KEY 10-Q Quarterly Report Sept. 30, 2013

KEY 10-Q Quarter ended Sept. 30, 2013

KEYCORP /NEW/

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10-Q 1 d600439d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended 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):

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

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


	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


	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.

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).

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).

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).

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).

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).

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 ).


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.

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

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.

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.

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

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

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.

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.


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)

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


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)

(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.

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.

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.

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.

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.

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

Total consumer other		1,100		19		7		1		27		54		—		1,154

Total consumer loans	$	15,560	$	114	$	57	$	39	$	342	$	552	$	16	$	16,128


Total loans	$	52,660	$	213	$	75	$	90	$	541	$	919	$	18	$	53,597


December 31, 2012 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans ^(a)		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	23,030	$	56	$	34	$	22	$	99	$	211	$	1	$	23,242
Commercial real estate:
Commercial mortgage		7,556		21		11		9		120		161		3		7,720
Construction		943		1		2		1		56		60		—		1,003

Total commercial real estate loans		8,499		22		13		10		176		221		3		8,723
Commercial lease financing		4,772		88		31		8		16		143		—		4,915

Total commercial loans	$	36,301	$	166	$	78	$	40	$	291	$	575	$	4	$	36,880


Real estate — residential mortgage	$	2,023	$	16	$	10	$	6	$	103	$	135	$	16	$	2,174
Home equity:
Key Community Bank		9,506		54		26		17		210		307		3		9,816
Other		387		9		4		2		21		36		—		423

Total home equity loans		9,893		63		30		19		231		343		3		10,239
Consumer other — Key Community Bank		1,325		9		5		8		2		24		—		1,349
Credit cards		706		7		5		—		11		23		—		729
Consumer other:
Marine		1,288		23		9		4		34		70		—		1,358
Other		87		2		1		1		2		6		—		93

Total consumer other		1,375		25		10		5		36		76		—		1,451

Total consumer loans	$	15,322	$	120	$	60	$	38	$	383	$	601	$	19	$	15,942


Total loans	$	51,623	$	286	$	138	$	78	$	674	$	1,176	$	23	$	52,822

(a)	Includes $72 million of performing secured loans 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.


September 30, 2012 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans ^(a)		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	21,766	$	46	$	19	$	15	$	132	$	212	$	1	$	21,979
Commercial real estate:
Commercial mortgage		7,344		19		3		26		134		182		3		7,529
Construction		993		5		3		13		53		74		—		1,067

Total commercial real estate loans		8,337		24		6		39		187		256		3		8,596
Commercial lease financing		4,881		48		11		2		18		79		—		4,960

Total commercial loans	$	34,984	$	118	$	36	$	56	$	337	$	547	$	4	$	35,535


Real estate — residential mortgage	$	1,997	$	22	$	13	$	6	$	83	$	124	$	17	$	2,138
Home equity:
Key Community Bank		9,492		57		30		15		171		273		3		9,768
Other		374		9		5		3		18		35		—		409

Total home equity loans		9,866		66		35		18		189		308		3		10,177
Consumer other — Key Community Bank		1,290		9		4		6		3		22		1		1,313
Credit cards		692		6		4		—		8		18		—		710
Consumer other:
Marine		1,377		29		9		2		31		71		—		1,448
Other		92		2		1		1		2		6		—		98

Total consumer other		1,469		31		10		3		33		77		—		1,546

Total consumer loans	$	15,314	$	134	$	66	$	33	$	316	$	549	$	21	$	15,884


Total loans	$	50,298	$	252	$	102	$	89	$	653	$	1,096	$	25	$	51,419

(a)	Includes $38 million of performing secured loans 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.

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

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 rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk 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, excluding $18 million of PCI loans at September 30, 2013, based on bond rating, regulatory classification and payment activity as of September 30, 2013, and 2012 are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category ^(a)


September 30, in millions
	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING ^{(b) (c)}	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012
AAA — AA	$	292	$	166		—	$	1	$	1	$	1	$	454	$	465	$	747	$	633
A		774		755	$	73		63		1		1		866		1,107		1,714		1,926
BBB — BB		21,837		19,229		6,867		6,137		879		759		3,021		3,087		32,604		29,212
B		487		940		294		585		26		38		133		188		940		1,751
CCC — C		927		888		308		740		151		268		76		113		1,462		2,009

Total	$	24,317	$	21,978	$	7,542	$	7,526	$	1,058	$	1,067	$	4,550	$	4,960	$	37,467	$	35,531

(a)	Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b)	Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

(c)	Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

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


September 30, in millions
	Residential — Prime
GRADE	2013		2012
Pass	$	12,487	$	11,999
Substandard		333		296

Total	$	12,820	$	12,295

Credit Risk Profile Based on Payment Activity ^(a) (b)


September 30, in millions	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
September 30, in millions	2013		2012		2013		2012		2013		2012		2013		2012		2013		2012
Performing	$	1,438	$	1,309	$	694	$	702	$	1,058	$	1,417	$	69	$	96	$	3,259	$	3,524
Nonperforming		2		3		4		8		25		31		2		2		33		44

Total	$	1,440	$	1,312	$	698	$	710	$	1,083	$	1,448	$	71	$	98	$	3,292	$	3,568

(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. 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 in accordance with regulatory guidance issued in January 2012.

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” on page 120 of our 2012 Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at September 30, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

Although quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, 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. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans are charged off when payments are 180 days past due. All other consumer loans are charged off when payments are 120 days past due.

At September 30, 2013, the ALLL was $868 million, or 1.62% of loans, compared to $888 million, or 1.73% of loans, at September 30, 2012. At September 30, 2013, the ALLL was 160.4% of nonperforming loans, compared to 136.0% at September 30, 2012.

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2013			2012			2013			2012
Balance at beginning of period — continuing operations	$	876		$	888		$	888		$	1,004
Charge-offs		(78	)		(141	)		(242	)		(404	)
Recoveries		41			32			111			117

Net loans and leases charged off		(37	)		(109	)		(131	)		(287	)
Provision for loan and lease losses from continuing operations		28			109			111			172
Foreign currency translation adjustment		1			—			—			(1	)

Balance at end of period — continuing operations	$	868		$	888		$	868		$	888

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


in millions	December 31, 2012		Provision			Charge-offs			Recoveries		September 30, 2013
Commercial, financial and agricultural	$	327	$	57		$	(44	)	$	30	$	370
Real estate — commercial mortgage		198		(28	)		(18	)		20		172
Real estate — construction		41		(17	)		(2	)		14		36
Commercial lease financing		55		24			(25	)		10		64

Total commercial loans		621		36			(89	)		74		642
Real estate — residential mortgage		30		17			(13	)		1		35
Home equity:
Key Community Bank		105		19			(50	)		8		82
Other		25		—			(16	)		5		14

Total home equity loans		130		19			(66	)		13		96
Consumer other — Key Community Bank		38		8			(24	)		5		27
Credit cards		26		30			(25	)		3		34
Consumer other:
Marine		39		1			(22	)		13		31
Other		4		—			(3	)		2		3

Total consumer other:		43		1			(25	)		15		34

Total consumer loans		267		75			(153	)		37		226

Total ALLL — continuing operations		888		111			(242	)		111		868
Discontinued operations		55		11			(42	)		14		38

Total ALLL — including discontinued operations	$	943	$	122		$	(284	)	$	125	$	906


in millions	December 31, 2011		Provision			Charge-offs			Recoveries		September 30, 2012
Commercial, financial and agricultural	$	334	$	9		$	(65	)	$	40	$	318
Real estate — commercial mortgage		272		—			(69	)		18		221
Real estate — construction		63		—			(19	)		3		47
Commercial lease financing		78		(10	)		(20	)		18		66

Total commercial loans		747		(1	)		(173	)		79		652
Real estate — residential mortgage		37		5			(19	)		2		25
Home equity:
Key Community Bank		103		92			(113	)		7		89
Other		29		14			(23	)		4		24

Total home equity loans		132		106			(136	)		11		113
Consumer other — Key Community Bank		41		15			(29	)		5		32
Credit cards		—		27			(2	)		—		25
Consumer other:
Marine		46		14			(41	)		18		37
Other		1		5			(4	)		2		4

