Form 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

June 30, 2014

Commission File Number 1-11302

 

 

LOGO

Exact name of registrant as specified in its charter:

 

Ohio   34-6542451

State or other jurisdiction of

incorporation or organization

 

I.R.S. Employer

Identification Number:

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

(216) 689-3000

Registrant’s telephone number, including area code:

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

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

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

 

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

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


Table of Contents

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

         

Page Number

Item 1.

  

Financial Statements

  
  

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

   6
  

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

   7
  

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

   8
  

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

   9
  

Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2014, and June  30, 2013

   10
  

Notes to Consolidated Financial Statements (Unaudited)

   11
  

Note 1. Basis of Presentation

   11
  

Note 2. Earnings Per Common Share

   14
  

Note 3. Loans and Loans Held for Sale

   15
  

Note 4. Asset Quality

   17
  

Note 5. Fair Value Measurements

   32
  

Note 6. Securities

   49
  

Note 7. Derivatives and Hedging Activities

   53
  

Note 8. Mortgage Servicing Assets

   61
  

Note 9. Variable Interest Entities

   62
  

Note 10. Income Taxes

   64
  

Note 11. Acquisitions and Discontinued Operations

   65
  

Note 12. Securities Financing Activities

   73

 

2


Table of Contents
  

Note 13. Employee Benefits

   75
  

Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

   76
  

Note 15. Contingent Liabilities and Guarantees

   77
  

Note 16 . Accumulated Other Comprehensive Income

   80
  

Note 17. Shareholders’ Equity

   83
  

Note 18. Line of Business Results

   84
  

Report of Independent Registered Public Accounting Firm

   88

Item 2.

  

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

   89
  

Introduction

   89
  

Terminology

   89
  

Selected financial data

   90
  

Forward-looking statements

   91
  

Economic overview

   92
  

Long-term financial goals

   93
  

Strategic developments

   93
  

Demographics

   94
  

Supervision and regulation

   96
  

Regulatory reform developments

   96
  

Debit card and interchange fees and routing

   96
  

Regulatory capital rules

   96
  

Highlights of Our Performance

   98
  

Financial performance

   98
  

Results of Operations

   104
  

Net interest income

   104
  

Noninterest income

   107
  

Trust and investment services income

   109
  

Investment banking and debt placement fees

   109
  

Service charges on deposit accounts

   109
  

Operating lease income and other leasing gains

   109
  

Cards and payments income

   109
  

Consumer mortgage income

   109
  

Mortgage servicing fees

   110
  

Other income

   110
  

Noninterest expense

   110
  

Personnel

   111
  

Operating lease expense

   111
  

Other expense

   111
  

Income taxes

   111

 

3


Table of Contents
  

Line of Business Results

   112
  

Key Community Bank summary of operations

   112
  

Key Corporate Bank summary of operations

   113
  

Other Segments

   114
  

Financial Condition

   115
  

Loans and loans held for sale

   115
  

Commercial loan portfolio

   115
  

Commercial, financial and agricultural

   115
  

Commercial real estate loans

   116
  

Commercial lease financing

   117
  

Commercial loan modification and restructuring

   117
  

Extensions

   118
  

Guarantors

   119
  

Consumer loan portfolio

   119
  

Loans held for sale

   120
  

Loan sales

   120
  

Securities

   121
  

Securities available-for-sale

   122
  

Held-to-maturity securities

   123
  

Other investments

   124
  

Deposits and other sources of funds

   124
  

Capital

   125
  

CCAR and capital actions

   125
  

Dividends

   125
  

Common shares outstanding

   125
  

Capital adequacy

   126
  

Risk Management

   129
  

Overview

   129
  

Market risk management

   130
  

Trading market risk

   130
  

Management of trading risks

   130
  

Covered positions

   130
  

VaR and stressed VaR

   131
  

Internal capital adequacy assessment

   132
  

Nontrading market risk

   132
  

Net interest income simulation analysis

   133
  

Economic value of equity modeling

   134
  

Management of interest rate exposure

   134
  

Liquidity risk management

   135
  

Governance structure

   135
  

Factors affecting liquidity

   135
  

Managing liquidity risk

   136
  

Long-term liquidity strategy

   136
  

Sources of liquidity

   137
  

Liquidity programs

   137
  

Liquidity for KeyCorp

   137
  

Our liquidity position and recent activity

   137

 

4


Table of Contents
  

Credit risk management

   138
  

Credit policy, approval, and evaluation

   138
  

Allowance for loan and lease losses

   139
  

Net loan charge-offs

   140
  

Nonperforming assets

   143
  

Operational risk management

   145
  

Cybersecurity

   146
  

Critical Accounting Policies and Estimates

   146
  

European Sovereign and Non-Sovereign Debt Exposures

   147

Item 3.

  

Quantitative and Qualitative Disclosure about Market Risk

   148

Item 4.

  

Controls and Procedures

   148
   PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

   148

Item 1A.

  

Risk Factors

   148

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   149

Item 6.

