		12
Other nonperforming assets		—		—		7

Total nonperforming assets	$	457	$	436	$	469

Nonperforming assets from discontinued operations—education lending^(d)	$	8	$	11	$	20

Restructured loans included in nonperforming loans	$	141	$	157	$	178
Restructured loans with an allocated specific allowance^(e)		70		82		51
Specifically allocated allowance for restructured loans^(f)		39		34		32
Accruing loans past due 90 days or more	$	111	$	96	$	89
Accruing loans past due 30 through 89 days		216		235		267

(a)	Loan balances exclude $12 million, $13 million, and $16 million of PCI loans at March 31, 2015, December 31, 2014, and March 31, 2014, respectively.

(b)	Includes carrying value of consumer residential mortgage loans in the process of foreclosure of approximately $119 million at March 31, 2015.

(c)	Includes carrying value of foreclosed residential real estate of approximately $17 million at March 31, 2015.

(d)	Restructured loans of approximately $18 million, $17 million, and $15 million are included in discontinued operations at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.

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

(f)	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, 2015, the outstanding unpaid principal balance and carrying value of all PCI loans was $19 million and $12 million, respectively. Changes in the accretable yield during the first quarter of 2015 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at March 31, 2015.

At March 31, 2015, the approximate carrying amount of our commercial nonperforming loans outstanding represented 79% of their original contractual amount, total nonperforming loans outstanding represented 81% of their original contractual amount owed, and nonperforming assets in total were carried at 81% of their original contractual amount.

At March 31, 2015, our 20 largest nonperforming loans totaled $123 million, representing 28% of total loans on nonperforming status. At March 31, 2014, our 20 largest nonperforming loans totaled $75 million, representing 17% 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, 2015, and $16 million for the year ended December 31, 2014.

The following tables set forth a further breakdown of individually impaired loans as of March 31, 2015, December 31, 2014, and March 31, 2014:


March 31, 2015 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	20	$	51		—	$	13
Commercial real estate:
Commercial mortgage		14		19		—		14
Construction		7		7		—		6

Total commercial real estate loans		21		26		—		20

Total commercial loans		41		77		—		33

Real estate — residential mortgage		23		23		—		23
Home equity:
Key Community Bank		62		62		—		62
Other		1		2		—		1

Total home equity loans		63		64		—		63
Consumer other:
Marine		1		1		—		2

Total consumer other		1		1		—		2

Total consumer loans		87		88		—		88

Total loans with no related allowance recorded		128		165		—		121
With an allowance recorded:
Commercial, financial and agricultural		62		62	$	20		50
Commercial real estate:
Commercial mortgage		6		7		2		6
Construction		—		—		—		1

Total commercial real estate loans		6		7		2		7

Total commercial loans		68		69		22		57

Real estate — residential mortgage		32		32		5		32
Home equity:
Key Community Bank		49		49		16		48
Other		11		11		2		11

Total home equity loans		60		60		18		59
Consumer other — Key Community Bank		3		3		—		3
Credit cards		4		4		—		4
Consumer other:
Marine		41		41		4		42
Other		2		2		—		2

Total consumer other		43		43		4		44

Total consumer loans		142		142		27		142

Total loans with an allowance recorded		210		211		49		199

Total	$	338	$	376	$	49	$	320

(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.


December 31, 2014 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	6	$	17		—	$	8
Commercial real estate:
Commercial mortgage		15		20		—		19
Construction		5		6		—		7

Total commercial real estate loans		20		26		—		26

Total commercial loans		26		43		—		34

Real estate — residential mortgage		24		24		—		30
Home equity:
Key Community Bank		62		63		—		63
Other		1		1		—		2

Total home equity loans		63		64		—		65
Consumer other:
Marine		2		2		—		2

Total consumer other		2		2		—		2

Total consumer loans		89		90		—		97

Total loans with no related allowance recorded		115		133		—		131
With an allowance recorded:
Commercial, financial and agricultural		37		37	$	9		28
Commercial real estate:
Commercial mortgage		6		6		2		6
Construction		3		3		1		2

Total commercial real estate loans		9		9		3		8

Total commercial loans		46		46		12		36

Real estate — residential mortgage		31		31		5		25
Home equity:
Key Community Bank		46		46		16		43
Other		11		11		2		11

Total home equity loans		57		57		18		54
Consumer other — Key Community Bank		4		4		—		3
Credit cards		4		4		—		4
Consumer other:
Marine		43		43		5		45
Other		2		2		—		2

Total consumer other		45		45		5		47

Total consumer loans		141		141		28		133

Total loans with an allowance recorded		187		187		40		169

Total	$	302	$	320	$	40	$	300

(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.