Total consumer other:		47		19			(45	)		20		41

Total consumer loans		257		172			(231	)		38		236

Total ALLL — continuing operations		1,004		171	^(a)		(404	)		117		888
Discontinued operations		104		4			(56	)		13		65

Total ALLL — including discontinued operations	$	1,108	$	175		$	(460	)	$	130	$	953

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

Our ALLL decreased by $20 million, or 2%, since the third quarter of 2012. This contraction was associated with the improvement in credit quality of our loan portfolios. The quality of new loan originations and decreasing NPLs and net charge-offs has resulted in a reduction in our general allowance. Our general allowance encompasses the application of expected loss rates to our existing loans with similar risk characteristics, an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends have declined during 2012 and thus far in 2013 due to a modest level of loan growth, relatively stable conditions in the economic environment, and continued run off in our exit loan portfolio and reflects our effort to maintain a moderate enterprise risk tolerance.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $411 million, with a corresponding allowance of $47 million at September 30, 2013. Loans outstanding collectively evaluated for impairment totaled $53.2 billion, with a corresponding allowance of $820 million at September 30, 2013. At September 30, 2013, PCI loans evaluated for impairment totaled $18 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the quarter ended September 30, 2013.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of September 30, 2013, follows:


	Allowance						Outstanding
September 30, 2013 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
September 30, 2013 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
Commercial, financial and agricultural	$	17	$	353		—	$	24,317		$	108	$	24,209		—
Commercial real estate:
Commercial mortgage		1		171		—		7,544			46		7,496	$	2
Construction		—		36		—		1,058			44		1,014		—

Total commercial real estate loans		1		207		—		8,602			90		8,510		2
Commercial lease financing		—		64		—		4,550			—		4,550		—

Total commercial loans		18		624		—		37,469			198		37,269		2
Real estate — residential mortgage		6		28	$	1		2,198			36		2,148		14
Home equity:
Key Community Bank		10		72		—		10,285			102		10,181		2
Other		2		12		—		353			13		340		—

Total home equity loans		12		84		—		10,638			115		10,521		2
Consumer other — Key Community Bank		—		27		—		1,440			3		1,437		—
Credit cards		1		33		—		698			6		692		—
Consumer other:
Marine		10		21		—		1,083			52		1,031		—
Other		—		3		—		71			1		70		—

Total consumer other		10		24		—		1,154			53		1,101		—

Total consumer loans		29		196		1		16,128			213		15,899		16

Total ALLL — continuing operations		47		820		1		53,597			411		53,168		18
Discontinued operations		1		37		—		4,738	^(a)		11		4,727		—

Total ALLL — including discontinued operations	$	48	$	857	$	1	$	58,335		$	422	$	57,895	$	18

(a)	Amount includes $2.3 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2012, follows:


	Allowance						Outstanding
December 31, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
Commercial, financial and agricultural	$	12	$	314		—	$	23,242		$	65	$	23,176	$	1
Commercial real estate:
Commercial mortgage		1		198		—		7,720			96		7,621		3
Construction		—		41		—		1,003			48		955		—

Total commercial real estate loans		1		239		—		8,723			144		8,576		3
Commercial lease financing		—		55		—		4,915			—		4,915		—

Total commercial loans		13		608		—		36,880			209		36,667		4
Real estate — residential mortgage		1		29	$	1		2,174			38		2,120		16
Home equity:
Key Community Bank		11		94		—		9,816			87		9,726		3
Other		1		24		—		423			12		411		—

Total home equity loans		12		118		—		10,239			99		10,137		3
Consumer other — Key Community Bank		2		36		—		1,349			2		1,347		—
Credit cards		—		26		—		729			2		727		—
Consumer other:
Marine		7		32		—		1,358			60		1,298		—
Other		—		3		—		93			1		92		—

Total consumer other		7		35		—		1,451			61		1,390		—

Total consumer loans		22		244		1		15,942			202		15,721		19

Total ALLL — continuing operations		35		852		1		52,822			411		52,388		23
Discontinued operations		—		55		—		5,201	^(a)		3		5,198		—

Total ALLL — including discontinued operations	$	35	$	907	$	1	$	58,023		$	414	$	57,586	$	23

(a)	Amount includes $2.5 billion of loans carried at fair value that are excluded from ALLL consideration.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of September 30, 2012, follows:


	Allowance						Outstanding
September 30, 2012 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired
Commercial, financial and agricultural	$	12	$	306		—	$	21,979		$	92	$	21,886	$	1
Commercial real estate:
Commercial mortgage		7		214		—		7,529			138		7,388		3
Construction		—		47		—		1,067			42		1,025		—

Total commercial real estate loans		7		261		—		8,596			180		8,413		3
Commercial lease financing		—		66		—		4,960			—		4,960		—

Total commercial loans		19		633		—		35,535			272		35,259		4
Real estate — residential mortgage		1		24		—		2,138			18		2,103		17
Home equity:
Key Community Bank		10		79		—		9,768			65		9,700		3
Other		1		23		—		409			10		399		—

Total home equity loans		11		102		—		10,177			75		10,099		3
Consumer other — Key Community Bank		1		31		—		1,313			2		1,310		1
Credit cards		—		25				710			—		710		—
Consumer other:
Marine		7		30		—		1,448			60		1,388		—
Other		—		4		—		98			1		97		—

Total consumer other		7		34		—		1,546			61		1,485		—

Total consumer loans		20		216		—		15,884			156		15,707		21

Total ALLL — continuing operations		39		849		—		51,419			428		50,966		25
Discontinued operations		—		65		—		5,328	^(a)		3		5,325		—

Total ALLL — including discontinued operations	$	39	$	914		—	$	56,747		$	431	$	56,291	$	25

(a)	Amount includes $2.6 billion of loans carried at fair value that are excluded from ALLL considerations.

The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments has decreased by $3 million since the third quarter of 2012 to $40 million at September 30, 2013. When combined with our ALLL, our total allowance for credit losses represented 1.69% of loans at September 30, 2013, compared to 1.81% at September 30, 2012.

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


	Three months ended September 30,					Nine months ended September 30,
in millions	2013		2012			2013		2012
Balance at beginning of period	$	37	$	51		$	29	$	45
Provision (credit) for losses on lending-related commitments		3		(8	)		11		(2	)

Balance at end of period	$	40	$	43		$	40	$	43

5. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty’s or our own credit quality. We make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:

•

the amount of time since the last relevant valuation;

•

whether there is an actual trade or relevant external quote available at the measurement date; and

•

volatility associated with the primary pricing components.

We ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:

•

an independent review and approval of valuation models and assumptions;

•

recurring detailed reviews of profit and loss; and

•

a validation of valuation model components against benchmark data and similar products, where possible.

We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable. Various Working Groups that report to the Fair Value Committee analyze and approve the valuation methodologies used to fair value assets and liabilities managed within specific areas. The Working Groups are discussed in more detail in the qualitative disclosures within this footnote and in Note 11 (“Acquisitions and Discontinued Operations”). Formal documentation of the fair valuation methodologies is prepared by the lines of business and support areas as appropriate. The documentation details the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation inputs.

Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” on page 122 of our 2012 Form 10-K.

Qualitative Disclosures of Valuation Techniques

Loans . Most loans recorded as trading account assets are valued based on market spreads for similar assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.

Securities (trading and available for sale) . We own several types of securities, requiring a range of valuation methods:

•

Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities.

•

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate CMOs. Inputs to the pricing models include actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets, spread tables, matrices, high-grade scales, option-adjusted spreads, and standard inputs, such as yields, benchmark securities, bids, and offers.

