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, 2016

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		842,372,999 Shares
Title of class		Outstanding at May 2, 2016

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


			Page Number
Item 1.	Financial Statements			5

	Consolidated Balance Sheets — March 31, 2016 (Unaudited), December 31, 2015, and March 31, 2015 (Unaudited)			5

	Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2016, and March 31, 2015			6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three months ended March 31, 2016, and March 31, 2015			7

	Consolidated Statements of Changes in Equity (Unaudited) — Three months ended March 31, 2016, and March 31, 2015			8

	Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2016, and March 31, 2015			9

	Notes to Consolidated Financial Statements (Unaudited)			10

	Note 1.	Basis of Presentation and Accounting Policies		10
	Note 2.	Earnings Per Common Share		15
	Note 3.	Loans and Loans Held for Sale		16
	Note 4.	Asset Quality		18
	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		61
	Note 10.	Income Taxes		63
	Note 11.	Acquisitions and Discontinued Operations		64
	Note 12.	Securities Financing Activities		70
	Note 13.	Employee Benefits		72
	Note 14.	Trust Preferred Securities Issued by Unconsolidated Subsidiaries		73
	Note 15.	Contingent Liabilities and Guarantees		74
	Note 16.	Accumulated Other Comprehensive Income		76
	Note 17.	Shareholders’ Equity		77
	Note 18.	Line of Business Results		78

	Report of Ernst & Young LLP, Independent Registered Public Accounting Firm			82


Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	83

	Introduction	83
	Terminology	83
	Selected financial data	84
	Forward-looking statements	85
	Economic overview	86
	Long-term financial goals	87
	Strategic developments	87
	Demographics	88
	Supervision and regulation	90

	Highlights of Our Performance	93
	Financial performance	93

	Results of Operations	98
	Net interest income	98
	Noninterest income	101
	Noninterest expense	104
	Income taxes	105

	Line of Business Results	106
	Key Community Bank summary of operations	106
	Key Corporate Bank summary of operations	107
	Other Segments	108

	Financial Condition	109
	Loans and loans held for sale	109
	Securities	116
	Other investments	119
	Deposits and other sources of funds	119
	Capital	120

	Risk Management	123
	Overview	123
	Market risk management	124
	Liquidity risk management	129
	Credit risk management	132
	Operational and compliance risk management	139

	Critical Accounting Policies and Estimates	140

	European Sovereign and Non-Sovereign Debt Exposures	141

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	142
Item 4.	Controls and Procedures	142


	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	142
Item 1A.	Risk Factors	142
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	143
Item 6.	Exhibits	143
	Signature	144
	Exhibits

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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets


	March 31,			December 31,			March 31,
in millions, except per share data	2016			2015			2015
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	474		$	607		$	506
Short-term investments		5,436			2,707			3,378
Trading account assets		765			788			789
Securities available for sale		14,304			14,218			13,120
Held-to-maturity securities (fair value: $5,031, $4,848, and $5,003)		5,003			4,897			5,005
Other investments		643			655			730
Loans, net of unearned income of $623, $646, and $665		60,438			59,876			57,953
Less: Allowance for loan and lease losses		826			796			794

Net loans		59,612			59,080			57,159
Loans held for sale		684			639			1,649
Premises and equipment		750			779			806
Operating lease assets		362			340			306
Goodwill		1,060			1,060			1,057
Other intangible assets		57			65			92
Corporate-owned life insurance		3,557			3,541			3,488
Derivative assets		1,065			619			731
Accrued income and other assets		2,849			3,292			3,142
Discontinued assets (including $3, $4, and $187 million of portfolio loans at fair value, see Note 11)		1,781			1,846			2,246

Total assets	$	98,402		$	95,133		$	94,204

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	38,946		$	37,089		$	35,623
Savings deposits		2,385			2,341			2,413
Certificates of deposit ($100,000 or more)		3,095			2,392			1,982
Other time deposits		3,259			3,127			3,182

Total interest-bearing deposits		47,685			44,949			43,200
Noninterest-bearing deposits		25,697			26,097			27,948
Deposits in foreign office — interest-bearing		—			—			474

Total deposits		73,382			71,046			71,622
Federal funds purchased and securities sold under repurchase agreements		374			372			517
Bank notes and other short-term borrowings		615			533			608
Derivative liabilities		790			632			825
Accrued expense and other liabilities		1,410			1,605			1,308
Long-term debt		10,760			10,186			8,711

Total liabilities		87,331			84,374			83,591

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, 2,900,234, and 2,900,234 shares		290			290			290
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		3,818			3,922			3,910
Retained earnings		9,042			8,922			8,445
Treasury stock, at cost (174,680,274, 181,218,648, and 166,049,974 shares)		(2,888	)		(3,000	)		(2,780	)
Accumulated other comprehensive income (loss)		(213	)		(405	)		(279	)

Key shareholders’ equity		11,066			10,746			10,603
Noncontrolling interests		5			13			10

Total equity		11,071			10,759			10,613

Total liabilities and equity	$	98,402		$	95,133		$	94,204

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended March 31,
dollars in millions, except per share amounts	2016		2015
INTEREST INCOME
Loans	$	562	$	523
Loans held for sale		8		7
Securities available for sale		75		70
Held-to-maturity securities		24		24
Trading account assets		7		5
Short-term investments		4		2
Other investments		3		5

Total interest income		683		636

INTEREST EXPENSE
Deposits		31		26
Bank notes and other short-term borrowings		2		2
Long-term debt		46		37

Total interest expense		79		65

NET INTEREST INCOME		604		571
Provision for credit losses		89		35

Net interest income after provision for credit losses		515		536

NONINTEREST INCOME
Trust and investment services income		109		109
Investment banking and debt placement fees		71		68
Service charges on deposit accounts		65		61
Operating lease income and other leasing gains		17		19
Corporate services income		50		43
Cards and payments income		46		42
Corporate-owned life insurance income		28		31
Consumer mortgage income		2		3
Mortgage servicing fees		12		13
Net gains (losses) from principal investing		—		29
Other income ^(a)		31		19

Total noninterest income		431		437

NONINTEREST EXPENSE
Personnel		404		389
Net occupancy		61		65
Computer processing		43		38
Business services and professional fees		41		33
Equipment		21		22
Operating lease expense		13		11
Marketing		12		8
FDIC assessment		9		8
Intangible asset amortization		8		9
OREO expense, net		1		2
Other expense		90		84

