10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

March 31, 2014

Commission File Number 1-11302

 

 

 

 

LOGO

Exact name of registrant as specified in its charter:

 

 

 

Ohio   34-6542451

State or other jurisdiction of

incorporation or organization

 

I.R.S. Employer

Identification Number:

127 Public Square, Cleveland, Ohio   44114-1306
Address of principal executive offices:   Zip Code:

(216) 689-3000

Registrant’s telephone number, including area code:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Shares with a par value of $1 each

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

 

 

 


Table of Contents

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

         

Page Number

Item 1.

  

Financial Statements

  
  

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

   6
  

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

   7
  

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

   8
  

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

   9
  

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

   10
  

Notes to Consolidated Financial Statements (Unaudited)

   11
  

Note 1. Basis of Presentation

   11
  

Note 2. Earnings Per Common Share

   14
  

Note 3. Loans and Loans Held for Sale

   15
  

Note 4. Asset Quality

   17
  

Note 5. Fair Value Measurements

   32
  

Note 6. Securities

   48
  

Note 7. Derivatives and Hedging Activities

   52
  

Note 8. Mortgage Servicing Assets

   60
  

Note 9. Variable Interest Entities

   61
  

Note 10. Income Taxes

   63
  

Note 11. Acquisitions and Discontinued Operations

   64
  

Note 12. Securities Financing Activities

   72

 

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Table of Contents
  

Note 13. Employee Benefits

   74
  

Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

   75
  

Note 15. Contingent Liabilities and Guarantees

   76
  

Note 16. Accumulated Other Comprehensive Income

   79
  

Note 17. Shareholders’ Equity

   81
  

Note 18. Line of Business Results

   82
  

Report of Independent Registered Public Accounting Firm

   86

Item 2.

  

Management’s Discussion & Analysis of Financial Condition & Results of Operations

   87
  

Introduction

   87
  

Terminology

   87
  

Selected financial data

   88
  

Forward-looking statements

   89
  

Economic overview

   90
  

Long-term financial goals

   91
  

Strategic developments

   91
  

Demographics

   92
  

Supervision and regulation

   94
  

Regulatory reform developments

   94
  

Enhanced prudential standards and early remediation requirements

   94
  

Debit card and interchange fees and routing

   94
  

Regulatory capital rules

   94
  

Highlights of Our Performance

   96
  

Financial performance

   96
  

Results of Operations

   101
  

Net interest income

   101
  

Noninterest income

   105
  

Trust and investment services income

   105
  

Investment banking and debt placement fees

   106
  

Service charges on deposit accounts

   106
  

Operating lease income and other leasing gains

   106
  

Cards and payments income

   106
  

Consumer mortgage income

   106
  

Mortgage servicing fees

   106
  

Other income

   106
  

Noninterest expense

   106
  

Personnel

   107
  

Operating lease expense

   107
  

Other expense

   107
  

Income taxes

   108

 

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Table of Contents
  

Line of Business Results

   109
  

Key Community Bank summary of operations

   109
  

Key Corporate Bank summary of operations

   110
  

Other Segments

   111
  

Financial Condition

   112
  

Loans and loans held for sale

   112
  

Commercial loan portfolio

   112
  

Commercial, financial and agricultural

   112
  

Commercial real estate loans

   113
  

Commercial lease financing

   114
  

Commercial loan modification and restructuring

   114
  

Extensions

   115
  

Guarantors

   116
  

Consumer loan portfolio

   116
  

Loans held for sale

   117
  

Loan sales

   117
  

Securities

   118
  

Securities available-for-sale

   119
  

Held-to-maturity securities

   120
  

Other investments

   120
  

Deposits and other sources of funds

   121
  

Capital

   121
  

CCAR and capital actions

   121
  

Dividends

   121
  

Common shares outstanding

   121
  

Capital adequacy

   122
  

Risk Management

   125
  

Overview

   125
  

Market risk management

   126
  

Trading market risk

   126
  

Management of trading risks

   126
  

Covered positions

   126
  

VaR and stressed VaR

   127
  

Internal capital adequacy

   128
  

Nontrading market risk

   128
  

Net interest income simulation analysis

   129
  

Economic value of equity modeling

   130
  

Management of interest rate exposure

   130
  

Liquidity risk management

   131
  

Governance structure

   131
  

Factors affecting liquidity

   131
  

Managing liquidity risk

   132
  

Long-term liquidity strategy

   132
  

Sources of liquidity

   133
  

Liquidity programs

   133
  

Liquidity for KeyCorp

   133
  

Our liquidity position and recent activity

   133

 

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Credit risk management

   134
  

Credit policy, approval, and evaluation

   134
  

Allowance for loan and lease losses

   135
  

Net loan charge-offs

   136
  

Nonperforming assets

   139
  

Operational risk management

   141
  

Cybersecurity

   142
  

Critical Accounting Policies and Estimates

   142
  

European Sovereign Debt Exposure

   143

Item 3.

  

Quantitative and Qualitative Disclosure about Market Risk

   144

Item 4.

  

Controls and Procedures

   144
PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

   144

Item 1A.

  

Risk Factors

   144

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   145

Item 6.

  

Exhibits

   145
  

Signature

   146
  

Exhibits

   147

Throughout the Notes to Consolidated Financial Statements (Unaudited) and Management’s Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations as defined in Note 1 (“Basis of Presentation”) that begins on page 11.

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Consolidated Balance Sheets

 

in millions, except per share data

   March 31,
2014
    December 31,
2013
    March 31,
2013
 
     (Unaudited)           (Unaudited)  

ASSETS

      

Cash and due from banks

   $ 409     $ 617     $ 621  

Short-term investments

     2,922       5,590       3,081  

Trading account assets

     840       738       701  

Securities available for sale

     12,359       12,346       13,496  

Held-to-maturity securities (fair value: $4,733, $4,617, and $3,779)

     4,826       4,756       3,721  

Other investments

     899       969       1,059  

Loans, net of unearned income of $776, $805, and $923

     55,445       54,457       52,574  

Less: Allowance for loan and lease losses

     834       848       893  
  

 

 

   

 

 

   

 

 

 

Net loans

     54,611       53,609       51,681  

Loans held for sale

     401       611       434  

Premises and equipment

     862       885       930  

Operating lease assets

     294       305       309  

Goodwill

     979       979       979  

Other intangible assets

     117       127       159  

Corporate-owned life insurance

     3,425       3,408       3,352  

Derivative assets

     427       407       609  

Accrued income and other assets (including $15 of consolidated LIHTC guaranteed funds VIEs, see Note 9) (a)