  

Exhibits

   149
  

Signature

   150
  

Exhibits

   151

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

 

5


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Consolidated Balance Sheets

 

in millions, except per share data

   June 30,
2014
    December 31,
2013
    June 30,
2013
 
     (Unaudited)           (Unaudited)  

ASSETS

      

Cash and due from banks

   $ 604     $ 617     $ 696  

Short-term investments

     3,176       5,590       3,582  

Trading account assets

     890       738       592  

Securities available for sale

     12,224       12,346       13,253  

Held-to-maturity securities (fair value: $5,154, $4,617, and $4,716)

     5,233       4,756       4,750  

Other investments

     899       969       1,037  

Loans, net of unearned income of $709, $805, and $901

     55,600       54,457       53,101  

Less: Allowance for loan and lease losses

     814       848       876  
  

 

 

   

 

 

   

 

 

 

Net loans

     54,786       53,609       52,225  

Loans held for sale

     435       611       402  

Premises and equipment

     844       885       900  

Operating lease assets

     306       305       303  

Goodwill

     979       979       979  

Other intangible assets

     108       127       149  

Corporate-owned life insurance

     3,438       3,408       3,362  

Derivative assets

     549       407       461  

Accrued income and other assets (including $1 of consolidated LIHTC guaranteed funds VIEs, see Note 9) (a)

     3,090       3,015       2,864  

Discontinued assets (including $1,730 of consolidated education loan securitization trust VIEs (see Note 9) and $209 of loans in portfolio at fair value) (a)

     4,237       4,572       5,084  
  

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

 

LIABILITIES

      

Deposits in domestic offices:

      

NOW and money market deposit accounts

   $ 33,637     $ 33,952     $ 32,689  

Savings deposits

     2,450       2,472       2,542  

Certificates of deposit ($100,000 or more)

     2,743       2,631       2,918  

Other time deposits

     3,505       3,648       4,089  
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     42,335       42,703       42,238  

Noninterest-bearing deposits

     24,781       26,001       24,939  

Deposits in foreign office — interest-bearing

     683       558       544  
  

 

 

   

 

 

   

 

 

 

Total deposits

     67,799       69,262       67,721  

Federal funds purchased and securities sold under repurchase agreements

     1,213       1,534       1,647  

Bank notes and other short-term borrowings

     521       343       298  

Derivative liabilities

     451       414       456  

Accrued expense and other liabilities

     1,400       1,557       1,421  

Long-term debt

     8,213       7,650       6,666  

Discontinued liabilities (including $1,677 of consolidated education loan securitization trust VIEs at fair value, see Note 9) (a)

     1,680       1,854       2,169  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     81,277       82,614       80,378  

EQUITY

      

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

      

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

     291       291       291  

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

     1,017       1,017       1,017  

Capital surplus

     3,987       4,022       4,045  

Retained earnings

     7,950       7,606       7,214  

Treasury stock, at cost (140,147,398, 126,245,538, and 104,086,859 shares)

     (2,452     (2,281     (2,020

Accumulated other comprehensive income (loss)

     (289     (352     (318
  

 

 

   

 

 

   

 

 

 

Key shareholders’ equity

     10,504       10,303       10,229  

Noncontrolling interests

     17       17       32  
  

 

 

   

 

 

   

 

 

 

Total equity

     10,521       10,320       10,261  
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

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

 

 

   

 

 

   

 

 

 

 

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

See Notes to Consolidated Financial Statements (Unaudited).

 

6


Table of Contents

Consolidated Statements of Income (Unaudited)

 

     Three months ended June 30,      Six months ended June 30,  

dollars in millions, except per share amounts

   2014     2013      2014     2013  

INTEREST INCOME

         

Loans

   $ 526     $ 539      $ 1,045     $ 1,087  

Loans held for sale

     5       5        9       9  

Securities available for sale

     71       80        143       160  

Held-to-maturity securities

     23       20        45       38  

Trading account assets

     7       4        13       10  

Short-term investments

     1       1        2       3  

Other investments

     6       8        12       17  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     639       657        1,269       1,324  

INTEREST EXPENSE

         

Deposits

     31       42        63       87  

Federal funds purchased and securities sold under repurchase agreements

     —         —          1       1  

Bank notes and other short-term borrowings

     2       2        4       3  

Long-term debt

     33       32        65       69  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     66       76        133       160  
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

     573       581        1,136       1,164  

Provision (credit) for loan and lease losses

     10       28        16       83  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     563       553        1,120       1,081  

NONINTEREST INCOME

         

Trust and investment services income

     94       100        192       195  

Investment banking and debt placement fees

     99       84        183       163  

Service charges on deposit accounts

     66       71        129       140  

Operating lease income and other leasing gains

     35       22        64       47  

Corporate services income

     41       43        83       88  

Cards and payments income

     43       42        81       79  

Corporate-owned life insurance income

     28       31        54       61  

Consumer mortgage income

     2       6        4       13  

Mortgage servicing fees

     11       13        26       21  

Net gains (losses) from principal investing

     27       7        51       15  

Other income (a)

     9       10        23       32  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     455       429        890       854  

NONINTEREST EXPENSE

         

