10-Q 1 d600439d10q.htm FORM 10-Q 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 September 30, 2013

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

 

896,671,849 Shares

Title of class   Outstanding at October 29, 2013

 

 

 


Table of Contents

KEYCORP

TABLE OF CONTENTS

 

          Page Number  
   PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements      5   
  

Consolidated Balance Sheets — September 30, 2013 (Unaudited), December 31, 2012, and September 30, 2012 (Unaudited)

     5   
  

Consolidated Statements of Income (Unaudited) — Three and nine months ended September 30, 2013 and 2012

     6   
  

Consolidated Statements of Comprehensive Income (Unaudited) — Three and nine months ended September 30, 2013 and 2012

     7   
  

Consolidated Statements of Changes in Equity (Unaudited) — Nine months ended September  30, 2013 and 2012

     8   
  

Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2013 and 2012

     9   
  

Notes to Consolidated Financial Statements (Unaudited)

     10   
  

Note 1. Basis of Presentation

     10   
  

Note 2. Earnings Per Common Share

     14   
  

Note 3. Loans and Loans Held for Sale

     15   
  

Note 4. Asset Quality

     17   
  

Note 5. Fair Value Measurements

     32   
  

Note 6. Securities

     49   
  

Note 7. Derivatives and Hedging Activities

     53   
  

Note 8. Mortgage Servicing Assets

     61   
  

Note 9. Variable Interest Entities

     63   
  

Note 10. Income Taxes

     65   
  

Note 11. Acquisitions and Discontinued Operations

     66   
  

Note 12. Securities Financing Activities

     74   
  

Note 13. Employee Benefits

     76   
  

Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

     77   
  

Note 15. Contingent Liabilities and Guarantees

     78   
  

Note 16. Accumulated Other Comprehensive Income

     81   
  

Note 17. Shareholders’ Equity

     82   

 

2


Table of Contents
  

Note 18. Line of Business Results

     83   
  

Report of Independent Registered Public Accounting Firm

     87   

Item 2.

  

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

     88   
  

Introduction

     88   
  

Terminology

     88   
  

Selected financial data

     89   
  

Forward-looking statements

     90   
  

Economic overview

     91   
  

Long-term financial goals

     92   
  

Strategic developments

     93   
  

Demographics

     93   
  

Supervision and regulation

     95   
  

Regulatory reform developments

     95   
  

Enhanced prudential standards and early remediation requirements

     95   
  

Debit card and interchange fees and routing

     95   
  

New regulatory capital rules

     95   
  

Liquidity capital ratios

     97   
  

New assessments, fees and other charges

     97   
  

Highlights of Our Performance

     97   
  

Financial performance

     97   
  

Results of Operations

     103   
  

Net interest income

     103   
  

Noninterest income

     106   
  

Trust and investment services income

     108   
  

Investment banking and debt placement fees

     108   
  

Operating lease income and other leasing gains

     108   
  

Cards and payments income

     108   
  

Other income

     108   
  

Noninterest expense

     109   
  

Personnel

     109   
  

Operating lease expense

     110   
  

Intangible asset amortization

     110   
  

Other expense

     110   
  

Income taxes

     110   
  

Line of Business Results

     111   
  

Key Community Bank summary of operations

     111   
  

Key Corporate Bank summary of operations

     112   
  

Other Segments

     113   
  

Financial Condition

     114   
  

Loans and loans held for sale

     114   
  

Commercial loan portfolio

     114   
  

Commercial, financial and agricultural

     114   
  

Commercial real estate loans

     115   
  

Commercial lease financing

     116   
  

Commercial loan modification and restructuring

     116   
  

Extensions

     117   
  

Guarantors

     118   
  

Consumer loan portfolio

     118   
  

Loans held for sale

     119   
  

Loan sales

     119   
  

Securities

     120   

 

3


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Securities available-for-sale

     121   
  

Held-to-maturity securities

     122   
  

Other investments

     123   
  

Deposits and other sources of funds

     123   
  

Capital

     124   
  

CCAR and capital actions

     124   
  

Dividends

     124   
  

Common shares outstanding

     124   
  

Capital adequacy

     125   
  

Regulatory capital rules

     126   
  

Risk Management

     128   
  

Overview

     128   
  

Market risk management

     130   
  

Trading market risk

     130   
  

Management of trading risks

     130   
  

Covered positions

     130   
  

VaR and stressed VaR

     131   
  

Internal capital adequacy

     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

     136   
  

Liquidity programs

     136   
  

Liquidity for KeyCorp

     137   
  

Our liquidity position and recent activity

     137   
  

Credit risk management

     138   
  

Credit policy, approval and evaluation

     138   
  

Allowance for loan and lease losses

     139   
  

Net loan charge-offs

     141   
  

Nonperforming assets

     143   
  

Operational risk management

     146   
  

Critical Accounting Policies and Estimates

     146   
  

European Sovereign Debt Exposure

     148   

Item 3.

  

Quantitative and Qualitative Disclosure about Market Risk

     149   

Item 4.

  

Controls and Procedures

     149   
   PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     149   

Item 1A.

  

Risk Factors

     149   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     150   

Item 6.