March 31, 2014 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded 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.

For the three months ended March 31, 2015, and March 31, 2014, interest income recognized on the outstanding balances of accruing impaired loans totaled $1 million and $2 million, respectively.

At March 31, 2015, aggregate restructured loans (accrual and nonaccrual loans) totaled $268 million, compared to $270 million at December 31, 2014, and $294 million at March 31, 2014. We added $11 million in restructured loans during the first three months of 2015, which were offset by $13 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of March 31, 2015, follows:


March 31, 2015 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		11	$	25	$	22
Commercial real estate:
Real estate — commercial mortgage		12		37		13

Total commercial real estate loans		12		37		13

Total commercial loans		23		62		35
Real estate — residential mortgage		383		22		22
Home equity:
Key Community Bank		1,071		76		70
Other		128		4		3

Total home equity loans		1,199		80		73
Consumer other — Key Community Bank		28		1		1
Credit cards		275		2		1
Consumer other:
Marine		117		8		8
Other		26		1		1

Total consumer other		143		9		9

Total consumer loans		2,028		114		106

Total nonperforming TDRs		2,051		176		141
Prior-year accruing^(a)
Commercial, financial and agricultural		17		6		3
Commercial real estate:
Real estate — commercial mortgage		1		2		1

Total commercial real estate loans		1		2		1

Total commercial loans		18		8		4
Real estate — residential mortgage		454		34		34
Home equity:
Key Community Bank		803		47		41
Other		339		10		8

Total home equity loans		1,142		57		49
Consumer other — Key Community Bank		51		2		2
Credit cards		519		4		2
Consumer other:
Marine		429		60		35
Other		76		2		1

Total consumer other		505		62		36

Total consumer loans		2,671		159		123

Total prior-year accruing TDRs		2,689		167		127

Total TDRs		4,740	$	343	$	268

(a)	All TDRs that were restructured prior to January 1, 2015, and are fully accruing.

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


December 31, 2014 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		14	$	25	$	23
Commercial real estate:
Real estate — commercial mortgage		10		38		13
Real estate — construction		1		5		—

Total commercial real estate loans		11		43		13

Total commercial loans		25		68		36
Real estate — residential mortgage		453		27		27
Home equity:
Key Community Bank		1,184		79		72
Other		158		4		4

Total home equity loans		1,342		83		76
Consumer other — Key Community Bank		37		2		1
Credit cards		290		2		2
Consumer other:
Marine		206		17		14
Other		38		1		1

Total consumer other		244		18		15

Total consumer loans		2,366		132		121

Total nonperforming TDRs		2,391		200		157
Prior-year accruing^(a)
Commercial, financial and agricultural		20		6		3
Commercial real estate:
Real estate — commercial mortgage		1		2		1

Total commercial real estate loans		1		2		1

Total commercial loans		21		8		4
Real estate — residential mortgage		381		29		29
Home equity:
Key Community Bank		674		41		36
Other		310		9		8

Total home equity loans		984		50		44
Consumer other — Key Community Bank		45		2		2
Credit cards		514		4		2
Consumer other:
Marine		373		54		31
Other		67		2		1

Total consumer other		440		56		32

Total consumer loans		2,364		141		109

Total prior-year accruing TDRs		2,385		149		113

Total TDRs		4,776	$	349	$	270

(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 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.

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 2015, there were no significant commercial loan TDRs, and 89 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults from modifications resulting in TDR status during 2014. 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. 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 post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs and other selected financial data.


	March 31,		December 31,		March 31,
in millions	2015		2014		2014
Commercial loans:
Interest rate reduction	$	12	$	13	$	49
Forgiveness of principal		2		2		5
Other		25		25		7

Total	$	39	$	40	$	61

Consumer loans:
Interest rate reduction	$	140	$	140	$	142
Forgiveness of principal		4		4		5
Other		85		86		86

Total	$	229	$	230	$	233

Total commercial and consumer TDRs^(a)	$	268	$	270	$	294
Total loans		57,953		57,381		55,445

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $5 million, $5 million, and $2 million at March 31, 2015, December 31, 2014, and March 31, 2014, 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 116 of our 2014 Form 10-K.