Personnel

     389       406        777       797  

Net occupancy

     68       72        132       136  

Computer processing

     41       39        79       78  

Business services and professional fees

     41       37        82       72  

Equipment

     24       27        48       53  

Operating lease expense

     10       11        20       23  

Marketing

     13       11        18       17  

FDIC assessment

     6       8        12       16  

Intangible asset amortization

     9       10        19       22  

Provision (credit) for losses on lending-related commitments

     2       5        —         8  

OREO expense, net

     1       1        2       4  

Other expense

     85       84        162       166  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     689       711        1,351       1,392  
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     329       271        659       543  

Income taxes

     76       72        168       142  
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     253       199        491       401  

Income (loss) from discontinued operations, net of taxes of ($16), $4, ($14), and $8 (see Note 11)

     (28     5        (24     8  
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS)

     225       204        467       409  

Less: Net income (loss) attributable to noncontrolling interests

     6       —          6       1  
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 219     $ 204      $ 461     $ 408  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ 242     $ 193      $ 474     $ 389  

Net income (loss) attributable to Key common shareholders

     214       198        450       397  

Per common share:

         

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

   $ .28     $ .21      $ .54     $ .42  

Income (loss) from discontinued operations, net of taxes

     (.03     .01        (.03     .01  

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

     .24       .22        .51       .43  

Per common share — assuming dilution:

         

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

   $ .27     $ .21      $ .53     $ .42  

Income (loss) from discontinued operations, net of taxes

     (.03     .01        (.03     .01  

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

     .24       .22        .51       .43  

Cash dividends declared per common share

   $ .065     $ .055      $ .12     $ .105  

Weighted-average common shares outstanding (000)

     875,298       913,736        879,986       917,008  

Effect of convertible preferred stock

     20,602       —           —          —     

Effect of common share options and other stock awards

     6,237       4,892        6,698       5,311  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     902,137       918,628        886,684       922,319  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) For each of the three months ended June 30, 2014, and June 30, 2013, net securities gains (losses) totaled less than $1 million. For the three months ended June 30, 2014, and June 30, 2013, we did not have any impairment losses related to securities.
(b) EPS may not foot due to rounding.
(c) Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.

See Notes to Consolidated Financial Statements (Unaudited).

 

7


Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three months ended June 30,     Six months ended June 30,  

in millions

   2014     2013     2014     2013  

Net income (loss)

   $ 225     $ 204     $ 467     $ 409  

Other comprehensive income (loss), net of tax:

        

Net unrealized gains (losses) on securities available for sale, net of income taxes of $17, ($74), $34, and ($87)

     28       (125     57       (147

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $4, ($18), $3, and ($23)

     5       (31     4       (39

Foreign currency translation adjustments, net of income taxes of $4, ($2), $0, and ($4)

     (1     (3     (3     (14

Net pension and postretirement benefit costs, net of income taxes of $1, $2, $3, and $4

     3       3       5       6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     35       (156     63       (194
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     260       48       530       215  

Less: Comprehensive income attributable to noncontrolling interests

     6       —          6       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Key

   $ 254     $ 48     $ 524     $ 214  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

8


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)

                  408           1  

Other comprehensive income (loss):

                     

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($87)

                      (147  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($23)

                      (39  

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

                      (14  

Net pension and postretirement benefit costs, net of income taxes of $4

                      6    

Deferred compensation

                8          

Cash dividends declared on common shares ($.105 per share)

                  (96      

Cash dividends declared on Noncumulative Series A

                     

Preferred Stock ($3.875 per share)

                  (11      

Common shares repurchased

        (17,576               (177    

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

        4,690             (89       109      

Net contribution from (distribution to) noncontrolling interests

                        (7
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2013

     2,905        912,883     $ 291      $ 1,017      $ 4,045     $ 7,214     $ (2,020   $ (318   $ 32  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2013

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

Net income (loss)

                  461           6  

Other comprehensive income (loss):

                     

Net unrealized gains (losses) on securities available for sale, net of income taxes of $34

                      57    

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $3

                      4    

Foreign currency translation adjustments, net of income taxes of $0

                      (3  

Net pension and postretirement benefit costs, net of income taxes of $3

                      5    

Deferred compensation

                2          

Cash dividends declared on common shares ($.12 per share)

                  (106      

Cash dividends declared on Noncumulative Series A

                     

Preferred Stock ($3.875 per share)

                  (11      

Common shares repurchased

        (17,669               (236    

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

        3,768             (37       65      

Net contribution from (distribution to) noncontrolling interests

                        (6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JUNE 30, 2014

     2,905        876,823     $ 291      $ 1,017      $ 3,987     $ 7,950     $ (2,452   $ (289   $ 17  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

9


Table of Contents

Consolidated Statements of Cash Flows (Unaudited)

 

     Six months ended June 30,  

in millions

   2014     2013  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 467     $ 409  

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

    

Provision (credit) for loan and lease losses

     16       83  

Provision (credit) for losses on lending-related commitments

     —          8  

Provision (credit) for losses on LIHTC guaranteed funds

     (6     3  

Depreciation, amortization and accretion expense, net

     103       93  

Increase in cash surrender value of corporate-owned life insurance

     (48     (50

Stock-based compensation expense

     21       19  

FDIC reimbursement (payments), net of FDIC expense

     —          297  

Deferred income taxes (benefit)

