XNYS:KEY KeyCorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              To             

Commission File Number 1-11302

 

LOGO

                KeyCorp                 

(Exact name of registrant as specified in its charter)

 

                                 Ohio                                                   34-6542451                 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

    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  þ    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  þ    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   þ    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  þ                            

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    

                  953,136,969 Shares                

(Title of class)

  (Outstanding at April 30, 2012)


Table of Contents

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

         Page Number  

Item 1.

  Financial Statements   
 

Consolidated Balance Sheets —
March 31, 2012 (Unaudited), December 31, 2011, and
March 31, 2011 (Unaudited)

     5   
 

Consolidated Statements of Income (Unaudited) —
Three months ended March 31, 2012 and 2011

     6   
 

Consolidated Statements of Comprehensive Income (Unaudited) —
Three months ended March 31, 2012 and 2011

     7   
 

Consolidated Statements of Changes in Equity (Unaudited) —
Three months ended March 31, 2012 and 2011

     8   
 

Consolidated Statements of Cash Flows (Unaudited) —
Three months ended March 31, 2012 and 2011

     9   
 

Notes to Consolidated Financial Statements (Unaudited)

     10   
 

Note 1. Basis of Presentation

     10   
 

Note 2. Earnings Per Common Share

     13   
 

Note 3. Loans and Loans Held for Sale

     14   
 

Note 4. Asset Quality

     15   
 

Note 5. Fair Value Measurements

     26   
 

Note 6. Securities

     39   
 

Note 7. Derivatives and Hedging Activities

     43   
 

Note 8. Mortgage Servicing Assets

     50   
 

Note 9. Variable Interest Entities

     51   
 

Note 10. Income Taxes

     53   
 

Note 11. Acquisition and Discontinued Operations

     54   
 

Note 12. Contingent Liabilities and Guarantees

     60   
 

Note 13. Capital Securities Issued by Unconsolidated Subsidiaries

     63   
 

Note 14. Employee Benefits

     65   
 

Note 15. Shareholders’ Equity

     66   
 

Note 16. Line of Business Results

     67   
 

Report of Independent Registered Public Accounting Firm

     71   

 

2


Table of Contents

Item 2.

  Management’s Discussion & Analysis of Financial Condition
& Results of Operations
     72   
  Introduction      72   
 

Terminology

     72   
 

Forward-looking statements

     74   
 

Economic overview

     75   
 

Long-term financial goals

     75   
 

Strategic developments

     76   
 

Demographics

     76   
 

Supervision and regulation

     78   
 

Regulatory reform developments

     78   
 

Stress Testing

     78   
 

Interchange fees

     78   
 

Enhanced prudential standards and early remediation requirements

     78   
 

Highlights of Our Performance

     78   
 

Results of Operations

     81   
 

Net interest income

     81   
 

Noninterest income

     85   
 

Trust and investment services income

     86   
 

Operating lease income

     86   
 

Investment banking and capital markets income (loss)

     86   
 

Other income

     87   
 

Noninterest expense

     87   
 

Personnel

     88   
 

Operating lease expense

     88   
 

FDIC Assessment

     88   
 

Other Expense

     88   
 

Income taxes

     88   
 

Line of Business Results

     89   
 

Key Community Bank summary of operations

     89   
 

Key Corporate Bank summary of operations

     90   
 

Other Segments

     91   
 

Financial Condition

     92   
 

Loans and loans held for sale

     92   
 

Commercial loan portfolio

     92   
 

Commercial, financial and agricultural

     92   
 

Commercial real estate loans

     92   
 

Commercial lease financing

     93   
 

Commercial loan modification and restructuring

     93   
 

Extensions

     95   
 

Guarantors

     95   
 

Consumer loan portfolio

     96   
 

Loans held for sale

     96   
 

Loan sales

     96   
 

Securities

     97   
 

Securities available-for-sale

     98   
 

Held-to-maturity securities

     99   
 

Other investments

     100   
 

Deposits and other sources of funds

     100   
 

Capital

     101   
 

Comprehensive capital assessment review and capital actions

     101   
 

Repurchase of TARP CPP preferred stock, warrant and completion of equity and debt offerings

     101   

 

3


Table of Contents
 

Dividends

     102   
 

Common shares outstanding

     102   
 

Capital adequacy

     102   
 

Basel III

     104   
 

Risk Management

     106   
 

Overview

     106   
 

Market risk management

     107   
 

Interest rate risk management

     107   
 

Net interest income simulation analysis

     107   
 

Economic value of equity modeling

     108   
 

Management of interest rate exposure

     109   
 

Derivatives not designated in hedge relationships

     109   
 

Liquidity risk management

     109   
 

Governance structure

     110   
 

Factors affecting liquidity

     110   
 

Managing liquidity risk

     110   
 

Long-term liquidity strategy

     111   
 

Sources of liquidity

     111   
 

Liquidity programs

     111   
 

Liquidity for KeyCorp

     111   
 

Our liquidity position and recent activity

     112   
 

Credit risk management

     112   
 

Credit policy, approval and evaluation

     112   
 

Allowance for loan and lease losses

     113   
 

Net loan charge-offs

     116   
 

Nonperforming assets

     118   
 

Operational risk management

     121   
 

Critical Accounting Policies and Estimates

     121   
 

European Sovereign Debt Exposure

     123   

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

     124   

Item 4.

 

Controls and Procedures

     124   
 

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     124   

Item 1A.

 

Risk Factors

     124   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     125   

Item 6.