     3,004       3,015       2,884  

Discontinued assets (including $1,912 of consolidated education loan securitization trust VIEs (see Note 9) and $143 of loans in portfolio at fair value) (a)

     4,427       4,572       5,182  
  

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

 

LIABILITIES

      

Deposits in domestic offices:

      

NOW and money market deposit accounts

   $ 34,373     $ 33,952     $ 32,700  

Savings deposits

     2,513       2,472       2,546  

Certificates of deposit ($100,000 or more)

     2,849       2,631       2,998  

Other time deposits

     3,682       3,648       4,324  
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     43,417       42,703       42,568  

Noninterest-bearing deposits

     23,244       26,001       21,564  

Deposits in foreign office — interest-bearing

     605       558       522  
  

 

 

   

 

 

   

 

 

 

Total deposits

     67,266       69,262       64,654  

Federal funds purchased and securities sold under repurchase agreements

     1,417       1,534       1,950  

Bank notes and other short-term borrowings

     464       343       378  

Derivative liabilities

     408       414       524  

Accrued expense and other liabilities

     1,297       1,557       1,352  

Long-term debt

     7,712       7,650       7,785  

Discontinued liabilities (including $1,816 of consolidated education loan securitization trust VIEs at fair value, see Note 9) (a)

     1,819       1,854       2,176  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     80,383       82,614       78,819  

EQUITY

      

Preferred stock, $1 par value, authorized 25,000,000 shares:

      

7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839, and 2,904,839 shares

     291       291       291  

Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905, 1,016,969,905, and 1,016,969,905 shares

     1,017       1,017       1,017  

Capital surplus

     3,961       4,022       4,059  

Retained earnings

     7,793       7,606       7,065  

Treasury stock, at cost (132,100,665, 126,245,538, and 94,388,605 shares)

     (2,335     (2,281     (1,930

Accumulated other comprehensive income (loss)

     (324     (352     (162
  

 

 

   

 

 

   

 

 

 

Key shareholders’ equity

     10,403       10,303       10,340  

Noncontrolling interests

     16       17       39  
  

 

 

   

 

 

   

 

 

 

Total equity

     10,419       10,320       10,379  
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

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

 

 

   

 

 

   

 

 

 

 

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

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

Consolidated Statements of Income (Unaudited)

 

     Three months ended March 31,  

dollars in millions, except per share amounts

   2014     2013  

INTEREST INCOME

    

Loans

   $ 519     $ 548  

Loans held for sale

     4       4  

Securities available for sale

     72       80  

Held-to-maturity securities

     22       18  

Trading account assets

     6       6  

Short-term investments

     1       2  

Other investments

     6       9  
  

 

 

   

 

 

 

Total interest income

     630       667  

INTEREST EXPENSE

    

Deposits

     32       45  

Federal funds purchased and securities sold under repurchase agreements

     1       1  

Bank notes and other short-term borrowings

     2       1  

Long-term debt

     32       37  
  

 

 

   

 

 

 

Total interest expense

     67       84  
  

 

 

   

 

 

 

NET INTEREST INCOME

     563       583  

Provision (credit) for loan and lease losses

     6       55  
  

 

 

   

 

 

 

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

     557       528  

NONINTEREST INCOME

    

Trust and investment services income

     98       95  

Investment banking and debt placement fees

     84       79  

Service charges on deposit accounts

     63       69  

Operating lease income and other leasing gains

     29       25  

Corporate services income

     42       45  

Cards and payments income

     38       37  

Corporate-owned life insurance income

     26       30  

Consumer mortgage income

     2       7  

Mortgage servicing fees

     15       8  

Net gains (losses) from principal investing

     24       8  

Other income (a)

     14       22  
  

 

 

   

 

 

 

Total noninterest income

     435       425  

NONINTEREST EXPENSE

    

Personnel

     388       391  

Net occupancy

     64       64  

Computer processing

     38       39  

Business services and professional fees

     41       35  

Equipment

     24       26  

Operating lease expense

     10       12  

Marketing

     5       6  

FDIC assessment

     6       8  

Intangible asset amortization

     10       12  

Provision (credit) for losses on lending-related commitments

     (2     3  

OREO expense, net

     1       3  

Other expense

     77       82  
  

 

 

   

 

 

 

Total noninterest expense

     662       681  
  

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     330       272  

Income taxes

     92       70  
  

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     238       202  

Income (loss) from discontinued operations, net of taxes of $2 and $4 (see Note 11)

     4       3  
  

 

 

   

 

 

 

NET INCOME (LOSS)

     242       205  

Less: Net income (loss) attributable to noncontrolling interests

     —         1  
  

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 242     $ 204  
  

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Key common shareholders

   $ 232     $ 196  

Net income (loss) attributable to Key common shareholders

     236       199  

Per common share:

    

Income (loss) from continuing operations attributable to Key common shareholders

   $ .26     $ .21  

Income (loss) from discontinued operations, net of taxes

     —         —    

Net income (loss) attributable to Key common shareholders (b) 

     .27       .22  

Per common share — assuming dilution:

    

Income (loss) from continuing operations attributable to Key common shareholders

   $ .26     $ .21  

Income (loss) from discontinued operations, net of taxes

     —         —    

Net income (loss) attributable to Key common shareholders (b)

     .26       .21  

Cash dividends declared per common share

   $ .055     $ .05  

Weighted-average common shares outstanding (000)

     884,727       920,316  

Weighted-average common shares and potential common shares outstanding (000) (c)

     891,890       926,051  

 

(a) For the three months ended March 31, 2014, and 2013, net securities gains (losses) totaled less than $1 million. For the three months ended March 31, 2014, and 2013, we did not have any impairment losses related to securities.
(b) EPS may not foot due to rounding.
(c) Assumes conversion of stock options and/or Series A Preferred Stock, as applicable.