  

Exhibits

     150   
  

Signature

     151   
  

Exhibits

  

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

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Consolidated Balance Sheets

 

in millions, except per share data

   September 30,
2013
    December 31,
2012
    September 30,
2012
 
     (Unaudited)           (Unaudited)  

ASSETS

      

Cash and due from banks

   $ 748     $ 584     $ 973  

Short-term investments

     3,535       3,940       2,208  

Trading account assets

     806       605       663  

Securities available for sale

     12,606       12,094       11,962  

Held-to-maturity securities (fair value: $4,730, $3,992 and $4,212)

     4,835       3,931       4,153  

Other investments

     1,007       1,064       1,106  

Loans, net of unearned income of $827, $957 and $980

     53,597       52,822       51,419  

Less: Allowance for loan and lease losses

     868       888       888  
  

 

 

   

 

 

   

 

 

 

Net loans

     52,729       51,934       50,531  

Loans held for sale

     699       599       628  

Premises and equipment

     890       965       942  

Operating lease assets

     293       288       290  

Goodwill

     979       979       979  

Other intangible assets

     137       171       182  

Corporate-owned life insurance

     3,384       3,333       3,309  

Derivative assets

     475       693       771  

Accrued income and other assets (including $24 of consolidated LIHTC guaranteed funds VIEs, see Note 9) (a)

     2,747       2,774       2,853  

Discontinued assets (including $2,158 of consolidated education loan securitization trust VIEs (see Note 9) and $148 of loans in portfolio at fair value) (a)

     4,838       5,282       5,400  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 90,708     $ 89,236     $ 86,950  
  

 

 

   

 

 

   

 

 

 

LIABILITIES

      

Deposits in domestic offices:

      

NOW and money market deposit accounts

   $ 33,132     $ 32,380     $ 30,573  

Savings deposits

     2,489       2,433       2,393  

Certificates of deposit ($100,000 or more)

     2,698       2,879       3,226  

Other time deposits

     3,833       4,575       4,941  
  

 

 

   

 

 

   

 

 

 

Total interest-bearing

     42,152       42,267       41,133  

Noninterest-bearing

     25,778       23,319       22,486  

Deposits in foreign office — interest-bearing

     605       407       569  
  

 

 

   

 

 

   

 

 

 

Total deposits

     68,535       65,993       64,188  

Federal funds purchased and securities sold under repurchase agreements

     1,455       1,609       1,746  

Bank notes and other short-term borrowings

     466       287       388  

Derivative liabilities

     450       584       657  

Accrued expense and other liabilities

     1,375       1,387       1,205  

Long-term debt

     6,154       6,847       6,119  

Discontinued liabilities (including $2,037 of consolidated education loan securitization trust VIEs at fair value, see Note 9) (a)

     2,037       2,220       2,368  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     80,472       78,927       76,671  

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

     4,029       4,126       4,118  

Retained earnings

     7,431       6,913       6,762  

Treasury stock, at cost (119,148,654, 91,201,285 and 80,775,030)

     (2,193     (1,952     (1,868

Accumulated other comprehensive income (loss)

     (369     (124     (69
  

 

 

   

 

 

   

 

 

 

Key shareholders’ equity

     10,206       10,271       10,251  

Noncontrolling interests

     30       38       28  
  

 

 

   

 

 

   

 

 

 

Total equity

     10,236       10,309       10,279  
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 90,708     $ 89,236     $ 86,950  
  

 

 

   

 

 

   

 

 

 

 

(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).

 

5


Table of Contents

Consolidated Statements of Income (Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  

dollars in millions, except per share amounts

   2013     2012     2013      2012  

INTEREST INCOME

         

Loans

   $ 532     $ 538     $ 1,619      $ 1,592  

Loans held for sale

     5       5       14        15  

Securities available for sale

     76       93       236        314  

Held-to-maturity securities

     22       21       60        50  

Trading account assets

     5       4       15        15  

Short-term investments

     1       1       4        4  

Other investments

     6       9       23        27  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest income

     647       671       1,971        2,017  

INTEREST EXPENSE

         

Deposits

     37       60       124        208  

Federal funds purchased and securities sold under repurchase agreements

     1       1       2        3  

Bank notes and other short-term borrowings

     2       1       5        5  

Long-term debt

     29       37       98        138  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     69       99       229        354  
  

 

 

   

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     578       572       1,742        1,663  

Provision (credit) for loan and lease losses

     28       109       111        172  
  

 

 

   

 

 

   

 

 

    

 

 

 

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

     550       463       1,631        1,491  

NONINTEREST INCOME

         

Trust and investment services income

     100       94       295        280  

Investment banking and debt placement fees

     86       83       249        217  

Service charges on deposit accounts

     73       74       213        212  

Operating lease income and other leasing gains

     43       66       85        176  

Corporate services income

     44       39       132        127  

Cards and payments income

     43       37       122        97  

Corporate-owned life insurance income

     26       26       87        86  

Consumer mortgage income

     3       11       16        29  

Net gains (losses) from principal investing

     17       11       32        70  

Other income (a)

     24       77       82        123  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest income

     459       518       1,313        1,417  

NONINTEREST EXPENSE

         

Personnel

     414       399       1,211        1,148  

Net occupancy

     66       65       202        191  

Computer processing

     38       42       116        126  

Business services and professional fees

     37       48       109        136  

Equipment

     25       27       78        80  

Operating lease expense

     14       13       37        45  

Marketing

     16       18       33        48  

FDIC assessment

     7       7       23        23  

Intangible asset amortization on credit cards

     8       6       23        6  

Other intangible asset amortization

     4       3       11        5  

Provision (credit) for losses on lending-related commitments

     3       (8     11        (2

OREO expense, net

     1       1       5        14  

Other expense

     83       91       249        264  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest expense

     716       712       2,108        2,084  
  

 

 

   

 

 

   

 

 

    

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     293       269       836        824  

Income taxes

     59       51       201        178  
  

 

 

   

 

 

   

 

 

    

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     234       218       635        646  

Income (loss) from discontinued operations, net of taxes of $21, $1, $29, and $9 (see Note 11)

     37       3       45        16  
  

 