Total noninterest expense		703		669

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		243		304
Income taxes		56		74

INCOME (LOSS) FROM CONTINUING OPERATIONS		187		230
Income (loss) from discontinued operations, net of taxes of $0 and $3 (see Note 11)		1		5

NET INCOME (LOSS)		188		235
Less: Net income (loss) attributable to noncontrolling interests		—		2

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	188	$	233

Income (loss) from continuing operations attributable to Key common shareholders	$	182	$	222
Net income (loss) attributable to Key common shareholders		183		227

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.22	$	.26
Income (loss) from discontinued operations, net of taxes		—		.01
Net income (loss) attributable to Key common shareholders ^(b)		.22		.27

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.22	$	.26
Income (loss) from discontinued operations, net of taxes		—		.01
Net income (loss) attributable to Key common shareholders ^(b)		.22		.26

Cash dividends declared per common share	$	.075	$	.065

Weighted-average common shares outstanding (000) ^(c)		827,381		848,580
Effect of convertible preferred stock		—		—
Effect of common share options and other stock awards ^(c)		7,679		8,542

Weighted-average common shares and potential common shares outstanding (000) ^{(c), (d)}		835,060		857,122

(a)

For the three months ended March 31, 2016, and March 31, 2015, net securities gains (losses) totaled less than $1 million. For the three months ended March 31, 2016, we did not have any impairment losses related to securities. For the three months ended March 31, 2015, impaired losses related to securities totaled less than $1 million.

(b)	EPS may not foot due to rounding.

(c)

For the three months ended March 31, 2016, weighted-average common shares outstanding, effect of common share options and other stock awards, and weighted-average common shares and potential common shares outstanding have been revised from our financial results reported on Form 8-K on April 21, 2016.

(d)	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	2016		2015
Net income (loss)	$	188	$	235
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $76 and $33		128		55
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $34 and $19		58		32
Foreign currency translation adjustments, net of income taxes of $3 and ($8)		5		(13	)
Net pension and postretirement benefit costs, net of income taxes of $4 and $1		1		3

Total other comprehensive income (loss), net of tax		192		77

Comprehensive income (loss)		380		312
Less: Comprehensive income attributable to noncontrolling interests		—		2

Comprehensive income (loss) attributable to Key	$	380	$	310

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Equity (Unaudited)


	Key Shareholders’ Equity
dollars in millions, except per share amounts	Preferred Shares Outstanding (000)			Common Shares Outstanding (000)			Preferred Stock			Common Shares		Capital Surplus			Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests
BALANCE AT DECEMBER 31, 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	)
Series A Preferred Stock exchanged for common shares		(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

BALANCE AT DECEMBER 31, 2015		2,900			835,751		$	290		$	1,017	$	3,922		$	8,922		$	(3,000	)	$	(405	)	$	13
Net income (loss)																188									—
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $76																						128
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $34																						58
Foreign currency translation adjustments, net of income taxes of $3																						5
Net pension and postretirement benefit costs, net of income taxes of $3																						1
Deferred compensation													(6	)
Cash dividends declared on common shares ($.075 per share)																(63	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)																(5	)
Common shares reissued (returned) for stock options and other employee benefit plans					6,539								(98	)					112
Net contribution from (distribution to) noncontrolling interests																									(8	)

BALANCE AT MARCH 31, 2016		2,900			842,290		$	290		$	1,017	$	3,818		$	9,042		$	(2,888	)	$	(213	)	$	5

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended March 31,
in millions	2016			2015
OPERATING ACTIVITIES
Net income (loss)	$	188		$	235
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for credit losses		89			35
Depreciation, amortization and accretion expense, net		62			50
Increase in cash surrender value of corporate-owned life insurance		(25	)		(25	)
Stock-based compensation expense		19			13
FDIC reimbursement (payments), net of FDIC expense		1			—
Deferred income taxes (benefit)		50			50
Proceeds from sales of loans held for sale		1,110			1,225
Originations of loans held for sale, net of repayments		(1,153	)		(2,109	)
Net losses (gains) on sales of loans held for sale		(2	)		(20	)
Net losses (gains) from principal investing		—			(29	)
Net losses (gains) and writedown on OREO		1			—
Net losses (gains) on leased equipment		—			(3	)
Net losses (gains) on sales of fixed assets		1			—
Net decrease (increase) in trading account assets		23			(39	)
Other operating activities, net		9			(485	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		373			(1,102	)
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments, excluding acquisitions		(2,729	)		891
Purchases of securities available for sale		(610	)		(403	)
Proceeds from prepayments and maturities of securities available for sale		722			724
Proceeds from prepayments and maturities of held-to-maturity securities		251			266
Purchases of held-to-maturity securities		(358	)		(257	)
Purchases of other investments		(18	)		(13	)
Proceeds from sales of other investments		24			32
Proceeds from prepayments and maturities of other investments		—			4
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(663	)		(727	)
Proceeds from sales of portfolio loans		40			47
Proceeds from corporate-owned life insurance		9			15
Purchases of premises, equipment, and software		(8	)		(3	)
Proceeds from sales of OREO		3			6

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(3,337	)		582
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		2,336			(376	)
Net increase (decrease) in short-term borrowings		84			127
Net proceeds from issuance of long-term debt		976			1,000
Payments on long-term debt		(498	)		(129	)
Repurchase of common shares		—			(197	)
Net proceeds from reissuance of common shares		1			9
Cash dividends paid		(68	)		(61	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		2,831			373

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(133	)		(147	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		607			653

CASH AND DUE FROM BANKS AT END OF PERIOD	$	474		$	506

Additional disclosures relative to cash flows:
Interest paid	$	108		$	98
Income taxes paid (refunded)		13			19
Noncash items:
Reduction of secured borrowing and related collateral	$	21		$	72
Loans transferred to held for sale from portfolio		—			10
Loans transferred to OREO		4			7

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation and Accounting Policies

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 “2015 Form 10-K” refer to our Form 10-K for the year ended December 31, 2015, which was filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) and on our website (www.key.com/ir).