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three months ended March 31,  

in millions

   2014     2013  

Net income (loss)

   $ 242     $ 205  

Other comprehensive income (loss), net of tax:

    

Net unrealized gains (losses) on securities available for sale, net of income taxes of $17 and ($13)

     29       (22

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($1) and ($5)

     (1     (8

Foreign currency translation adjustments, net of income taxes of ($4) and ($2)

     (2     (11

Net pension and postretirement benefit costs, net of income taxes of $2 and $2

     2       3  
  

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     28       (38
  

 

 

   

 

 

 

Comprehensive income (loss)

     270       167  

Less: Comprehensive income attributable to noncontrolling interests

     —          1  
  

 

 

   

 

 

 

Comprehensive income (loss) attributable to Key

   $ 270     $ 166  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

Consolidated Statements of Changes in Equity (Unaudited)

 

     Key Shareholders’ Equity        

dollars in millions, except per
share amounts

   Preferred
Shares
Outstanding
(000)
     Common
Shares
Outstanding
(000)
    Preferred
Stock
     Common
Shares
     Capital
Surplus
    Retained
Earnings
    Treasury
Stock,

at Cost
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
 

BALANCE AT DECEMBER 31, 2012

     2,905        925,769     $ 291      $ 1,017      $ 4,126     $ 6,913     $ (1,952   $ (124   $ 38  

Net income (loss)

                  204           1  

Other comprehensive income (loss):

                     

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($13)

                      (22  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($5)

                      (8  

Foreign currency translation adjustments, net of income taxes of ($2)

                      (11  

Net pension and postretirement benefit costs, net of income taxes of $2

                      3    

Deferred compensation

                4          

Cash dividends declared on common shares ($.05 per share)

                  (47      

Cash dividends declared on Noncumulative Series A

                     

Preferred Stock ($1.9375 per share)

                  (5      

Common shares repurchased

        (6,790               (65    

Common shares reissued (returned) for stock options and other employee benefit plans

        3,602             (71       87      
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2013

     2,905        922,581     $ 291      $ 1,017      $ 4,059     $ 7,065     $ (1,930   $ (162   $ 39  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2013

     2,905        890,724     $ 291      $ 1,017      $ 4,022     $ 7,606     $ (2,281   $ (352   $ 17  

Net income (loss)

                  242           —     

Other comprehensive income (loss):

                     

Net unrealized gains (losses) on securities available for sale, net of income taxes of $17

                      29    

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($1)

                      (1  

Foreign currency translation adjustments, net of income taxes of ($4)

                      (2  

Net pension and postretirement benefit costs, net of income taxes of $2

                      2    

Deferred compensation

                (4        

Cash dividends declared on common shares ($.055 per share)

                  (49      

Cash dividends declared on Noncumulative Series A

                     

Preferred Stock ($1.9375 per share)

                  (6      

Common shares repurchased

        (9,845               (130    

Common shares reissued (returned) for stock options and other employee benefit plans

        3,990             (57       76      

Net contribution from (distribution to) noncontrolling interests

                        (1
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT MARCH 31, 2014

     2,905        884,869     $ 291      $ 1,017      $ 3,961     $ 7,793     $ (2,335   $ (324   $ 16  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Consolidated Statements of Cash Flows (Unaudited)

 

     Three months ended March 31,  

in millions

   2014     2013  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 242     $ 205  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Provision (credit) for loan and lease losses

     6       55  

Provision (credit) for losses on lending-related commitments

     (2     3  

Provision (credit) for losses on LIHTC guaranteed funds

     (6     —     

Depreciation, amortization and accretion expense, net

     52       44  

Increase in cash surrender value of corporate-owned life insurance

     (24     (25

Stock-based compensation expense

     11       10  

FDIC reimbursement (payments), net of FDIC expense

     (1     7  

Deferred income taxes (benefit)

     40       32  

Proceeds from sales of loans held for sale

     611       1,287  

Originations of loans held for sale, net of repayments

     (383     (1,075

Net losses (gains) on sales of loans held for sale

     (15     (29

Net losses (gains) from principal investing

     (24     (8

Net losses (gains) and writedown on OREO

     1       3  

Net losses (gains) on leased equipment

     (14     (7

Net losses (gains) on sales of fixed assets

     —          3  

Net decrease (increase) in trading account assets

     (102     (96

Other operating activities, net

     (236     (178
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     156       231  

INVESTING ACTIVITIES

    

Net decrease (increase) in short-term investments

     2,668       859  

Purchases of securities available for sale

     (618     (2,755

Proceeds from sales of securities available for sale

     —          3  

Proceeds from prepayments and maturities of securities available for sale

     650       1,315  

Proceeds from prepayments and maturities of held-to-maturity securities

     180       210  

Purchases of held-to-maturity securities

     (250     —     

Purchases of other investments

     (17     (11

Proceeds from sales of other investments

     122       3  

Proceeds from prepayments and maturities of other investments

     2       20  

Net decrease (increase) in loans, excluding acquisitions, sales and transfers

     (1,029     136  

Proceeds from sales of portfolio loans

     21       57  

Proceeds from corporate-owned life insurance

     6       6  

Purchases of premises, equipment, and software

     (11     (12

Proceeds from sales of premises and equipment

     1       8  

Proceeds from sales of other real estate owned

     5       5  
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     1,730       (156

FINANCING ACTIVITIES

    

Net increase (decrease) in deposits, excluding acquisitions

     (1,996     (1,339

Net increase (decrease) in short-term borrowings

     4       433  

Net proceeds from issuance of long-term debt

     78       1,007  

Payments on long-term debt

     (10     (30

Repurchase of common shares

     (130     (65

Net proceeds from issuance of common shares

     15       8  

Cash dividends paid

     (55     (52
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (2,094     (38
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     (208     37  

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

     617       584  
  

 

 

   

 

 

 

CASH AND DUE FROM BANKS AT END OF PERIOD

   $ 409     $ 621  
  

 

 

   

 

 

 

Additional disclosures relative to cash flows:

    

Interest paid

   $ 103     $ 110  

Income taxes paid (refunded)

     10       25  

Noncash items:

    

Secured borrowing less lease reductions

   $ 6       —     

Loans transferred to portfolio from held for sale

     2     $ 1  

Loans transferred to held for sale from portfolio

     5       20  

Loans transferred to other real estate owned

     3       7  

See Notes to Consolidated Financial Statements (Unaudited).

 

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Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

As used in these Notes, references to “Key,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorp’s subsidiary, KeyBank National Association.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion & Analysis of Financial Condition & Results of Operations. You may find it helpful to refer back to this page as you read this report.

References to our “2013 Form 10-K” refer to our Form 10-K for the year ended December 31, 2013, that has been filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) or on our website (www.key.com/ir).