     9       36  

Proceeds from sales of loans held for sale

     1,570       2,609  

Originations of loans held for sale, net of repayments

     (1,359     (2,316

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

     (40     (60

Net losses (gains) from principal investing

     (51     (15

Net losses (gains) and writedown on OREO

     2       4  

Net losses (gains) on leased equipment

     (34     (8

Net losses (gains) on sales of fixed assets

     1       8  

Net decrease (increase) in trading account assets

     (152     13  

Other operating activities, net

     (236     (208
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     263       925  

INVESTING ACTIVITIES

    

Cash received (used) in acquisitions, net of cash acquired

     —          573  

Net decrease (increase) in short-term investments

     2,414       357  

Purchases of securities available for sale

     (1,175     (4,030

Proceeds from sales of securities available for sale

     —          27  

Proceeds from prepayments and maturities of securities available for sale

     1,382       2,612  

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

     391       434  

Purchases of held-to-maturity securities

     (869     (1,253

Purchases of other investments

     (26     (20

Proceeds from sales of other investments

     167       11  

Proceeds from prepayments and maturities of other investments

     1       49  

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

     (1,269     (451

Proceeds from sales of portfolio loans

     67       77  

Proceeds from corporate-owned life insurance

     18       21  

Purchases of premises, equipment, and software

     (30     (34

Proceeds from sales of premises and equipment

     1       8  

Proceeds from sales of other real estate owned

     10       14  
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     1,082       (1,605

FINANCING ACTIVITIES

    

Net increase (decrease) in deposits, excluding acquisitions

     (1,463     1,038  

Net increase (decrease) in short-term borrowings

     (143     49  

Net proceeds from issuance of long-term debt

     608       1,008  

Payments on long-term debt

     (26     (1,033

Repurchase of common shares

     (236     (177

Net proceeds from issuance of common shares

     19       14  

Cash dividends paid

     (117     (107
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (1,358     792  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     (13     112  

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

     617       584  
  

 

 

   

 

 

 

CASH AND DUE FROM BANKS AT END OF PERIOD

   $ 604     $ 696  
  

 

 

   

 

 

 

Additional disclosures relative to cash flows:

    

Interest paid

   $ 133     $ 159  

Income taxes paid (refunded)

     82       62  

Noncash items:

    

Reduction of secured borrowing and related collateral

   $ 32       —     

Loans transferred to portfolio from held for sale

     10     $ 2  

Loans transferred to held for sale from portfolio

     5       38  

Loans transferred to other real estate owned

     9       14  

See Notes to Consolidated Financial Statements (Unaudited).

 

10


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

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

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

 

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

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

 

11


Table of Contents

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

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

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

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

Offsetting Derivative Positions

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

Accounting Guidance Adopted in 2014

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

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

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

Reporting of cumulative translation adjustments upon the derecognition of certain investments. In March 2013, the FASB issued new accounting guidance that addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary

 

12


Table of Contents

or group of assets that is a nonprofit activity or a business within a foreign entity. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Accounting Guidance Pending Adoption at June 30, 2014

Stock-based compensation. In June 2014, the FASB issued new accounting guidance that clarifies how to account for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a retrospective method or a prospective method. Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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

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

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

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

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

 

13


Table of Contents

2. Earnings Per Common Share

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

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

 

     Three months ended June 30,      Six months ended June 30,  

dollars in millions, except per share amounts

   2014     2013      2014     2013  

EARNINGS

         

Income (loss) from continuing operations

   $ 253     $ 199      $ 491     $ 401  

Less: Net income (loss) attributable to noncontrolling interests

     6       —          6       1  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Key

     247       199        485       400  

Less: Dividends on Series A Preferred Stock

     5       6        11       11  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     242       193        474       389  

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

     (28     5        (24     8  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to Key common shareholders

   $ 214     $ 198      $ 450     $ 397  
  

 

 

   

 

 

    

 

 

   

 

 

 

WEIGHTED-AVERAGE COMMON SHARES

         

Weighted-average common shares outstanding (000)

     875,298       913,736        879,986       917,008  

Effect of convertible preferred stock

     20,602       —           —          —     

Effect of common share options and other stock awards

     6,237       4,892        6,698       5,311  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     902,137       918,628        886,684       922,319  
  

 

 

   

 

 

    

 

 

   

 

 

 

EARNINGS PER COMMON SHARE

         

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

   $ .28     $ .21      $ .54     $ .42  

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

     (.03     .01        (.03     .01  

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

     .24       .22        .51       .43  

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

   $ .27     $ .21      $ .53     $ .42  

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

     (.03     .01        (.03     .01  

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

     .24       .22        .51       .43  

 

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

 

14


Table of Contents

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:

 

in millions

   June 30,
2014
     December 31,
2013
     June 30,
2013
 

Commercial, financial and agricultural (a)

   $ 26,327      $ 24,963      $ 23,715  

Commercial real estate:

        

Commercial mortgage

     7,946        7,720        7,474  

Construction

     1,047        1,093        1,060  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,993        8,813        8,534  

Commercial lease financing (b)

     4,241        4,551        4,774  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     39,561        38,327        37,023  

Residential — prime loans:

        

Real estate — residential mortgage

     2,189        2,187        2,176  

Home equity:

        

Key Community Bank

     10,379        10,340        10,173  

Other

     300        334        375  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,679        10,674        10,548  
  

 

 

    

 