AICPA: American Institute of Certified Public Accountants.		KCDC: Key Community Development Corporation.
ALCO: Asset/Liability Management Committee.		KEF: Key Equipment Finance.
ALLL: Allowance for loan and lease losses.		KPP: Key Principal Partners
A/LM: Asset/liability management.		KREEC: Key Real Estate Equity Capital, Inc.
AOCI: Accumulated other comprehensive income (loss).		LCR: Liquidity coverage ratio.
APBO: Accumulated postretirement benefit obligation.		LIBOR: London Interbank Offered Rate.
Austin: Austin Capital Management, Ltd.		LIHTC: Low-income housing tax credit.
BHCs: Bank holding companies.		Moody’s: Moody’s Investor Services, Inc.
Board: KeyCorp Board of Directors.		MRM: Market Risk Management group.
CCAR: Comprehensive Capital Analysis and Review.		N/A: Not applicable.
CMBS: Commercial mortgage-backed securities.		NASDAQ: The NASDAQ Stock Market LLC.
CMO: Collateralized mortgage obligation.		NAV: Net asset value.
Common shares: KeyCorp common shares, $1 par value.		N/M: Not meaningful.
DIF: Deposit Insurance Fund of the FDIC.		NOW: Negotiable Order of Withdrawal.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and		NPR: Notice of proposed rulemaking.
Consumer Protection Act of 2010.		NYSE: New York Stock Exchange.
EBITDA: Earnings before interest, taxes, depreciation, and		OCC: Office of the Comptroller of the Currency.
amortization.		OCI: Other comprehensive income (loss).
EPS: Earnings per share.		OREO: Other real estate owned.
ERM: Enterprise risk management.		OTTI: Other-than-temporary impairment.
EVE: Economic value of equity.		PBO: Projected benefit obligation.
FASB: Financial Accounting Standards Board.		PCI: Purchased credit impaired.
FDIC: Federal Deposit Insurance Corporation.		S&P: Standard and Poor’s Ratings Services, a Division of The
Federal Reserve: Board of Governors of the Federal Reserve		McGraw-Hill Companies, Inc.
System.		SEC: U.S. Securities and Exchange Commission.
FHLB: Federal Home Loan Bank of Cincinnati.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
FHLMC: Federal Home Loan Mortgage Corporation.		Perpetual Convertible Preferred Stock, Series A.
First Niagara: First Niagara Financial Group, Inc.		SIFIs: Systemically important financial institutions, including
(NASDAQ: FNFG).		BHCs with total consolidated assets of at least $50 billion
FNMA: Federal National Mortgage Association, or Fannie Mae.		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.
KBCM: KeyBanc Capital Markets, Inc.		VEBA: Voluntary Employee Beneficiary Association.
KCC: Key Capital Corporation.		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 2015 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 2016

Business combinations. In September 2015, the FASB issued new accounting guidance that obligates an acquirer in a business combination to recognize adjustments to provisional amounts in the reporting period that the amounts were determined, eliminating the requirement for retrospective adjustments. The acquirer should record in the current period any income effects that resulted from the change in provisional amounts, calculated as if the accounting were completed at the acquisition date. This accounting guidance was effective prospectively for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us). Early adoption was permitted. The adoption of this accounting guidance did not affect our financial condition or results of operations.

Fair value measurement. In May 2015, the FASB issued new disclosure guidance that eliminates the requirement to categorize investments measured using the net asset value practical expedient in the fair value hierarchy table. Entities are required to disclose the fair value of investments measured using the net asset value practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. This disclosure guidance was effective for interim and annual reporting periods beginning after December 15, 2015 (March 31, 2016, for us) on a retrospective basis. Early adoption was permitted. The adoption of this disclosure guidance did not affect our financial condition or results of operations. We provide the disclosure related to this new guidance in Note 5 (“Fair Value Measurements”).

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 was effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and could be implemented using either a prospective method or a retrospective method. Early adoption was permitted. We elected to implement this new accounting guidance using a prospective approach. The adoption of this accounting guidance did not affect 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 was effective retrospectively for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, 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.

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 was effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and was implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and early adoption was permitted. The adoption of this accounting guidance did not affect our financial condition or results of operations. Our Principal Investing unit and the Real Estate Capital line of business have equity and mezzanine investments, which were subjected to the new guidance. We determined these investments are VIEs. We provide disclosures related to our variable interest entities as required by the new guidance in Note 9 (“Variable Interest Entities”).

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 was effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and could be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and early adoption was permitted. The adoption of this accounting guidance did not affect 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 was effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and could be implemented using either a retrospective method or a cumulative-effect approach. Early adoption was permitted. The adoption of this accounting guidance did not affect 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 was effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and could be implemented using either a retrospective method or a prospective method. Early adoption was permitted. We elected to implement this new accounting guidance using a prospective approach. The adoption of this accounting guidance did not affect our financial condition or results of operations.

Accounting Guidance Pending Adoption at March 31, 2016

Stock-based compensation. In March 2016, the FASB issued new accounting guidance that simplifies accounting for several aspects of share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and presentation on the statement of cash flows. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us). The method of transition is dependent on the particular amendment within the new guidance. Early adoption is permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Equity method investments. In March 2016, the FASB issued new accounting guidance that simplifies the transition to equity method accounting by eliminating the requirement for an investor to make retroactive adjustments to the investment, results of operations, and retained earnings on a step-by-step basis when an investment becomes qualified for equity method accounting. Instead, when an investment qualifies for the equity method due to an increase in ownership or degree of

influence, an equity method investor is required to add the cost of acquiring the additional interest to the current basis of the previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. This accounting guidance will be effective prospectively 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.

Derivatives and hedging. In March 2016, the FASB issued new accounting guidance that requires an entity to use a four-step decision model when assessing contingent call (put) options that can accelerate the payment of principal on debt instruments to determine whether they are clearly and closely related to their debt hosts. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) and must be implemented using a modified retrospective basis. 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.

