Edgar Filing: KEYCORP /NEW/

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 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		1,082,180,931 Shares
Title of class		Outstanding at August 1, 2016

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements		5

	Consolidated Balance Sheets — June 30, 2016 (Unaudited), December 31, 2015, and June 30, 2015 (Unaudited)		5

	Consolidated Statements of Income (Unaudited) — Three and six months ended June 30, 2016, and June 30, 2015		6

	Consolidated Statements of Comprehensive Income (Unaudited) — Three and six months ended June 30, 2016, and June 30, 2015		7

	Consolidated Statements of Changes in Equity (Unaudited) — Six months ended June 30, 2016, and June 30, 2015		8

	Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2016, and June 30, 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		48
	Note 7. Derivatives and Hedging Activities		52
	Note 8. Mortgage Servicing Assets		60
	Note 9. Variable Interest Entities		62
	Note 10. Income Taxes		64
	Note 11. Acquisitions and Discontinued Operations		65
	Note 12. Securities Financing Activities		71
	Note 13. Employee Benefits		73
	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries		74
	Note 15. Contingent Liabilities and Guarantees		75
	Note 16. Accumulated Other Comprehensive Income		77
	Note 17. Shareholders’ Equity		80
	Note 18. Line of Business Results		81

	Report of Ernst & Young LLP, Independent Registered Public Accounting Firm		85


Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	86

	Introduction	86
	Terminology	86
	Selected financial data	87
	Forward-looking statements	88
	Economic overview	89
	Long-term financial goals	90
	Strategic developments	90
	Demographics	91
	Supervision and regulation	93

	Highlights of Our Performance	96
	Financial performance	96

	Results of Operations	101
	Net interest income	101
	Noninterest income	104
	Noninterest expense	107
	Income taxes	108

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

	Financial Condition	112
	Loans and loans held for sale	112
	Securities	119
	Other investments	122
	Deposits and other sources of funds	122
	Capital	123

	Risk Management	126
	Overview	126
	Market risk management	127
	Liquidity risk management	132
	Credit risk management	135
	Operational and compliance risk management	142

	Critical Accounting Policies and Estimates	143

	European Sovereign and Non-Sovereign Debt Exposures	144

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	145

Item 4.	Controls and Procedures	145


	PART II. OTHER INFORMATION

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

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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets


in millions, except per share data	June 30, 2016			December 31, 2015			June 30, 2015
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	496		$	607		$	693
Short-term investments		6,599			2,707			3,222
Trading account assets		965			788			674
Securities available for sale		14,552			14,218			14,244
Held-to-maturity securities (fair value: $4,889, $4,848, and $4,992)		4,832			4,897			5,022
Other investments		577			655			703
Loans, net of unearned income of $615, $646, and $657		62,098			59,876			58,264
Less: Allowance for loan and lease losses		854			796			796

Net loans		61,244			59,080			57,468
Loans held for sale		442			639			835
Premises and equipment		742			779			788
Operating lease assets		399			340			296
Goodwill		1,060			1,060			1,057
Other intangible assets		50			65			83
Corporate-owned life insurance		3,568			3,541			3,502
Derivative assets		1,234			619			536
Accrued income and other assets		2,673			3,290			3,312
Discontinued assets (including $3 and $4 million of portfolio loans at fair value and $179 million of portfolio loans held for sale at fair value, see Note 11)		1,717			1,846			2,169

Total assets	$	101,150		$	95,131		$	94,604

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	40,195		$	37,089		$	36,024
Savings deposits		2,355			2,341			2,370
Certificates of deposit ($100,000 or more)		3,381			2,392			2,032
Other time deposits		3,267			3,127			3,105

Total interest-bearing deposits		49,198			44,949			43,531
Noninterest-bearing deposits		26,127			26,097			26,640
Deposits in foreign office — interest-bearing		—			—			498

Total deposits		75,325			71,046			70,669
Federal funds purchased and securities sold under repurchase agreements		360			372			444
Bank notes and other short-term borrowings		687			533			528
Derivative liabilities		746			632			560
Accrued expense and other liabilities		1,326			1,605			1,537
Long-term debt		11,388			10,184			10,265

Total liabilities		89,832			84,372			84,003

EQUITY
Preferred stock, $1 par value, authorized 25,000,000 shares:
7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 2,900,234 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		3,835			3,922			3,898
Retained earnings		9,166			8,922			8,614
Treasury stock, at cost (174,267,011, 181,218,648, and 173,362,345 shares)		(2,881	)		(3,000	)		(2,884	)
Accumulated other comprehensive income (loss)		(114	)		(405	)		(345	)

Key shareholders’ equity		11,313			10,746			10,590
Noncontrolling interests		5			13			11

Total equity		11,318			10,759			10,601

Total liabilities and equity	$	101,150		$	95,131		$	94,604

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended June 30,					Six months ended June 30,
dollars in millions, except per share amounts	2016			2015		2016			2015
INTEREST INCOME
Loans	$	567		$	532	$	1,129		$	1,055
Loans held for sale		5			12		13			19
Securities available for sale		74			72		149			142
Held-to-maturity securities		24			24		48			48
Trading account assets		6			5		13			10
Short-term investments		6			2		10			4
Other investments		2			5		5			10