•

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. In such cases, we use internal models based on certain assumptions to determine fair value. Level 3 instruments consist of certain commercial mortgage-backed securities. Our Real Estate Capital line of business is responsible for the valuation process for these commercial mortgage-backed securities, which is conducted on a quarterly basis. The methodology incorporates a loan-by-loan credit review in combination with discounting the risk-adjusted bond cash flows. A detailed credit review of the underlying loans involves a screening process using a multitude of filters to identify the highest risk loans associated with these commercial mortgage-backed securities. Each of the highest risk loans identified is re-underwritten and loan specific defaults and recoveries are assigned. A matrix approach is used to assign an expected default and recovery percentage for the loans that are not individually re-underwritten. Bond classes will then be run through a discounted cash flow analysis, taking into account the expected default and recovery percentages as well as discount rates developed by our Finance area. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which take into account expected default and recovery percentages, market research, and discount rates commensurate with current market conditions. Changes in the credit quality of the underlying loans or market discount rate would impact the value of the bonds. An increase in the underlying loan credit quality or decrease in the market discount rate would positively impact the bond value. A decrease in the underlying loan credit quality or increase in the market discount rate would negatively impact the bond value.

The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. In valuations of state and political subdivisions securities, inputs used by the third-party pricing service also include material event notices.

On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:

•

review documentation received from our third-party pricing service regarding the inputs used in their valuations and determine a level assessment for each category of securities;

•

substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and

•

substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings.

Private equity and mezzanine investments . Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods.

Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then adjusted to fair value based on current market conditions using the discounted cash flow method based on the expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. Periodically, a third-party appraisal is obtained for the investment to validate the specific inputs for determining fair value.

Inputs used in calculating future cash flows include the cost of build-out, future selling prices, current market outlook, and operating performance of the investment. Investment income and expense assumptions are based on market inputs, such as rental/leasing rates and vacancy rates for the geographic- and property type-specific markets. For investments under construction, investment income and expense assumptions are determined using expected future build-out costs and anticipated future rental prices based on current market conditions, discount rates, holding period, the terminal cap rate and sales commissions paid in the terminal cap year. For investments that are in lease-up or are fully leased, income and expense assumptions are based on the current geographic market lease rates, underwritten expenses, market lease terms, and historical vacancy rates. Asset Management validates these inputs on a quarterly basis through the use of industry publications, third-party broker opinions, and comparable property sales, where applicable. Changes in the significant inputs (rental/leasing rates, vacancy rates, valuation capitalization rate, discount rate, and terminal cap rate) would significantly affect the fair value measurement. Increases in rental/leasing rates would increase fair value while increases in the vacancy rates, the valuation capitalization rate, the discount rate, and the terminal cap rate would decrease fair value.

Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to use statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. The calculation to determine the investment’s fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager.

Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair value of our indirect investments and related unfunded commitments at September 30, 2013:


September 30, 2013 in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Passive funds ^(a)	$	13	$	1
Co-managed funds ^(b)		15		—

Total	$	28	$	1

(a)

We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to seven years.

(b)

We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. We can sell or transfer our interest in any of these funds with the written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of two to five years.

Principal investments . Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors).

Each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. This process is a coordinated and documented effort by the Principal Investing Entities Deal Team (comprised of individuals from one of the independent investment managers who oversee these instruments), members of the Key Principal Partners (“KPP”) finance and accounting staff, and the Investment Committee (comprised of individuals from Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.

Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these

investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.

Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Team’s knowledge of the current financial status of the subject company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the company’s payment history, adequacy of cash flows from operations, and current operating results, including market multiples, and historical and forecast earnings before interest, taxation, depreciation, and amortization. Inputs can also include the seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected and the net liquidation value of collateral.

Valuations of equity instruments of private companies, which are prepared on a quarterly basis, are based on current market conditions and the current financial status of each company. A valuation analysis is performed to value each investment that is reviewed by the Principal Investing Entities Deal Team Member as well as reviewed and approved by the Chief Administrative Officer of one of the independent investment managers. Significant unobservable inputs used in these valuations include adequacy of the company’s cash flows from operations, any significant change in the company’s performance since the prior valuation, and any significant equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an active market for the identical security. If the instrument is restricted, the fair value is determined considering the number of shares traded daily, the number of the company’s total restricted shares, and price volatility.

Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest.

For indirect investments, management makes adjustments as deemed appropriate to the net asset value and only if it is determined that the net asset value does not properly reflect fair value. In determining the need for an adjustment to net asset value, management performs an analysis of the private equity funds based on the independent fund manager’s valuations as well as management’s own judgment. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment, and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.

The fair value of our indirect investments and related unfunded commitments at September 30, 2013, was $417 million and $83 million, respectively. Our indirect investments consist of buyout, venture capital, and fund of funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to nine years.

Derivatives . Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded. The majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, LIBOR and Overnight Index Swap (OIS) discount rates and curves, index pricing curves, foreign currency curves, and volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity). These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps, and credit default swaps.

In addition, we have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as bond spreads and asset values, as well as unobservable internally-derived assumptions, such as loss probabilities and internal risk ratings of customers. These derivatives are priced monthly by our Market Risk Management group using a credit valuation adjustment methodology. Swap details with the customer and our related participation

percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.

Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a default reserve. The credit component is determined by individual counterparty based on the probability of default, and considers master netting and collateral agreements. The default reserve is classified as Level 3. Our Market Risk Management group is responsible for the valuation policies and procedure related to this default reserve. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and corporate accounting personnel. On a quarterly basis, Market Risk Management prepares the reserve calculation. A detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast are provided by Market Risk Management to ensure that the default reserve recorded at period end is sufficient.

Other assets and liabilities . The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets, and bids and offers.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at September 30, 2013, December 31, 2012 and September 30, 2012.


September 30, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Short-term investments:
Securities purchased under resale agreements		—	$	516		—	$	516
Trading account assets:
U.S. Treasury, agencies and corporations		—		616		—		616
States and political subdivisions		—		26		—		26
Collateralized mortgage obligations		—		6		—		6
Other mortgage-backed securities		—		83		—		83
Other securities	$	6		66		—		72

Total trading account securities		6		797		—		803
Commercial loans		—		3		—		3

Total trading account assets		6		800		—		806
Securities available for sale:
States and political subdivisions		—		41		—		41
Collateralized mortgage obligations		—		11,779		—		11,779
Other mortgage-backed securities		—		762		—		762
Other securities		24		—		—		24

Total securities available for sale		24		12,582		—		12,606
Other investments:
Principal investments:
Direct		—		—	$	168		168
Indirect		—		—		417		417

Total principal investments		—		—		585		585
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		28		28

Total equity and mezzanine investments		—		—		28		28

Total other investments		—		—		613		613
Derivative assets:
Interest rate		—		1,112		19		1,131
Foreign exchange		60		10		—		70
Energy and commodity		—		137		—		137
Credit		—		2		4		6
Equity		—		—		—		—

Derivative assets		60		1,261		23		1,344
Netting adjustments ^(a)		—		—		—		(869	)

Total derivative assets		60		1,261		23		475
Accrued income and other assets		—		48		—		48

Total assets on a recurring basis at fair value	$	90	$	15,207	$	636	$	15,064

LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	464		—	$	464
Bank notes and other short-term borrowings:
Short positions	$	4		458		—		462
Derivative liabilities:
Interest rate		—		798		—		798
Foreign exchange		59		10		—		69
Energy and commodity		—		130	$	1		131
Credit		—		10		1		11
Equity		—		—		—		—

Derivative liabilities		59		948		2		1,009
Netting adjustments ^(a)		—		—		—		(559	)

Total derivative liabilities		59		948		2		450
Accrued expense and other liabilities		—		133		—		133

Total liabilities on a recurring basis at fair value	$	63	$	2,003	$	2	$	1,509

(a)

Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.