 

   

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS)

     271       221       680        662  

Less: Net income (loss) attributable to noncontrolling interests

     (1     2       —           7  
  

 

 

   

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 272     $ 219     $ 680      $ 655  
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 229     $ 211     $ 618      $ 623  

Net income (loss) attributable to Key common shareholders

     266       214       663        639  

Per common share:

         

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

   $ .25     $ .23     $ .68      $ .66  

Income (loss) from discontinued operations, net of taxes

     .04       —          .05        .02  

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

     .29       .23       .73        .68  

Per common share — assuming dilution:

         

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

   $ .25     $ .22     $ .67      $ .66  

Income (loss) from discontinued operations, net of taxes

     .04       —          .05        .02  

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

     .29       .23       .72        .67  

Cash dividends declared per common share

   $ .055     $ .05     $ .16      $ .13  

Weighted-average common shares outstanding (000)

     901,904       936,223       911,918        943,378  

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

     928,854       940,764       917,579        947,582  

 

(a) For the three months ended September 30, 2013 and 2012, we did not have any impairment losses related to securities.
(b) EPS may not foot due to rounding.
(c) Assumes conversion of stock options and/or Series A Preferred Stock, as applicable.

See Notes to Consolidated Financial Statements (Unaudited).

 

6


Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  

in millions

   2013     2012     2013     2012  

Net income (loss)

   $ 271     $ 221     $ 680     $ 662  

Other comprehensive income (loss), net of tax:

        

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($48), ($17), ($135) and ($48)

     (81     (28     (228     (81

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $6, $12, ($17) and $17

     10       20       (29     28  

Foreign currency translation adjustments, net of income taxes

     2       9       (12     5  

Net pension and postretirement benefit costs, net of income taxes

     18       2       24       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (51     3       (245     (41
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     220       224       435       621  

Less: Comprehensive income attributable to noncontrolling interests

     (1     2       —          7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Key

   $ 221     $ 222     $ 435     $ 614  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

Consolidated Statements of Changes in Equity (Unaudited)

 

    Key Shareholders’ Equity        

dollars in millions, except per share amounts

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

at Cost
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
 

BALANCE AT DECEMBER 31, 2011

    2,905       953,008     $ 291     $ 1,017     $ 4,194     $ 6,246     $ (1,815   $ (28   $ 17  

Net income (loss)

              655           7  

Other comprehensive income (loss):

                 

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($48)

                  (81  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $17

                  28    

Foreign currency translation adjustments, net of income taxes

                  5    

Net pension and postretirement benefit costs, net of income taxes

                  7    

Deferred compensation

            10          

Cash dividends declared on common shares ($.13 per share)

              (123      

Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share)

              (16      

Common shares repurchased

      (20,107             (163    

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

      3,294           (86       110      

Net contribution from (distribution to) noncontrolling interests

                    4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2012

    2,905       936,195     $ 291     $ 1,017     $ 4,118     $ 6,762     $ (1,868   $ (69   $ 28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT DECEMBER 31, 2012

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

Net income (loss)

              680           —     

Other comprehensive income (loss):

                 

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($135)

                  (228  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($17)

                  (29  

Foreign currency translation adjustments, net of income taxes

                  (12  

Net pension and postretirement benefit costs, net of income taxes

                  24    

Deferred compensation

            3          

Cash dividends declared on common shares ($.16 per share)

              (145      

Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share)

              (17      

Common shares repurchased

      (33,940             (375    

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

      5,992           (100       134      

Net contribution from (distribution to) noncontrolling interests

                    (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT SEPTEMBER 30, 2013

    2,905       897,821     $ 291     $ 1,017     $ 4,029     $ 7,431     $ (2,193   $ (369   $ 30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Consolidated Statements of Cash Flows (Unaudited)

 

     Nine months ended September 30,  

in millions

   2013     2012  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 680     $ 662  

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

    

Provision (credit) for loan and lease losses

     111       172  

Provision (credit) for losses on lending-related commitments

     11       (2

Provision (credit) for losses on LIHTC guaranteed funds

     4       —     

Depreciation, amortization and accretion expense, net

     147       162  

Stock-based compensation expense

     27       38  

FDIC (payments) net of FDIC expense

     296       19  

Deferred income taxes (benefit)

     (4     36  

Proceeds from sales of loans held for sale

     3,821       3,737  

Originations of loans held for sale, net of repayments

     (3,779     (3,507

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

     (91     (93

Net losses (gains) from principal investing

     (32     (70

Net losses (gains) and writedown on OREO

     5       12  

Net losses (gains) on leased equipment

     (36     (109

Net losses (gains) on sales of fixed assets

     9       —     

Net decrease (increase) in trading account assets

     (201     (40

Other operating activities, net

     52       (369
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     1,020       648  

INVESTING ACTIVITIES

    

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

     817       866  

Proceeds from sale of Victory

     72       —     

Gain on sale of Victory

     (92     —     

Net decrease (increase) in short-term investments

     405       1,311  

Purchases of securities available for sale

     (4,628     (232

Proceeds from sales of securities available for sale

     29       1  

Proceeds from prepayments and maturities of securities available for sale

     3,725       4,159  

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

     667       437  

Purchases of held-to-maturity securities

     (1,572     (2,481

Purchases of other investments

     (30     (48

Proceeds from sales of other investments

     39       17  

Proceeds from prepayments and maturities of other investments

     82       134  

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

     (1,077     (1,342

Proceeds from sales of portfolio loans

     150       207  

Purchases of premises and equipment

     (60     (101

Proceeds from sales of premises and equipment

     8       1  

Proceeds from sales of other real estate owned

     19       55  
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (1,446     2,984  