Derivatives and hedging. In March 2016, the FASB issued new accounting guidance that clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, by itself, require dedesignation, but all other hedge accounting criteria must be met. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) and can be implemented using either a prospective method or a modified retrospective method. Early adoption is permitted. We have elected to implement this new accounting guidance using a prospective method. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Extinguishment of liabilities. In March 2016, the FASB issued new accounting guidance that clarifies that liabilities related to the sale of prepaid stored-value products are financial liabilities, and breakage should be accounted for under the breakage guidance in the new revenue recognition accounting guidance. It also provides clarity on how prepaid product liabilities should be derecognized. 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 modified retrospective approach or retrospective approach. We are currently determining a transition method and evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Leases. In February 2016, the FASB issued new accounting guidance that requires a lessee to recognize a liability to make lease payments and a right of use asset representing its right to use an underlying asset during the lease term for both finance and operating leases. The definition of a lease was modified to exemplify the concept of control over an asset identified in the lease. Lease classification criteria remains substantially similar to criteria in current lease guidance. The guidance defines which payments can be used in determining lease classification. For short-term leases with a term of 12 months or less, lessees can make a policy election not to recognize lease assets and lease liabilities. Lessor accounting is largely unchanged. Leveraged leases that commenced before the effective date of the new guidance are grandfathered. New disclosures are required, and certain practical expedients are allowed upon adoption. This accounting and disclosure guidance will be effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019, for us) and should be implemented using the modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Financial instruments. In January 2016, the FASB issued new accounting guidance that requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the balance sheet or in the footnotes. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in OCI. We have not elected to measure any of our liabilities at fair value, and therefore, this aspect of the guidance is not applicable to us. This accounting and disclosure guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). For the guidance applicable to us, the accounting will be implemented on a prospective basis, whereby early adoption is not permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

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.

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 can be implemented using either a retrospective method or a cumulative-effect approach. In August 2015, the FASB issued an update that defers the effective date of the revenue recognition guidance by one year. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. 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 the FASB has recently issued updates to certain aspects of the guidance to address implementation issues. For example, the FASB issued accounting guidance in March 2016 to clarify principal versus agent considerations and additional guidance in April 2016 to clarify the identification of performance obligations and the licensing implementation guidance. 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	2016		2015
EARNINGS
Income (loss) from continuing operations	$	187	$	230
Less: Net income (loss) attributable to noncontrolling interests		—		2

Income (loss) from continuing operations attributable to Key		187		228
Less: Dividends on Series A Preferred Stock		5		6

Income (loss) from continuing operations attributable to Key common shareholders		182		222
Income (loss) from discontinued operations, net of taxes ^(a)		1		5

Net income (loss) attributable to Key common shareholders	$	183	$	227

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000) ^(b)		827,381		848,580
Effect of convertible preferred stock		—		—
Effect of common share options and other stock awards ^(b)		7,679		8,542

Weighted-average common shares and potential common shares outstanding (000) ^{(b), (c)}		835,060		857,122

EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.22	$	.26
Income (loss) from discontinued operations, net of taxes ^(a)		—		.01
Net income (loss) attributable to Key common shareholders ^(d)		.22		.27

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.22	$	.26
Income (loss) from discontinued operations, net of taxes ^(a)		—		.01
Net income (loss) attributable to Key common shareholders — assuming dilution ^(d)		.22		.26

(a)

In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. As a result of this decision, we have accounted for this business as a discontinued operation. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (“Acquisitions and Discontinued Operations”).

(b)

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

(d)	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, 2016		December 31, 2015		March 31, 2015
Commercial, financial and agricultural ^(a)	$	31,976	$	31,240	$	28,783
Commercial real estate:
Commercial mortgage		8,364		7,959		8,162
Construction		841		1,053		1,142

Total commercial real estate loans		9,205		9,012		9,304
Commercial lease financing ^(b)		3,934		4,020		4,064

Total commercial loans		45,115		44,272		42,151
Residential — prime loans:
Real estate — residential mortgage		2,234		2,242		2,231
Home equity loans		10,149		10,335		10,523

Total residential — prime loans		12,383		12,577		12,754
Consumer direct loans		1,579		1,600		1,547
Credit cards		782		806		727
Consumer indirect loans		579		621		774

Total consumer loans		15,323		15,604		15,802

Total loans ^{(c) (d)}	$	60,438	$	59,876	$	57,953

(a)	Loan balances include $85 million, $85 million, and $87 million of commercial credit card balances at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

(b)

Commercial lease financing includes receivables held as collateral for a secured borrowing of $115 million, $134 million, and $230 million at March 31, 2016, December 31, 2015, and March 31, 2015, 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 208 of our 2015 Form 10-K.

(c)

At March 31, 2016, total loans include purchased loans of $109 million, of which $11 million were PCI loans. At December 31, 2015, total loans include purchased loans of $114 million, of which $11 million were PCI loans. At March 31, 2015, total loans include purchased loans of $130 million, of which $12 million were PCI loans.

(d)

Total loans exclude loans of $1.8 billion at March 31, 2016, $1.8 billion at December 31, 2015, and $2.2 billion at March 31, 2015, related to the discontinued operations of the education lending business. Additional information pertaining to these loans is provided in Note 11 (“Acquisitions and Discontinued Operations”).

Our loans held for sale are summarized as follows:


in millions	March 31, 2016		December 31, 2015		March 31, 2015
Commercial, financial and agricultural	$	103	$	76	$	183
Real estate — commercial mortgage		562		532		1,408
Commercial lease financing		—		14		14
Real estate — residential mortgage		19		17		44

Total loans held for sale	$	684	$	639	$	1,649

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


in millions	March 31, 2016			December 31, 2015			March 31, 2015
Balance at beginning of the period	$	639		$	916		$	734
New originations		1,114			1,655			2,130
Transfers from (to) held to maturity, net		—			22			10
Loan sales		(1,108	)		(1,943	)		(1,204	)
Loan draws (payments), net		39			(11	)		(21	)

Balance at end of period	$	684		$	639		$	1,649

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.

Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming loans do not include loans held for sale or PCI loans. Nonperforming assets include nonperforming loans, nonperforming loans held for sale, OREO, and other nonperforming assets.