At March 31, 2015, approximately $57.2 billion, or 98.7%, of our total loans were current. At March 31, 2015, total past due loans and nonperforming loans of $764 million represented approximately 1.3% of total loans.

The following aging analysis of past due and current loans as of March 31, 2015, December 31, 2014, and March 31, 2014, provides further information regarding Key’s credit exposure.


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
March 31, 2015			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	$	28,603	$	36	$	11	$	35	$	98	$	180		—	$	28,783
Commercial real estate:
Commercial mortgage		8,080		5		18		29		30		82		—		8,162
Construction		1,114		10		4		2		12		28		—		1,142

Total commercial real estate loans		9,194		15		22		31		42		110		—		9,304
Commercial lease financing		4,017		9		6		12		20		47		—		4,064

Total commercial loans	$	41,814	$	60	$	39	$	78	$	160	$	337		—	$	42,151

Real estate — residential mortgage	$	2,129	$	12	$	5	$	2	$	72	$	91	$	11	$	2,231
Home equity:
Key Community Bank		10,012		39		23		13		182		257		1		10,270
Other		238		4		1		1		9		15		—		253

Total home equity loans		10,250		43		24		14		191		272		1		10,523
Consumer other — Key Community Bank		1,527		8		4		6		2		20		—		1,547
Credit cards		708		5		3		9		2		19		—		727
Consumer other:
Marine		707		8		4		2		9		23		—		730
Other		42		1		—		—		1		2		—		44

Total consumer other		749		9		4		2		10		25		—		774

Total consumer loans	$	15,363	$	77	$	40	$	33	$	277	$	427	$	12	$	15,802

Total loans	$	57,177	$	137	$	79	$	111	$	437	$	764	$	12	$	57,953


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
December 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	$	27,858	$	19	$	14	$	32	$	59	$	124		—	$	27,982
Commercial real estate:
Commercial mortgage		7,981		6		10		16		34		66		—		8,047
Construction		1,084		2		—		1		13		16		—		1,100

Total commercial real estate loans		9,065		8		10		17		47		82		—		9,147
Commercial lease financing		4,172		30		21		11		18		80		—		4,252

Total commercial loans	$	41,095	$	57	$	45	$	60	$	124	$	286		—	$	41,381

Real estate — residential mortgage	$	2,111	$	12	$	7	$	4	$	79	$	102	$	12	$	2,225
Home equity:
Key Community Bank		10,098		46		22		14		185		267		1		10,366
Other		249		5		2		1		10		18		—		267

Total home equity loans		10,347		51		24		15		195		285		1		10,633
Consumer other — Key Community Bank		1,541		9		3		5		2		19		—		1,560
Credit cards		733		6		4		9		2		21		—		754
Consumer other:
Marine		746		11		5		2		15		33		—		779
Other		46		1		—		1		1		3		—		49

Total consumer other		792		12		5		3		16		36		—		828

Total consumer loans	$	15,524	$	90	$	43	$	36	$	294	$	463	$	13	$	16,000

Total loans	$	56,619	$	147	$	88	$	96	$	418	$	749	$	13	$	57,381


			30-59		60-89		90 and Greater				Total Past 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

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 re-evaluated 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 $12 million and $16 million of PCI loans at March 31, 2015, and March 31, 2014, respectively, based on bond rating, regulatory classification, and payment activity as of March 31, 2015, and March 31, 2014, 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)}	2015		2014		2015		2014		2015		2014		2015		2014		2015		2014
AAA — AA	$	286	$	500	$	6	$	1	$	1	$	1	$	535	$	805	$	828	$	1,307
A		1,267		1,010		2		57		—		1		516		448		1,785		1,516
BBB — BB		25,684		23,361		7,604		7,267		992		826		2,842		2,964		37,122		34,418
B		648		551		325		337		127		84		104		101		1,204		1,073
CCC — C		898		802		225		214		22		95		67		78		1,212		1,189

Total	$	28,783	$	26,224	$	8,162	$	7,876	$	1,142	$	1,007	$	4,064	$	4,396	$	42,151	$	39,503

(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	2015		2014
Pass	$	12,463	$	12,445
Substandard		279		319

Total	$	12,742	$	12,764

Credit Risk Profile Based on Payment Activity^(a)