FINANCING ACTIVITIES

    

Net increase (decrease) in deposits, excluding acquisitions

     1,605       184  

Net increase (decrease) in short-term borrowings

     26       86  

Net proceeds from issuance of long-term debt

     1,013       59  

Payments on long-term debt

     (1,540     (3,381

Repurchase of Common Shares

     (375     (163

Net proceeds from reissuance of Common Shares

     22       2  

Tax benefits in excess of reorganized compensation costs for share-based payment

     1       —     

Cash dividends paid

     (162     (139
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     590       (3,352
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     164       280  

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

     584       693  
  

 

 

   

 

 

 

CASH AND DUE FROM BANKS AT END OF PERIOD

   $ 748     $ 973  
  

 

 

   

 

 

 

Additional disclosures relative to cash flows:

    

Interest paid

   $ 271     $ 302  

Income taxes paid (refunded)

     114       39  

Noncash items:

    

Assets acquired

   $ 41     $ 1,194  

Liabilities assumed

     —          2,059  

Loans transferred to portfolio from held for sale

     2       41  

Loans transferred to held for sale from portfolio

     53       80  

Loans transferred to other real estate owned

     16       32  

See Notes to Consolidated Financial Statements (Unaudited).

 

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Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

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

References to our “2012 Form 10-K” refer to our Form 10-K for the year ended December 31, 2012, 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).

 

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ABO: Accumulated benefit obligation.   LIHTC: Low-income housing tax credit.
AICPA: American Institute of Certified Public Accountants.   LILO: Lease in, lease out transaction.
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.
BHCA: Bank Holding Company Act of 1956, as amended.   NPR: Notice of proposed rulemaking.
BHCs: Bank holding companies.   NYSE: New York Stock Exchange.
CCAR: Comprehensive Capital Analysis and Review.   OCC: Office of the Comptroller of the Currency.
CFPB: Bureau of Consumer Financial Protection.   OCI: Other comprehensive income (loss).
CFTC: Commodities Futures Trading Commission.   OFR: Office of Financial Research of the U.S. Department of
CMBS: Commercial mortgage-backed securities.   Treasury.
CMO: Collateralized mortgage obligation.   OREO: Other real estate owned.
Common Shares: Common Shares, $1 par value.   OTTI: Other-than-temporary impairment.
CPP: Capital Purchase Program of the U.S. Treasury.   QSPE: Qualifying special purpose entity.
DIF: Deposit Insurance Fund of the FDIC.   PBO: Projected benefit obligation.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and   PCCR: Purchased credit card relationship.
Consumer Protection Act of 2010.   PCI: Purchased credit impaired.
ERISA: Employee Retirement Income Security Act of 1974.   S&P: Standard and Poor’s Ratings Services, a Division of The
ERM: Enterprise risk management.   McGraw-Hill Companies, Inc.
EVE: Economic value of equity.   SCAP: Supervisory Capital Assessment Program administered
FASB: Financial Accounting Standards Board.   by the Federal Reserve.
FDIA: Federal Deposit Insurance Act, as amended.   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 companies, including
FHFA: Federal Housing Finance Agency.   BHCs with total consolidated assets of at least $50 billion
FHLMC: Federal Home Loan Mortgage Corporation.   and nonbank financial companies designated by FSOC for
FINRA: Financial Industry Regulatory Authority.   supervision by the Federal Reserve.
FNMA: Federal National Mortgage Association.   SILO: Sale in, lease out transaction.
FOMC: Federal Open Market Committee of the Federal Reserve   SPE: Special purpose entity.
Board.   TDR: Troubled debt restructuring.
FSOC: Financial Stability Oversight Council.   TE: Taxable equivalent.
FVA: Fair value of pension plan assets.   U.S. Treasury: United States Department of the Treasury.
GAAP: U.S. generally accepted accounting principles.   VaR: Value at risk.
GNMA: Government National Mortgage Association.   VEBA: Voluntary Employee Beneficiary Association.
HUD: U.S. Department of Housing and Urban Development.   Victory: Victory Capital Management and/or
IRS: Internal Revenue Service.   Victory Capital Advisors.
ISDA: International Swaps and Derivatives Association.   VIE: Variable interest entity.
KAHC: Key Affordable Housing Corporation.   XBRL: eXtensible Business Reporting Language.
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.

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.

 

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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 (primarily principal investments) 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 2012 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 2013

Benchmark interest rate. In July 2013, the FASB issued new accounting guidance allowing entities to designate the Federal Funds Effective Swap Rate (which is the Overnight Index Swap rate, or OIS rate, in the U.S.) as a benchmark interest rate, in addition to U.S. Treasury and LIBOR rates, for hedge accounting purposes. This new accounting guidance was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 (effective July 17, 2013, for us). Note 7 (“Derivatives and Hedging Activities”) provides information regarding our use of derivatives and hedge accounting.

Reporting of amounts reclassified out of AOCI. In February 2013, the FASB issued new accounting guidance that requires reclassifications of amounts out of AOCI to be reported in a new format. It does not require the reporting of any information that is not currently required to be disclosed under existing GAAP. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2012 (effective January 1, 2013, for us). The disclosures required by this accounting guidance are provided in Note 16 (“Accumulated Other Comprehensive Income”).

Testing indefinite-lived intangible assets for impairment. In July 2012, the FASB issued new accounting guidance that simplifies how an entity tests indefinite-lived intangible assets other than goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether further testing for impairment of indefinite-lived intangible assets other than goodwill is required. This accounting guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Offsetting disclosures. In December 2011, the FASB issued new accounting guidance that requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to understand the effect of those arrangements on the entity’s financial position. In January 2013, the FASB issued new accounting guidance that clarified the scope of the guidance to include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing transactions. This accounting guidance was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (effective January 1, 2013, for us). Information about our offsetting and related arrangements is provided in Note 12 (“Securities Financing Activities”).