Our nonperforming assets and past due loans were as follows:


in millions	March 31, 2016		December 31, 2015		March 31, 2015
Total nonperforming loans ^{(a), (b)}	$	676	$	387	$	437
OREO ^(c)		14		14		20
Other nonperforming assets		2		2		—

Total nonperforming assets	$	692	$	403	$	457

Nonperforming assets from discontinued operations - education lending ^(d)	$	6	$	7	$	8

Restructured loans included in nonperforming loans	$	151	$	159	$	141
Restructured loans with an allocated specific allowance ^(e)		59		69		70
Specifically allocated allowance for restructured loans^(f)		29		30		39

Accruing loans past due 90 days or more	$	70	$	72	$	111
Accruing loans past due 30 through 89 days		237		208		216

(a)	Loan balances exclude $11 million, $11 million, and $12 million of PCI loans at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

(b)	Includes carrying value of consumer residential mortgage loans in the process of foreclosure of approximately $131 million, $114 million, and $119 million at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

(c)	Includes carrying value of foreclosed residential real estate of approximately $11 million, $11 million, and $17 million at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

(d)	Restructured loans of approximately $21 million, $21 million, and $18 million are included in discontinued operations at March 31, 2016, December 31, 2015, and March 31, 2015, 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. All PCI loans were acquired in 2012. At the 2012 acquisition date, 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, 2016, the outstanding unpaid principal balance and carrying value of all PCI loans was $17 million and $11 million, respectively, compared to $17 million and $11 million, respectively, at December 31, 2015, and $19 million and $12 million, respectively, at March 31, 2015. Changes in the accretable yield during the first quarter of 2016 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at March 31, 2016. Changes in the accretable yield during 2015 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at December 31, 2015, which was unchanged from the ending balance at December 31, 2014. 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, 2016, the approximate carrying amount of our commercial nonperforming loans outstanding represented 89% of their original contractual amount owed, total nonperforming loans outstanding represented 88% of their original contractual amount owed, and nonperforming assets in total were carried at 88% of their original contractual amount owed.

At March 31, 2016, our 20 largest nonperforming loans totaled $359 million, representing 54% of total loans on nonperforming status. At March 31, 2015, our 20 largest nonperforming loans totaled $123 million, representing 28% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $5 million for the three months ended March 31, 2016, and $4 million for the three months ended March 31, 2015.

The following tables set forth a further breakdown of individually impaired loans as of March 31, 2016, December 31, 2015, and March 31, 2015:


			Unpaid				Average
March 31, 2016	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	260	$	270		—	$	150
Commercial real estate:
Commercial mortgage		4		7		—		4
Construction		8		8		—		7

Total commercial real estate loans		12		15		—		11

Total commercial loans		272		285		—		161

Real estate — residential mortgage		23		23		—		23
Home equity loans		68		68		—		65
Consumer indirect loans		1		1		—		1

Total consumer loans		92		92		—		89

Total loans with no related allowance recorded		364		377		—		250

With an allowance recorded:
Commercial, financial and agricultural		101		113	$	28		64
Commercial real estate:
Commercial mortgage		4		4		1		5

Total commercial real estate loans		4		4		1		5

Total commercial loans		105		117		29		69

Real estate — residential mortgage		32		32		3		33
Home equity loans		65		65		19		64
Consumer direct loans		3		3		—		3
Credit cards		3		3		—		3
Consumer indirect loans		35		35		3		36

Total consumer loans		138		138		25		139

Total loans with an allowance recorded		243		255		54		208

Total	$	607	$	632	$	54	$	458

(a)	The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

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


			Unpaid				Average
December 31, 2015	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	40	$	74		—	$	23
Commercial real estate:
Commercial mortgage		5		8		—		10
Construction		5		5		—		5

Total commercial real estate loans		10		13		—		15

Total commercial loans		50		87		—		38

Real estate — residential mortgage		23		23		—		24
Home equity loans		61		61		—		62
Consumer direct loans		—		—		—		—
Credit cards		—		—		—		—
Consumer indirect loans		1		1		—		1

Total consumer loans		85		85		—		87

Total loans with no related allowance recorded		135		172		—		125

With an allowance recorded:
Commercial, financial and agricultural		28		43	$	7		33
Commercial real estate:
Commercial mortgage		5		6		1		6
Construction		—		—		—		1

Total commercial real estate loans		5		6		1		7

Total commercial loans		33		49		8		40

Real estate — residential mortgage		33		33		4		32
Home equity loans		64		64		20		60
Consumer direct loans		3		3		—		4
Credit cards		3		3		—		4
Consumer indirect loans		37		37		3		40

Total consumer loans		140		140		27		140

Total loans with an allowance recorded		173		189		35		180

Total	$	308	$	361	$	35	$	305

(a)	The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

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


			Unpaid				Average
March 31, 2015	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance^(b)		Allowance		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 loans		63		64		—		63
Consumer indirect loans		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 loans		60		60		18		59
Consumer direct loans		3		3		—		3
Credit cards		4		4		—		4
Consumer indirect loans		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.

For the three months ended March 31, 2016, and March 31, 2015, interest income recognized on the outstanding balances of accruing impaired loans totaled $4 million and $1 million, respectively.

At March 31, 2016, aggregate restructured loans (accrual and nonaccrual loans) totaled $283 million, compared to $280 million at December 31, 2015, and $268 million at March 31, 2015. During the first three months of 2016, we added $23 million in restructured loans, which were partially offset by $20 million in payments and charge-offs. During 2015, we added $99 million in restructured loans, which were partially offset by $89 million in payments and charge-offs. During the first three months of 2015, we added $11 million in restructured loans, 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, 2016, follows:


			Pre-modification		Post-modification
			Outstanding		Outstanding
March 31, 2016	Number		Recorded		Recorded
dollars in millions	of Loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		13	$	58	$	46
Commercial real estate:
Real estate — commercial mortgage		10		13		4

Total commercial loans		23		71		50
Real estate — residential mortgage		323		21		21
Home equity loans		1,350		85		76
Consumer direct loans		29		1		—
Credit cards		253		1		1
Consumer indirect loans		94		4		3

Total consumer loans		2,049		112		101

Total nonperforming TDRs		2,072		183		151

Prior-year accruing: ^(a)
Commercial, financial and agricultural		7		5		2

Total commercial loans		7		5		2
Real estate — residential mortgage		532		36		36
Home equity loans		1,149		68		57
Consumer direct loans		41		2		2
Credit cards		488		3		2
Consumer indirect loans		445		59		33

Total consumer loans		2,655		168		130

Total prior-year accruing TDRs		2,662		173		132

Total TDRs		4,734	$	356	$	283

(a)	All TDRs that were restructured prior to January 1, 2016, and are fully accruing.