 

    

 

 

 

Total residential — prime loans

     12,868        12,861        12,724  

Consumer other — Key Community Bank

     1,514        1,449        1,424  

Credit cards

     718        722        701  

Consumer other:

        

Marine

     888        1,028        1,160  

Other

     51        70        69  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     939        1,098        1,229  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     16,039        16,130        16,078  
  

 

 

    

 

 

    

 

 

 

Total loans (c) (d)

   $ 55,600      $ 54,457      $ 53,101  
  

 

 

    

 

 

    

 

 

 

 

(a) Loan balances include $94 million, $94 million, and $96 million of commercial credit card balances at June 30, 2014, December 31, 2013, and June 30, 2013, respectively.
(b) Commercial lease financing includes receivables of $375 million and $58 million held as collateral for a secured borrowing at June 30, 2014, and December 31, 2013, respectively. Principal reductions are based on the cash payments received from these related receivables. We expect to record additional commercial lease financing receivables held as collateral for a secured borrowing through the second half of 2014. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”) beginning on page 200 of our 2013 Form 10-K.
(c) At June 30, 2014, total loans include purchased loans of $151 million, of which $15 million were PCI loans. At December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. At June 30, 2013, total loans include purchased loans of $187 million, of which $19 million were PCI loans.
(d) Total loans exclude loans of $4.2 billion at June 30, 2014, $4.5 billion at December 31, 2013, and $5.0 billion at June 30, 2013, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:

 

in millions

   June 30,
2014
     December 31,
2013
     June 30,
2013
 

Commercial, financial and agricultural

   $ 181      $ 278      $ 22  

Real estate — commercial mortgage

     221        307        318  

Commercial lease financing

     10        9        14  

Real estate — residential mortgage

     23        17        48  
  

 

 

    

 

 

    

 

 

 

Total loans held for sale

   $ 435      $ 611      $ 402  
  

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

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

 

in millions

   June 30,
2014
    December 31,
2013
    June 30,
2013
 

Balance at beginning of the period

   $ 401     $ 699     $ 434  

New originations

     978       1,669       1,241  

Transfers from held to maturity, net

     (8     1       17  

Loan sales

     (934     (1,750     (1,292

Loan draws (payments), net

     (2     (8     —     

Transfers to OREO / valuation adjustments

     —          —          2  
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 435     $ 611     $ 402  
  

 

 

   

 

 

   

 

 

 

 

16


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

   June 30,
2014
     December 31,
2013
     June 30,
2013
 

Total nonperforming loans (a)

   $ 396      $ 508      $ 652  

Nonperforming loans held for sale

     1        1        14  

OREO

     12        15        18  

Other nonperforming assets

     1        7        9  
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

   $ 410      $ 531      $ 693  
  

 

 

    

 

 

    

 

 

 

Nonperforming assets from discontinued operations — education lending (b)

   $ 19      $ 25      $ 19  
  

 

 

    

 

 

    

 

 

 

Restructured loans included in nonperforming loans

   $ 142      $ 214      $ 195  

Restructured loans with an allocated specific allowance (c)

     59        71        65  

Specifically allocated allowance for restructured loans (d)

     30        35        30  

Accruing loans past due 90 days or more

   $ 83      $ 71      $ 80  

Accruing loans past due 30 through 89 days

     274        318        251  

 

(a) Loan balances exclude $15 million, $16 million, and $19 million of PCI loans at June 30, 2014, December 31, 2013, and June 30, 2013, respectively.
(b) Includes restructured loans of approximately $18 million, $13 million, and $8 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.
(c) Included in individually impaired loans allocated a specific allowance.
(d) Included in allowance for individually evaluated impaired loans.

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

At June 30, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $22 million and $15 million, respectively. Changes in the accretable yield during 2014 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at June 30, 2014.

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

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

Nonperforming loans and loans held for sale reduced expected interest income by $8 million for the six months ended June 30, 2014, and $23 million for the year ended December 31, 2013.

 

17


Table of Contents

The following tables set forth a further breakdown of individually impaired loans as of June 30, 2014, December 31, 2013, and June 30, 2013:

 

            Unpaid             Average  
June 30, 2014    Recorded      Principal      Specific      Recorded  

in millions

   Investment (a)      Balance (b)      Allowance      Investment  

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 12      $ 18        —         $ 23  

Commercial real estate:

           

Commercial mortgage

     23        28        —           23  

Construction

     6        17        —           6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     29        45        —           29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     41        63        —           52  

Real estate — residential mortgage

     25        25        —           26  

Home equity:

           

Key Community Bank

     66        66        —           68  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     68        68        —           70  

Consumer other:

           

Marine

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     95        95        —           98  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     136        158        —           150  

With an allowance recorded:

           

Commercial, financial and agricultural

     5        7      $ 3        6  

Commercial real estate:

           

Commercial mortgage

     2        3        1        2  

Construction

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     2        3        1        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     7        10        4        8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     29        29        5        28  

Home equity:

           

Key Community Bank

     37        37        15        36  

Other

     11        11        3        11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     48        48        18        47  

Consumer other — Key Community Bank

     3        3        —           3  

Credit cards

     4        4        —           4  

Consumer other:

           

Marine

     48        48        5        49  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     49        49        5        50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     133        133        28        132  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     140        143        32        140  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276      $ 301      $ 32      $ 290  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

18


Table of Contents
            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.