 

AICPA: American Institute of Certified Public Accountants.    Moody’s: Moody’s Investor Services, Inc.
ALCO: Asset/Liability Management Committee.    MSRs: Mortgage servicing rights.
ALLL: Allowance for loan and lease losses.    N/A: Not applicable.
A/LM: Asset/liability management.    NASDAQ: The NASDAQ Stock Market LLC.
AOCI: Accumulated other comprehensive income (loss).    N/M: Not meaningful.
APBO: Accumulated postretirement benefit obligation.    NOW: Negotiable Order of Withdrawal.
Austin: Austin Capital Management, Ltd.    NPLs: Nonperforming loans.
BHCs: Bank holding companies.    NPR: Notice of proposed rulemaking.
CCAR: Comprehensive Capital Analysis and Review.    NYSE: New York Stock Exchange.
CMBS: Commercial mortgage-backed securities.    OCC: Office of the Comptroller of the Currency.
CMO: Collateralized mortgage obligation.    OCI: Other comprehensive income (loss).
Common shares: KeyCorp common shares, $1 par value.    OREO: Other real estate owned.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and    OTTI: Other-than-temporary impairment.
Consumer Protection Act of 2010.    QSPE: Qualifying special purpose entity.
EPS: Earnings per share.    PBO: Projected benefit obligation.
ERISA: Employee Retirement Income Security Act of 1974.    PCCR: Purchased credit card relationship.
ERM: Enterprise risk management.    PCI: Purchased credit impaired.
EVE: Economic value of equity.    S&P: Standard and Poor’s Ratings Services, a Division of The
FASB: Financial Accounting Standards Board.    McGraw-Hill Companies, Inc.
FDIC: Federal Deposit Insurance Corporation.    SEC: U.S. Securities & Exchange Commission.
Federal Reserve: Board of Governors of the Federal Reserve    Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
System.    Perpetual Convertible Preferred Stock, Series A.
FHLMC: Federal Home Loan Mortgage Corporation.    SIFIs: Systemically important financial institutions, including
FNMA: Federal National Mortgage Association.    BHCs with total consolidated assets of at least $50 billion
FOMC: Federal Open Market Committee of the Federal Reserve    and nonbank financial companies designated by FSOC for
Board.    supervision by the Federal Reserve.
FSOC: Financial Stability Oversight Council.    TDR: Troubled debt restructuring.
GAAP: U.S. generally accepted accounting principles.    TE: Taxable equivalent.
GNMA: Government National Mortgage Association.    U.S. Treasury: United States Department of the Treasury.
ISDA: International Swaps and Derivatives Association.    VaR: Value at risk.
KAHC: Key Affordable Housing Corporation.    VEBA: Voluntary Employee Beneficiary Association.
KEF: Key Equipment Finance.    Victory: Victory Capital Management and/or
KREEC: Key Real Estate Equity Capital, Inc.    Victory Capital Advisors.
LIBOR: London Interbank Offered Rate.    VIE: Variable interest entity.
LIHTC: Low-income housing tax credit.    XBRL: eXtensible Business Reporting Language.

 

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

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

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

We believe that the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2013 Form 10-K.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.

Offsetting Derivative Positions

In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 7 (“Derivatives and Hedging Activities”).

Accounting Guidance Adopted in 2014

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

Investment companies. In June 2013, the FASB issued new accounting guidance that modifies the criteria used in defining an investment company. It also sets forth certain measurement and disclosure requirements for an investment company. This accounting guidance was effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide the disclosures required by this new accounting guidance in Note 5 (“Fair Value Measurements”).

Liquidation basis of accounting. In April 2013, the FASB issued new accounting guidance that specifies when and how an entity should prepare its financial statements using the liquidation basis of accounting when liquidation is imminent as defined in the guidance and describes the related disclosures that should be made. This new accounting guidance was effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein (effective January 1, 2014, for us). Entities should apply the requirements prospectively from the day that liquidation becomes imminent.

 

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Reporting of cumulative translation adjustments upon the derecognition of certain investments. In March 2013, the FASB issued new accounting guidance that addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Accounting Guidance Pending Adoption at March 31, 2014

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

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

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

 

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2. Earnings Per Common Share

Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each common share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each common share outstanding during the reporting periods adjusted to include the effects of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for the conversion of our convertible Series A Preferred Stock, stock options, and other stock-based awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. For diluted earnings per share, net income available to common shareholders can be affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the amount of preferred dividends associated with our Series A Preferred Stock. For the three months ended March 31, 2014, weighted-average common shares and potential common shares outstanding included approximately 7 million shares associated with common share options and other stock awards.

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

 

     Three months ended March 31,  

dollars in millions, except per share amounts

   2014      2013  

EARNINGS

     

Income (loss) from continuing operations

   $ 238      $ 202  

Less: Net income (loss) attributable to noncontrolling interests

     —           1  
  

 

 

    

 

 

 

Income (loss) from continuing operations attributable to Key

     238        201  

Less: Dividends on Series A Preferred Stock

     6        5  
  

 

 

    

 

 

 

Income (loss) from continuing operations attributable to Key common shareholders

     232        196  

Income (loss) from discontinued operations, net of taxes (a)

     4        3  
  

 

 

    

 

 

 

Net income (loss) attributable to Key common shareholders

   $ 236      $ 199  
  

 

 

    

 

 

 

WEIGHTED-AVERAGE COMMON SHARES

     

Weighted-average common shares outstanding (000)

     884,727        920,316  

Effect of dilutive convertible preferred stock, common share options and other stock awards (000)

     7,163        5,735  
  

 

 

    

 

 

 

Weighted-average common shares and potential common shares outstanding (000)

     891,890        926,051  
  

 

 

    

 

 

 

EARNINGS PER COMMON SHARE

     

Income (loss) from continuing operations attributable to Key common shareholders

   $ .26      $ .21  

Income (loss) from discontinued operations, net of taxes (a)

     —           —     

Net income (loss) attributable to Key common shareholders (b)

     .27        .22  

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution

   $ .26      $ .21  

Income (loss) from discontinued operations, net of taxes (a)

     —           —     

Net income (loss) attributable to Key common shareholders — assuming dilution (b)

     .26        .21  

 

(a) In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (“Acquisitions and Discontinued Operations”).
(b) EPS may not foot due to rounding.