 

Exhibits

     125   
 

Signature

     126   
 

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 which are defined in Note 1 (“Basis of Presentation”), which 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   

March 31,  

2012  

     December 31,  
2011  
    

March 31,  

2011  

 
     (Unaudited)               (Unaudited)    

ASSETS

        

Cash and due from banks

    $ 416         $ 694         $ 540    

Short-term investments

     3,605          3,519          3,705    

Trading account assets

     614          623          1,041    

Securities available for sale

     14,633          16,012          19,448    

Held-to-maturity securities (fair value: $3,052, $2,133 and $19)

     3,019          2,109          19    

Other investments

     1,188          1,163          1,402    

Loans, net of unearned income of $1,282, $1,388 and $1,498

     49,226          49,575          48,552    

Less: Allowance for loan and lease losses

     944          1,004          1,372    

Net loans

     48,282          48,571          47,180    

Loans held for sale

     511          728          426    

Premises and equipment

     937          944          906    

Operating lease assets

     335          350          491    

Goodwill

     917          917          917    

Other intangible assets

     15          17          20    

Corporate-owned life insurance

     3,270          3,256          3,187    

Derivative assets

     830          945          1,005    

Accrued income and other assets (including $87 of consolidated LIHTC guaranteed funds VIEs, see Note 9)(a)

     3,091          3,077          3,758    

Discontinued assets (including $2,747 of consolidated education loan securitization trust VIEs (see Note 9) and $74 of loans in portfolio at fair value)(a)

     5,768          5,860          6,393    

Total assets

    $ 87,431         $ 88,785         $ 90,438    
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Deposits in domestic offices:

        

NOW and money market deposit accounts

    $ 29,124         $ 27,954         $ 26,177    

Savings deposits

     2,075          1,962          1,964    

Certificates of deposit ($100,000 or more)

     3,984          4,111          5,314    

Other time deposits

     5,848          6,243          7,597    

Total interest-bearing

     41,031          40,270          41,052    

Noninterest-bearing

     19,606          21,098          16,495    

Deposits in foreign office — interest-bearing

     857          588          3,263    

Total deposits

     61,494          61,956          60,810    

Federal funds purchased and securities sold under repurchase agreements

     1,846          1,711          2,232    

Bank notes and other short-term borrowings

     324          337          685    

Derivative liabilities

     754          1,026          1,106    

Accrued expense and other liabilities

     1,450          1,763          1,931    

Long-term debt

     8,898          9,520          11,048    

Discontinued liabilities (including $2,542 of consolidated education loan securitization trust VIEs at fair value, see Note 9)(a)

     2,549          2,550          2,929    

Total liabilities

     77,315          78,863          80,741    

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    

Common stock warrant

     —           —           87    

Capital surplus

     4,116          4,194          4,167    

Retained earnings

     6,411          6,246          5,721    

Treasury stock, at cost (60,868,267, 63,962,113 and 63,043,642)

     (1,717)          (1,815)          (1,823)    

Accumulated other comprehensive income (loss)

     (19)          (28)          (35)    

Key shareholders’ equity

     10,099          9,905          9,425    

Noncontrolling interests

     17          17          272    

Total equity

     10,116          9,922          9,697    

Total liabilities and equity

    $ 87,431         $ 88,785         $ 90,438    
  

 

 

    

 

 

    

 

 

 
                            

 

(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 March 31,    
dollars in millions, except per share amounts    2012        2011    

INTEREST INCOME

     

Loans

     $ 536          $ 570    

Loans held for sale

     5          4    

Securities available for sale

     116          166    

Held-to-maturity securities

     12          —     

Trading account assets

     6          7    

Short-term investments

     1          1    

Other investments

     8          12    

Total interest income

     684          760    

INTEREST EXPENSE

     

Deposits

     77          110    

Federal funds purchased and securities sold under repurchase agreements

     1          1    

Bank notes and other short-term borrowings

     2          3    

Long-term debt

     51          49    

Total interest expense

     131          163    

NET INTEREST INCOME

     553          597    

Provision (credit) for loan and lease losses

     42          (40)    

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

     511          637    

NONINTEREST INCOME

     

Trust and investment services income

     109          110    

Service charges on deposit accounts

     68          68    

Operating lease income

     22          35    

Letter of credit and loan fees

     54          55    

Corporate-owned life insurance income

     30          27    

Net securities gains (losses)(a)

     —           (1)    

Electronic banking fees

     17          30    

Gains on leased equipment

     27          4    

Insurance income

     12          15    

Net gains (losses) from loan sales

     22          19    

Net gains (losses) from principal investing

     35          35    

Investment banking and capital markets income (loss)

     43          43    

Other income

     33          17    

Total noninterest income

     472          457    

NONINTEREST EXPENSE

     

Personnel

     385          371    

Net occupancy

     64          65    

Operating lease expense

     17          28    

Computer processing

     41          42    

Business services and professional fees

     38          38    

FDIC assessment

     8          29    

OREO expense, net

     6          10    

Equipment

     26          26    

Marketing

     13          10    

Provision (credit) for losses on lending-related commitments

     —           (4)    

Other expense

     105          86    

Total noninterest expense

     703          701    

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     280          393    

Income taxes

     75          111    

INCOME (LOSS) FROM CONTINUING OPERATIONS

     205          282    

Income (loss) from discontinued operations, net of taxes of ($3) and ($6) (see Note 11)

     (5)          (11)    

NET INCOME (LOSS)

     200          271    

Less: Net income (loss) attributable to noncontrolling interests

     —           8    

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

     $ 200          $ 263    
  

 

 

    

 

 

 

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

     $ 199          $ 184    

Net income (loss) attributable to Key common shareholders

     194          173    

Per common share:

     

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

     $ .21          $ .21    

Income (loss) from discontinued operations, net of taxes

     (.01)          (.01)    

Net income (loss) attributable to Key common shareholders

     .20          .20    

Per common share — assuming dilution:

     

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

     $ .21          $ .21    

Income (loss) from discontinued operations, net of taxes

     (.01)          (.01)    

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

     .20          .19    

Cash dividends declared per common share

     $ .03          $ .01    

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

     949,342          881,894    

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

     953,971          887,836    

 

(a) For the three months ended March 31, 2012 and 2011, we did not have any impairment losses related to securities.

 

(b) Assumes conversion of stock options and/or Preferred Series A, as applicable.

 

(c) EPS may not foot due to rounding.