March 31,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2015		2014		2015		2014		2015		2014		2015		2014		2015		2014
Performing	$	1,545	$	1,434	$	725	$	697	$	721	$	950	$	43	$	62	$	3,034	$	3,143
Nonperforming		2		2		2		1		9		15		1		1		14		19

Total	$	1,547	$	1,436	$	727	$	698	$	730	$	965	$	44	$	63	$	3,048	$	3,162

(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 117 of our 2014 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 or 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, 2015, 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, 2015, the ALLL was $794 million, or 1.37% of loans, compared to $834 million, or 1.50% of loans, at March 31, 2014. At March 31, 2015, the ALLL was 181.7% of nonperforming loans, compared to 185.7% at March 31, 2014.

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


	Three months ended March 31,
in millions	2015			2014
Balance at beginning of period — continuing operations	$	794		$	848
Charge-offs		(47	)		(57	)
Recoveries		19			37

Net loans and leases charged off		(28	)		(20	)
Provision for loan and lease losses from continuing operations		29			6
Foreign currency translation adjustment		(1	)		—

Balance at end of period — continuing operations	$	794		$	834

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


	December 31,										March 31,
in millions	2014		Provision			Charge-offs			Recoveries		2015
Commercial, financial and agricultural	$	391	$	21		$	(12	)	$	5	$	405
Real estate — commercial mortgage		148		—			(2	)		2		148
Real estate — construction		28		1			(1	)		—		28
Commercial lease financing		56		(3	)		(2	)		4		55

Total commercial loans		623		19			(17	)		11		636
Real estate — residential mortgage		23		—			(2	)		—		21
Home equity:
Key Community Bank		66		(3	)		(7	)		2		58
Other		5		—			(1	)		1		5

Total home equity loans		71		(3	)		(8	)		3		63
Consumer other — Key Community Bank		22		3			(6	)		2		21
Credit cards		33		7			(8	)		—		32
Consumer other:
Marine		21		1			(5	)		3		20
Other		1		1			(1	)		—		1

Total consumer other:		22		2			(6	)		3		21

Total consumer loans		171		9			(30	)		8		158

Total ALLL — continuing operations		794		28	^(a)		(47	)		19		794
Discontinued operations		29		2			(10	)		4		25

Total ALLL — including discontinued operations	$	823	$	30		$	(57	)	$	23	$	819

(a)	Includes $1 million of foreign currency translation adjustment. Excludes provision for losses on lending-related commitments of $6 million.


	December 31,										March 31,
in millions	2013		Provision			Charge-offs			Recoveries		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	^(a)		(57	)		37		834
Discontinued operations		39		4			(13	)		4		34

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

(a)	Excludes credit for losses on lending-related commitments of $2 million.

Our ALLL from continuing operations decreased by $40 million, or 4.8%, from the first quarter of 2014 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 classified and nonperforming loans 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 2014 and into 2015 due to continued improved credit quality, solid 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 $338 million, with a corresponding allowance of $49 million at March 31, 2015. Loans outstanding collectively evaluated for impairment totaled $57.6 billion, with a corresponding allowance of $744 million at March 31, 2015. At March 31, 2015, PCI loans evaluated for impairment totaled $12 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, 2015. At March 31, 2014, the loans outstanding individually evaluated for impairment totaled $304 million, with a corresponding allowance of $34 million. 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, 2015, follows:


	Allowance						Outstanding
March 31, 2015 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	20	$	385		—	$	28,783		$	82	$	28,701			—
Commercial real estate:
Commercial mortgage		2		146		—		8,162			20		8,142			—
Construction		—		28		—		1,142			7		1,135			—

Total commercial real estate loans		2		174		—		9,304			27		9,277			—
Commercial lease financing		—		55		—		4,064			—		4,064			—

Total commercial loans		22		614		—		42,151			109		42,042			—
Real estate — residential mortgage		5		15	$	1		2,231			55		2,165		$	11
Home equity:
Key Community Bank		16		42		—		10,270			111		10,158			1
Other		2		3		—		253			12		241			—

Total home equity loans		18		45		—		10,523			123		10,399			1
Consumer other — Key Community Bank		—		21		—		1,547			3		1,544			—
Credit cards		—		32		—		727			4		723			—
Consumer other:
Marine		4		16		—		730			42		688			—
Other		—		1		—		44			2		42			—