 

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3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:

 

in millions

   March 31,
2014
     December 31,
2013
     March 31,
2013
 

Commercial, financial and agricultural (a)

   $ 26,224      $ 24,963      $ 23,412  

Commercial real estate:

        

Commercial mortgage

     7,877        7,720        7,544  

Construction

     1,007        1,093        1,057  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,884        8,813        8,601  

Commercial lease financing (b)

     4,396        4,551        4,796  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     39,504        38,327        36,809  

Residential — prime loans:

        

Real estate — residential mortgage

     2,183        2,187        2,176  

Home equity:

        

Key Community Bank

     10,281        10,340        9,809  

Other

     315        334        401  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,596        10,674        10,210  
  

 

 

    

 

 

    

 

 

 

Total residential — prime loans

     12,779        12,861        12,386  

Consumer other — Key Community Bank

     1,436        1,449        1,353  

Credit cards

     698        722        693  

Consumer other:

        

Marine

     965        1,028        1,254  

Other

     63        70        79  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     1,028        1,098        1,333  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     15,941        16,130        15,765  
  

 

 

    

 

 

    

 

 

 

Total loans (c) (d)

   $ 55,445      $ 54,457      $ 52,574  
  

 

 

    

 

 

    

 

 

 

 

(a) March 31, 2014, December 31, 2013, and March 31, 2013, loan balances include $95 million, $94 million, and $93 million of commercial credit card balances, respectively.
(b) March 31, 2014, and December 31, 2013, commercial lease financing includes receivables of $124 million and $58 million, respectively, held as collateral for a secured borrowing. Principal reductions are based on the cash payments received from these related receivables. We expect to record additional commercial lease financing receivables held as collateral for a secured borrowing through the second quarter of 2014. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”) beginning on page 200 of our 2013 Form 10-K.
(c) March 31, 2014, total loans include purchased loans of $159 million, of which $16 million were PCI loans. December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. March 31, 2013, total loans include purchased loans of $204 million, of which $22 million were PCI loans.
(d) Excluded at March 31, 2014, December 31, 2013, and March 31, 2013, are loans in the amount of $4.4 billion, $4.5 billion, and $5.1 billion related to the discontinued operations of the education lending business, respectively.

Our loans held for sale are summarized as follows:

 

in millions

   March 31,
2014
     December 31,
2013
     March 31,
2013
 

Commercial, financial and agricultural

   $ 44      $ 278      $ 180  

Real estate — commercial mortgage

     333        307        196  

Commercial lease financing

     8        9        9  

Real estate — residential mortgage

     16        17        49  
  

 

 

    

 

 

    

 

 

 

Total loans held for sale

   $ 401      $ 611      $ 434  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

in millions

   March 31,
2014
    December 31,
2013
    March 31,
2013
 

Balance at beginning of the period

   $ 611     $ 699     $ 599  

New originations

     645       1,669       1,075  

Transfers from held to maturity, net

     3       1       19  

Loan sales

     (596     (1,750     (1,257

Loan draws (payments), net

     (262     (8     —    

Transfers to OREO / valuation adjustments

     —         —         (2
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 401     $ 611     $ 434  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

4. Asset Quality

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

Our nonperforming assets and past due loans were as follows:

 

in millions

   March 31,
2014
     December 31,
2013
     March 31,
2013
 

Total nonperforming loans (a)

   $ 449      $ 508      $ 650  

Nonperforming loans held for sale

     1        1        23  

OREO

     12        15        21  

Other nonperforming assets

     7        7        11  
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

   $ 469      $ 531      $ 705  
  

 

 

    

 

 

    

 

 

 

Nonperforming assets from discontinued operations — education lending (b)

   $ 20      $ 25      $ 15  
  

 

 

    

 

 

    

 

 

 

Restructured loans included in nonperforming loans

   $ 178      $ 214      $ 178  

Restructured loans with an allocated specific allowance (c)

     51        71        52  

Specifically allocated allowance for restructured loans (d)

     32        35        30  

Accruing loans past due 90 days or more

   $ 89      $ 71      $ 83  

Accruing loans past due 30 through 89 days

     267        318        368  

 

(a) March 31, 2014, December 31, 2013, and March 31, 2013, loan balances exclude $16 million, $16 million, and $22 million of PCI loans, respectively.
(b) Includes restructured loans of approximately $15 million, $13 million, and $4 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.
(c) Included in individually impaired loans allocated a specific allowance.
(d) Included in allowance for individually evaluated impaired loans.

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. At the date of acquisition, the estimated gross contractual amount receivable of all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The difference between the fair value and the cash flows expected to be collected from the purchased loans is accreted to interest income over the remaining term of the loans.

At March 31, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $23 million and $16 million, respectively. Changes in the accretable yield during the first quarter of 2014 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at March 31, 2014.

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

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

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

 

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

 

            Unpaid             Average  
March 31, 2014    Recorded      Principal      Specific      Recorded  

in millions

   Investment (a)      Balance (b)      Allowance      Investment  

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 33      $ 60        —        $ 33  

Commercial real estate:

           

Commercial mortgage

     23        28        —           22  

Construction

     7        17        —           27  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     30        45        —           49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     63        105        —           82  

Real estate — residential mortgage

     26        26        —           26  

Home equity:

           

Key Community Bank

     70        70        —           69  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     72        72        —           71  

Consumer other:

           

Marine

     2        2        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     2        2        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     100        100        —           100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     163        205        —           182  

With an allowance recorded:

           

Commercial, financial and agricultural

     7        10      $ 2        12  

Commercial real estate:

           

Commercial mortgage

     2        2        1        4  

Construction

     —           —           —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     2        2        1        5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     9        12        3        17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     28        28        5        28  

Home equity:

           

Key Community Bank

     36        36        16        36  

Other

     11        11        2        11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     47        47        18        47  

Consumer other — Key Community Bank

     3        3        —           3  

Credit cards

     4        4        1        4  

Consumer other:

           

Marine

     49        49        7        49  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     50        50        7        50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     132        132        31        132  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     141        144        34        149  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 304      $ 349      $ 34      $ 331  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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            Unpaid             Average  
December 31, 2013    Recorded      Principal      Specific      Recorded  

in millions

   Investment (a)      Balance (b)      Allowance      Investment  

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 33      $ 69        —         $ 33  

Commercial real estate:

           

Commercial mortgage

     21        25        —           55  

Construction

     48        131        —           48  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     69        156        —           103  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     102        225        —           136  

Real estate — residential mortgage

     27        27        —           24  

Home equity:

           

Key Community Bank

     67        67        —           66  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     69        69        —           68  

Consumer other:

           

Marine

     3        3        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     3        3        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     99        99        —           94  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     201        324        —           230  

With an allowance recorded:

           

Commercial, financial and agricultural

     17        20      $ 8        25  

Commercial real estate:

           

Commercial mortgage

     6        6        2        7  

Construction

     2        12        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8        18        2        8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     25        38        10        33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     29        29        9        23  

Home equity:

           

Key Community Bank

     35        35        10        29  

Other

     10        11        1        9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     45        46        11        38  

Consumer other — Key Community Bank

     3        3        1        2  

Credit cards

     5        5        1        3  

Consumer other:

           