See Notes to Consolidated Financial Statements (Unaudited).

 

6


Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three months ended March 31,   
in millions    2012        2011    

Net income (loss)

     $ 200          $ 271    

Other comprehensive income (loss):

     

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($6) and ($12)

     (11)          (20)    

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $7 and ($5)

     12          (8)    

Foreign currency translation adjustments

     6          9    

Net pension and postretirement benefit costs, net of income taxes

     2          1    

Other comprehensive income (loss), net of tax:

     209          253    

Net contribution to (distribution from) noncontrolling interests

     —           15    

Total comprehensive income (loss) attributable to Key

     $ 209          $ 268    
  

 

 

    

 

 

 
                   

See Notes to Consolidated Financial Statements (Unaudited).

 

7


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  
    Common  
Stock  
Warrant  
    Capital  
Surplus  
    Retained  
Earnings  
    Treasury  
Stock, at  
Cost  
    Accumulated  
Other  
Comprehensive  
Income (Loss)  
    Noncontrolling  
Interests  
 

BALANCE AT DECEMBER 31, 2010

    2,930         880,608         $ 2,737         $ 946         $ 87         $ 3,711         $ 5,557         $ (1,904)         $ (17)         $ 257    

Net income (loss)

                263          

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($12)

                    (20)      

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

                    (8)      

Net distribution to noncontrolling interests

                      15    

Foreign currency translation adjustments

                    9      

Net pension and postretirement benefit costs, net of income taxes

                    1      

Deferred compensation

              (5)            

Cash dividends declared on common shares ($.01 per share)

                (9)          

Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)

                (6)          

Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)

                (31)          

Series B Preferred Stock - TARP redemption

    (25)            (2,451)               (49)          

Amortization of discount on Series B Preferred Stock

        4               (4)          

Common shares issuance

      70,621           71           529            

Common shares reissued for stock options and other employee benefit plans

      2,697               (68)           81        

Other

                    1                                                            

BALANCE AT MARCH 31, 2011

    2,905         953,926         $ 291         $ 1,017         $ 87         $ 4,167         $ 5,721         $ (1,823)         $ (35)         $ 272    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                                 

BALANCE AT DECEMBER 31, 2011

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

Net income (loss)

                200          

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($6)

                    (11)      

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $7

                    12      

Foreign currency translation adjustments

                    6      

Net pension and postretirement benefit costs, net of income taxes

                    2      

Deferred compensation

              4            

Cash dividends declared on common shares ($.03 per share)

                (29)          

Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)

                (6)          

Common shares reissued for stock options and other employee benefit plans

            3,094                                 (82)                 98                    

BALANCE AT MARCH 31, 2012

    2,905         956,102         $ 291         $ 1,017         —          $ 4,116         $ 6,411         $ (1,717)         $ (19)         $ 17    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                                 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Consolidated Statements of Cash Flows (Unaudited)

 

     Three months ended March 31,   
in millions    2012        2011    

OPERATING ACTIVITIES

     

Net income (loss)

     $ 200          $ 271    

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

     

Provision (credit) for loan and lease losses

     42          (40)    

Depreciation and amortization expense

     60          74    

FDIC (payments) net of FDIC expense

     7          27    

Deferred income taxes (benefit)

     28          96    

Net losses (gains) and writedown on OREO

     6          10    

Provision (credit) for customer derivative losses

     (1)          (11)    

Net losses (gains) from loan sales

     (22)          (19)    

Net losses (gains) from principal investing

     (35)          (35)    

Provision (credit) for losses on lending-related commitments

     —           (4)    

(Gains) losses on leased equipment

     (27)          (4)    

Net securities losses (gains)

     —           1    

Net decrease (increase) in loans held for sale excluding loan transfers from continuing operations

     198          80    

Net decrease (increase) in trading account assets

     9          (56)    

Other operating activities, net

     (402)          22    

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     63          412    

INVESTING ACTIVITIES

     

Net decrease (increase) in short-term investments

     (86)          (2,361)    

Purchases of securities available for sale

     (2)          (613)    

Proceeds from sales of securities available for sale

     —           1,578    

Proceeds from prepayments and maturities of securities available for sale

     1,364          1,486    

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

     96          —     

Purchases of held-to-maturity securities

     (1,005)          (2)    

Purchases of other investments

     (16)          (45)    

Proceeds from sales of other investments

     2          14    

Proceeds from prepayments and maturities of other investments

     24          21    

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

     202          1,234    

Proceeds from loan sales

     41          75    

Purchases of premises and equipment

     (26)          (30)    

Proceeds from sales of other real estate owned

     12          35    

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     606          1,392    

FINANCING ACTIVITIES

     

Net increase (decrease) in deposits

     (462)          200    

Net increase (decrease) in short-term borrowings

     122          (279)    

Net proceeds from issuance of long-term debt

     —           1,000    

Payments on long-term debt

     (572)          (502)    

Net proceeds from issuance of common stock

     —           600    

Series B Preferred Stock - TARP redemption

     —           (2,500)    

Cash dividends paid

     (35)          (61)    

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (947)          (1,542)    

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     (278)          262    

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

     694          278    

CASH AND DUE FROM BANKS AT END OF PERIOD

     $ 416          $ 540    
  

 

 

    

 

 

 
                   

Additional disclosures relative to cash flows:

     

Interest paid

     $ 101          $ 134    

Income taxes paid (refunded)

     3          (267)    

Noncash items:

     

Loans transferred to portfolio from held for sale

     $ 19          —     

Loans transferred to held for sale from portfolio

     —           $ 39    

Loans transferred to other real estate owned

     15          12    

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 “2011 Annual Report on Form 10-K” refer to our Annual Report on Form 10-K for the year ended December 31, 2011, which 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).

 

ABO: Accumulated benefit obligation.

   Moody’s: Moody’s Investors Service, Inc.

AICPA: American Institute of Certified Public Accountants.

   N/A: Not applicable.