Accounting Guidance Pending Adoption at September 30, 2013

Presentation of unrecognized tax benefits. In July 2013, the FASB issued new accounting guidance that requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if

 

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certain criteria are met. This accounting guidance will be applied prospectively to unrecognized tax benefits that exist at the effective date. It will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (effective January 1, 2014, for us). Early adoption and/or retrospective application are permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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 will be effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013 (effective January 1, 2014, for us). Early application is prohibited. We are currently evaluating the impact this accounting guidance may have on our financial condition or results of operations.

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 will be 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. Early adoption is permitted.

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

 

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2. Earnings Per Common Share

Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each common share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each common share outstanding during the reporting periods adjusted to include the effects of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for the conversion of our convertible Series A Preferred Stock, stock options, and other stock-based awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. For diluted earnings per share, net income available to common shareholders can be affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the amount of preferred dividends associated with our Series A Preferred Stock. For the three months ended September 30, 2013, weighted-average common shares and potential common shares outstanding included 20.6 million shares associated with the conversion of our Series A Preferred Stock and 6.4 million shares associated with common share options and other stock awards.

Our basic and diluted earnings per Common Share are calculated as follows:

 

    Three months ended
September 30,
    Nine months ended
September 30,
 

dollars in millions, except per share amounts

  2013     2012     2013     2012  

EARNINGS

       

Income (loss) from continuing operations

  $ 234     $ 218     $ 635     $ 646  

Less: Net income (loss) attributable to noncontrolling interests

    (1     2       —          7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Key

    235       216       635       639  

Less: Dividends on Series A Preferred Stock

    6       5       17       16  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    229       211       618       623  

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

    37       3       45       16  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Key common shareholders

  $ 266     $ 214     $ 663     $ 639  
 

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED-AVERAGE COMMON SHARES

       

Weighted-average common shares outstanding (000)

    901,904       936,223       911,918       943,378  

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

    26,950       4,541       5,661       4,204  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    928,854       940,764       917,579       947,582  
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE

       

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

  $ .25     $ .23     $ .68     $ .66  

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

    .04       —          .05       .02  

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

    .29       .23       .73       .68  

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

  $ .25     $ .22     $ .67     $ .66  

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

    .04       —          .05       .02  

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

    .29       .23       .72       .67  

 

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

 

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3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:

 

in millions

   September 30,
2013
     December 31,
2012
     September 30,
2012
 

Commercial, financial and agricultural (a)

   $ 24,317      $ 23,242      $ 21,979  

Commercial real estate:

        

Commercial mortgage

     7,544        7,720        7,529  

Construction

     1,058        1,003        1,067  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8,602        8,723        8,596  

Commercial lease financing

     4,550        4,915        4,960  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     37,469        36,880        35,535  

Residential — prime loans:

        

Real estate — residential mortgage

     2,198        2,174        2,138  

Home equity:

        

Key Community Bank

     10,285        9,816        9,768  

Other

     353        423        409  (d) 
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     10,638        10,239        10,177  
  

 

 

    

 

 

    

 

 

 

Total residential — prime loans

     12,836        12,413        12,315  

Consumer other — Key Community Bank

     1,440        1,349        1,313  

Credit cards

     698        729        710  

Consumer other:

        

Marine

     1,083        1,358        1,448  

Other

     71        93        98  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     1,154        1,451        1,546  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     16,128        15,942        15,884  
  

 

 

    

 

 

    

 

 

 

Total loans (b) (c)

   $ 53,597      $ 52,822      $ 51,419  
  

 

 

    

 

 

    

 

 

 

 

(a) September 30, 2013, December 31, 2012, and September 30, 2012 loan balances include $96 million, $90 million, and $88 million of commercial credit card balances, respectively.
(b) Excluded at September 30, 2013, December 31, 2012, and September 30, 2012, are loans in the amount of $4.7 billion, $5.2 billion, and $5.3 billion, respectively, related to the discontinued operations of the education lending business.
(c) September 30, 2013 loan balance includes purchased loans of $176 million of which $18 million were PCI loans. December 31, 2012 loan balance includes purchased loans of $217 million of which $23 million were PCI loans. September 30, 2012 loan balance includes purchased loans of $231 million of which $25 million were PCI loans.
(d) This loan category was impacted by $45 million in net loan charge-offs taken during the third quarter of 2012 related to updated regulatory guidance.

Our loans held for sale are summarized as follows:

 

     September 30,      December 31,      September 30,  

in millions

   2013      2012      2012  

Commercial, financial and agricultural

   $ 68      $ 29      $ 13  

Real estate — commercial mortgage

     608        477        484  

Real estate — construction

     —           —           10  

Commercial lease financing

     —           8        4  

Real estate — residential mortgage

     23        85        117  
  

 

 

    

 

 

    

 

 

 

Total loans held for sale

   $ 699      $ 599      $ 628  
  

 

 

    

 

 

    

 

 

 

 

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

 

in millions

   September 30,
2013
    December 31,
2012
    September 30,
2012
 

Balance at beginning of the period

   $ 402     $ 628     $ 656  

New originations

     1,467       1,686       1,280  

Transfers from held to maturity, net

     15       38       13  

Loan sales

     (1,181     (1,747     (1,311

Loan draws (payments), net

     (4     (4     (9

Transfers to OREO / valuation adjustments

     —          (2     (1
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 699     $ 599     $ 628  
  

 

 

   

 

 

   

 

 

 

 

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4. Asset Quality

We manage our exposure to credit risk by closely monitoring loan performance trends and general economic conditions. An indicator of potential credit losses is the level of nonperforming assets and past due loans.