Total interest income		684			652		1,367			1,288

INTEREST EXPENSE
Deposits		34			26		65			52
Bank notes and other short-term borrowings		3			2		5			4
Long-term debt		50			40		96			77

Total interest expense		87			68		166			133

NET INTEREST INCOME		597			584		1,201			1,155
Provision for credit losses		52			41		141			76

Net interest income after provision for credit losses		545			543		1,060			1,079

NONINTEREST INCOME
Trust and investment services income		110			111		219			220
Investment banking and debt placement fees		98			141		169			209
Service charges on deposit accounts		68			63		133			124
Operating lease income and other leasing gains		18			24		35			43
Corporate services income		53			43		103			86
Cards and payments income		52			47		98			89
Corporate-owned life insurance income		28			30		56			61
Consumer mortgage income		3			4		5			7
Mortgage servicing fees		10			9		22			22
Net gains (losses) from principal investing		11			11		11			40
Other income^(a)		22			5		53			24

Total noninterest income		473			488		904			925

NONINTEREST EXPENSE
Personnel		427			408		831			797
Net occupancy		59			66		120			131
Computer processing		45			42		88			80
Business services and professional fees		40			42		81			75
Equipment		21			22		42			44
Operating lease expense		14			12		27			23
Marketing		22			15		34			23
FDIC assessment		8			8		17			16
Intangible asset amortization		7			9		15			18
OREO expense, net		2			1		3			3
Other expense		106			86		196			170

Total noninterest expense		751			711		1,454			1,380

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		267			320		510			624
Income taxes		69			84		125			158

INCOME (LOSS) FROM CONTINUING OPERATIONS		198			236		385			466
Income (loss) from discontinued operations, net of taxes of $2, $2, $2, and $5 (see Note 11)		3			3		4			8

NET INCOME (LOSS)		201			239		389			474
Less: Net income (loss) attributable to noncontrolling interests		(1	)		1		(1	)		3

NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	202		$	238	$	390		$	471

Income (loss) from continuing operations attributable to Key common shareholders	$	193		$	230	$	375		$	452
Net income (loss) attributable to Key common shareholders		196			233		379			460
Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.27	$	.45		$	.53
Income (loss) from discontinued operations, net of taxes		—			—		—			.01
Net income (loss) attributable to Key common shareholders ^(b)		.23			.28		.45			.54
Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.27	$	.44		$	.52
Income (loss) from discontinued operations, net of taxes		—			—		—			.01
Net income (loss) attributable to Key common shareholders ^(b)		.23			.27		.45			.53
Cash dividends declared per common share	$	.085		$	.075	$	.16		$	.14
Weighted-average common shares outstanding (000)		831,899			839,454		829,640			843,992
Effect of convertible preferred stock		—			—		—			—
Effect of common share options and other stock awards		6,597			6,858		7,138			7,695

Weighted-average common shares and potential common shares outstanding (000)^(c)		838,496			846,312		836,778			851,687

(a)	For the three months ended June 30, 2016, and June 30, 2015, net securities gains (losses) totaled less than $1 million. For the three months ended June 30, 2016, and June 30, 2015, we did not have any impairment losses related to securities.

(b)	EPS may not foot due to rounding.

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended June 30,						Six months ended June 30,
in millions	2016			2015			2016			2015
Net income (loss)	$	201		$	239		$	389		$	474
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $35, ($31), $111 and $2		59			(51	)		187			4
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $22, ($10), $56, and $9		36			(17	)		94			15
Foreign currency translation adjustments, net of income taxes of $1, $0, $4, and ($8)		2			—			7			(13	)
Net pension and postretirement benefit costs, net of income taxes of $1, $2, $5, and $3		2			2			3			5

Total other comprehensive income (loss), net of tax		99			(66	)		291			11

Comprehensive income (loss)		300			173			680			485
Less: Comprehensive income attributable to noncontrolling interests		(1	)		1			(1	)		3

Comprehensive income (loss) attributable to Key	$	301		$	172		$	681		$	482

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)																471									3
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $2																						4
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $9																						15
Foreign currency translation adjustments, net of income taxes of ($8)																						(13	)
Net pension and postretirement benefit costs, net of income taxes of $3																						5
Deferred compensation													12
Cash dividends declared on common shares ($.14 per share)																(119	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)																(11	)
Common shares repurchased					(22,881	)													(325	)
Series A Preferred Stock exchanged for common shares		(5	)		33			(1	)										1
Common shares reissued (returned) for stock options and other employee benefit plans					7,053								(100	)					121
Net contribution from (distribution to) noncontrolling interests																									(4	)