ALCO: Asset/Liability Management Committee.

   NASDAQ: National Association of Securities Dealers

ALLL: Allowance for loan and lease losses.

   Automated Quotation System.

A/LM: Asset/liability management.

   N/M: Not meaningful.

AOCI: Accumulated other comprehensive income (loss).

   NOW: Negotiable Order of Withdrawal.

APBO: Accumulated postretirement benefit obligation.

   NYSE: New York Stock Exchange.

Austin: Austin Capital Management, Ltd.

   OCI: Other comprehensive income (loss).

BHCs: Bank holding companies.

   OREO: Other real estate owned.

CCAR: Comprehensive Capital Analysis and Review.

   OTTI: Other-than-temporary impairment.

CMO: Collateralized mortgage obligation.

   QSPE: Qualifying special purpose entity.

Common Shares: Common Shares, $1 par value.

   PBO: Projected Benefit Obligation.

CPP: Capital Purchase Program of the U.S. Treasury.

   S&P: Standard and Poor’s Ratings Services, a Division of The

DIF: Deposit Insurance Fund.

   McGraw-Hill Companies, Inc.

Dodd-Frank Act: Dodd-Frank Wall Street Reform and

   SCAP: Supervisory Capital Assessment Program administered

Consumer Protection Act of 2010.

   by the Federal Reserve.

ERISA: Employee Retirement Income Security Act of 1974.

   SEC: U.S. Securities & Exchange Commission.

ERM: Enterprise risk management.

   Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative

EVE: Economic value of equity.

   Perpetual Convertible Preferred Stock, Series A.

FASB: Financial Accounting Standards Board.

   Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative

FDIC: Federal Deposit Insurance Corporation.

   Perpetual Preferred Stock, Series B issued to the U.S. Treasury

Federal Reserve: Board of Governors of the Federal Reserve

   under the CPP.

System.

   SILO: Sale in, lease out transaction.

FHLMC: Federal Home Loan Mortgage Corporation.

   SPE: Special purpose entity.

FNMA: Federal National Mortgage Association.

   TAG: Transaction Account Guarantee program of the FDIC.

FVA: Fair Value of pension plan assets.

   TARP: Troubled Asset Relief Program.

GAAP: U.S. generally accepted accounting principles.

   TDR: Troubled debt restructuring.

GNMA: Government National Mortgage Association.

   TE: Taxable equivalent.

IRS: Internal Revenue Service.

   TLGP: Temporary Liquidity Guarantee Program of the FDIC.

ISDA: International Swaps and Derivatives Association.

   U.S. Treasury: United States Department of the Treasury.

KAHC: Key Affordable Housing Corporation.

   VAR: Value at risk.

LIBOR: London Interbank Offered Rate.

   VEBA: Voluntary Employee Beneficiary Association.

LIHTC: Low-income housing tax credit.

   VIE: Variable interest entity.

LILO: Lease in, lease out transaction.

   XBRL: eXtensible Business Reporting Language.

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.

 

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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 (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 2011 Annual Report on Form 10-K. See Note 11 (“Acquisitions and Discontinued Operations”) for further information regarding an error correction that was made during the third quarter of 2011.

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 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 2012

Fair value measurement.  In May 2011, the FASB issued accounting guidance that changes the wording used to describe many of the current accounting requirements for measuring fair value and disclosing information about fair value measurements. This accounting guidance clarifies the FASB’s intent about the application of existing fair value measurement requirements. It is effective for the interim and annual periods beginning on or after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Presentation of comprehensive income.  In June 2011, the FASB issued new accounting guidance that requires all nonowner changes in shareholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new accounting guidance does not change any of the components currently recognized in net income or comprehensive income. It is effective for public entities for interim and annual periods beginning after December 15, 2011 (effective January 1, 2012, for us) as well as interim and annual periods thereafter. New consolidated Statements of Comprehensive Income (Unaudited) are now included as part of our financial statements as required by this accounting guidance.

Testing goodwill for impairment.  In September 2011, the FASB issued new accounting guidance that simplifies how an entity will test goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. This accounting guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

 

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Repurchase agreements.  In April 2011, the FASB issued accounting guidance that changed the accounting for repurchase agreements and other similar arrangements by eliminating the collateral maintenance requirement when assessing effective control in these transactions. This change could result in more of these transactions being accounted for as secured borrowings instead of sales. This accounting guidance is effective for new transactions and transactions that are modified on or after the first interim or annual period beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations since we do not account for these types of arrangements as sales.

Accounting Guidance Pending Adoption at March 31, 2012

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. This new accounting guidance will be 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).

 

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2. Earnings Per Common Share

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

 

                 Three months ended  March 31,     
dollars in millions, except per share amounts    2012        2011    

 

 

EARNINGS

     

Income (loss) from continuing operations

     $ 205          $ 282    

Less: Net income (loss) attributable to noncontrolling interests

     —           8    

 

 

Income (loss) from continuing operations attributable to Key

     205          274    

Less: Dividends on Series A Preferred Stock

     6          6    

          Cash dividends on Series B Preferred Stock (b)

     —           31    

          Amortization of discount on Series B Preferred Stock(b)

     —           53    

 

 

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

     199          184    

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

     (5)          (11)    

 

 

Net income (loss) attributable to Key common shareholders

     $ 194          $ 173    
  

 

 

    

 

 

 

 

 

WEIGHTED-AVERAGE COMMON SHARES

     

Weighted-average common shares outstanding (000)

     949,342          881,894    

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

     4,629          5,942    

 

 

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

     953,971          887,836    
  

 

 

    

 

 

 

 

 

EARNINGS PER COMMON SHARE

     

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

     $ .21          $ .21    

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

     (.01)          (.01)    

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

     .20          .20    

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

     $ .21          $ .21    

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

     (.01)          (.01)    

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

     .20          .19    

 

 

 

(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. As a result of these decisions, we have accounted for these businesses as discontinued operations. The loss from discontinued operations for the periods ended March 31, 2012 and March 31, 2011, was primarily attributable to fair value adjustments related to the education lending securitization trusts.