Total consumer other		4		17		—		774			44		730			—

Total consumer loans		27		130		1		15,802			229		15,561			12

Total ALLL — continuing operations		49		744		1		57,953			338		57,603			12
Discontinued operations		1		24		—		2,219	^(a)		18		2,201	^(a)		—

Total ALLL — including discontinued operations	$	50	$	768	$	1	$	60,172		$	356	$	59,804		$	12

(a)	Amount includes $187 million of portfolio 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, 2014, follows:


	Allowance						Outstanding
December 31, 2014 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	9	$	382		—	$	27,982		$	43	$	27,939			—
Commercial real estate:
Commercial mortgage		2		146		—		8,047			21		8,025		$	1
Construction		1		27		—		1,100			8		1,092			—

Total commercial real estate loans		3		173		—		9,147			29		9,117			1
Commercial lease financing		—		56		—		4,252			—		4,252			—

Total commercial loans		12		611		—		41,381			72		41,308			1
Real estate — residential mortgage		5		17	$	1		2,225			55		2,159			11
Home equity:
Key Community Bank		16		50		—		10,366			108		10,257			1
Other		2		3		—		267			12		255			—

Total home equity loans		18		53		—		10,633			120		10,512			1
Consumer other — Key Community Bank		—		22		—		1,560			4		1,556			—
Credit cards		—		33		—		754			4		750			—
Consumer other:
Marine		5		16		—		779			45		734			—
Other		—		1		—		49			2		47			—

Total consumer other		5		17		—		828			47		781			—

Total consumer loans		28		142		1		16,000			230		15,758			12

Total ALLL — continuing operations		40		753		1		57,381			302		57,066			13
Discontinued operations		1		28		—		2,295	^(a)		17		2,278	^(a)		—

Total ALLL — including discontinued operations	$	41	$	781	$	1	$	59,676		$	319	$	59,344		$	13

(a)	Amount includes $191 million 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 March 31, 2014, follows:


	Allowance						Outstanding
March 31, 2014 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
Commercial, financial and agricultural	$	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		—

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.

The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments is $41 million at March 31, 2015. When combined with our ALLL, our total allowance for credit losses represented 1.44% of loans at March 31, 2015, compared to 1.57% at March 31, 2014.

Changes in the liability for credit losses on unfunded lending-related commitments are summarized as follows:


	Three months ended March 31,
in millions	2015		2014
Balance at beginning of period	$	35	$	37
Provision (credit) for losses on lending-related commitments		6		(2	)

Balance at end of period	$	41	$	35

5. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty’s or our own credit quality. We make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:

•

the amount of time since the last relevant valuation;

•

whether there is an actual trade or relevant external quote available at the measurement date; and

•

volatility associated with the primary pricing components.

We ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:

•

an independent review and approval of valuation models and assumptions;

•

recurring detailed reviews of profit and loss; and

•

a validation of valuation model components against benchmark data and similar products, where possible.

We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable. Various Working Groups that report to the Fair Value Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note and in Note 11 (“Acquisitions and Discontinued Operations”). Formal documentation of the fair valuation methodologies is prepared by the lines of business and support areas as appropriate. The documentation details the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation inputs.

Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” beginning on page 118 of our 2014 Form 10-K.

Qualitative Disclosures of Valuation Techniques

Loans. Most loans recorded as trading account assets are valued based on market spreads for similar assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.

Securities (trading and available for sale). We own several types of securities, requiring a range of valuation methods:

•

Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities.

•

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate CMOs. Inputs to the pricing models include: standard inputs, such as yields, benchmark securities, bids, and offers; actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets; spread tables; matrices; high-grade scales; and option-adjusted spreads.

•

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. To determine fair value in such cases, depending on the complexity of the valuations required, we use internal models based on certain assumptions or a third-party valuation service. At March 31, 2015, our Level 3 instruments consist of a convertible preferred security. Our Strategy group is responsible for reviewing the valuation model and determining the fair value of this investment on a quarterly basis. The security is valued using a cash flow analysis of the associated private company issuer. The valuation of the security is negatively impacted by a projected net loss of the associated private company and positively impacted by a projected net gain.

The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices.

On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:

•

review documentation received from our third-party pricing service regarding the inputs used in their valuations and determine a level assessment for each category of securities;

•

substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and

•

substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings.

Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods. The portion of our Real Estate Capital line of business involved with private equity and mezzanine investments is accounted for as an investment company in accordance with the applicable accounting guidance, whereby all investments are recorded at fair value.

Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then adjusted to fair value based on current market conditions using the discounted cash flow method based on the expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. Periodically, we obtain a third-party appraisal for the investments to validate the specific inputs for determining fair value.

Inputs used in calculating future cash flows include the cost of build-out, future selling prices, current market outlook, and operating performance of the investment. Investment income and expense assumptions are based on market inputs, such as rental/leasing rates and vacancy rates for the geographic- and property type-specific markets. For investments under construction, investment income and expense assumptions are determined using expected future build-out costs and anticipated future rental prices based on current market conditions, discount rates, holding period, the terminal cap rate, and sales commissions paid in the terminal cap year. For investments that are in lease-up or are fully leased, income and expense assumptions are based on the geographic market’s current lease rates, underwritten expenses, market lease terms, and historical vacancy rates. Asset Management validates these inputs on a quarterly basis through the use of industry publications, third-party broker opinions, and comparable property sales, where applicable. Changes in the significant inputs (rental/leasing rates, vacancy rates, valuation capitalization rate, discount rate, and terminal cap rate) would significantly affect the fair value measurement. Increases in rental/leasing rates would increase fair value while increases in the vacancy rates, the valuation capitalization rate, the discount rate, and the terminal cap rate would decrease fair value.

Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. The calculation to determine the investment’s fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of March 31, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. For more information about the Volcker Rule, see the discussion under the heading “Other Regulatory Developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation” beginning on page 16 of our 2014 Form 10-K.

Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting.

The following table presents the fair value of our indirect investments and related unfunded commitments at March 31, 2015. We did not provide any financial support to investees related to our direct and indirect investments for the three months ended March 31, 2015, and March 31, 2014.


March 31, 2015			Unfunded
in millions	Fair Value		Commitments
INVESTMENT TYPE
Indirect investments
Passive funds^(a)	$	9	$	1
Co-managed funds^(b)		—		—

Total	$	9	$	1

(a)

We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to four years. The purpose of KREEC’s funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements.

(b)

We are a manager or co-manager of these funds, which have been written down to zero. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. We can sell or transfer our interest in any of these funds with the written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of one to two years. The purpose of KREEC’s funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements.

Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company) and indirect investments (investments made through funds that include other investors). Our principal investing entities are accounted for as investment companies in accordance with the applicable accounting guidance, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. This process is a coordinated and documented effort by the Principal Investing Entities Deal Team (individuals from one of the independent investment managers who oversee these instruments), accounting staff, and the Investment Committee (individual employees and a former employee of Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.

Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.

Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Team’s knowledge of the current financial status of the subject company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the company’s payment history, adequacy of cash flows from operations, and current operating results, including market multiples and historical and forecast earnings before interest, taxation, depreciation, and amortization (EBITDA). Inputs can also include the seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected, and the net liquidation value of collateral.

Valuations of equity instruments of private companies, which are prepared on a quarterly basis, are based on current market conditions and the current financial status of each company. A valuation analysis is performed to value each investment. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and reviewed and approved by the Chief Administrative Officer of one of the independent investment managers. Significant unobservable inputs used in these valuations include adequacy of the company’s cash flows from operations, any significant change in the company’s performance since the prior valuation, and any significant equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an active market for the identical security. If the instrument is restricted, the fair value is determined considering the number of shares traded daily, the number of the company’s total restricted shares, and price volatility.

Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of March 31, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

For indirect investments, management may make adjustments it deems appropriate to the net asset value if it is determined that the net asset value does not properly reflect fair value. In determining the need for an adjustment to net asset value, management performs an analysis of the private equity funds based on the independent fund manager’s valuations as well as management’s own judgment. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment, and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.

The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at March 31, 2015, as well as financial support provided for the three months ended March 31, 2015, and March 31, 2014:


					Financial support provided
					Three months ended March 31,
	March 31, 2015				2015				2014
in millions	Fair Value		Unfunded Commitments		Funded Commitments		Funded Other		Funded Commitments		Funded Other
INVESTMENT TYPE
Direct investments^(a)	$	74		—		—	$	1		—	$	1
Indirect investments^(b)		301	$	57	$	2		—	$	2		—

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