BALANCE AT JUNE 30, 2015		2,900			843,608		$	290		$	1,017	$	3,898		$	8,614		$	(2,884	)	$	(345	)	$	11

BALANCE AT DECEMBER 31, 2015		2,900			835,751		$	290		$	1,017	$	3,922		$	8,922		$	(3,000	)	$	(405	)	$	13
Net income (loss)																390									(1	)
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $111																						187
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $56																						94
Foreign currency translation adjustments, net of income taxes of $4																						7
Net pension and postretirement benefit costs, net of income taxes of $5																						3
Deferred compensation													(4	)
Cash dividends declared on common shares ($.16 per share)																(135	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)																(11	)
Common shares reissued (returned) for stock options and other employee benefit plans					6,952								(83	)					119
Net contribution from (distribution to) noncontrolling interests																									(7	)

BALANCE AT JUNE 30, 2016		2,900			842,703		$	290		$	1,017	$	3,835		$	9,166		$	(2,881	)	$	(114	)	$	5

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
in millions	2016			2015
OPERATING ACTIVITIES
Net income (loss)	$	389		$	474
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for credit losses		141			76
Depreciation, amortization and accretion expense, net		124			116
Increase in cash surrender value of corporate-owned life insurance		(49	)		(50	)
Stock-based compensation expense		36			33
FDIC reimbursement (payments), net of FDIC expense		—			(1	)
Deferred income taxes (benefit)		27			(27	)
Proceeds from sales of loans held for sale		2,940			3,726
Originations of loans held for sale, net of repayments		(2,691	)		(3,756	)
Net losses (gains) on sales of loans held for sale		(31	)		(55	)
Net losses (gains) from principal investing		(11	)		(40	)
Net losses (gains) and writedown on OREO		2			2
Net losses (gains) on leased equipment		1			(9	)
Net securities losses (gains)		—			1
Net losses (gains) on sales of fixed assets		3			2
Net decrease (increase) in trading account assets		(177	)		76
Other operating activities, net		20			(509	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		724			59
INVESTING ACTIVITIES
Net decrease (increase) in short-term investments, excluding acquisitions		(3,892	)		1,047
Purchases of securities available for sale		(1,614	)		(2,451	)
Proceeds from sales of securities available for sale		—			11
Proceeds from prepayments and maturities of securities available for sale		1,565			1,547
Proceeds from prepayments and maturities of held-to-maturity securities		586			566
Purchases of held-to-maturity securities		(523	)		(575	)
Purchases of other investments		(24	)		(20	)
Proceeds from sales of other investments		77			77
Proceeds from prepayments and maturities of other investments		1			5
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(2,429	)		(1,128	)
Proceeds from sales of portfolio loans		72			67
Proceeds from corporate-owned life insurance		22			26
Purchases of premises, equipment, and software		(30	)		(17	)
Proceeds from sales of OREO		7			10

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(6,182	)		(835	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		4,279			(1,329	)
Net increase (decrease) in short-term borrowings		142			(26	)
Net proceeds from issuance of long-term debt		1,578			2,750
Payments on long-term debt		(509	)		(141	)
Repurchase of common shares		—			(325	)
Net proceeds from reissuance of common shares		3			17
Cash dividends paid		(146	)		(130	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		5,347			816

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		(111	)		40
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		607			653

CASH AND DUE FROM BANKS AT END OF PERIOD	$	496		$	693

Additional disclosures relative to cash flows:
Interest paid	$	190		$	149
Income taxes paid (refunded)		59			90
Noncash items:
Reduction of secured borrowing and related collateral	$	33		$	103
Loans transferred to portfolio from held for sale		6			—
Loans transferred to held for sale from portfolio		28			16
Loans transferred to OREO		10			12

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.
ERISA: Employee Retirement Income Security Act of 1974.		OTTI: Other-than-temporary impairment.
ERM: Enterprise risk management.		PBO: Projected benefit obligation.
EVE: Economic value of equity.		PCI: Purchased credit impaired.
FASB: Financial Accounting Standards Board.		S&P: Standard and Poor’s Ratings Services, a Division of The
FDIC: Federal Deposit Insurance Corporation.		McGraw-Hill Companies, Inc.
Federal Reserve: Board of Governors of the Federal Reserve		SEC: U.S. Securities and Exchange Commission.
System.		Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
FHLB: Federal Home Loan Bank of Cincinnati.		Perpetual Convertible Preferred Stock, Series A.
FHLMC: Federal Home Loan Mortgage Corporation.		SIFIs: Systemically important financial institutions, including
First Niagara: First Niagara Financial Group, Inc.		BHCs with total consolidated assets of at least $50 billion
(NASDAQ: FNFG).		and nonbank financial companies designated by FSOC for
FNMA: Federal National Mortgage Association, or Fannie Mae.		supervision by the Federal Reserve.
FSOC: Financial Stability Oversight Council.		TDR: Troubled debt restructuring.
GAAP: U.S. generally accepted accounting principles.		TE: Taxable-equivalent.
GNMA: Government National Mortgage Association.		U.S. Treasury: United States Department of the Treasury.
ISDA: International Swaps and Derivatives Association.		VaR: Value at risk.
KAHC: Key Affordable Housing Corporation.		VEBA: Voluntary Employee Beneficiary Association.
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 June 30, 2016