 

19


Table of Contents
            Unpaid             Average  
June 30, 2013    Recorded      Principal      Specific      Recorded  

in millions

   Investment (a)      Balance (b)      Allowance      Investment  

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 89      $ 140        —         $ 91  

Commercial real estate:

           

Commercial mortgage

     88        138        —           88  

Construction

     50        157        —           49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     138        295        —           137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     227        435        —           228  

Real estate — residential mortgage

     16        16        —           16  

Home equity:

           

Key Community Bank

     69        69        —           66  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     71        71        —           68  

Consumer other:

           

Marine

     3        3        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     3        3        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     90        90        —           87  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     317        525        —           315  

With an allowance recorded:

           

Commercial, financial and agricultural

     22        31      $ 6        18  

Commercial real estate:

           

Commercial mortgage

     5        6        2        7  

Construction

     2        12        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     7        18        2        8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     29        49        8        26  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     20        20        5        19  

Home equity:

           

Key Community Bank

     30        30        9        28  

Other

     10        10        1        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     40        40        10        38  

Consumer other — Key Community Bank

     3        3        1        3  

Credit cards

     4        4        —           4  

Consumer other:

           

Marine

     50        50        10        49  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     51        51        10        50  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     118        118        26        114  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     147        167        34        140  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 464      $ 692      $ 34      $ 455  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

For the six months ended June 30, 2014, and June 30, 2013, interest income recognized on the outstanding balances of accruing impaired loans totaled $4 million and $3 million, respectively.

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

 

20


Table of Contents

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

 

            Pre-modification      Post-modification  
            Outstanding      Outstanding  
June 30, 2014    Number      Recorded      Recorded  

dollars in millions

   of loans      Investment      Investment  

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     24      $ 20      $ 10  

Commercial real estate:

        

Real estate — commercial mortgage

     11        40        14  

Real estate — construction

     3        15        2  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     14        55        16  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     38        75        26  

Real estate — residential mortgage

     521        34        34  

Home equity:

        

Key Community Bank

     1,086        68        64  

Other

     126        4        3  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,212        72        67  

Consumer other — Key Community Bank

     33        1        1  

Credit cards

     60        —           —     

Consumer other:

        

Marine

     207        15        13  

Other

     36        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     243        16        14  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,069        123        116  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     2,107        198        142  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     32        7        3  

Commercial real estate:

        

Real estate — commercial mortgage

     4        17        9  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     4        17        9  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     36        24        12  

Real estate — residential mortgage

     287        21        21  

Home equity:

        

Key Community Bank

     759        43        39  

Other

     322        10        8  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,081        53        47  

Consumer other — Key Community Bank

     54        2        2  

Credit cards

     653        5        3  

Consumer other:

        

Marine

     428        60        37  

Other

     73        2        2  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     501        62        39  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,576        143        112  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     2,612        167        124  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,719      $ 365      $ 266  
  

 

 

    

 

 

    

 

 

 

 

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

 

21


Table of Contents

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.

 

22


Table of Contents

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2013, follows:

 

            Pre-modification      Post-
modification
 
            Outstanding      Outstanding  
June 30, 2013    Number      Recorded      Recorded  

dollars in millions

   of loans      Investment      Investment  

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     43      $ 53      $ 24  

Commercial real estate:

        

Real estate — commercial mortgage

     15        58        21  

Real estate — construction

     6        19        5  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     21        77        26  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     64        130        50  

Real estate — residential mortgage

     381        23        23  

Home equity:

        

Key Community Bank

     1,683        89        87  

Other

     262        8        8  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,945        97        95  

Consumer other — Key Community Bank

     54        2        2  

Credit cards

     506        3        3  

Consumer other:

        

Marine

     360        41        21  

Other

     48        2        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     408        43        22  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,294        168        145  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     3,358        298        195  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     87        10        5  

Commercial real estate:

        

Real estate — commercial mortgage

     4        22        15  

Real estate — construction

     1        23        32  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     5        45        47  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     92        55        52  

Real estate — residential mortgage

     118        12        12  

Home equity:

        

Key Community Bank

     134        14        14  

Other

     178        5        5  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     312        19        19  

Consumer other — Key Community Bank

     26        1        1  

Credit cards

     309        2        2  

Consumer other:

        

Marine

     243        29        28  

Other

     49        2        2  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     292        31        30  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,057        65        64  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     1,149        120        116  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,507      $ 418      $ 311  
  

 

 

    

 

 

    

 

 

 

 

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

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

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During the three months ended June 30, 2014, there were no significant commercial loan TDRs, and 107 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults from modifications resulting in TDR status during 2013. During the three months ended June 30, 2013, there were no significant commercial loan TDRs, and 127

 

23


Table of Contents

consumer loan TDRs with a combined recorded investment of $5 million that experienced payment defaults from modifications resulting in TDR status during 2012. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL.