Our nonperforming assets and past due loans were as follows:

 

in millions

   September 30,
2013
     December 31,
2012
     September 30,
2012
 

Total nonperforming loans (a), (b)

   $ 541      $ 674      $ 653  

Nonperforming loans held for sale

     13        25        19  

OREO

     15        22        29  

Other nonperforming assets

     10        14        17  
  

 

 

    

 

 

    

 

 

 

Total nonperforming assets

   $ 579      $ 735      $ 718  
  

 

 

    

 

 

    

 

 

 

Nonperforming assets from discontinued operations — education lending (c)

   $ 23      $ 20      $ 22  
  

 

 

    

 

 

    

 

 

 

Restructured loans included in nonperforming loans (a)

   $ 228      $ 249      $ 217  

Restructured loans with an allocated specific allowance (d)

     104        114        78  

Specifically allocated allowance for restructured loans (e)

     46        33        31  
  

 

 

    

 

 

    

 

 

 

Accruing loans past due 90 days or more

   $ 90      $ 78      $ 89  

Accruing loans past due 30 through 89 days

     288        424        354  

 

(a) December 31, 2012 and September 30, 2012 loan balance includes $72 million and $38 million of current, paying as originally agreed, secured loans respectively, that were discharged through Chapter 7 bankruptcy and not formally re-affirmed, as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.
(b) September 30, 2013, December 31, 2012 and September 30, 2012 loan balances exclude $18 million, $23 million and $25 million of PCI loans, respectively.
(c) Includes approximately $11 million, $3 million and $3 million of restructured loans at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.
(d) Included in individually impaired loans allocated a specific allowance.
(e) 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 PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) was $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 September 30, 2013, the outstanding unpaid principal balance and carrying value of all PCI loans was $25 million and $18 million, respectively. Changes in the accretable yield during 2013 included accretion of $1 million and net reclassifications of $1 million, resulting in an ending balance of $5 million at September 30, 2013.

At September 30, 2013, the approximate carrying amount of our commercial nonperforming loans outstanding represented 61% of their original contractual amount, total nonperforming loans outstanding represented 74% of their original contractual amount owed, and nonperforming assets in total were carried at 72% of their original contractual amount.

At September 30, 2013, our twenty largest nonperforming loans totaled $119 million, representing 22% of total loans on nonperforming status from continuing operations. At September 30, 2012, the twenty largest nonperforming loans totaled $202 million, representing 31% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $18 million for the nine months ended September 30, 2013, and $25 million for the year ended December 31, 2012.

 

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The following tables set forth a further breakdown of individually impaired loans as of September 30, 2013, December 31, 2012 and September 30, 2012:

 

September 30, 2013

in millions

   Recorded
Investment (a)
     Unpaid
Principal
Balance (b)
     Specific
Allowance
     Average
Recorded
Investment
 

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 58      $ 116        —         $ 74  

Commercial real estate:

           

Commercial mortgage

     43        80        —           66  

Construction

     41        124        —           45  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     84        204        —           111  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with no related allowance recorded

     142        320        —           185  

Real estate — residential mortgage

     16        16        —           16  

Home equity:

           

Key Community Bank

     69        69        —           69  

Other

     2        2        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     71        71        —           71  

Consumer other:

           

Marine

     3        3        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     3        3        —           3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     90        90        —           90  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     232        410        —           275  

With an allowance recorded:

           

Commercial, financial and agricultural

     50        51      $ 17        36  

Commercial real estate:

           

Commercial mortgage

     3        3        1        4  

Construction

     3        13        —           2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     6        16        1        6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with an allowance recorded

     56        67        18        42  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     20        20        6        20  

Home equity:

           

Key Community Bank

     33        33        10        32  

Other

     11        11        2        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     44        44        12        42  

Consumer other — Key Community Bank

     3        3        —           3  

Credit cards

     6        6        1        5  

Consumer other:

           

Marine

     49        49        10        50  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     50        50        10        51  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     123        123        29        121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     179        190        47        163  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 411      $ 600      $ 47      $ 438  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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December 31, 2012

in millions

   Recorded
Investment (a)
     Unpaid
Principal
Balance (b)
     Specific
Allowance
     Average
Recorded
Investment
 

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 32      $ 64        —         $ 60  

Commercial real estate:

           

Commercial mortgage

     89        142        —           95  

Construction

     48        182        —           39  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     137        324        —           134  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with no related allowance recorded

     169        388        —           194  

Real estate — residential mortgage

     21        21        —           10  

Home equity:

           

Key Community Bank

     65        65        —           33  

Other

     3        3        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     68        68        —           34  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     89        89        —           44  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     258        477        —           238  

With an allowance recorded:

           

Commercial, financial and agricultural

     33        42      $ 12        48  

Commercial real estate:

           

Commercial mortgage

     7        7        1        51  

Construction

     —           —           —           6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     7        7        1        57  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with an allowance recorded

     40        49        13        105  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     17        17        1        8  

Home equity:

           

Key Community Bank

     22        22        11        11  

Other

     9        9        1        5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     31        31        12        16  

Consumer other — Key Community Bank

     2        2        2        1  

Credit cards

     2        2        —           1  

Consumer other:

           

Marine

     60        60        7        30  

Other

     1        1        —           1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     61        61        7        31  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     113        113        22        57  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     153        162        35        162  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 411      $ 639      $ 35      $ 400  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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September 30, 2012

in millions

   Recorded
Investment (a)
     Unpaid
Principal
Balance (b)
     Specific
Allowance
     Average
Recorded
Investment
 