December 31, 2012
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Short term investments:
Securities purchased under resale agreements		—	$	271		—	$	271
Trading account assets:
U.S. Treasury, agencies and corporations		—		383		—		383
States and political subdivisions		—		21	$	3		24
Collateralized mortgage obligations		—		8		—		8
Other mortgage-backed securities		—		4		—		4
Other securities	$	2		175		—		177

Total trading account securities		2		591		3		596
Commercial loans		—		9		—		9

Total trading account assets		2		600		3		605
Securities available for sale:
States and political subdivisions		—		49		—		49
Collateralized mortgage obligations		—		11,464		—		11,464
Other mortgage-backed securities		—		538		—		538
Other securities		43		—		—		43

Total securities available for sale		43		12,051		—		12,094
Other investments:
Principal investments:
Direct		—		—		191		191
Indirect		—		—		436		436

Total principal investments		—		—		627		627
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		41		41

Total equity and mezzanine investments		—		—		41		41

Total other investments		—		—		668		668
Derivative assets:
Interest rate		—		1,705		19		1,724
Foreign exchange		54		21		—		75
Energy and commodity		—		154		2		156
Credit		—		3		5		8
Equity		—		—		—		—

Derivative assets		54		1,883		26		1,963
Netting adjustments ^(a)		—		—		—		(1,270	)

Total derivative assets		54		1,883		26		693
Accrued income and other assets		—		3		—		3

Total assets on a recurring basis at fair value	$	99	$	14,808	$	697	$	14,334

LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	228		—	$	228
Bank notes and other short-term borrowings:
Short positions		—		287		—		287
Derivative liabilities:
Interest rate		—		1,152		—		1,152
Foreign exchange	$	55		20		—		75
Energy and commodity		—		149	$	1		150
Credit		—		9		1		10
Equity		—		—		—		—

Derivative liabilities		55		1,330		2		1,387
Netting adjustments ^(a)		—		—		—		(803	)

Total derivative liabilities		55		1,330		2		584
Accrued expense and other liabilities		—		49		—		49

Total liabilities on a recurring basis at fair value	$	55	$	1,894	$	2	$	1,148

(a)


September 30, 2012
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Short term investments:
Securities purchased under resale agreements		—	$	294		—	$	294
Trading account assets:
U.S. Treasury, agencies and corporations		—		486		—		486
States and political subdivisions		—		14	$	56		70
Collateralized mortgage obligations		—		4		—		4
Other mortgage-backed securities		—		9		1		10
Other securities	$	10		78		—		88

Total trading account securities		10		591		57		658
Commercial loans		—		5		—		5

Total trading account assets		10		596		57		663
Securities available for sale:
States and political subdivisions		—		54		—		54
Collateralized mortgage obligations		—		11,283		—		11,283
Other mortgage-backed securities		—		597		1		598
Other securities		27		—		—		27

Total securities available for sale		27		11,934		1		11,962
Other investments:
Principal investments:
Direct		—		—		214		214
Indirect		—		—		455		455

Total principal investments		—		—		669		669
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		42		42

Total equity and mezzanine investments		—		—		42		42

Total other investments		—		—		711		711
Derivative assets:
Interest rate		—		1,841		23		1,864
Foreign exchange		52		29		—		81
Energy and commodity		—		183		—		183
Credit		—		14		5		19
Equity		—		—		—		—

Derivative assets		52		2,067		28		2,147
Netting adjustments ^(a)		—		—		—		(1,376	)

Total derivative assets		52		2,067		28		771
Accrued income and other assets		—		138		—		138

Total assets on a recurring basis at fair value	$	89	$	15,029	$	797	$	14,539

LIABILITIES MEASURED ON A RECURRING BASIS
Federal funds purchased and securities sold under repurchase agreements:
Securities sold under repurchase agreements		—	$	398		—	$	398
Bank notes and other short-term borrowings:
Short positions	$	4		384		—		388
Derivative liabilities:
Interest rate		—		1,283		—		1,283
Foreign exchange		56		27		—		83
Energy and commodity		—		177	$	1		178
Credit		—		17		1		18
Equity		—		—		—		—

Derivative liabilities		56		1,504		2		1,562
Netting adjustments ^(a)		—		—		—		(905	)

Total derivative liabilities		56		1,504		2		657
Accrued expense and other liabilities		1		—		—		1

Total liabilities on a recurring basis at fair value	$	61	$	2,286	$	2	$	1,444

(a)

Changes in Level 3 Fair Value Measurements

The following table shows the change in the fair values of our Level 3 financial instruments for the three and nine months ended September 30, 2013, and 2012. We mitigate the credit risk, interest rate risk, and risk of loss related to many of these Level 3 instruments by using securities and derivative positions classified as Level 1 or Level 2. Level 1 and Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of our risk management activities.


in millions	Beginning of Period Balance		Gains (Losses) Included in Earnings			Purchases		Sales			Settlements			Transfers into Level 3 ^(e)			Transfers out of Level 3 ^(e)			End of Period Balance ^(g)			Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2013

Trading account assets
Other mortgage-backed securities		—	$	4	^(b)		—	$	(4	)		—			—			—			—			—

Other securities		—		4	^(b)		—		—		$	(4	)		—			—			—		$	(1	) ^(b)
State and political subdivisions	$	3		—			—		(3	)		—			—			—			—			—

Other investments
Principal investments

Direct		191		(9	) ^(c)	$	7		(21	)		—			—			—		$	168			(19	) ^(c)

Indirect		436		37	^(c)		14		(70	)		—			—			—			417			13	^(c)
Equity and mezzanine investments

Direct		—		—			—		—			—			—			—			—			8	^(c)

Indirect		41		1	^(c)		—		—			(14	)		—			—			28			1	^(c)

Derivative instruments ^(a)
Interest rate		19		(10	) ^(d)		—		(1	)		—		$	39	^(f)	$	(28	) ^(f)		19			—
Energy and commodity		1		(2	) ^(d)		—		—			—			—			—			(1	)		—
Credit		4		(6	) ^(d)		—		—			5			—			—			3			—

Three months ended September 30, 2013

Trading account assets
Other mortgage-backed securities		—		—			—		—			—			—			—			—			—

Other securities		—	$	1	^(b)		—		—		$	(1	)		—			—			—		$	(2	) ^(b)
State and political subdivisions		—		—			—		—			—			—			—			—			—

Other investments
Principal investments

Direct	$	186		(4	) ^(c)	$	3	$	(17	)		—			—			—		$	168			(8	) ^(c)

Indirect		426		18	^(c)		3		(30	)		—			—			—			417			9	^(c)
Equity and mezzanine investments

Direct		—		—			—		—			—			—			—			—			5	^(c)

Indirect		32		(1	) ^(c)		—		—			(3	)		—			—			28			(1	) ^(c)

Derivative instruments ^(a)
Interest rate		25		(7	) ^(d)		—		—			—			—		$	1	^(f)		19			—
Energy and commodity		1		(2	) ^(d)		—		—			—			—			—			(1	)		—
Credit		4		(3	) ^(d)		—		—			2			—			—			3			—


in millions	Beginning of Period Balance			Gains (Losses) Included in Earnings			Purchases			Sales			Settlements			Transfers into Level 3 ^(e)			Transfers out of Level 3 ^(e)			End of Period Balance ^(g)			Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2012

Trading account assets
Other mortgage-backed securities	$	35		$	2	^(b)		—		$	(32	)		—			—		$	(4	)	$	1			—

Other securities		—			2	^(b)		—			—		$	(3	)	$	57	^(h)		—			56		$	2	^(b)

Other investments
Principal investments

Direct		225			12	^(c)	$	11			(34	)		—			—			—			214			10	^(c)

Indirect		473			50	^(c)		24			(92	)		—			—			—			455			21	^(c)
Equity and mezzanine investments

Direct		15			3	^(c)		—			—			(18	)		—			—			—			15	^(c)

Indirect		36			6	^(c)		4			—			(4	)		—			—			42			6	^(c)

Derivative instruments ^(a)
Interest rate		38			(5	) ^(d)		1			(7	)		—			7			(11	)		23			—
Energy and commodity		(1	)		1	^(d)		(1	)		—			—			—			—			(1	)		—
Credit		(21	)		(11	) ^(d)		—			—			37			—			—			5			—

Three months ended September 30, 2012

Trading account assets
Other mortgage-backed securities	$	1			—			—			—			—			—			—		$	1			—

Other securities		57		$	4	^(b)		—			—		$	(5	)		—			—			56		$	4	^(b)

Other investments
Principal investments

Direct		231			4	^(c)	$	1		$	(22	)		—			—			—			214			2	^(c)

Indirect		482			7	^(c)		4			(38	)		—			—			—			455			(7	) ^(c)
Equity and mezzanine investments

Direct		18			—			—			—			(18	)		—			—			—			5	^(c)
Indirect		43			—			—			—			—		$	(1	)		—			42			—

Derivative instruments ^(a)
Interest rate		35			(2	) ^(d)		—			(6	)		—			3		$	(7	)		23			—
Energy and commodity		(1	)		—			—			—			—			—			—			(1	)		—
Credit		5			(4	) ^(d)		—			—			4			—			—			5			—

(a)	Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.