 

(b) Includes a $49 million deemed dividend recorded in the first quarter of 2011 related to the repurchase of the $2.5 billion Series B Preferred Stock.

 

(c) 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:

 

     March 31,        December 31,        March 31,    
in millions    2012        2011        2011    

Commercial, financial and agricultural

       $ 19,787            $ 19,378            $ 16,440    

Commercial real estate:

        

Commercial mortgage

     7,807          8,037          8,806    

Construction

     1,273          1,312          1,845    

 

 

Total commercial real estate loans

     9,080          9,349          10,651    

Commercial lease financing

     5,755          6,055          6,207    

 

 

Total commercial loans

     34,622          34,782          33,298    

Residential — prime loans:

        

Real estate — residential mortgage

     1,967          1,946          1,803    

Home equity:

        

Key Community Bank

     9,153          9,229          9,421    

Other

     507          535          627    

 

 

Total home equity loans

     9,660          9,764          10,048    

 

 

Total residential — prime loans

     11,627          11,710          11,851    

Consumer other — Key Community Bank

     1,212          1,192          1,141    

Consumer other:

        

Marine

     1,654          1,766          2,112    

Other

     111          125          150    

 

 

Total consumer other

     1,765          1,891          2,262    

 

 

Total consumer loans

     14,604          14,793          15,254    

 

 

Total loans (a)

       $                     49,226            $                     49,575            $                     48,552    
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) Excludes loans in the amount of $5.7 billion, $5.8 billion and $6.3 billion at March 31, 2012, December 31, 2011, and March 31, 2011, respectively, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:

 

     March 31,        December 31,        March 31,    
in millions    2012        2011        2011    

 

 

Commercial, financial and agricultural

    $ 28         $ 19         $ 19    

Real estate — commercial mortgage

     362          567          287    

Real estate — construction

     15          35          61    

Commercial lease financing

     30          12          7    

Real estate — residential mortgage

     76          95          52    

 

 

Total loans held for sale (a)

    $                     511         $             728         $             426    
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) Excludes loans in the amount of $14 million at March 31, 2011, related to the discontinued operations of the education lending business. There were no loans held for sale in the discontinued operations of the education lending business at March 31, 2012 and December 31, 2011.

Our summary of changes in loans held for sale follows:

 

     March 31,       December 31,      March 31,   
in millions    2012       2011      2011   

 

 

Balance at beginning of the period

    $ 728        $ 479        $ 467   

New originations

     935         1,235         980   

Transfers from held to maturity, net

     19         19         32   

Loan sales

     (1,168)         (932)         (991)   

Loan draws (payments), net

     (3)         (72)         (62)   

Transfers to OREO / valuation adjustments

     —          (1)         —    

 

 

Balance at end of perod

    $                     511        $                     728        $                     426   
  

 

 

    

 

 

    

 

 

 

 

 

 

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4. Asset Quality

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

Our nonperforming assets and past due loans were as follows:

 

     March 31,        December 31,        March 31,    
in millions    2012        2011        2011    

 

 

Total nonperforming loans

    $                     666         $                     727         $ 885    

Nonperforming loans held for sale

     24          46          86    

OREO

     61          65          97    

Other nonperforming assets

     16          21          21    

 

 

Total nonperforming assets

    $ 767         $ 859         $                     1,089    
  

 

 

    

 

 

    

 

 

 

 

 

Restructured loans included in nonperforming loans(a)

    $ 184         $ 191         $ 136    

Restructured loans with an allocated specific allowance (b)

     47          50          29    

Specifically allocated allowance for restructured loans (c)

     18          10          9    

 

 

Accruing loans past due 90 days or more

    $ 169         $ 164         $ 153    

Accruing loans past due 30 through 89 days

     420          441          474    

 

 

 

(a) A loan is “restructured” (i.e., troubled debt restructurings) when the borrower is experiencing financial difficulty and we grant a concession that we would not otherwise have considered to improve the collectability of the loan. Typical concessions include reducing the interest rate, extending the maturity date or reducing the principal balance.

 

(b) Included in individually impaired loans allocated a specific allowance.

 

(c) Included in allowance for individually evaluated impaired loans.

At March 31, 2012, the approximate carrying amount of our commercial nonperforming loans outstanding represented 58% of their original contractual amount, total nonperforming loans outstanding represented 68% of their original contractual amount owed, and nonperforming assets in total were carried at 63% of their original contractual amount.

At March 31, 2012, our twenty largest nonperforming loans totaled $215 million, representing 32% of total loans on nonperforming status from continuing operations. At March 31, 2011, the twenty largest nonperforming loans totaled $284 million representing 32% of total loans on nonperforming status.

The amount by which nonperforming loans and loans held for sale reduced expected interest income was $6 million for the three months ended March 31, 2012, and $31 million for the year ended December 31, 2011.

 

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The following tables set forth a further breakdown of individually impaired loans as of March 31, 2012, December 31, 2011 and March 31, 2011:

 

March 31, 2012    Recorded             Unpaid  
Principal  
         Specific        Average  
Recorded  
 
in millions    Investment       (a)    Balance       (b)    Allowance        Investment    

 

 

With no related allowance recorded:

               

Commercial, financial and agricultural

    $ 77            $ 189             —          $ 83    

Commercial real estate:

               

Commercial mortgage

     113             252             —           106    

Construction

     47             164             —           39    

 

 

Total commercial real estate loans

     160             416             —           145    

 

 

Total commercial loans with no related allowance recorded

     237             605             —           228    

With an allowance recorded:

               

Commercial, financial and agricultural

     49             60            $ 19          55    

Commercial real estate:

               

Commercial mortgage

     69             111             16          83    

Construction

     4             4             3          8    

 

 

Total commercial real estate loans

     73             115             19          91    

 

 

Total commercial loans with an allowance recorded

     122             175             38          146    

 