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


			Pre-modification		Post-modification
			Outstanding		Outstanding
December 31, 2015	Number		Recorded		Recorded
dollars in millions	of Loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		12	$	56	$	45
Commercial real estate:
Real estate — commercial mortgage		12		30		7

Total commercial real estate loans		12		30		7

Total commercial loans		24		86		52
Real estate — residential mortgage		366		23		23
Home equity loans		1,262		85		76
Consumer direct loans		28		1		1
Credit cards		339		2		2
Consumer indirect loans		103		6		5

Total consumer loans		2,098		117		107

Total nonperforming TDRs		2,122		203		159

Prior-year accruing: ^(a)
Commercial, financial and agricultural		7		5		2
Commercial real estate:
Real estate — commercial mortgage		—		—		—

Total commercial real estate loans		—		—		—

Total commercial loans		7		5		2
Real estate — residential mortgage		489		34		34
Home equity loans		1,071		57		49
Consumer direct loans		42		2		2
Credit cards		461		4		2
Consumer indirect loans		430		59		32

Total consumer loans		2,493		156		119

Total prior-year accruing TDRs		2,500		161		121

Total TDRs		4,622	$	364	$	280

(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 March 31, 2015, follows:


			Pre-modification		Post-modification
			Outstanding		Outstanding
March 31, 2015	Number		Recorded		Recorded
dollars in millions	of Loans		Investment		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 loans		1,199		80		73
Consumer direct loans		28		1		1
Credit cards		275		2		1
Consumer indirect loans		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 loans		1,142		57		49
Consumer direct loans		51		2		2
Credit cards		519		4		2
Consumer indirect loans		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.

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 2016, there were no commercial loan TDRs and 51 consumer loan TDRs with a combined recorded investment of $3 million that experienced payment defaults after modifications resulting in TDR status during 2015. 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. 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’ debts 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	2016		2015		2015
Commercial loans:
Interest rate reduction	$	48	$	51	$	12
Forgiveness of principal		—		2		2
Other		4		1		25

Total	$	52	$	54	$	39

Consumer loans:
Interest rate reduction	$	128	$	132	$	140
Forgiveness of principal		20		8		4
Other		83		86		85

Total	$	231	$	226	$	229

Total commercial and consumer TDRs ^(a)	$	283	$	280	$	268
Total loans		60,438		59,876		57,953

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $6 million, $9 million, and $5 million at March 31, 2016, December 31, 2015, and March 31, 2015, 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 121 of our 2015 Form 10-K.

At March 31, 2016, approximately $59.4 billion, or 98.4%, of our total loans were current, compared to approximately $59.2 billion, or 98.9% of total loans, at December 31, 2015, and approximately $57.2 billion, or 98.7% of total loans, at March 31, 2015. At March 31, 2016, total past due loans and nonperforming loans of $983 million represented approximately 1.6% of total loans, compared to $667 million, or 1.1% of total loans, at December 31, 2015, and $764 million, or 1.3% of total loans, at March 31, 2015.

The following aging analysis of past due and current loans as of March 31, 2016, December 31, 2015, and March 31, 2015, provides further information regarding Key’s credit exposure.


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
March 31, 2016			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	$	31,522	$	30	$	31	$	13	$	380	$	454		—	$	31,976
Commercial real estate:
Commercial mortgage		8,327		3		3		15		16		37		—		8,364
Construction		807		20		1		1		12		34		—		841

Total commercial real estate loans		9,134		23		4		16		28		71		—		9,205
Commercial lease financing		3,868		18		25		12		11		66		—		3,934

Total commercial loans	$	44,524	$	71	$	60	$	41	$	419	$	591		—	$	45,115

Real estate — residential mortgage	$	2,151	$	10	$	2	$	2	$	59	$	73	$	10	$	2,234
Home equity loans		9,879		45		20		13		191		269		1		10,149
Consumer direct loans		1,564		6		3		5		1		15		—		1,579
Credit cards		764		5		4		7		2		18		—		782
Consumer indirect loans		562		9		2		2		4		17		—		579

Total consumer loans	$	14,920	$	75	$	31	$	29	$	257	$	392	$	11	$	15,323

Total loans	$	59,444	$	146	$	91	$	70	$	676	$	983	$	11	$	60,438


							90 and				Total Past
			30-59		60-89		Greater				Due and		Purchased
December 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	$	31,116	$	11	$	11	$	20	$	82	$	124		—	$	31,240
Commercial real estate:
Commercial mortgage		7,917		8		5		10		19		42		—		7,959
Construction		1,042		1		1		—		9		11		—		1,053

Total commercial real estate loans		8,959		9		6		10		28		53		—		9,012
Commercial lease financing		3,952		33		11		11		13		68		—		4,020

Total commercial loans	$	44,027	$	53	$	28	$	41	$	123	$	245		—	$	44,272

Real estate — residential mortgage	$	2,149	$	14	$	3	$	2	$	64	$	83	$	10	$	2,242
Home equity loans		10,056		50		24		14		190		278		1		10,335
Consumer direct loans		1,580		10		3		5		2		20		—		1,600
Credit cards		785		6		4		9		2		21		—		806
Consumer indirect loans		601		9		4		1		6		20		—		621

Total consumer loans	$	15,171	$	89	$	38	$	31	$	264	$	422	$	11	$	15,604

Total loans	$	59,198	$	142	$	66	$	72	$	387	$	667	$	11	$	59,876


							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 loans		10,250		43		24		14		191		272		1		10,523
Consumer direct loans		1,527		8		4		6		2		20		—		1,547
Credit cards		708		5		3		9		2		19		—		727
Consumer indirect loans		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

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 our commercial and consumer loan portfolios, excluding $11 million and $12 million of PCI loans at March 31, 2016, and March 31, 2015, respectively, based on regulatory classification and payment activity as of March 31, 2016, and March 31, 2015, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category ^(a) (b)


in millions
	Commercial, financial and agricultural						RE — Commercial						RE — Construction
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
RATING	2016		2015		2015		2016		2015		2015		2016		2015		2015
Pass	$	30,335	$	29,921	$	27,886	$	8,176	$	7,800	$	7,937	$	796	$	1,007	$	1,120
Criticized (Accruing)		1,260		1,236		798		172		139		195		33		37		10
Criticized (Nonaccruing)		381		83		99		16		20		30		12		9		12

Total	$	31,976	$	31,240	$	28,783	$	8,364	$	7,959	$	8,162	$	841	$	1,053	$	1,142


	Commercial Lease						Total
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
RATING	2016		2015		2015		2016		2015		2015
Pass	$	3,878	$	3,967	$	3,996	$	43,185	$	42,695	$	40,939
Criticized (Accruing)		45		38		48		1,510		1,450		1,051
Criticized (Nonaccruing)		11		15		20		420		127		161

Total	$	3,934	$	4,020	$	4,064	$	45,115	$	44,272	$	42,151

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

(b)

The term criticized refers to those loans that are internally classified by Key as special mention or worse, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not classified as criticized.