Financial instruments. In June 2016, the FASB issued new accounting guidance that changes the methodology for recognizing credit losses related to financial instruments. Under current GAAP, a credit loss is not recognized until it is probable the loss has been incurred. The new accounting guidance eliminates that threshold and expands the information required for an entity to consider when developing an estimate of expected credit losses, including the use of forecasted information. Entities will be required to present financial assets measured on an amortized cost basis at the net amount that is expected to be collected. This new guidance will impact the accounting for our loans, debt securities available for sale, and liability for credit losses on unfunded lending-related commitments as well as purchased financial assets with a more than insignificant amount of credit deterioration since origination. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2018. This guidance must be implemented using a modified retrospective basis except a prospective approach must be used for debt securities for which an other-than-

temporary impairment had been recognized before the effective date. A prospective transition approach also should be used for purchased financial assets with credit deterioration. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

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. The adoption of this accounting guidance is not expected to have a material effect 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. The adoption of this accounting guidance is not expected to have a material effect 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. In May 2016, the FASB issued narrow-scope improvements related to collectability, sales tax and noncash consideration, and practical expedients for contract modifications and completed contracts. 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 June 30,					Six months ended June 30,
dollars in millions, except per share amounts	2016			2015		2016			2015
EARNINGS
Income (loss) from continuing operations	$	198		$	236	$	385		$	466
Less: Net income (loss) attributable to noncontrolling interests		(1	)		1		(1	)		3

Income (loss) from continuing operations attributable to Key		199			235		386			463
Less: Dividends on Series A Preferred Stock		6			5		11			11

Income (loss) from continuing operations attributable to Key common shareholders		193			230		375			452
Income (loss) from discontinued operations, net of taxes^(a)		3			3		4			8

Net income (loss) attributable to Key common shareholders	$	196		$	233	$	379		$	460

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		831,899			839,454		829,640			843,992
Effect of convertible preferred stock		—			—		—			—
Effect of common share options and other stock awards		6,597			6,858		7,138			7,695

Weighted-average common shares and potential common shares outstanding (000)^(b)		838,496			846,312		836,778			851,687

EARNINGS PER COMMON SHARE

Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.27	$	.45		$	.53
Income (loss) from discontinued operations, net of taxes^(a)		—			—		—			.01
Net income (loss) attributable to Key common shareholders^(c)		.23			.28		.45			.54

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.23		$	.27	$	.44		$	.52
Income (loss) from discontinued operations, net of taxes^(a)		—			—		—			.01
Net income (loss) attributable to Key common shareholders — assuming dilution^(c)		.23			.27		.45			.53

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

(c)	EPS may not foot due to rounding.

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


in millions	June 30, 2016		December 31, 2015		June 30, 2015
Commercial, financial and agricultural^(a)	$	33,376	$	31,240	$	29,285
Commercial real estate:
Commercial mortgage		8,582		7,959		7,874
Construction		881		1,053		1,254

Total commercial real estate loans		9,463		9,012		9,128
Commercial lease financing^(b)		3,988		4,020		4,010

Total commercial loans		46,827		44,272		42,423
Residential — prime loans:
Real estate — residential mortgage		2,285		2,242		2,252
Home equity loans		10,062		10,335		10,532

Total residential — prime loans		12,347		12,577		12,784
Consumer direct loans		1,584		1,600		1,595
Credit cards		813		806		753
Consumer indirect loans		527		621		709

Total consumer loans		15,271		15,604		15,841

Total loans^{(c) (d)}	$	62,098	$	59,876	$	58,264

(a)	Loan balances include $88 million, $85 million, and $89 million of commercial credit card balances at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

(b)

Commercial lease financing includes receivables held as collateral for a secured borrowing of $102 million, $134 million, and $191 million at June 30, 2016, December 31, 2015, and June 30, 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 June 30, 2016, total loans include purchased loans of $104 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 June 30, 2015, total loans include purchased loans of $125 million, of which $12 million were PCI loans.

(d)

Total loans exclude loans of $1.7 billion at June 30, 2016, $1.8 billion at December 31, 2015, and $2 billion at June 30, 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	June 30, 2016		December 31, 2015		June 30, 2015
Commercial, financial and agricultural	$	150	$	76	$	217
Real estate — commercial mortgage		270		532		576
Commercial lease financing		3		14		7
Real estate — residential mortgage		19		17		35

Total loans held for sale	$	442	$	639	$	835

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


in millions	June 30, 2016			December 31, 2015			June 30, 2015
Balance at beginning of the period	$	684		$	916		$	1,649
New originations		1,539			1,655			1,650
Transfers from (to) held to maturity, net		22			22			6
Loan sales		(1,802	)		(1,943	)		(2,466	)
Loan draws (payments), net		(1	)		(11	)		(4	)

Balance at end of period	$	442		$	639		$	835

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	June 30, 2016		December 31, 2015		June 30, 2015
Total nonperforming loans^{(a), (b)}	$	619	$	387	$	419
OREO^(c)		15		14		20
Other nonperforming assets		3		2		1