(b)	Realized and unrealized gains and losses on trading account assets are reported in “other income” on the income statement.

(c)	Realized and unrealized gains and losses on principal investments and private equity and mezzanine investments are reported in “net gains (losses) from principal investing” on the income statement.

(d)	Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.

(e)	Our policy is to recognize transfers into and transfers out of Level 3 as of the end of the reporting period.

(f)

Transfers from Level 2 to Level 3 were the result of Level 3 unobservable inputs becoming significant to certain derivatives previously classified as Level 2. Transfers from Level 3 to Level 2 were the result of Level 3 unobservable inputs becoming less significant to certain derivatives previously classified as Level 3.

(g)	There were no issuances for the nine-month periods ended September 30, 2013 and 2012.

(h)	Transfers from Level 2 to Level 3 were the result of decreased observable market activity for these securities.

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2013, December 31, 2012, and September 30, 2012:


	September 30, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	26	$	26
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—	$	1		10		11

Total assets on a nonrecurring basis at fair value		—		1	$	36	$	37


	December 31, 2012
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	25	$	25
Loans held for sale ^(a)		—		—		9		9
Accrued income and other assets		—	$	2		20		22

Total assets on a nonrecurring basis at fair value		—	$	2	$	54	$	56


	September 30, 2012
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	52	$	52
Loans held for sale ^(a)		—		—		10		10
Accrued income and other assets		—	$	15		22		37

Total assets on a nonrecurring basis at fair value		—	$	15	$	84	$	99

(a)

During the first nine months of 2013, we transferred $2 million of commercial and consumer loans and leases at their current fair value from held-for-sale status to the held-to-maturity portfolio compared to $17 million during 2012, and $17 million during the first nine months ended September 30, 2012.

Impaired loans . We typically adjust the carrying amount of our impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows, the fair value of the underlying collateral, or the loan’s observable market price. Impaired loans with a specifically allocated allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets, while those with a specifically allocated allowance based on an observable market price that reflects recent sale transactions for similar loans and collateral are classified as Level 2.

The evaluations for impairment are prepared by the responsible relationship managers in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. The Asset Recovery Group is part of the Risk Management Group and reports to our Chief Risk Officer. These evaluations are performed in conjunction with the quarterly ALLL process.

Subject loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter’s review are reevaluated and if their values are materially different from the prior quarter evaluation, the underlying information (loan balance and in most cases, collateral value) is compared. Material differences are evaluated for reasonableness, and discussions are held between the relationship managers and their senior managers to understand the difference and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values.

The following two internal methods are used to value impaired loans:

•

Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure and changes in collateral values.

•

The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations and assessments provided by third-party appraisers. We perform or reaffirm appraisals of collateral-dependent impaired loans at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due, or there has been a material deterioration in the performance of the project or condition of the property. Adjustments to outdated appraisals that result in an appraisal value less than the carrying amount of a collateral-dependent impaired loan are reflected in the ALLL.

Impairment valuations are back-tested each quarter, based on a look-back of actual incurred losses on closed deals previously evaluated for impairment. The overall percent variance of actual net charge-offs on closed deals as compared to the specific allocations on such deals is considered in determining each quarter’s specific allocations.

Loans held for sale . Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determined that adjustments were necessary to record some of the portfolios at the lower of cost or fair value in accordance with GAAP. There were no loans held for sale portfolios adjusted to fair value at September 30, 2013. Loans held for sale portfolios adjusted to fair value totaled $9 million at December 31, 2012, and $10 million at September 30, 2012.

Current market conditions, including updated collateral values, and reviews of our borrowers’ financial condition influenced the inputs used in our internal models and other valuation methodologies, resulting in these adjustments. The valuations are prepared by the responsible relationship managers or analysts in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. Actual gains or losses realized on the sale of various loans held for sale provide a back-testing mechanism for determining the appropriateness of our valuations of these loans held for sale that are adjusted to fair value.

Valuations of performing commercial mortgage and construction loans held for sale are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates.

Valuations of nonperforming commercial mortgage and construction loans held for sale are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, we use third-party appraisals, adjusted for current market conditions. Since valuations are based on unobservable data, these loans have been classified as Level 3 assets.

Direct financing leases and operating lease assets held for sale . Our Key Equipment Finance (KEF) Accounting and Capital Markets groups are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF Capital Markets group reports to the President of our Equipment Finance line of business. A weekly report is distributed to both groups that lists all Equipment Finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.

Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. Leases also may be valued using current nonbinding bids when they are available. These leases are classified as Level 2 assets. In a distressed market where market data is not available, an estimate of the fair value of the leased asset may be used to value the lease, resulting in a Level 3 classification. In an inactive market, the market value of the assets held for sale is determined as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.

Goodwill and other intangible assets . On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of the goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. New accounting guidance that permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required became effective for us on January 1, 2012. We did not choose to utilize this qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2012. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally.

Inputs used include market-available data, such as industry, historical and expected growth rates, and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified goodwill as Level 3. We use a third-party valuation services provider to perform the annual, and if necessary, any interim, Step 1 valuation process, and to perform a Step 2 analysis, if needed, on our reporting units. Annual and any interim valuations prepared by the third-party valuation services provider are reviewed by the appropriate individuals within Key to ensure that the assumptions used in preparing the analysis are appropriate and properly supported. For additional information on the results of recent goodwill impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”) on page on 171 of our 2012 Form 10-K.

The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions. Accordingly, these assets are classified as Level 3. Our lines of business, with oversight from our Accounting group, are responsible for routinely, at least quarterly, assessing whether impairment indicators are present. All indicators that signal impairment may exist are appropriately considered in this analysis. An impairment loss is only recognized for a held and used long lived asset if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value.

Our primary assumptions include attrition rates, alternative costs of funds and rates paid on deposits. For additional information on the results of other intangible assets impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”) on page on 171 of our 2012 Form 10-K.

Other assets . OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded initially as held for sale at fair value less estimated selling costs at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.

•

Commercial Real Estate Valuation Process: When a loan is reclassified from loan status to OREO because we took possession of the collateral, the Asset Recovery Group Loan Officer, in consultation with our OREO group, obtains a broker price opinion or a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value of the underlying collateral less estimated selling costs becomes the carrying value of the OREO asset. In addition to valuations from independent third-party sources, our OREO group also writes down the carrying balance of OREO assets once a bona fide offer is contractually accepted, through execution of a Purchase and Sale Agreement, where the accepted price is lower than the current balance of the particular OREO asset. The fair value of OREO property is re-evaluated every 90 days and the OREO asset is adjusted as necessary.

•

Consumer Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures in this area. The current vendor partner provides monthly reporting of all broker price opinion evaluations, appraisals and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 90 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate.

Mortgage servicing assets are valued based on inputs such as prepayment speeds, earn rates, credit default rates, discount rates and servicing advances. We classify these assets as Level 3. Additional information regarding the valuation of mortgage servicing assets is provided in Note 8 (“Mortgage Servicing Assets”).