Marine

     49        49        10        55  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     50        50        10        56  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     132        133        32        122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     157        171        42        155  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 358      $ 495      $ 42      $ 385  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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            Unpaid             Average  
March 31, 2013    Recorded      Principal      Specific      Recorded  

in millions

   Investment (a)      Balance (b)      Allowance      Investment  

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 93      $ 131        —         $ 63  

Commercial real estate:

           

Commercial mortgage

     87        140        —           88  

Construction

     48        175        —           48  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     135        315        —           136  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     228        446        —           199  

Real estate — residential mortgage

     15        15        —           18  

Home equity:

           

Key Community Bank

     64        64        —           65  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     66        66        —           67  

Consumer other:

           

Marine

     3        3        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     3        3        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     84        84        —           86  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     312        530        —           285  

With an allowance recorded:

           

Commercial, financial and agricultural

     15        23      $ 8        24  

Commercial real estate:

           

Commercial mortgage

     9        9        3        8  

Construction

     —           9        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     9        18        3        8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     24        41        11        32  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     18        18        1        18  

Home equity:

           

Key Community Bank

     26        25        14        24  

Other

     10        10        —           10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     36        35        14        34  

Consumer other — Key Community Bank

     3        3        1        2  

Credit cards

     4        4        1        3  

Consumer other:

           

Marine

     47        47        5        53  

Other

     1        1        1        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     48        48        6        54  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     109        108        23        111  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     133        149        34        143  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 445      $ 679      $ 34      $ 428  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

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

 

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

 

            Pre-modification      Post-modification  
            Outstanding      Outstanding  
March 31, 2014    Number      Recorded      Recorded  

dollars in millions

   of loans      Investment      Investment  

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     28      $ 58      $ 33  

Commercial real estate:

        

Real estate — commercial mortgage

     11        40        14  

Real estate — construction

     5        16        2  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     16        56        16  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     44        114        49  

Real estate — residential mortgage

     687        42        42  

Home equity:

        

Key Community Bank

     1,190        73        69  

Other

     132        4        4  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,322        77        73  

Consumer other — Key Community Bank

     33        1        1  

Credit cards

     10        —           —     

Consumer other:

        

Marine

     210        14        12  

Other

     41        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     251        15        13  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,303        135        129  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     2,347        249        178  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     42        7        4  

Commercial real estate:

        

Real estate — commercial mortgage

     4        18        8  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     4        18        8  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     46        25        12  

Real estate — residential mortgage

     111        12        12  

Home equity:

        

Key Community Bank

     708        40        37  

Other

     312        9        8  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,020        49        45  

Consumer other — Key Community Bank

     51        2        2  

Credit cards

     785        5        5  

Consumer other:

        

Marine

     430        62        39  

Other

     68        2        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     498        64        40  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,465        132        104  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     2,511        157        116  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,858      $ 406      $ 294  
  

 

 

    

 

 

    

 

 

 

 

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

 

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

 

            Pre-modification      Post-modification  
            Outstanding      Outstanding  
December 31, 2013    Number      Recorded      Recorded  

dollars in millions

   of loans      Investment      Investment  

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     33      $ 72      $ 34  

Commercial real estate:

        

Real estate — commercial mortgage

     11        41        14  

Real estate — construction

     6        19        4  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     17        60        18  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     50        132        52  

Real estate — residential mortgage

     676        43        43  

Home equity:

        

Key Community Bank

     1,708        91        86  

Other

     227        6        6  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,935        97        92  

Consumer other — Key Community Bank

     49        2        1  

Credit cards

     629        5        4  

Consumer other:

        

Marine

     360        24        21  

Other

     50        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     410        25        22  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,699        172        162  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     3,749        304        214  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     50        7        3  

Commercial real estate:

        

Real estate — commercial mortgage

     4        18        10  

Real estate — construction

     1        23        42  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     5        41        52  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     55        48        55  

Real estate — residential mortgage

     119        12        12  

Home equity:

        

Key Community Bank

     161        17        17  

Other

     212        7        6  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     373        24        23  

Consumer other — Key Community Bank

     31        1        1  

Credit cards

     240        2        1  

Consumer other:

        

Marine

     272        51        31  

Other

     54        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     326        52        32  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,089        91        69  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     1,144        139        124  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,893      $ 443      $ 338  
  

 

 

    

 

 

    

 

 

 

 

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

 

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

 

            Pre-modification      Post-
modification
 
            Outstanding      Outstanding  
March 31, 2013    Number      Recorded      Recorded  

dollars in millions

   of loans      Investment      Investment  

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     48      $ 58      $ 25  

Commercial real estate:

        

Real estate — commercial mortgage

     17        61        23  

Real estate — construction

     6        30        4  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     23        91        27  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     71        149        52  

Real estate — residential mortgage

     347        21        21  

Home equity:

        

Key Community Bank

     1,479        75        74  

Other

     229        6        6  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,708        81        80  

Consumer other — Key Community Bank

     59        2        2  

Credit cards

     360        2        2  

Consumer other:

        

Marine

     302        41        20  

Other

     36        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     338        42        21  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,812        148        126  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     2,883        297        178  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     106        11        5  

Commercial real estate:

        

Real estate — commercial mortgage

     4        22        15  

Real estate — construction

     1        23        29  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     5        45        44  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     111        56        49  

Real estate — residential mortgage

     121        12        12  

Home equity:

        

Key Community Bank

     147        15        15  

Other

     190        6        5  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     337        21        20  

Consumer other — Key Community Bank

     24        1        1  

Credit cards

     308        2        2  

Consumer other:

        

Marine

     263        30        30  

Other

     57        2        2  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     320        32        32  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,110        68        67  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     1,221        124        116  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,104      $ 421      $ 294  
  

 

 

    

 

 

    

 

 

 

 

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

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e., individually evaluated) and may impact the ALLL through a charge-off or increased loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 11 (“Acquisitions and Discontinued Operations”).

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During the first three months of 2014, two commercial loan TDRs with a combined recorded investment of $11 million and 157 consumer loan TDRs with a combined recorded investment of $4 million experienced payment defaults from modifications resulting in TDR status during 2013. During the first three months of 2013, there were no significant commercial loan TDRs, and 240

 

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Table of Contents

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

Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. The commercial TDR other concession category includes modification of loan terms, covenants, or conditions. The consumer TDR other concession category primarily includes those borrowers that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed.