Total nonperforming assets^(a)	$	637	$	403	$	440

Nonperforming assets from discontinued operations—education lending^(d)	$	5	$	7	$	6

Restructured loans included in nonperforming loans^(a)	$	133	$	159	$	170
Restructured loans with an allocated specific allowance^(e)		54		69		79
Specifically allocated allowance for restructured loans^(f)		34		30		36

Accruing loans past due 90 days or more	$	70	$	72	$	66
Accruing loans past due 30 through 89 days		203		208		181

(a)	Nonperforming loan balances exclude $11 million, $11 million, and $12 million of PCI loans at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

(b)	Includes carrying value of consumer residential mortgage loans in the process of foreclosure of approximately $111 million, $114 million, and $116 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

(c)	Includes carrying value of foreclosed residential real estate of approximately $12 million, $11 million, and $15 million at June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

(d)	Restructured loans of approximately $22 million, $21 million, and $19 million are included in discontinued operations at June 30, 2016, December 31, 2015, and June 30, 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 June 30, 2016, the outstanding unpaid principal balance and carrying value of all PCI loans was $16 million and $11 million, respectively, compared to $17 million and $11 million, respectively, at December 31, 2015, and $18 million and $12 million, respectively, at June 30, 2015. Changes in the accretable yield during the first six months of 2016 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 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 primarily unchanged from the ending balance at December 31, 2014, given that accretion and net reclassifications were less than $1 million during 2015. Changes in the accretable yield during the first six months of 2015 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 2015.

At June 30, 2016, the approximate carrying amount of our commercial nonperforming loans outstanding represented 83% of their original contractual amount owed, total nonperforming loans outstanding represented 83% of their original contractual amount owed, and nonperforming assets in total were carried at 83% of their original contractual amount owed.

At June 30, 2016, our 20 largest nonperforming loans totaled $331 million, representing 54% of total loans on nonperforming status. At June 30, 2015, our 20 largest nonperforming loans totaled $120 million, representing 29% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $12 million for the six months ended June 30, 2016, and $8 million for the six months ended June 30, 2015.

The following tables set forth a further breakdown of individually impaired loans as of June 30, 2016, December 31, 2015, and June 30, 2015:


June 30, 2016 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	293	$	328		—	$	276
Commercial real estate:
Commercial mortgage		5		7		—		5
Construction		21		29		—		15

Total commercial real estate loans		26		36		—		20

Total commercial loans		319		364		—		296

Real estate — residential mortgage		22		22		—		23
Home equity loans		65		65		—		66
Consumer indirect loans		1		1		—		1

Total consumer loans		88		88		—		90

Total loans with no related allowance recorded		407		452		—		386

With an allowance recorded:
Commercial, financial and agricultural		29		30	$	16		65
Commercial real estate:
Commercial mortgage		—		—		—		2

Total commercial real estate loans		—		—		—		2

Total commercial loans		29		30		16		67

Real estate — residential mortgage		31		31		3		32
Home equity loans		66		66		20		65
Consumer direct loans		3		3		—		3
Credit cards		3		3		—		3
Consumer indirect loans		32		32		2		33

Total consumer loans		135		135		25		136

Total loans with an allowance recorded		164		165		41		203

Total	$	571	$	617	$	41	$	589

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

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


December 31, 2015 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded 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 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.


June 30, 2015 in millions	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance		Average Recorded Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	9	$	56		—	$	15
Commercial real estate:
Commercial mortgage		10		14		—		12
Construction		7		7		—		7

Total commercial real estate loans		17		21		—		19

Total commercial loans		26		77		—		34

Real estate — residential mortgage		22		22		—		22
Home equity loans		62		62		—		63
Consumer indirect loans		1		1		—		1

Total consumer loans		85		85		—		86

Total loans with no related allowance recorded		111		162		—		120
With an allowance recorded:
Commercial, financial and agricultural		73		86	$	24		67
Commercial real estate:
Commercial mortgage		6		7		1		6

Total commercial real estate loans		6		7		1		6

Total commercial loans		79		93		25		73

Real estate — residential mortgage		33		33		5		33
Home equity loans		63		63		19		62
Consumer direct loans		3		3		—		3
Credit cards		3		3		—		3
Consumer indirect loans		42		42		3		42

Total consumer loans		144		144		27		143

Total loans with an allowance recorded		223		237		52		216

Total	$	334	$	399	$	52	$	336

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

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

For the six months ended June 30, 2016, and June 30, 2015, interest income recognized on the outstanding balances of accruing impaired loans totaled $6 million and $3 million, respectively.