 

Total

    $                 359            $                 780            $                 38         $                 374    
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

(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, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

 

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

 

December 31, 2011    Recorded            Unpaid  
Principal  
         Specific        Average  
Recorded  
 
in millions    Investment       (a)    Balance       (b)    Allowance        Investment    

 

 

With no related allowance recorded:

               

Commercial, financial and agricultural

    $ 88           $ 195            —          $ 75    

Commercial real estate:

               

Commercial mortgage

     100            240            —           131    

Construction

     30            113            —           98    

 

 

Total commercial real estate loans

     130            353            —           229    

 

 

Total loans with no related allowance recorded

     218            548            —           304    

With an allowance recorded:

               

Commercial, financial and agricultural

     62            70           $ 26          75    

Commercial real estate:

               

Commercial mortgage

     96            115            21          91    

Construction

     12            18            4          29    

 

 

Total commercial real estate loans

     108            133            25          120    

Commercial lease financing

     —             —             —           6    

 

 

Total loans with an allowance recorded

     170            203            51          201    

 

 

Total

    $                 388           $                 751           $                 51         $                 505    
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

(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, 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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March 31, 2011    Recorded            Unpaid  
Principal  
         Specific        Average  
Recorded  
 
in millions    Investment       (a)    Balance       (b)    Allowance        Investment    

 

 

With no related allowance recorded:

               

Commercial, financial and agricultural

     $ 84            $ 178            —           $ 72    

Commercial real estate:

               

Commercial mortgage

     156            298            —           159    

Construction

     121            408            —           144    

 

 

Total commercial real estate loans

     277            706            —           303    

 

 

Total loans with no related allowance recorded

     361            884            —           375    

With an allowance recorded:

               

Commercial, financial and agricultural

     63            117            $ 25          76    

Commercial real estate:

               

Commercial mortgage

     62            115            13          74    

Construction

     7            11            1          26    

 

 

Total commercial real estate loans

     69            126            14          100    

Commercial lease financing

     —             —             —           6    

 

 

Total loans with an allowance recorded

     132            243            39          182    

 

 

Total

     $                 493            $                 1,127            $                 39          $                 557    
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

(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, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

 

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

For the three months ended March 31, 2012 and 2011, interest income recognized on the outstanding balances of accruing impaired loans totaled $1 million respectively.

At March 31, 2012, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $293 million, compared to $276 million at December 31, 2011 and $242 million at March 31, 2011. We added $56 million in restructured loans during the first three months of 2012, partially offset by $39 million in payments and charge-offs.

 

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A further breakdown of restructured loans (TDRs) included in nonperforming loans by loan category as of March 31, 2012, follows:

 

March 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

     102          $                              105          $                                  64    

Commercial real estate:

        

Real estate — commercial mortgage

     16          102          64    

Real estate — construction

     8          35          19    

 

 

Total commercial real estate loans

     24          137          83    

 

 

Total commercial loans

     126          242          147    

Real estate — residential mortgage

     43          5          5    

Home equity:

        

Key Community Bank

     27          3          3    

Other

     32          1          1    

 

 

Total home equity loans

     59          4          4    

Consumer other — Key Community Bank

     2          —           —     

Consumer other:

        

Marine

     48          28          28    

Other

     6          —           —     

 

 

Total consumer other

     54          28          28    

 

 

Total consumer loans

     158          37          37    

 

 

Total nonperforming TDRs

     284          279          184    

Prior-year accruing(a)

        

Commercial, financial and agricultural

     176          20          11    

Commercial real estate:

        

Real estate — commercial mortgage

     7          75          57    

Real estate — construction

     1          15          2    

 

 

Total commercial real estate loans

     8          90          59    

 

 

Total commercial loans

     184          110          70    

Real estate — residential mortgage

     113          12          12    

Home equity:

        

Key Community Bank

     88          7          7    

Other

     104          3          3    

 

 

Total home equity loans

     192          10          10    

Consumer other — Key Community Bank

     19          —           —     

Consumer other:

        

Marine

     140          15          15    

Other

     51          2          2    

 

 

Total consumer other

     191          17          17    

 

 

Total consumer loans

     515          39          39    

 

 

Total prior-year accruing TDRs

     699          149          109    

 

 

Total TDRs

                 983          $ 428          $ 293    
  

 

 

    

 

 

    

 

 

 

 

 

 

(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 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. Consumer loan TDRs are assigned a loss rate that reflects the current assessment of that category of consumer loans to determine the appropriate allowance level. The financial effects of TDRs are reflected in the components that comprise the allowance for loan and lease losses in either the amount of charge-offs or loan loss provision and appropriately impact the ultimate allowance level.

Commercial and consumer loan TDRs are considered subsequently defaulted at 90 days past due and when they are greater than 60 days past due, respectively, for principal and interest payments. There were no significant commercial or consumer

 

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loans that were designated as TDRs during calendar year 2011, for which there was a payment default during the first three months of 2012.

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. A majority of our concessions granted to borrowers are in the form of interest rate reductions. Other concession types include forgiveness of principal and other modifications of loan terms. Consumer loan concessions include Home Affordable Modification Program (“HAMP”) loans of approximately $3 million as of March 31, 2012. These loan concessions have successfully completed the required trial period under HAMP and as a result have been permanently modified and are included in consumer TDRs.

The following table shows the concession types for our commercial accruing and nonaccruing TDRs.

 

dollars in millions   

March 31,   

2012   

   

December 31,   

2011   

   

March 31,   

2011   

 

 

 

Interest rate reduction

   $ 184        $ 177        $ 165     

Forgiveness of principal

     11          23          10     

Other modification of loan terms

     22          8          7     

 

 

Total

   $                     217        $                     208        $                     182     
  

 

 

   

 

 

   

 

 

 
      

Total commercial and consumer TDRs(a)

   $ 293        $ 276        $ 242     

Total commercial TDRs to total commercial loans

     .63        .60        .55   

Total commercial TDRs to total loans

     .44          .42          .37     

Total commercial loans

   $ 34,622        $ 34,782        $ 33,298     

Total loans

     49,226          49,575          48,552     

 

 

 

(a) Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $24 million, $25 million, and $44 million at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.