Consumer Credit Exposure

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


in millions
	Residential — Prime
	March 31,		December 31,		March 31,
GRADE	2016		2015		2015
Pass	$	12,107	$	12,296	$	12,463
Substandard		265		270		279

Total	$	12,372	$	12,566	$	12,742


Credit Risk Profile Based on Payment Activity (a)
in millions
	Consumer direct loans						Credit cards						Consumer indirect loans
	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
	2016		2015		2015		2016		2015		2015		2016		2015		2015
Performing	$	1,578	$	1,598	$	1,545	$	780	$	804	$	725	$	575	$	615	$	764
Nonperforming		1		2		2		2		2		2		4		6		10

Total	$	1,579	$	1,600	$	1,547	$	782	$	806	$	727	$	579	$	621	$	774


	Total
	March 31,		December 31,		March 31,
	2016		2015		2015
Performing	$	2,933	$	3,017	$	3,034
Nonperforming		7		10		14

Total	$	2,940	$	3,027	$	3,048

(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 122 of our 2015 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 qualitative 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, 2016, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

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. Consumer loans generally are charged off when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to net realizable value 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, 2016, the ALLL was $826 million, or 1.37% of loans, compared to $794 million, or 1.37% of loans, at March 31, 2015. At March 31, 2016, the ALLL was 122.2% of nonperforming loans, compared to 181.7% at March 31, 2015.

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	2016			2015
Balance at beginning of period — continuing operations	$	796		$	794
Charge-offs		(60	)		(47	)
Recoveries		14			19

Net loans and leases charged off		(46	)		(28	)
Provision for loan and lease losses from continuing operations		76			29
Foreign currency translation adjustment		—			(1	)

Balance at end of period — continuing operations	$	826		$	794

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


	December 31,										March 31,
in millions	2015		Provision			Charge-offs			Recoveries		2016
Commercial, financial and agricultural	$	450	$	50		$	(26	)	$	3	$	477
Real estate — commercial mortgage		134		—			(1	)		2		135
Real estate — construction		25		(3	)		—			1		23
Commercial lease financing		47		(1	)		(3	)		—		43

Total commercial loans		656		46			(30	)		6		678
Real estate — residential mortgage		18		2			(2	)		2		20
Home equity loans		57		14			(10	)		3		64
Consumer direct loans		20		5			(6	)		1		20
Credit cards		32		6			(8	)		1		31
Consumer indirect loans		13		3			(4	)		1		13

Total consumer loans		140		30			(30	)		8		148

Total ALLL — continuing operations		796		76	^(a)		(60	)		14		826
Discontinued operations		28		2			(9	)		3		24

Total ALLL — including discontinued operations	$	824	$	78		$	(69	)	$	17	$	850

(a)	Excludes a provision for losses on lending-related commitments of $13 million.


	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 loans		71		(3	)		(8	)		3		63
Consumer direct loans		22		3			(6	)		2		21
Credit cards		33		7			(8	)		—		32
Consumer indirect loans		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 a $1 million foreign currency translation adjustment. Excludes provision for losses on lending-related commitments of $6 million.

Our ALLL from continuing operations increased by $32 million, or 4%, from the first quarter of 2015. Our 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 commercial ALLL increased by $42 million, or 6.6%, from the first quarter of 2015 primarily because of loan growth and increased incurred loss estimates. The increase in these incurred loss estimates during 2015 was primarily due to the continued decline in oil and gas prices since 2014. Partially offsetting this increase was a decrease in our consumer ALLL of $10 million, or 6.3%, from the first quarter of 2015. Our consumer ALLL decrease was primarily due to continued improvement in credit metrics, such as delinquency, average credit bureau score, and loan to value, which have decreased expected loss rates since 2014. The continued improvement in the consumer portfolio credit quality metrics from the first quarter of 2015 was primarily due to continued improved credit quality and benefits of relatively stable economic conditions.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $607 million, with a corresponding allowance of $54 million at March 31, 2016. Loans outstanding collectively evaluated for impairment totaled $59.8 billion, with a corresponding allowance of $771 million at March 31, 2016. At March 31, 2016, PCI loans evaluated for impairment totaled $11 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, 2016. At March 31, 2015, the loans outstanding individually evaluated for impairment totaled $338 million, with a corresponding allowance of $49 million. 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.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of March 31, 2016, follows:


	Allowance						Outstanding
	Individually		Collectively		Purchased					Individually		Collectively			Purchased
March 31, 2016	Evaluated for		Evaluated for		Credit					Evaluated for		Evaluated for			Credit
in millions	Impairment		Impairment		Impaired		Loans			Impairment		Impairment			Impaired
Commercial, financial and agricultural	$	28	$	449		—	$	31,976		$	361	$	31,615			—
Commercial real estate:
Commercial mortgage		1		134		—		8,364			8		8,356			—
Construction		—		23		—		841			8		833			—

Total commercial real estate loans		1		157		—		9,205			16		9,189			—
Commercial lease financing		—		43		—		3,934			—		3,934			—

Total commercial loans		29		649		—		45,115			377		44,738			—
Real estate — residential mortgage		3		16	$	1		2,234			55		2,169		$	10
Home equity loans		19		45				10,149			133		10,015			1
Consumer direct loans		—		20		—		1,579			3		1,576			—
Credit cards		—		31		—		782			3		779			—
Consumer indirect loans		3		10				579			36		543			—

Total consumer loans		25		122		1		15,323			230		15,082			11

Total ALLL — continuing operations		54		771		1		60,438			607		59,820			11
Discontinued operations		2		22		—		1,760	(a)		21		1,739	(a)		—

Total ALLL — including discontinued operations	$	56	$	793	$	1	$	62,198		$	628	$	61,559		$	11

(a)	Amount includes $3 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 December 31, 2015, follows:


	Allowance						Outstanding
	Individually		Collectively		Purchased					Individually		Collectively			Purchased
December 31, 2015	Evaluated for		Evaluated for		Credit					Evaluated for		Evaluated for			Credit
in millions	Impairment		Impairment		Impaired		Loans			Impairment		Impairment			Impaired
Commercial, financial and agricultural	$	7	$	443		—	$	31,240		$	68	$	31,172			—
Commercial real estate:
Commercial mortgage		1		133		—		7,959			10		7,949			—
Construction		—		25		—		1,053			5		1,048			—

Total commercial real estate loans		1		158		—		9,012			15		8,997			—
Commercial lease financing		—		47		—		4,020			—		4,020			—

Total commercial loans		8		648		—		44,272			83		44,189			—
Real estate — residential mortgage		4		13	$	1		2,242			56		2,176		$	10
Home equity loans		20		37		—		10,335			125		10,209			1
Consumer direct loans		—		20		—		1,600			3		1,597			—
Credit cards		—		32		—		806			3		803			—
Consumer indirect loans		3		10		—		621			38		583			—

Total consumer loans		27		112		1		15,604			225		15,368			11

Total ALLL — continuing operations		35		760		1		59,876			308		59,557			11

Discontinued operations		2		26		—		1,828	(a)		21		1,807	(a)		—

Total ALLL — including discontinued operations	$	37	$	786	$	1	$	61,704		$	329	$	61,364		$	11

(a)	Amount includes $4 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, 2015, follows:


	Allowance						Outstanding
	Individually		Collectively		Purchased					Individually		Collectively			Purchased
March 31, 2015	Evaluated for		Evaluated for		Credit					Evaluated for		Evaluated for			Credit
in millions	Impairment		Impairment		Impaired		Loans			Impairment		Impairment			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 loans		18		45		—		10,523			123		10,399			1
Consumer direct loans		—		21		—		1,547			3		1,544			—
Credit cards		—		32		—		727			4		723			—
Consumer indirect loans		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 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 was $69 million at March 31, 2016. When combined with our ALLL, our total allowance for credit losses represented 1.48% of loans at March 31, 2016, compared to 1.44% at March 31, 2015.

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


	Three months ended March 31,
in millions	2016		2015
Balance at beginning of period	$	56	$	35
Provision (credit) for losses on lending-related commitments		13		6

Balance at end of period	$	69	$	41

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. 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 124 of our 2015 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, 2016, our Level 3 instruments consist of two convertible preferred securities. Our Strategy group is responsible for reviewing the valuation model and determining the fair value of these investments on a quarterly basis. The securities are valued using a cash flow analysis of the associated private company issuers. The valuations of the securities are negatively impacted by projected net losses of the associated private companies and positively impacted by projected net gains.

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.

Direct 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. There were no significant direct equity and mezzanine investments at March 31, 2016, and March 31, 2015.

The fair value of our indirect investments is based on 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, 2016, 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 17 of our 2015 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, 2016. We did not provide any financial support to investees related to our direct and indirect investments for the three months ended March 31, 2016, and March 31, 2015.


March 31, 2016	Fair Value		Unfunded Commitments
in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Indirect investments
Passive funds ^(a)	$	8	$	1

Total	$	8	$	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 three 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 the funds based on its 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. As of December 31, 2015, the valuation of our Level 2 investment included a quoted price, which was adjusted by liquidity assumptions due to a contractual term of the investment. The contractual term expired and this investment was transferred from Level 2 to Level 1 as of March 31, 2016. 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 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 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). Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. At March 31, 2016, one of our indirect investments was identified for sale, and management has committed to a plan to sell this identified investment. It is probable that we will sell this investment for an amount different from its net asset value. The investment is valued at its probable sale price as of March 31, 2016. The remaining 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. 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, 2016, as well as financial support provided for the three months ended March 31, 2016, and March 31, 2015.


					Financial support provided
					Three months ended March 31,
	March 31, 2016				2016				2015
in millions	Fair Value		Unfunded Commitments		Funded Commitments		Funded Other		Funded Commitments		Funded Other
INVESTMENT TYPE
Direct investments ^(a)	$	61		—		—	$	13		—	$	3
Indirect investments (measured at NAV) ^(b)		211	$	47	$	1		—	$	2		—
Other indirect investment ^(b)		18		3		—		—		—		—

Total	$	290	$	50	$	1	$	13	$	2	$	3

(a)

Our direct investments consist of equity and debt investments directly in independent business enterprises. Operations of the business enterprises are handled by management of the portfolio company. The purpose of funding these enterprises is to provide financial support for business development and acquisition strategies. We infuse equity capital based on an initial contractual cash contribution and later from additional requests on behalf of the companies’ management.

(b)

Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to eight years. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.

Other. We had one indirect equity investment in the form of limited partnership units representing less than a five percent ownership interest in the entity’s equity. The fair value of this investment was based upon the NAV accounting methodology. Under the requirements of the Volcker Rule, we were required to dispose of this investment. Prior to December 31, 2015, this investment was redeemed.

Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded. The majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, LIBOR and Overnight Index Swap (OIS) discount rates and curves, index pricing curves, foreign currency curves, and volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity). These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps, and credit default swaps.

In addition, we have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as bond spreads and asset values, as well as unobservable internally derived assumptions, such as loss probabilities and internal risk ratings of customers. These derivatives are priced monthly by our MRM group using a credit valuation adjustment methodology. Swap details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.

Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a credit valuation adjustment. The credit component is determined by individual counterparty based on the probability of default and considers master netting and collateral agreements. The credit valuation adjustment is classified as Level 3. Our MRM group is responsible for the valuation policies and procedures related to this credit valuation adjustment. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and corporate accounting personnel. On a quarterly basis, MRM prepares the credit valuation adjustment calculation, which includes a detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast to ensure that the credit valuation adjustment recorded at period end is sufficient.

Other assets and liabilities. The value of our short positions is driven by the valuation of the underlying securities. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings, and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets and bids and offers.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at March 31, 2016, December 31, 2015, and March 31, 2015.


March 31, 2016
in millions	Level 1		Level 2			Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	636			—	$	636
States and political subdivisions		—		26			—		26
Collateralized mortgage obligations		—		—			—		—
Other mortgage-backed securities		—		64			—		64
Other securities		—		37			—		37

Total trading account securities		—		763			—		763
Commercial loans		—		2	<

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