With no related allowance recorded:

           

Commercial, financial and agricultural

   $ 57      $ 118        —        $ 58  

Commercial real estate:

           

Commercial mortgage

     106        182        —          109  

Construction

     42        203        —          47  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     148        385        —          156  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with no related allowance recorded

     205        503        —          214  

Real estate — residential mortgage

     —          —          —          1  

Home equity:

           

Key Community Bank

     45        45        —          23  

Other

     2        2        —          1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     47        47        —          24  

Consumer other — Key Community Bank

     1        1        —          1  

Consumer other:

           

Marine

     4        4        —          2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     4        4        —          2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     52        52        —          28  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

     257        555        —          242  

With an allowance recorded:

           

Commercial, financial and agricultural

     35        45      $ 12        39  

Commercial real estate:

           

Commercial mortgage

     31        32        7        44  

Construction

     —          —          —          2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     31        32        7        46  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans with an allowance recorded

     66        77        19        85  
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

     18        18        1        17  

Home equity:

           

Key Community Bank

     20        20        10        16  

Other

     8        8        1        7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity loans

     28        28        11        23  

Consumer other — Key Community Bank

     2        2        1        2  

Consumer other:

           

Marine

     56        56        7        53  

Other

     1        1        —          1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer other

     57        57        7        54  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     105        105        20        96  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

     171        182        39        181  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 428      $ 737      $ 39      $ 423  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The Recorded Investment in impaired loans 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 nine months ended September 30, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $5 million and $4 million, respectively.

At September 30, 2013, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $349 million, compared to $320 million at December 31, 2012, and $323 million at September 30, 2012. We added $143 million in restructured loans during the first nine months of 2013, which were offset by $114 million in payments and charge-offs.

 

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

 

September 30, 2013

dollars in millions

   Number
of loans
     Pre-modification
Outstanding
Recorded
Investment
     Post-modification
Outstanding
Recorded
Investment
 

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     39      $ 96      $ 63  

Commercial real estate:

        

Real estate — commercial mortgage

     14        51        17  

Real estate — construction

     6        19        4  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     20        70        21  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     59        166        84  

Real estate — residential mortgage

     401        24        24  

Home equity:

        

Key Community Bank

     1,677        89        85  

Other

     237        6        6  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,914        95        91  

Consumer other — Key Community Bank

     40        2        1  

Credit cards

     689        5        5  

Consumer other:

        

Marine

     346        42        22  

Other

     46        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     392        43        23  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,436        169        144  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     3,495        335        228  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     68        9        4  

Commercial real estate:

        

Real estate — commercial mortgage

     3        17        12  

Real estate — construction

     1        23        35  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     4        40        47  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     72        49        51  

Real estate — residential mortgage

     118        13        13  

Home equity:

        

Key Community Bank

     162        18        17  

Other

     214        6        6  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     376        24        23  

Consumer other — Key Community Bank

     32        1        1  

Credit cards

     267        2        2  

Consumer other:

        

Marine

     276        32        30  

Other

     56        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     332        33        31  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,125        73        70  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     1,197        122        121  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     4,692      $ 457      $ 349  
  

 

 

    

 

 

    

 

 

 

 

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

 

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A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2012, follows:

 

December 31, 2012

dollars in millions

   Number
of loans
     Pre-modification
Outstanding
Recorded
Investment
     Post-modification
Outstanding
Recorded
Investment
 

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     82      $ 76      $ 39  

Commercial real estate:

        

Real estate — commercial mortgage

     15        62        25  

Real estate — construction

     8        53        33  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     23        115        58  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     105        191        97  

Real estate — residential mortgage

     372        28        28  

Home equity:

        

Key Community Bank

     1,577        87        82  

Other

     322        9        8  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     1,899        96        90  

Consumer other — Key Community Bank

     28        1        1  

Credit cards

     405        3        3  

Consumer other:

        

Marine

     251        30        29  

Other

     34        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     285        31        30  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     2,989        159        152  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     3,094        350        249  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     122        12        6  

Commercial real estate:

        

Real estate — commercial mortgage

     4        22        15  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     4        22        15  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     126        34        21  

Real estate — residential mortgage

     101        10        10  

Home equity:

        

Key Community Bank

     76        5        5  

Other

     84        3        3  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     160        8        8  

Consumer other — Key Community Bank

     16        —          —    

Consumer other:

        

Marine

     117        31        31  

Other

     43        1        1  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     160        32        32  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     437        50        50  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     563        84        71  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     3,657      $ 434      $ 320  
  

 

 

    

 

 

    

 

 

 

 

(a) All TDRs that were restructured prior to January 1, 2012, and are fully accruing.