Quantitative Information about Level 3 Fair Value Measurements

The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at September 30, 2013, December 31, 2012, and September 30, 2012, along with the valuation techniques used, are shown in the following table:


September 30, 2013	Fair Value of			Significant	Range
dollars in millions	Level 3 Assets		Valuation Technique	Unobservable Input	(Weighted-Average)

Recurring
Other investments	$	168	Individual analysis of the condition of each investment
— principal investments — direct:
Debt instruments				EBITDA multiple	5.80 - 7.20% (6.00%)
Equity instruments of private companies				EBITDA multiple (where applicable)	4.70 - 9.60% (6.30%)
				Revenue multiple (where applicable)	1.00 - 4.80% (4.10%)

Nonrecurring
Impaired loans		26	Fair value of underlying collateral	Discount	10.00 - 100.00% (35.00%)

Goodwill		979	Discounted cash flow and market data	Earnings multiple of peers	9.70 - 14.20 (11.25)
				Equity multiple of peers	.95 - 1.17 (1.09)
				Control premium	N/A (30.00%)
				Weighted-average cost of capital	N/A (13.00%)


December 31, 2012	Fair Value of			Significant	Range
dollars in millions	Level 3 Assets		Valuation Technique	Unobservable Input	(Weighted-Average)

Recurring
Other investments	$	181	Individual analysis of the condition of each investment
— principal investments — direct:
Debt instruments				EBITDA multiple	5.50 - 6.00% (5.90%)
Equity instruments of private companies				EBITDA multiple (where applicable)	5.00 - 8.50% (6.10%)
				Revenue multiple (where applicable)	0.30 - 5.70% (4.80%)

Nonrecurring
Impaired loans		25	Fair value of underlying collateral	Discount	0.00 - 100.00% (45.00%)

Goodwill		979	Discounted cash flow and market data	Earnings multiple of peers	9.70 - 14.20 (11.25)
				Equity multiple of peers	.95 - 1.17 (1.09)
				Control premium	N/A (30.00%)
				Weighted-average cost of capital	N/A (13.00%)


September 30, 2012	Fair Value of			Significant	Range
dollars in millions	Level 3 Assets		Valuation Technique	Unobservable Input	(Weighted-Average)

Recurring
Other investments	$	202	Individual analysis of the condition of each investment
— principal investments — direct:
Debt instruments				EBITDA multiple	4.90 - 6.00% (5.90%)
Equity instruments of private companies				EBITDA multiple (where applicable)	5.50 - 10.80% (6.10%)
				Revenue multiple (where applicable)	0.20 - 4.40% (2.80%)

Nonrecurring
Impaired loans		52	Fair value of underlying collateral	Discount	0.00 - 100.00% (35.00%)

Goodwill		979	Discounted cash flow and market data	Earnings multiple of peers	8.30 - 11.90 (10.01)
				Equity multiple of peers	1.21 - 1.32 (1.27)
				Control premium	N/A (32.00%)
				Weighted-average cost of capital	N/A (15.00%)

Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at September 30, 2013, December 31, 2012, and September 30, 2012 are shown in the following table.

September 30, 2013

Fair Value

in millions

Carrying
Amount

Level 1

Level 2

Level 3

Netting
Adjustment

Total

ASSETS

Cash and short-term investments ^(a)

4,283

3,767

516

—

4,283

Trading account assets ^(e)

806

800

—

806

Securities available for sale ^(e)

12,606

12,582

—

12,606

Held-to-maturity securities ^(b)

4,835

—

4,730

—

4,730

Other investments ^(e)

1,007

—

394

613

—

1,007

Loans, net of allowance ^(c)

52,729

—

51,301

—

51,301

Loans held for sale ^(e)

699

—

699

—

699

Mortgage servicing assets ^(d)

331

—

388

—

388

Derivative assets ^(e)

475

1,261

(869

) ^(f)

475

LIABILITIES

Deposits with no stated maturity ^(a)

61,399

—

61,399

—

61,399

Time deposits ^(d)

7,136

605

6,632

—

7,237

Short-term borrowings ^(a)

1,921

1,917

—

1,921

Long-term debt ^(d)

6,154

6,192

265

—

6,457

Derivative liabilities ^(e)

450

948

(559

) ^(f)

450


	December 31, 2012
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	4,525	$	4,254	$	271		—		—		$	4,525
Trading account assets ^(e)		605		2		600	$	3		—			605
Securities available for sale ^(e)		12,094		43		12,051		—		—			12,094
Held-to-maturity securities ^(b)		3,931		—		3,992		—		—			3,992
Other investments ^(e)		1,064		—		396		668		—			1,064
Loans, net of allowance ^(c)		51,934		—		—		51,046		—			51,046
Loans held for sale ^(e)		599		—		—		599		—			599
Mortgage servicing assets ^(d)		204		—		—		238		—			238
Derivative assets ^(e)		693		54		1,883		26	$	(1,270	) ^(f)		693

LIABILITIES
Deposits with no stated maturity ^(a)	$	58,132		—	$	58,132		—		—		$	58,132
Time deposits ^(d)		7,861	$	408		7,612		—		—			8,020
Short-term borrowings ^(a)		1,896		—		1,896		—		—			1,896
Long-term debt ^(d)		6,847		2,807		4,585		—		—			7,392
Derivative liabilities ^(e)		584		54		1,331	$	2	$	(803	) ^(f)		584


	September 30, 2012
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	3,182	$	2,888	$	294		—		—		$	3,182
Trading account assets ^(e)		663		10		596	$	57		—			663
Securities available for sale ^(e)		11,962		27		11,934		1		—			11,962
Held-to-maturity securities ^(b)		4,153		—		4,212		—		—			4,212
Other investments ^(e)		1,106		—		395		711		—			1,106
Loans, net of allowance ^(c)		50,531		—		—		49,737		—			49,737
Loans held for sale ^(e)		628		—		—		628		—			628
Mortgage servicing assets ^(d)		188		—		—		237		—			237
Derivative assets ^(e)		771		52		2,067		28	$	(1,376	) ^(f)		771

LIABILITIES
Deposits with no stated maturity ^(a)	$	55,452		—	$	55,452		—		—		$	55,452
Time deposits ^(d)		8,736	$	569		8,344		—		—			8,913
Short-term borrowings ^(a)		2,134		4		2,130		—		—			2,134
Long-term debt ^(d)		6,119		2,819		3,777		—		—			6,596
Derivative liabilities ^(e)		657		56		1,504	$	2	$	(905	) ^(f)		657

Valuation Methods and Assumptions

(a)	Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.

(b)

Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.

(c)

The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.

(d)	Fair values of mortgage servicing assets, time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.

(e)	Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets Measured at Fair Value on a Nonrecurring Basis” in this note.

(f)

We use valuation methods based on exit market prices in accordance with applicable accounting guidance. We determine fair value based on assumptions pertaining to the factors a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During the first nine months of 2013, the fair values of our loan portfolios have generally remained stable, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.

Education lending business . The discontinued education lending business consists of assets and liabilities (recorded at fair value) in the securitization trusts, as well as loans in portfolio (recorded at fair value), and loans in portfolio (recorded at carrying value with appropriate valuation reserves) that are outside the trusts. All of these loans were excluded from the table above as follows:

•

Loans at carrying value, net of allowance, of $2.4 billion ($2.0 billion at fair value) at September 30, 2013, $2.6 billion ($2.3 billion at fair value) at December 31, 2012, and $2.7 billion ($2.3 billion at fair value) at September 30, 2012;

•

Portfolio loans at fair value of $148 million at September 30, 2013, $157 million at December 31, 2012, and $71 million at September 30, 2012;

•

Loans in the trusts at fair value of $2.1 billion at September 30, 2013, $2.4 billion at December 31, 2012, and $2.5 billion at September 30, 2012.

Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $2.0 billion in fair value at September 30, 2013, $2.2 billion in fair value at December 31, 2012, and $2.3 billion in fair value at September 30, 2012 are also excluded from the above table.

These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.

Residential real estate mortgage loans . Residential real estate mortgage loans with carrying amounts of $2.2 billion at September 30, 2013, and December 31, 2012, and $2.1 billion at September 30, 2012 are included in “Loans, net of allowance” in the above table.

Short-term financial instruments . For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.

6. Securities

Securities available for sale . These are securities that we intend to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available for sale are reported at fair value. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in equity as a component of AOCI on the balance sheet. Unrealized losses on equity securities deemed to be “other-than-temporary,” and realized gains and losses resulting from sales of securities using the specific identification method, are included in “other income” on the income statement. Unrealized losses on debt securities deemed to be “other-than-temporary” are included in “other income” on the income statement or AOCI in accordance with the applicable accounting guidance related to the recognition of OTTI of debt securities.

“Other securities” held in the available-for-sale portfolio are primarily marketable equity securities that are traded on a public exchange such as the NYSE or NASDAQ.

Held-to-maturity securities . These are debt securities that we have the intent and ability to hold until maturity. Debt securities are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.

“Other securities” held in the held-to-maturity portfolio consist of foreign bonds and capital securities.