At June 30, 2016, aggregate restructured loans (accrual and nonaccrual loans) totaled $277 million, compared to $280 million at December 31, 2015, and $300 million at June 30, 2015. During the first six months of 2016, we added $49 million in restructured loans, which were offset by $52 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 six months of 2015, we added $73 million in restructured loans, which were partially offset by $43 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2016, follows:


June 30, 2016 dollars in millions	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		14	$	50	$	32
Commercial real estate:
Real estate — commercial mortgage		8		2		1

Total commercial real estate loans		8		2		1

Total commercial loans		22		52		33
Real estate — residential mortgage		307		19		19
Home equity loans		1,332		86		76
Consumer direct loans		28		1		1
Credit cards		267		1		1
Consumer indirect loans		81		4		3

Total consumer loans		2,015		111		100

Total nonperforming TDRs		2,037		163		133
Prior-year accruing:^(a)
Commercial, financial and agricultural		6		30		20

Total commercial loans		6		30		20
Real estate — residential mortgage		536		35		35
Home equity loans		1,116		64		54
Consumer direct loans		39		2		2
Credit cards		478		3		2
Consumer indirect loans		415		59		31

Total consumer loans		2,584		163		124

Total prior-year accruing TDRs		2,590		193		144

Total TDRs		4,627	$	356	$	277

(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:


December 31, 2015 dollars in millions	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		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 June 30, 2015, follows:


June 30, 2015 dollars in millions	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		12	$	74	$	58
Commercial real estate:
Real estate — commercial mortgage		12		32		8

Total commercial real estate loans		12		32		8

Total commercial loans		24		106		66
Real estate — residential mortgage		352		21		21
Home equity loans		1,193		80		73
Consumer direct loans		28		1		1
Credit cards		289		2		2
Consumer indirect loans		125		9		7

Total consumer loans		1,987		113		104

Total nonperforming TDRs		2,011		219		170
Prior-year accruing:^(a)
Commercial, financial and agricultural		14		6		3
Commercial real estate:
Real estate — commercial mortgage		1		2		1

Total commercial real estate loans		1		2		1

Total commercial loans		15		8		4
Real estate — residential mortgage		491		36		36
Home equity loans		1,138		58		50
Consumer direct loans		48		2		2
Credit cards		489		3		2
Consumer indirect loans		492		62		36

Total consumer loans		2,658		161		126

Total prior-year accruing TDRs		2,673		169		130

Total TDRs		4,684	$	388	$	300

(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 three months ended June 30, 2016, there were no commercial loan TDRs and 41 consumer loan TDRs with a combined recorded investment of $2 million that experienced payment defaults after modifications resulting in TDR status during 2015. During the three months ended June 30, 2015, there were no significant commercial loan TDRs and 65 consumer loan TDRs with a combined recorded investment of $3 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.


in millions	June 30, 2016		December 31, 2015		June 30, 2015
Commercial loans:
Interest rate reduction	$	52	$	51	$	60
Forgiveness of principal		—		2		2
Other		1		1		8

Total	$	53	$	54	$	70

Consumer loans:
Interest rate reduction	$	128	$	132	$	142
Forgiveness of principal		3		8		4
Other		93		86		84

Total	$	224	$	226	$	230

Total commercial and consumer TDRs^(a)	$	277	$	280	$	300
Total loans		62,098		59,876		58,264

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $7 million, $9 million, and $8 million at June 30, 2016, December 31, 2015, and June 30, 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 June 30, 2016, approximately $61.2 billion, or 98.5%, of our total loans were current, compared to approximately $59.2 billion, or 98.9% of total loans, at December 31, 2015, and approximately $57.6 billion, or 98.8% of total loans, at June 30, 2015. At June 30, 2016, total past due loans and nonperforming loans of $892 million represented approximately 1.4% of total loans, compared to $667 million, or 1.1% of total loans, at December 31, 2015, and $666 million, or 1.2% of total loans, at June 30, 2015.

The following aging analysis of past due and current loans as of June 30, 2016, December 31, 2015, and June 30, 2015, provides further information regarding Key’s credit exposure.


June 30, 2016 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	32,975	$	46	$	10	$	24	$	321	$	401		—	$	33,376
Commercial real estate:
Commercial mortgage		8,556		4		1		7		14		26		—		8,582
Construction		854		—		—		2		25		27		—		881

Total commercial real estate loans		9,410		4		1		9		39		53		—		9,463
Commercial lease financing		3,939		22		6		11		10		49		—		3,988

Total commercial loans	$	46,324	$	72	$	17	$	44	$	370	$	503		—	$	46,827

Real estate — residential mortgage	$	2,208	$	9	$	3	$	1	$	54	$	67	$	10	$	2,285
Home equity loans		9,799		36		25		12		189		262		1		10,062
Consumer direct loans		1,557		18		3		5		1		27		—		1,584
Credit cards		796		5		3		7		2		17		—		813
Consumer indirect loans		511		9		3		1		3		16		—		527

Total consumer loans	$	14,871	$	77	$	37	$	26	$	249	$	389	$	11	$	15,271

Total loans	$	61,195	$	149	$	54	$	70	$	619	$	892	$	11	$	62,098


December 31, 2015 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	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


June 30, 2015 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	29,137	$	26	$	5	$	17	$	100	$	148		—	$	29,285
Commercial real estate:
Commercial mortgage		7,823		6		2		17		26		51		—		7,874
Construction		1,242		—		—		—		12		12		—		1,254

Total commercial real estate loans		9,065		6		2		17		38		63		—		9,128
Commercial lease financing		3,967		20		3		2		18		43		—		4,010