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

 

     March 31,      December 31,      March 31,  

in millions

   2014      2013      2013  

Commercial loans:

        

Interest rate reduction

   $ 49      $ 95      $ 85  

Forgiveness of principal

     5        5        10  

Other

     7        7        6  
  

 

 

    

 

 

    

 

 

 

Total

   $ 61      $ 107      $ 101  
  

 

 

    

 

 

    

 

 

 

Consumer loans:

        

Interest rate reduction

   $ 142      $ 130      $ 95  

Forgiveness of principal

     5        5        6  

Other

     86        96        92  
  

 

 

    

 

 

    

 

 

 

Total

   $ 233      $ 231      $ 193  
  

 

 

    

 

 

    

 

 

 

Total commercial and consumer TDRs (a)

   $ 294      $ 338      $ 294  

Total loans

     55,445        54,457        52,574  

 

(a) Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $2 million, $15 million, and $33 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” beginning on page 117 of our 2013 Form 10-K.

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

 

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Table of Contents

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

 

                          90 and             Total Past                
            30-59      60-89      Greater             Due and      Purchased         
March 31, 2014           Days Past      Days Past      Days Past      Nonperforming      Nonperforming      Credit      Total  

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

   $ 26,071      $ 67      $ 8      $ 18      $ 60      $ 153        —         $ 26,224  

Commercial real estate:

                       

Commercial mortgage

     7,806        9        7        17        37        70      $ 1        7,877  

Construction

     987        3        5        1        11        20        —           1,007  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,793        12        12        18        48        90        1        8,884  

Commercial lease financing

     4,338        15        12        13        18        58        —           4,396  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

   $ 39,202      $ 94      $ 32      $ 49      $ 126      $ 301      $ 1      $ 39,504  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 2,043      $ 13      $ 6      $ 3      $ 105      $ 127      $ 13      $ 2,183  

Home equity:

                       

Key Community Bank

     10,010        45        25        11        188        269        2        10,281  

Other

     296        5        2        1        11        19        —           315  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,306        50        27        12        199        288        2        10,596  

Consumer other — Key Community Bank

     1,415        8        5        6        2        21        —           1,436  

Credit cards

     671        7        4        15        1        27        —           698  

Consumer other:

                       

Marine

     928        12        6        4        15        37        —           965  

Other

     59        2        1        —           1        4        —           63  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     987        14        7        4        16        41        —           1,028  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

   $ 15,422      $ 92      $ 49      $ 40      $ 323      $ 504      $ 15      $ 15,941  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          90 and             Total Past                
            30-59      60-89      Greater             Due and      Purchased         
December 31, 2013           Days Past      Days Past      Days Past      Nonperforming      Nonperforming      Credit      Total  

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

   $ 24,823      $ 39      $ 8      $ 16      $ 77      $ 140        —         $ 24,963  

Commercial real estate:

                       

Commercial mortgage

     7,638        20        7        17        37        81      $ 1        7,720  

Construction

     1,068        10        —           1        14        25        —           1,093  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,706        30        7        18        51        106        1        8,813  

Commercial lease financing

     4,463        32        33        4        19        88        —           4,551  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

   $ 37,992      $ 101      $ 48      $ 38      $ 147      $ 334      $ 1      $ 38,327  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 2,038      $ 19      $ 5      $ 4      $ 107      $ 135      $ 14      $ 2,187  

Home equity:

                       

Key Community Bank

     10,038        51        31        14        205        301        1        10,340  

Other

     308        6        4        1        15        26        —           334  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,346        57        35        15        220        327        1        10,674  

Consumer other — Key Community Bank

     1,426        8        5        7        3        23        —           1,449  

Credit cards

     698        11        5        4        4        24        —           722  

Consumer other:

                       

Marine

     979        15        6        2        26        49        —           1,028  

Other

     65        2        1        1        1        5        —           70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     1,044        17        7        3        27        54        —           1,098  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

   $ 15,552      $ 112      $ 57      $ 33      $ 361      $ 563      $ 15      $ 16,130  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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            30-59      60-89     

90 and

Greater

           

Total Past

Due and

     Purchased         
March 31, 2013           Days Past      Days Past      Days Past      Nonperforming      Nonperforming      Credit      Total  

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

   $ 23,134      $ 35      $ 74      $ 26      $ 142      $ 277      $ 1      $ 23,412  

Commercial real estate:

                       

Commercial mortgage

     7,368        35        14        11        114        174        2        7,544  

Construction

     1,024        5        —           1        27        33        —           1,057  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,392        40        14        12        141        207        2        8,601  

Commercial lease financing

     4,728        34        11        11        12        68        —           4,796  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

   $ 36,254      $ 109      $ 99      $ 49      $ 295      $ 552      $ 3      $ 36,809  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 2,037      $ 15      $ 5      $ 7      $ 96      $ 123      $ 16      $ 2,176  

Home equity:

                       

Key Community Bank

     9,512        51        28        17        199        295        2        9,809  

Other

     371        7        3        2        18        30        —           401  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     9,883        58        31        19        217        325        2        10,210  

Consumer other — Key Community Bank

     1,331        8        4        6        3        21        1        1,353  

Credit cards

     668        8        4        —           13        25        —           693  

Consumer other:

                       

Marine

     1,202        18        7        2        25        52        —           1,254  

Other

     76        1        1        —           1        3        —           79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     1,278        19        8        2        26        55        —           1,333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

   $ 15,197      $ 108      $ 52      $ 34      $ 355      $ 549      $ 19      $ 15,765  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the loan risk rating grades assigned for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios.

Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically reevaluated thereafter. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk in the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.

Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating categories. Payment activity and the regulatory classifications of pass and substandard are indicators of the credit quality of our consumer loan portfolios.

 

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Credit quality indicators for our commercial and consumer loan portfolios, excluding $16 million and $22 million of PCI loans at March 31, 2014, and 2013, respectively, based on bond rating, regulatory classification, and payment activity as of March 31, 2014, and 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category (a) 

 

 

March 31,                                                                      

in millions

                                                                     
     Commercial, financial and
agricultural
     RE — Commercial      RE — Construction      Commercial Lease      Total  

RATING (b), (c)

   2014      2013      2014      2013      2014      2013      2014      2013      2014      2013  

AAA — AA

   $ 500      $ 222      $ 1        —         $ 1      $ 1      $ 805      $ 548      $ 1,307      $ 771  

A

     1,010        522        57      $ 75        1        1        448        950        1,516        1,548  

BBB — BB

     23,361        21,120        7,267        6,529        826        866        2,964        3,043        34,418        31,558  

B

     551        672        337        426        84        23        101        165        1,073        1,286  

CCC — C

     802        875        214        512        95        166        78        90        1,189        1,643  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.
(b) Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.
(c) Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications (a), (b) 

 

March 31,              

in millions

             
     Residential — Prime  

GRADE

   2014      2013  

Pass

   $ 12,445      $ 12,029  

Substandard

     319        339  
  

 

 

    

 

 

 

Total

   $ 12,764      $ 12,368  
  

 

 

    

 

 

 

Credit Risk Profile Based on Payment Activity (a)

 

March 31,    Consumer — Key Community
Bank
     Credit cards      Consumer — Marine      Consumer — Other      Total  

in millions

   2014      2013      2014      2013      2014      2013      2014      2013      2014      2013  

Performing

   $ 1,434      $ 1,349      $ 697      $ 680      $ 950      $ 1,229      $ 62      $ 78      $ 3,143      $ 3,336  

Nonperforming

     2        3        1        13        15        25        1        1        19        42  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.
(b) Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days; and substandard = 90 days and greater plus nonperforming loans.