 

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A further breakdown of TDRs included in nonperforming loans by loan category as of September 30, 2012, follows:

 

September 30, 2012

dollars in millions

   Number
of loans
     Pre-modification
Outstanding
Recorded
Investment
     Post-modification
Outstanding
Recorded
Investment
 

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     91      $ 107      $ 54  

Commercial real estate:

        

Real estate — commercial mortgage

     18        47        29  

Real estate — construction

     8        53        30  
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     26        100        59  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     117        207        113  

Real estate — residential mortgage

     70        7        7  

Home equity:

        

Key Community Bank

     1,804        89        58  

Other

     486        11        7  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     2,290        100        65  

Consumer other — Key Community Bank

     125        2        2  

Consumer other:

        

Marine

     491        33        28  

Other

     91        2        2  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     582        35        30  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     3,067        144        104  
  

 

 

    

 

 

    

 

 

 

Total nonperforming TDRs

     3,184        351        217  

Prior-year accruing (a)

        

Commercial, financial and agricultural

     152        15        7  

Commercial real estate:

        

Real estate — commercial mortgage

     7        71        45  

Real estate — construction

     1        15        —    
  

 

 

    

 

 

    

 

 

 

Total commercial real estate loans

     8        86        45  
  

 

 

    

 

 

    

 

 

 

Total commercial loans

     160        101        52  

Real estate — residential mortgage

     108        11        11  

Home equity:

        

Key Community Bank

     86        6        6  

Other

     95        3        3  
  

 

 

    

 

 

    

 

 

 

Total home equity loans

     181        9        9  

Consumer other — Key Community Bank

     20        —          —    

Consumer other:

        

Marine

     126        32        32  

Other

     51        2        2  
  

 

 

    

 

 

    

 

 

 

Total consumer other

     177        34        34  
  

 

 

    

 

 

    

 

 

 

Total consumer loans

     486        54        54  
  

 

 

    

 

 

    

 

 

 

Total prior-year accruing TDRs

     646        155        106  
  

 

 

    

 

 

    

 

 

 

Total TDRs

     3,830      $ 506      $ 323  
  

 

 

    

 

 

    

 

 

 

 

(a) All TDRs that were restructured prior to January 1, 2012, and are fully accruing.

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession to the borrower without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are evaluated for impairment individually to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. The financial effects of TDRs are reflected in the components that make up the allowance for loan and lease losses in either the amount of a charge-off or the 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. There were 138 consumer loan TDRs with a combined recorded investment of $7 million that have experienced payment defaults during the three months ended September 30, 2013 compared to 127 consumer TDRs with a combined recorded investment of $5 million during the three months ended June 30, 2013 from modifications resulting in TDR status during 2012. There were no significant payment defaults during the first nine months of 2013 arising from commercial loans that were designated as TDRs during 2012.

 

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Table of Contents

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 our client’s financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal and other modifications. Other loan term modifications for consumer TDRs include concessions determined to have been made as defined in updated regulatory guidance issued in the third quarter of 2012.

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

 

dollars in millions

   September 30,
2013
     December 31,
2012
     September 30,
2012
 

Commercial loans:

        

Interest rate reduction

   $ 104      $ 104      $ 145  

Forgiveness of principal

     5        7        7  

Other modification of loan terms

     26        7        14  
  

 

 

    

 

 

    

 

 

 

Total

   $ 135      $ 118      $ 166  
  

 

 

    

 

 

    

 

 

 

Consumer loans:

        

Interest rate reduction

   $ 110      $ 122      $ 92  

Forgiveness of principal

     5        6        7  

Other modification of loan terms

     99        74        58  
  

 

 

    

 

 

    

 

 

 

Total

   $ 214      $ 202      $ 157  
  

 

 

    

 

 

    

 

 

 

Total commercial and consumer TDRs (a)

   $ 349      $ 320      $ 323  

Total loans

     53,597        52,822        51,419  

 

(a) Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $26 million, $32 million, and $47 million at September 30, 2013, December 31, 2012, and September 30, 2012, 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” on page 120 of our 2012 Form 10-K. Pursuant to regulatory guidance issued in January 2012, the above-mentioned policy for nonperforming loans was revised effective for the second quarter of 2012. Beginning in the second quarter of 2012, any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. This policy was implemented prospectively, and, therefore, prior periods were not restated or represented. As of September 30, 2013, in order to be consistent with other unsecured product treatment, the credit card loans nonaccrual policy was revised from 90 day past due status to placement on nonaccrual (and charge off) at 180 days past due.

At September 30, 2013, approximately $52.7 billion, or 98.3%, of our total loans are current. At September 30, 2013, total past due loans and nonperforming loans of $919 million represent approximately 1.7% of total loans.

 

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Table of Contents

The following aging analysis as of September 30, 2013, December 31, 2012, and September 30, 2012, of past due and current loans provides further information regarding Key’s credit exposure.

 

September 30, 2013

in millions

    Current       30-59
  Days Past  
Due
    60-89
  Days Past  
Due
    90 and
Greater
  Days Past  
Due
      Nonperforming  
Loans
    Total Past
Due and
  Nonperforming  
Loans
      Purchased  
Credit
Impaired
    Total
  Loans  
 

LOAN TYPE

               

Commercial, financial and agricultural

  $ 24,161     $ 33     $ 9     $ 12     $ 102     $ 156       —       $ 24,317  

Commercial real estate:

               

Commercial mortgage

    7,429       22       2       31       58       113     $ 2       7,544  

Construction

    1,038       3       —         —         17       20       —         1,058  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate loans

    8,467       25       2       31       75       133       2       8,602  

Commercial lease financing

    4,472       41       7       8       22       78       —         4,550  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

  $ 37,100     $ 99     $ 18     $ 51     $ 199     $ 367     $ 2     $ 37,469  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate — residential mortgage

  $ 2,045     $ 22     $ 9     $ 10     $ 98     $ 139     $ 14     $ 2,198  

Home equity:

               

Key Community Bank

    9,994       50       29       12       198       289       2       10,285  

Other

    327       8       3       2       13       26       —         353  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total home equity loans

    10,321       58       32       14       211       315       2       10,638  

Consumer other — Key Community Bank

    1,419       8       5       6       2       21       —         1,440  

Credit cards

    675       7       4       8       4       23       —         698  

Consumer other:

               

Marine

    1,034       17       6       1       25       49       —         1,083  

Other

    66       2       1       —         2       5       —         71  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 </