Total commercial loans	$	42,169	$	52	$	10	$	36	$	156	$	254		—	$	42,423

Real estate — residential mortgage	$	2,155	$	13	$	3	$	3	$	67	$	86	$	11	$	2,252
Home equity loans		10,264		47		24		12		184		267		1		10,532
Consumer direct loans		1,577		8		3		6		1		18		—		1,595
Credit cards		735		5		3		8		2		18		—		753
Consumer indirect loans		686		10		3		1		9		23		—		709

Total consumer loans	$	15,417	$	83	$	36	$	30	$	263	$	412	$	12	$	15,841

Total loans	$	57,586	$	135	$	46	$	66	$	419	$	666	$	12	$	58,264

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, $11 million, and $12 million of PCI loans at June 30, 2016, December 31, 2015, and June 30, 2015, respectively, based on regulatory classification and payment activity as of June 30, 2016, December 31, 2015, and June 30, 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
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
RATING	2016		2015		2015		2016		2015		2015		2016		2015		2015
Pass	$	31,700	$	29,921	$	28,169	$	8,380	$	7,800	$	7,603	$	831	$	1,007	$	1,222
Criticized (Accruing)		1,354		1,236		1,015		188		139		245		25		37		20
Criticized (Nonaccruing)		322		83		101		14		20		26		25		9		12

Total	$	33,376	$	31,240	$	29,285	$	8,582	$	7,959	$	7,874	$	881	$	1,053	$	1,254


	Commercial Lease						Total
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
RATING	2016		2015		2015		2016		2015		2015
Pass	$	3,932	$	3,967	$	3,944	$	44,843	$	42,695	$	40,938
Criticized (Accruing)		46		38		48		1,613		1,450		1,328
Criticized (Nonaccruing)		10		15		18		371		127		157

Total	$	3,988	$	4,020	$	4,010	$	46,827	$	44,272	$	42,423

(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
	June 30,		December 31,		June 30,
GRADE	2016		2015		2015
Pass	$	12,080	$	12,296	$	12,506
Substandard		256		270		266

Total	$	12,336	$	12,566	$	12,772

Credit Risk Profile Based on Payment Activity^(a)


in millions
	Consumer direct loans						Credit cards						Consumer indirect loans
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
	2016		2015		2015		2016		2015		2015		2016		2015		2015
Performing	$	1,583	$	1,598	$	1,594	$	811	$	804	$	751	$	524	$	615	$	700
Nonperforming		1		2		1		2		2		2		3		6		9

Total	$	1,584	$	1,600	$	1,595	$	813	$	806	$	753	$	527	$	621	$	709


	Total
	June 30,		December 31,		June 30,
	2016		2015		2015
Performing	$	2,918	$	3,017	$	3,045
Nonperforming		6		10		12

Total	$	2,924	$	3,027	$	3,057

(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 June 30, 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 June 30, 2016, the ALLL was $854 million, or 1.38% of loans, compared to $796 million, or 1.37% of loans, at June 30, 2015. At June 30, 2016, the ALLL was 138% of nonperforming loans, compared to 190% at June 30, 2015.

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


	Three months ended June 30,						Six months ended June 30,
in millions	2016			2015			2016			2015
Balance at beginning of period — continuing operations	$	826		$	794		$	796		$	794
Charge-offs		(64	)		(52	)		(124	)		(99	)
Recoveries		21			16			35			35

Net loans and leases charged off		(43	)		(36	)		(89	)		(64	)
Provision for loan and lease losses from continuing operations		71			37			147			66
Foreign currency translation adjustment		—			1			—			—

Balance at end of period — continuing operations	$	854		$	796		$	854		$	796

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


in millions	December 31, 2015		Provision			Charge-offs			Recoveries		June 30, 2016
Commercial, financial and agricultural	$	450	$	118		$	(61	)	$	6	$	513
Real estate — commercial mortgage		134		(4	)		(3	)		8		135
Real estate — construction		25		(9	)		—			1		17
Commercial lease financing		47		2			(6	)		2		45

Total commercial loans		656		107			(70	)		17		710
Real estate — residential mortgage		18		1			(3	)		2		18
Home equity loans		57		18			(17	)		7		65
Consumer direct loans		20		8			(12	)		3		19
Credit cards		32		12			(16	)		2		30
Consumer indirect loans		13		1			(6	)		4		12

Total consumer loans		140		40			(54	)		18		144

Total ALLL — continuing operations		796		147	^(a)		(124	)		35		854
Discontinued operations		28		2			(15	)		5		20

Total ALLL — including discontinued operations	$	824	$	149		$	(139	)	$	40	$	874

(a)	Excludes a credit for losses on lending-related commitments of $6 million.


in millions	December 31, 2014		Provision			Charge-offs			Recoveries		June 30, 2015
Commercial, financial and agricultural	$	391	$	49		$	(33	)	$	11	$	418
Real estate — commercial mortgage		148		(4	)		(2	)		2		144
Real estate — construction		28		3			(1	)		1		31
Commercial lease financing		56		(5	)		(3	)		5		53

Total commercial loans		623		43			(39	)		19		646
Real estate — residential mortgage		23		(1	)		(3	)		1		20
Home equity loans		71		3			(18	)		5		61
Consumer direct loans		22		7			(12	)		4		21
Credit cards		33		13			(16	)		1		31
Consumer indirect loans		22		1			(11	)		5		17

Total consumer loans		171		23			(60	)		16		150

Total ALLL — continuing operations		794		66	^(a)		(99	)		35		796
Discontinued operations		29		1			(16	)		8		22

Total ALLL — including discontinued operations	$	823	$	67		$	(115	)	$	43	$	818

(a)	Excludes provision for losses on lending-related commitments of $10 million.