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 118 of our 2013 Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million and greater, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Non-Chapter 7 consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the loan’s effective interest rate. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at March 31, 2014, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

 

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Table of Contents

Although quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, we have not changed the accounting policies or methodology that we use to estimate the ALLL.

Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Most consumer loans are charged off when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans, and similar unsecured products, are charged off when payments are 180 days past due.

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

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

 

     Three months ended March 31,  

in millions

   2014     2013  

Balance at beginning of period — continuing operations

   $ 848     $ 888  

Charge-offs

     (57     (90

Recoveries

     37       41  
  

 

 

   

 

 

 

Net loans and leases charged off

     (20     (49

Provision for loan and lease losses from continuing operations

     6       55  

Foreign currency translation adjustment

     —          (1
  

 

 

   

 

 

 

Balance at end of period — continuing operations

   $ 834     $ 893  
  

 

 

   

 

 

 

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

 

in millions

   December 31,
2013
       Provision       Charge-offs     Recoveries      March 31,
2014
 

Commercial, financial and agricultural

   $ 362      $ 13     $ (12   $ 10      $ 373  

Real estate — commercial mortgage

     165        (3     (2     1        161  

Real estate — construction

     32        (7     (2     14        37  

Commercial lease financing

     62        1       (3     2        62  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial loans

     621        4       (19     27        633  

Real estate — residential mortgage

     37        (8     (3     1        27  

Home equity:

            

Key Community Bank

     84        3       (10     3        80  

Other

     11        2       (3     1        11  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total home equity loans

     95        5       (13     4        91  

Consumer other — Key Community Bank

     29        2       (8     2        25  

Credit cards

     34        4       (6     —           32  

Consumer other:

            

Marine

     29        (2     (7     3        23  

Other

     3        1       (1     —           3  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer other:

     32        (1     (8     3        26  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer loans

     227        2       (38     10        201  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — continuing operations

     848        6       (57     37        834  

Discontinued operations

     39        4       (13     4        34  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — including discontinued operations

   $ 887      $ 10     $ (70   $ 41      $ 868  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

in millions

   December 31,
2012
     Provision     Charge-offs     Recoveries      March 31,
2013
 

Commercial, financial and agricultural

   $ 327      $ 13     $ (14   $ 12      $ 338  

Real estate — commercial mortgage

     198        3       (13     5        193  

Real estate — construction

     41        (13     (1     8        35  

Commercial lease financing

     55        9       (6     4        62  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial loans

     621        12       (34     29        628  

Real estate — residential mortgage

     30        10       (6     —           34  

Home equity:

            

Key Community Bank

     105        17       (18     2        106  

Other

     25        (3     (6     2        18  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total home equity loans

     130        14       (24     4        124  

Consumer other — Key Community Bank

     38        2       (9     2        33  

Credit cards

     26        14       (8     —           32  

Consumer other:

            

Marine

     39        2       (8     5        38  

Other

     4        —          (1     1        4  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer other:

     43        2       (9     6        42  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer loans

     267        42       (56     12        265  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — continuing operations

     888        54  (a)       (90     41        893  

Discontinued operations

     55        6       (16     4        49  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — including discontinued operations

   $ 943      $ 60     $ (106   $ 45      $ 942  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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

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

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

 

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Table of Contents

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

 

    Allowance     Outstanding  
    Individually     Collectively     Purchased           Individually     Collectively     Purchased  
March 31, 2014   Evaluated for     Evaluated for     Credit           Evaluated for     Evaluated for     Credit  

in millions

  Impairment     Impairment     Impaired     Loans     Impairment     Impairment     Impaired  

Commercial, financial and agricultural

  $ 2     $ 371       —        $ 26,224     $ 40     $ 26,184       —     

Commercial real estate:

             

Commercial mortgage

    1       160       —          7,877       25       7,851     $ 1  

Construction

    —          37       —          1,007       6       1,001       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate loans

    1       197       —          8,884       31       8,852       1  

Commercial lease financing

    —          62       —          4,396       —          4,396       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

    3       630       —          39,504       71       39,432       1  

Real estate — residential mortgage

    4       22     $ 1       2,183       54       2,116       13  

Home equity:

             

Key Community Bank

    16       64       —          10,281       105       10,174       2  

Other

    2       9       —          315       13       302       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total home equity loans

    18       73       —          10,596       118       10,476       2  

Consumer other — Key Community Bank

    —          25       —          1,436       4       1,432       —     

Credit cards

    1       31       —          698       4       694       —     

Consumer other:

             

Marine

    7       16       —          965       52       913       —     

Other

    1       2       —          63       1       62       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer other

    8       18       —          1,028       53       975       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

    31       169       1       15,941       233       15,693       15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL — continuing operations

    34       799       1       55,445       304       55,125       16  

Discontinued operations

    1       33       —          4,382  (a)      15       4,367  (a)      —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL — including discontinued operations

  $ 35     $ 832     $ 1     $ 59,827     $ 319     $ 59,492     $ 16  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Amount includes $2.0 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2013, follows:

 

    Allowance     Outstanding  
    Individually     Collectively     Purchased           Individually     Collectively     Purchased  
December 31, 2013   Evaluated for     Evaluated for     Credit           Evaluated for     Evaluated for     Credit  

in millions

  Impairment     Impairment     Impaired     Loans     Impairment     Impairment     Impaired  

Commercial, financial and agricultural

  $ 8     $ 354       —        $ 24,963     $ 50     $ 24,913       —     

Commercial real estate:

             

Commercial mortgage

    2       163       —          7,720       27       7,692     $ 1  

Construction

    —          32       —          1,093       50       1,043       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate loans

    2       195       —          8,813       77       8,735       1  

Commercial lease financing

    —          62       —          4,551       —          4,551       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

    10       611       —          38,327       127       38,199       1  

Real estate — residential mortgage