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

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

 

in millions

   June 30,
2014
     December 31,
2013
     June 30,
2013
 

Commercial loans:

        

Interest rate reduction

   $ 27      $ 95      $ 88  

Forgiveness of principal

     5        5        6  

Other

     6        7        8  
  

 

 

    

 

 

    

 

 

 

Total

   $ 38      $ 107      $ 102  
  

 

 

    

 

 

    

 

 

 

Consumer loans:

        

Interest rate reduction

   $ 139      $ 130      $ 104  

Forgiveness of principal

     4        5        5  

Other

     85        96        100  
  

 

 

    

 

 

    

 

 

 

Total

   $ 228      $ 231      $ 209  
  

 

 

    

 

 

    

 

 

 

Total commercial and consumer TDRs (a)

   $ 266      $ 338      $ 311  

Total loans

     55,600        54,457        53,101  

 

(a) Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $1 million, $15 million, and $25 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively.

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

At June 30, 2014, approximately $54.8 billion, or 98.6%, of our total loans were current. At June 30, 2014, total past due loans and nonperforming loans of $753 million represented approximately 1.4% of total loans.

 

24


Table of Contents

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

 

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

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

   $ 26,212      $ 52      $ 11      $ 15      $ 37      $ 115        —         $ 26,327  

Commercial real estate:

                       

Commercial mortgage

     7,855        18        15        19        38        90      $ 1        7,946  

Construction

     1,029        2        2        5        9        18        —           1,047  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,884        20        17        24        47        108        1        8,993  

Commercial lease financing

     4,186        32        4        4        15        55        —           4,241  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

   $ 39,282      $ 104      $ 32      $ 43      $ 99      $ 278      $ 1      $ 39,561  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 2,061      $ 16      $ 6      $ 4      $ 89      $ 115      $ 13      $ 2,189  

Home equity:

                       

Key Community Bank

     10,115        46        22        17        178        263        1        10,379  

Other

     281        5        2        1        11        19        —           300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,396        51        24        18        189        282        1        10,679  

Consumer other — Key Community Bank

     1,493        9        4        6        2        21        —           1,514  

Credit cards

     698        6        4        9        1        20        —           718  

Consumer other:

                       

Marine

     855        13        3        2        15        33        —           888  

Other

     47        1        1        1        1        4        —           51  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     902        14        4        3        16        37        —           939  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

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

Commercial real estate:

                       

Commercial mortgage

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

Construction

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

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

Commercial lease financing

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

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

Home equity:

                       

Key Community Bank

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

Other

     308        6        4        1        15        26        —           334  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

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

Consumer other — Key Community Bank

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

Credit cards

     698        11        5        4        4        24        —           722  

Consumer other:

                       

Marine

     979        15        6        2        26        49        —           1,028  

Other

     65        2        1        1        1        5        —           70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents
            30-59      60-89      90 and
Greater
           

Total Past

Due and

     Purchased         
June 30, 2013           Days Past      Days Past      Days Past      Nonperforming      Nonperforming      Credit      Total  

in millions

   Current      Due      Due      Due      Loans      Loans      Impaired      Loans  

LOAN TYPE

                       

Commercial, financial and agricultural

   $ 23,512      $ 37      $ 9      $ 11      $ 146      $ 203        —         $ 23,715  

Commercial real estate:

                       

Commercial mortgage

     7,307        16        5        38        106        165      $ 2        7,474  

Construction

     1,031        3        —           —           26        29        —           1,060  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,338        19        5        38        132        194        2        8,534  

Commercial lease financing

     4,734        14        7        5        14        40        —           4,774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 2,037      $ 20      $ 7      $ 3      $ 94      $ 124      $ 15      $ 2,176  

Home equity:

                       

Key Community Bank

     9,877        51        25        13        205        294        2        10,173  

Other

     347        7        3        2        16        28        —           375  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,224        58        28        15        221        322        2        10,548  

Consumer other — Key Community Bank

     1,403        9        3        6        3        21        —           1,424  

Credit cards

     680        6        4        —           11        21        —           701  

Consumer other:

                       

Marine

     1,106        18        5        1        30        54        —           1,160  

Other

     65        2        —           1        1        4        —           69  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     1,171        20        5        2        31        58        —           1,229  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

 

26


Table of Contents

Credit quality indicators for our commercial and consumer loan portfolios, excluding $15 million and $19 million of PCI loans at June 30, 2014, and June 30, 2013, respectively, based on bond rating, regulatory classification, and payment activity as of June 30, 2014, and June 30, 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category (a) 

 

 

June 30,                                                                      

in millions

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

RATING (b), (c)

   2014      2013      2014      2013      2014      2013      2014      2013      2014      2013  

AAA — AA

   $ 364      $ 275      $ 3      $ 1      $ 1      $ 1      $ 712      $ 485      $ 1,080      $ 762  

A

     1,091        618        1        74        1        1        382        1,011        1,475        1,704  

BBB — BB

     23,534        21,355        7,412        6,600        907        871        2,968        3,046        34,821        31,872  

B

     545        560        287        364        99        23        99        145        1,030        1,092  

CCC — C

     793        907        242        433        39        164        80        87        1,154        1,591  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Consumer Credit Exposure

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

 

June 30,              

in millions

             
     Residential — Prime  

GRADE

   2014      2013  

Pass

   $ 12,554      $ 12,374  

Substandard

     300        333  
  

 

 

    

 

 