Our policies for our commercial and consumer loan portfolios for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” on page 117 of our 2011 Annual Report on Form 10-K.

At March 31, 2012, approximately $48.0 billion, or 97%, of our total loans are current. At March 31, 2012, total past due loans and nonperforming loans of $1.3 billion represent approximately 3% of total loans.

 

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The following aging analysis as of March 31, 2012 and 2011, of past due and current loans provides further information regarding Key’s credit exposure.

 

March 31, 2012

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
    

Total

Loans

 

 

 

LOAN TYPE

                    

Commercial, financial and agricultural

   $         19,559         $             25         $             16         $         19         $         168         $             228         $         19,787     

Commercial real estate:

                    

Commercial mortgage

     7,532           7           11           82           175           275           7,807     

Construction

     1,170           19           7           11           66           103           1,273     

 

 

 Total commercial real estate loans

     8,702           26           18           93           241           378           9,080     

Commercial lease financing

     5,570           126           22           15           22           185           5,755     

 

 

 Total commercial loans

   $ 33,831         $ 177         $ 56         $ 127         $ 431         $ 791         $ 34,622     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 1,852         $ 20         $ 8         $ 5         $ 82         $ 115         $ 1,967     

Home equity:

                    

Key Community Bank

     8,941           53           34           16           109           212           9,153     

Other

     476           9           6           4           12           31           507     

 

 

Total home equity loans

     9,417           62           40           20           121           243           9,660     

Consumer other — Key Community Bank

     1,189           9           4           9           1           23           1,212     

Consumer other:

                    

Marine

     1,576           30           11           7           30           78           1,654     

Other

     106           2           1           1           1           5           111     

 

 

 Total consumer other

     1,682           32           12           8           31           83           1,765     

 

 

 Total consumer loans

   $ 14,140         $ 123         $ 64         $ 42         $ 235         $ 464         $ 14,604     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total loans

   $ 47,971         $ 300         $ 120         $ 169         $ 666         $ 1,255         $ 49,226     

 

 

March 31, 2011

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
    

Total

Loans

 

 

 

LOAN TYPE

                    

Commercial, financial and agricultural

   $ 16,138         $ 46         $ 13         $ 22         $ 221         $ 302         $ 16,440     

Commercial real estate:

                    

Commercial mortgage

     8,459           36           37           29           245           347           8,806     

Construction

     1,623           40           14           22           146           222           1,845     

 

 

 Total commercial real estate loans

     10,082           76           51           51           391           569           10,651     

Commercial lease financing

     6,054           53           21           37           42           153           6,207     

 

 

 Total commercial loans

   $ 32,274         $ 175         $ 85         $ 110         $ 654         $ 1,024         $ 33,298     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

   $ 1,676         $ 22         $ 12         $ 9         $ 84         $ 127         $ 1,803     

Home equity:

                    

Key Community Bank

     9,211           60           34           17           99           210           9,421     

Other

     591           11           7           5           13           36           627     

 

 

Total home equity loans

     9,802           71           41           22           112           246           10,048     

Consumer other — Key Community Bank

     1,115           10           5           8           3           26           1,141     

Consumer other:

                    

Marine

     2,030           34           14           3           31           82           2,112     

Other

     144           3           1           1           1           6           150     

 

 

 Total consumer other

     2,174           37           15           4           32           88           2,262     

 

 

 Total consumer loans

   $ 14,767         $ 140         $ 73         $ 43         $ 231         $ 487         $ 15,254     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total loans

   $ 47,041         $ 315         $ 158         $ 153         $ 885         $ 1,511         $ 48,552     

 

 

The risk characteristic prevalent to 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 assigned loan risk rating grades for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios. This risk rating stratification assists in the determination of the ALLL. Loan grades are assigned at the time of origination, verified by credit risk management and periodically reevaluated thereafter.

 

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Most extensions of credit are subject to loan grading or scoring. 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 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 within 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.

Credit quality indicators for our commercial and consumer loan portfolios based on bond rating, regulatory classification and payment activity as of March 31, 2012 and 2011, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category (a)

 

March 31,                                                                     
in millions                                                                     

 

 
         Commercial, financial and    
agricultural
         RE — Commercial             RE — Construction              Commercial Lease              Total      
RATING (b) (c)    2012         2011         2012         2011        2012         2011         2012         2011         2012         2011     

 

 

AAA — AA

   $ 165         $ 95         $ 3         $ 2         $ 3           —          $ 599         $ 645         $ 770         $ 742     

A

     785           712           62           84           1         $ 5           1,156           1,246           2,004           2,047     

BBB — BB

     16,801           12,646           6,007           6,045           788           801           3,623           3,655           27,219           23,147     

B

     848           1,125           568           954           165           309           236           365           1,817           2,753     

CCC — C

     1,188           1,862           1,167           1,721           316           730           141           296           2,812           4,609     

 

 

Total

   $ 19,787         $ 16,440         $ 7,807         $     8,806         $ 1,273         $ 1,845         $ 5,755         $ 6,207         $     34,622         $     33,298     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(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)
March 31,                                                      
in millions                   

 

                         
     Residential — Prime                                          
GRADE    2012         2011          

 

    

Pass

   $ 11,399         $ 11,624        

Substandard

     228           227        

 

    

Total

   $ 11,627         $ 11,851        
  

 

 

    

 

 

                         

 

                         
Credit Risk Profile Based on Payment Activity (a) (b)                     
March 31,    Consumer — Key
Community Bank
     Consumer — Marine      Consumer —
Other
     Total            
in millions    2012         2011         2012         2011         2012         2011         2012         2011          

 

       

Performing

   $ 1,211         $ 1,138         $ 1,624         $ 2,081          $ 110         $ 149         $ 2,945         $ 3,368        

Nonperforming

     1           3           30           31            1           1           32           35        

 

    

Total

   $ 1,212         $ 1,141         $ 1,654         $ 2,112          $ 111         $ 150         $ 2,977         $ 3,403        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

       

 

(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 117 of our 2011 Annual Report on 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 TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the

 

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probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the carrying amount 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. 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. Consumer loan TDRs are assigned a loss rate that reflects the current assessment of that category of consumer loans to determine the appropriate ALLL level. The ALLL at March 31, 2012 represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

While 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, there have been no changes to the accounting policies or methodology we used 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. Our charge-off policy for most consumer loans is similar but takes effect 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.