Our ALLL from continuing operations increased by $58 million, or 7.3%, from the second 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 $64 million, or 9.9%, from the second quarter of 2015 primarily because of loan growth and increased incurred loss estimates. The increase in these incurred loss estimates during 2015 and into 2016 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 $6 million, or 4%, from the second 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 second 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 $571 million, with a corresponding allowance of $41 million at June 30, 2016. Loans outstanding collectively evaluated for impairment totaled $61.5 billion, with a corresponding allowance of $812 million at June 30, 2016. At June 30, 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 six months ended June 30, 2016. At June 30, 2015, the loans outstanding individually evaluated for impairment totaled $334 million, with a corresponding allowance of $52 million. Loans outstanding collectively evaluated for impairment totaled $57.9 billion, with a corresponding allowance of $743 million at June 30, 2015. At June 30, 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 six months ended June 30, 2015.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2016, follows:


	Allowance						Outstanding
June 30, 2016 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	16	$	497		—	$	33,376		$	322	$	33,054			—
Commercial real estate:
Commercial mortgage		—		135		—		8,582			5		8,577			—
Construction		—		17		—		881			21		860			—

Total commercial real estate loans		—		152		—		9,463			26		9,437			—
Commercial lease financing		—		45		—		3,988			—		3,988			—

Total commercial loans		16		694		—		46,827			348		46,479			—
Real estate — residential mortgage		3		14	$	1		2,285			53		2,222		$	10
Home equity loans		20		45		—		10,062			131		9,930			1
Consumer direct loans		—		19		—		1,584			3		1,581			—
Credit cards		—		30		—		813			3		810			—
Consumer indirect loans		2		10		—		527			33		494			—

Total consumer loans		25		118		1		15,271			223		15,037			11

Total ALLL — continuing operations		41		812		1		62,098			571		61,516			11
Discontinued operations		2		18		—		1,692	^(a)		22		1,670	^(a)		—

Total ALLL — including discontinued operations	$	43	$	830	$	1	$	63,790		$	593	$	63,186		$	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
December 31, 2015 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	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 June 30, 2015, follows:


	Allowance						Outstanding
June 30, 2015 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
Commercial, financial and agricultural	$	24	$	394		—	$	29,285	$	82	$	29,203		—
Commercial real estate:
Commercial mortgage		1		143		—		7,874		16		7,858		—
Construction		—		31		—		1,254		7		1,247		—

Total commercial real estate loans		1		174		—		9,128		23		9,105		—
Commercial lease financing		—		53		—		4,010		—		4,010		—

Total commercial loans		25		621		—		42,423		105		42,318		—
Real estate — residential mortgage		5		14	$	1		2,252		56		2,185	$	11
Home equity loans		19		42		—		10,532		124		10,407		1
Consumer direct loans		—		21		—		1,595		3		1,592		—
Credit cards		—		31		—		753		3		750		—
Consumer indirect loans		3		14		—		709		43		666		—

Total consumer loans		27		122		1		15,841		229		15,600		12

Total ALLL — continuing operations		52		743		1		58,264		334		57,918		12
Discontinued operations		1		21		—		1,962		19		1,943		—

Total ALLL — including discontinued operations	$	53	$	764	$	1	$	60,226	$	353	$	59,861	$	12

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 $50 million at June 30, 2016. When combined with our ALLL, our total allowance for credit losses represented 1.46% of loans at June 30, 2016, compared to 1.44% at June 30, 2015.

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


	Three months ended June 30,					Six months ended June 30,
in millions	2016			2015		2016			2015
Balance at beginning of period	$	69		$	41	$	56		$	35
Provision (credit) for losses on lending-related commitments		(19	)		4		(6	)		10

Balance at end of period	$	50		$	45	$	50		$	45

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 June 30, 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 June 30, 2016, and June 30, 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. The Federal Reserve extended the conformance period to July 21, 2017, for all banking entities with respect to covered funds. Key is permitted to file for an additional extension of up to five years for illiquid funds, to retain the indirect investments for a longer period of time. We plan to continue to evaluate our options, including applying for the extension and holding the investments. As of June 30, 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 June 30, 2016. We did not provide any financial support to investees related to our direct and indirect investments for the six months ended June 30, 2016, and June 30, 2015.


June 30, 2016 in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Indirect investments
Passive funds^(a)	$	8	$	1

Total	$	8	$	1

(a)

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company