 

Total

   $ 12,854      $ 12,707  
  

 

 

    

 

 

 

Credit Risk Profile Based on Payment Activity (a)

 

June 30,    Consumer — Key Community
Bank
     Credit cards      Consumer — Marine      Consumer — Other      Total  

in millions

   2014      2013      2014      2013      2014      2013      2014      2013      2014      2013  

Performing

   $ 1,512      $ 1,421      $ 717      $ 690      $ 873      $ 1,130      $ 50      $ 68      $ 3,152      $ 3,309  

Nonperforming

     2        3        1        11        15        30        1        1        19        45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million and greater, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Non-Chapter 7 consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the loan’s effective interest rate. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at June 30, 2014, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

 

27


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

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

 

     Three months ended June 30,     Six months ended June 30,  

in millions

   2014     2013     2014     2013  

Balance at beginning of period — continuing operations

   $ 834     $ 893     $ 848     $ 888  

Charge-offs

     (56     (74     (113     (164

Recoveries

     26       29       63       70  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loans and leases charged off

     (30     (45     (50     (94

Provision for loan and lease losses from continuing operations

     10       28       16       83  

Foreign currency translation adjustment

     —         —         —         (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period — continuing operations

   $ 814     $ 876     $ 814     $ 876  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

in millions

   December 31,
2013
       Provision       Charge-offs     Recoveries      June 30,
2014
 

Commercial, financial and agricultural

   $ 362      $ 13     $ (23   $ 21      $ 373  

Real estate — commercial mortgage

     165        (5     (3     2        159  

Real estate — construction

     32        (11     (2     15        34  

Commercial lease financing

     62        (3     (5     6        60  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial loans

     621        (6     (33     44        626  

Real estate — residential mortgage

     37        (9     (5     2        25  

Home equity:

            

Key Community Bank

     84        9       (20     4        77  

Other

     11        1       (6     3        9  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total home equity loans

     95        10       (26     7        86  

Consumer other — Key Community Bank

     29        8       (16     3        24  

Credit cards

     34        13       (18     1        30  

Consumer other:

            

Marine

     29        1       (14     5        21  

Other

     3        (1     (1     1        2  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer other:

     32        —          (15     6        23  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer loans

     227        22       (80     19        188  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — continuing operations

     848        16       (113     63        814  

Discontinued operations

     39        9       (24     8        32  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — including discontinued operations

   $ 887      $ 25     $ (137   $ 71      $ 846  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

28


Table of Contents

in millions

   December 31,
2012
     Provision     Charge-offs     Recoveries      June 30,
2013
 

Commercial, financial and agricultural

   $ 327      $ 35     $ (29   $ 19      $ 352  

Real estate — commercial mortgage

     198        (10     (16     10        182  

Real estate — construction

     41        (13     (2     8        34  

Commercial lease financing

     55        6       (8     8        61  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial loans

     621        18       (55     45        629  

Real estate — residential mortgage

     30        13       (10     —          33  

Home equity:

            

Key Community Bank

     105        19       (36     6        94  

Other

     25        —         (12     3        16  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total home equity loans

     130        19       (48     9        110  

Consumer other — Key Community Bank

     38        7       (16     4        33  

Credit cards

     26        21       (16     2        33  

Consumer other:

            

Marine

     39        4       (17     9        35  

Other

     4        —         (2     1        3  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer other:

     43        4       (19     10        38  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer loans

     267        64       (109     25        247  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — continuing operations

     888        82  (a)      (164     70        876  

Discontinued operations

     55        5       (28     9        41  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total ALLL — including discontinued operations

   $ 943      $ 87     $ (192   $ 79      $ 917  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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

Our ALLL from continuing operations decreased by $62 million, or 7.1%, from the second quarter of 2013 primarily because of the improvement in the credit quality of our loan portfolios. The quality of new loan originations as well as decreasing levels of criticized, classified, and nonperforming loans and net loan charge-offs has also resulted in a reduction in our general allowance. Our general allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Our delinquency trends declined during 2013 and into 2014 due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio, reflecting our effort to maintain a moderate enterprise risk tolerance.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $276 million, with a corresponding allowance of $32 million at June 30, 2014. Loans outstanding collectively evaluated for impairment totaled $55.3 billion, with a corresponding allowance of $781 million at June 30, 2014. At June 30, 2014, PCI loans evaluated for impairment totaled $15 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the six months ended June 30, 2014. At June 30, 2013, the loans outstanding individually evaluated for impairment totaled $464 million, with a corresponding allowance of $34 million. Loans outstanding collectively evaluated for impairment totaled $52.6 billion, with a corresponding allowance of $842 million at June 30, 2013. At June 30, 2013, PCI loans evaluated for impairment totaled $19 million, with a corresponding allowance of less than $1 million. There was a credit for loan and lease losses on these PCI loans of $1 million during the six months ended June 30, 2013.

 

29


Table of Contents

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

 

     Allowance      Outstanding  
     Individually      Collectively      Purchased            Individually      Collectively     Purchased  
June 30, 2014    Evaluated for      Evaluated for      Credit            Evaluated for      Evaluated for     Credit  

in millions

   Impairment      Impairment      Impaired      Loans     Impairment      Impairment