At March 31, 2012, the ALLL was $944 million, or 1.92% of loans, compared to $1.4 billion, or 2.83% of loans, at March 31, 2011. At March 31, 2012, the ALLL was 141.74% of nonperforming loans compared to 155.03% at March 31, 2011.

A summary of the allowance for loan and lease losses for the periods indicated is presented in the table below:

 

     Three months ended March 31,  
in millions    2012        2011    

 

 

Balance at beginning of period — continuing operations

     $                 1,004          $                 1,604    

Charge-offs

     (132)           (232)     

Recoveries

     31          39    

 

 

Net loans charged off

     (101)           (193)     

Provision for loan and lease losses from continuing operations

     42          (40)     

Foreign currency translation adjustment

     (1)           1    

 

 

Balance at end of period — continuing operations

     $ 944          $ 1,372    
  

 

 

    

 

 

 

 

 

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

 

in millions    December 31,   
2011   
     Provision              Charge-offs         Recoveries         March 31,   
2012   
 

 

 

Commercial, financial and agricultural

   $             334         $                 (3)        $                 (26)       $                     11         $                 316     

Real estate — commercial mortgage

     272           12          (23)         2           263     

Real estate — construction

     63                   (11)         1           56     

Commercial lease financing

     78           (10)          (4)         4           68     

 

 

Total commercial loans

     747                   (64)         18           703     

Real estate — residential mortgage

     37                   (6)         1           36     

Home equity:

               

Key Community Bank

     103           14          (25)         2           94     

Other

     29                   (8)         1           28     

 

 

Total home equity loans

     132           20          (33)         3           122     

Consumer other — Key Community Bank

     41                   (10)         1           37     

Consumer other:

               

Marine

     46                   (17)         7           45     

Other

     1                   (2)         1           1     

 

 

Total consumer other:

     47           10          (19)         8           46     

 

 

Total consumer loans

     257           39          (68)         13           241     

 

 

Total ALLL — continuing operations

     1,004           41        (a )      (132)         31           944     

Discontinued operations

     104                   (23)         4           90     

 

 

Total ALLL — including discontinued operations

   $ 1,108         $ 46        $ (155)       $ 35         $ 1,034     
  

 

 

    

 

 

     

 

 

    

 

 

    

 

 

 

 

 

 

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

 

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in millions    December 31,   
2010   
     Provision         Charge-offs         Recoveries         March 31,   
2011   
 

Commercial, financial and agricultural

     $ 485           $ (34)        $ (42)         $             10         $ 419     

Real estate — commercial mortgage

     416           13         (46)         3           386     

Real estate — construction

     145                  (35)         5           117     

Commercial lease financing

     175           (32)        (17)         6           132     

Total commercial loans

     1,221           (51)        (140)         24           1,054     

Real estate — residential mortgage

     49           —         (10)         1           40     

Home equity:

             

Key Community Bank

     120           15         (25)         1           111     

Other

     57                  (15)         1           45     

Total home equity loans

     177           17         (40)         2           156     

Consumer other — Key Community Bank

     57                           3         (12)         2           50     

Consumer other:

             

Marine

     89           (2)        (27)         8           68     

Other

     11           (6)        (3)         2           4     

Total consumer other:

     100           (8)        (30)         10           72     

Total consumer loans

     383           12         (92)         15           318     

Total ALLL — continuing operations

     1,604           (39)   (a)      (232)         39           1,372     

Discontinued operations

     114           32         (38)         3           111     

Total ALLL — including discontinued operations

     $         1,718           $ (7)        $             (270)         $ 42           $             1,483     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

 

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

Our ALLL decreased by $428 million, or 31%, since the first quarter of 2011. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably over the past five quarters. Our asset quality metrics have showed continued improvement and, therefore, resulted in favorable risk rating migration and a reduction in our general allowance. Our general allowance encompasses the application of expected loss rates to our existing loans with similar risk characteristics and an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends improved during 2011 and into 2012. We attribute this improvement to a more moderate level of lending activity, more favorable conditions in the capital markets, improvement in client income statements and continued run off in our exit loan portfolio.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $359 million, with a corresponding allowance of $38 million at March 31, 2012. Loans outstanding collectively evaluated for impairment totaled $48.9 billion, with a corresponding allowance of $906 million at March 31, 2012.

 

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A breakdown of the individual and collective allowance for loan and lease losses and the corresponding loan balances as of March 31, 2012 follows:

 

      Allowance (a)      Outstanding (a)  

March 31, 2012

in millions

   Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Loans     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
 

Commercial, financial and agricultural

     $ 19           $ 297           $ 19,787           $ 125           $ 19,662     

Commercial real estate:

             

Commercial mortgage

     16           247           7,807           182           7,625     

Construction

     3           53           1,273           52           1,221     

Total commercial real estate loans

     19           300           9,080           234           8,846     

Commercial lease financing

     —            68           5,755           —            5,755     

Total commercial loans

     38           665           34,622           359           34,263     

Real estate — residential mortgage

     —            36           1,967           —            1,967     

Home equity:

             

Key Community Bank

     —            94           9,153           —            9,153     

Other

     —            28           507           —            507     

Total home equity loans

     —            122           9,660           —            9,660     

Consumer other — Key Community Bank

     —            37           1,212