Unrealized losses on equity securities deemed to be “other-than-temporary,” and realized gains and losses resulting from sales of securities using the specific identification method, are included in “other income” on the income statement. Unrealized losses on debt securities deemed to be “other-than-temporary” are included in “other income” on the income statement or AOCI in accordance with the applicable accounting guidance related to the recognition of OTTI of debt securities.

The amortized cost, unrealized gains and losses, and approximate fair value of our securities available for sale and held-to-maturity securities are presented in the following tables. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change.


	September 30, 2013
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
States and political subdivisions	$	40	$	1		—	$	41
Collateralized mortgage obligations		11,810		194	$	225		11,779
Other mortgage-backed securities		733		31		2		762
Other securities		20		4				24

Total securities available for sale	$	12,603	$	230	$	227	$	12,606

HELD-TO-MATURITY SECURITIES
Collateralized mortgage obligations	$	4,815	$	10	$	115	$	4,710
Other securities		20		—		—		20

Total held-to-maturity securities	$	4,835	$	10	$	115	$	4,730


	December 31, 2012
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
States and political subdivisions	$	47	$	2		—	$	49
Collateralized mortgage obligations		11,148		316		—		11,464
Other mortgage-backed securities		491		47		—		538
Other securities		42		1		—		43

Total securities available for sale	$	11,728	$	366		—	$	12,094

HELD-TO-MATURITY SECURITIES
Collateralized mortgage obligations	$	3,913	$	61		—	$	3,974
Other securities		18		—		—		18

Total held-to-maturity securities	$	3,931	$	61		—	$	3,992


	September 30, 2012
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
States and political subdivisions	$	52	$	2		—	$	54
Collateralized mortgage obligations		10,949		334		—		11,283
Other mortgage-backed securities		543		55		—		598
Other securities		25		2		—		27

Total securities available for sale	$	11,569	$	393		—	$	11,962

HELD-TO-MATURITY SECURITIES
Collateralized mortgage obligations	$	4,135	$	59		—	$	4,194
Other securities		18		—		—		18

Total held-to-maturity securities	$	4,153	$	59		—	$	4,212

The following table summarizes our securities that were in an unrealized loss position as of September 30, 2013, December 31, 2012, and September 30, 2012.


	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
in millions	Fair Value		Gross Unrealized Losses ^(a)		Fair Value		Gross Unrealized Losses ^(b)		Fair Value		Gross Unrealized Losses ^(a)
September 30, 2013
Securities available for sale:
Collateralized mortgage obligations	$	5,380	$	225		—		—	$	5,380	$	225
Other mortgage-backed securities		94		2		—		—		94		2
Other securities		2		—		—		—		2		—
Held-to-maturity:
Collateralized mortgage obligations		3,659		115		—		—		3,659		115
Other securities		5		—		—		—		5		—

Total temporarily impaired securities	$	9,140	$	342		—		—	$	9,140	$	342

December 31, 2012
Securities available for sale:
Other securities	$	31		—	$	3		—	$	34		—

Total temporarily impaired securities	$	31		—	$	3		—	$	34		—

September 30, 2012
Securities available for sale:
Collateralized mortgage obligations	$	7		—		—		—	$	7		—
Other securities		14		—	$	3		—		17		—
Held-to-maturity:
Collateralized mortgage obligations		—		—		—		—		—		—

Total temporarily impaired securities	$	21		—	$	3		—	$	24		—

(a)	There were less than $1 million of gross unrealized losses for the period ended December 31, 2012 and September 30, 2012.

(b)	There were less than $1 million of gross unrealized losses for the period ended September 30, 2013, December 31, 2012 and September 30, 2012.

At September 30, 2013, we had $225 million of gross unrealized losses related to 55 fixed-rate collateralized mortgage obligations that were invested in as part of our overall A/LM strategy. These securities have a weighted-average maturity of 4.9 years at September 30, 2013. Since these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. We also had $2 million of gross unrealized losses related to 20 other mortgage-backed securities positions, which have a weighted-average maturity of 3.4 years at September 30, 2013. These unrealized losses are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments have been reduced to their fair value through OCI, not earnings.

We regularly assess our securities portfolio for OTTI. The assessments are based on the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell securities prior to expected recovery.

The debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, we did not have any impairment losses recognized in earnings for the three months ended September 30, 2013.

Three months ended September 30, 2013


in millions
Balance at June 30, 2013	$	4
Impairment recognized in earnings		—

Balance at September 30, 2013	$	4

Realized gains and losses related to securities available for sale were as follows:

Nine months ended September 30, 2013


in millions
Realized gains			—
Realized losses			—

Net securities gains (losses)			—

At September 30, 2013, securities available for sale and held-to-maturity securities totaling $11.1 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.

The following table shows securities by remaining maturity. CMOs and other mortgage-backed securities (both of which are included in the securities available-for-sale portfolio) as well the CMOs in the held-to-maturity portfolio are presented based on their expected average lives. The remaining securities, in both the available-for-sale and held-to-maturity portfolios, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.


	Securities Available for Sale				Held-to-Maturity Securities
September 30, 2013 in millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	492	$	500	$	7	$	6
Due after one through five years		10,938		10,982		4,682		4,584
Due after five through ten years		1,169		1,119		146		140
Due after ten years		4		5		—		—

Total	$	12,603	$	12,606	$	4,835	$	4,730

7. Derivatives and Hedging Activities

We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no net investment, and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.

The primary derivatives that we use are interest rate swaps, caps, floors, and futures; foreign exchange contracts; energy derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. As further discussed in this note:

•

interest rate risk represents the possibility that the EVE or net interest income will be adversely affected by fluctuations in interest rates;

•

credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms; and

•

foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument.

Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.

At September 30, 2013, after taking into account the effects of bilateral collateral and master netting agreements, we had $102 million of derivative assets and a positive $15 million of derivative liabilities that relate to contracts entered into for hedging purposes. Our hedging derivative liabilities are in an asset position largely due to contracts with positive fair values as a result of master netting agreements. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $373 million and derivative liabilities of $465 million that were not designated as hedging instruments.

The Dodd-Frank Act, which is currently being implemented, may limit the types of derivative activities that KeyBank and other insured depository institutions may conduct. As a result, we may not continue to use all of the types of derivatives noted above in the future.

Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives” on page 124 of our 2012 Form 10-K.

Derivatives Designated in Hedge Relationships

Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance sheet instruments; associated interest rates tied to each instrument; differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities; and changes in interest rates. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.

We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.

Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate

payments over the lives of the contracts without exchanging the notional amounts. We also designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.

We also use interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases entered into by our Equipment Finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt.

We use foreign currency forward transactions to hedge the foreign currency exposure of our net investment in various foreign Equipment Finance entities. These entities are denominated in a non-U.S. currency. These swaps are designated as net investment hedges to mitigate the exposure of measuring the net investment at the spot foreign exchange rate.

During the first quarter of 2012 and prior years, Key had outstanding issuances of medium-term notes that were denominated in foreign currencies. The notes were subject to translation risk, which represented the possibility that the fair value of the foreign-denominated debt would change based on movement of the underlying foreign currency spot rate. The derivatives used for managing foreign currency exchange risk were cross currency swaps. The hedge converted the notes to a variable-rate U.S. currency-denominated debt, which was designated as a fair value hedge of foreign currency exchange risk.

Derivatives Not Designated in Hedge Relationships

On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of derivatives hedging risks on an economic basis at September 30, 2013, was not significant.

Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular extension of credit. We may also sell credit derivatives to offset our purchased credit default swap position prior to maturity. Although we use credit default swaps for risk management purposes, they are not treated as hedging instruments.

We also enter into derivative contracts for other purposes, including:

•

interest rate swap, cap, and floor contracts entered into generally to accommodate the needs of commercial loan clients;

•

energy and base metal swap and options contracts entered into to accommodate the needs of clients;

•

futures contracts and positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and

•

foreign exchange forward contracts and options entered into primarily to accommodate the needs of clients.

These contracts are not designated as part of hedge relationships.

Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments

The following table summarizes the fair values of our derivative instruments on a gross and net basis as of September 30, 2013, December 31, 2012, and September 30, 2012. The change in the notional amounts of these derivatives by type from December 31, 2012, to September 30, 2013, indicates the volume of our derivative transaction activity during the first nine months of 2013. The notional amounts are not affected by bilateral collateral and master netting agreements. The balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements do not exist or are not enforceable agreements under bankruptcy laws, those derivative assets and liabilities with counterparties are not adjusted. Securities collateral related to legally enforceable master netting agreements are not offset on the balance sheet. Our derivative instruments are included in “derivative assets” or “derivative liabilities” on the balance sheet, as indicated in the following table:


	September 30, 2013								December 31, 2012								September 30, 2012
			Fair Value								Fair Value								Fair Value
in millions	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate	$	13,762	$	332		$	36		$	19,085	$	579		$	30		$	16,596	$	604		$	31
Foreign exchange		190		—			1			196		—			7			264		—			10

Total		13,952		332			37			19,281		579			37			16,860		604			41
Derivatives not designated as hedging instruments:
Interest rate		47,315		799			762			51,633		1,144			1,122			55,391		1,260			1,252
Foreign exchange		4,479		70			68			5,025		75			68			5,126		81			73
Energy and commodity		1,890		137			131			1,688		156			150			1,749		183			178
Credit		971		6			11			955		9			10			2,242		19			18
Equity		—		—			—			7		—			—			13		—			—

Total		54,655		1,012			972			59,308		1,384			1,350			64,521		1,543			1,521
Netting adjustments ^(a)		—		(869	)		(559	)		—		(1,270	)		(803	)		—		(1,376	)		(905	)

Net derivatives in the balance sheet		68,607		475			450			78,589		693			584			81,381		771			657
Other collateral ^(b)		—		(81	)		(356	)		—		(163	)		(475	)		—		(186	)		(552	)

Net derivative amounts	$	68,607	$	394		$	94		$	78,589	$	530		$	109		$	81,381	$	585		$	105

(a)	Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.

(b)

Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, any excess other collateral is not reflected above.

Fair value hedges . Instruments designated as fair value hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recorded in “other income” on the income statement with no corresponding offset. During the nine-month period ended September 30, 2013, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our fair value hedges remained “highly effective” as of September 30, 2013.

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the nine-month periods ended September 30, 2013, and 2012, and where they are recorded on the income statement.

Nine months ended September 30, 2013

in millions

Income Statement Location of

Net Gains (Losses) on Derivative

Net Gains
(Losses) on
Derivative

Hedged Item

Income Statement Location of
Net Gains (Losses) on Hedged Item

Net Gains
(Losses) on
Hedged Item

Interest rate

Other income

(167

)

Long-term debt

Other income

167

^(a)

Interest rate

Interest expense — Long-term debt

Total

(70

)

167

Nine months ended September 30, 2012

in millions

Income Statement Location of

Net Gains (Losses) on Derivative

Net Gains
(Losses) on
Derivative

Hedged Item

Income Statement Location of
Net Gains (Losses) on Hedged Item

Net Gains
(Losses) on
Hedged Item

Interest rate

Other income

(14

)

Long-term debt

Other income

^(a)

Interest rate

Interest expense — Long-term debt

123

Foreign exchange

Other income

Long-term debt

Other income

) ^(a)

Foreign exchange

Interest expense — Long-term debt

Long-term debt

Interest expense – Long-term debt

) ^(b)

Total

115

(a)	Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in interest rates.

(b)	Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates.

Cash flow hedges . Instruments designated as cash flow hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. Initially, the effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet and is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we pay variable-rate interest on debt, receive variable-rate interest on commercial

loans, or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in “other income” on the income statement. During the nine-month period ended September 30, 2013, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our cash flow hedges remained “highly effective” as of September 30, 2013.

Considering the interest rates, yield curves, and notional amounts as of September 30, 2013, we would expect to reclassify an estimated $26 million of net losses on derivative instruments from AOCI to income during the next twelve months for our cash flow hedges. In addition, we expect to reclassify approximately $6 million of net gains related to terminated cash flow hedges from AOCI to income during the next twelve months. As of September 30, 2013, the maximum length of time over which we hedge forecasted transactions is 15 years.

Net investment hedges . In May 2012, we began entering into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments as a result of changes in the related foreign exchange rates. Instruments designated as net investment hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. Initially, the effective portion of a gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we dispose of a foreign subsidiary). At September 30, 2013, AOCI reflected unrecognized after-tax losses totaling $2 million related to cumulative changes in the fair value of our net investment hedge, which offset the unrecognized after-tax gains on net investment balances. The ineffective portion of net investment hedging transactions is included in “other income” on the income statement. However, there was no net investment hedge ineffectiveness as of September 30, 2013. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness while these hedges were outstanding during the nine-month period ended September 30, 2013.

The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the nine-month periods ended September 30, 2013 and 2012, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in OCI during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period, and the portion of net gains (losses) recognized directly in income, representing the amount of hedge ineffectiveness.


	Nine months ended September 30, 2013
in millions	Net Gains (Losses) Recognized in OCI (Effective Portion)			Income Statement Location of Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)	Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)			Income Statement Location of Net Gains (Losses) Recognized in Income (Ineffective Portion)	Net Gains (Losses) Recognized in Income (Ineffective Portion)
Cash Flow Hedges
Interest rate	$	(25	)	Interest income — Loans	$	52		Other income		—
Interest rate		18		Interest expense — Long-term debt		(7	)	Other income		—
Interest rate		(2	)	Investment banking and debt placement fees		—		Other income		—

Net Investment Hedges
Foreign exchange contracts		6		Other Income		(3	)	Other income		—

Total	$	(3	)		$	42				—


	Nine months ended September 30, 2012
in millions	Net Gains (Losses) Recognized in OCI (Effective Portion)			Income Statement Location of Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)	Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)			Income Statement Location of Net Gains (Losses) Recognized in Income (Ineffective Portion)	Net Gains (Losses) Recognized in Income (Ineffective Portion)
Cash Flow Hedges
Interest rate	$	106		Interest income — Loans	$	45		Other income		—
Interest rate		(8	)	Interest expense — Long-term debt		(7	)	Other income		—
Interest rate		—		Investment banking and debt placement fees		—		Other income		—

Net Investment Hedges
Foreign exchange contracts		(15	)	Other Income		—		Other income		—

Total	$	83			$	38				—

The after-tax change in AOCI resulting from cash flow and net investment hedges is as follows:


in millions	December 31, 2012		2013 Hedging Activity			Reclassification of Gains to Net Income			September 30, 2013
AOCI resulting from cash flow and net investment hedges	$	18	$	(2	)	$	(27	)	$	(11	)

Nonhedging instruments . Our derivatives that are not designated as hedging instruments are recorded at fair value in “derivative assets” and “derivative liabilities” on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in “corporate services income” and “other income” on the income statement.

The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the nine-month periods ended September 30, 2013, and 2012, and where they are recorded on the income statement.


	Nine months ended September 30, 2013								Nine months ended September 30, 2012
in millions	Corporate Services Income		Other Income			Total			Corporate Services Income		Other Income			Total
NET GAINS (LOSSES)
Interest rate	$	13		—		$	13		$	18	$	(2	)	$	16
Foreign exchange		29		—			29			27		—			27
Energy and commodity		4		—			4			8		—			8
Credit		1	$	(11	)		(10	)		—		(16	)		(16	)

Total net gains (losses)	$	47	$	(11	)	$	36		$	53	$	(18	)	$	35

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with ISDA and other related agreements. We generally hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or GNMA. The cash collateral netted against derivative assets on the balance sheet totaled $327 million at September 30, 2013, $494 million at December 31, 2012, and $503 million at September 30, 2012. The cash collateral netted against derivative liabilities totaled $17 million at September 30, 2013, $27 million at December 31, 2012, and $32 million at September 30, 2012. At September 30, 2013, we posted $9 million of cash collateral with clearing organizations that we are unable to net against the gross exposures because the relevant clearing agreements are not considered to be qualified master netting agreements. This additional cash collateral is included in “accrued income and other assets” and “accrued expense and other liabilities” on the balance sheet.

The following table summarizes our largest exposure to an individual counterparty at the dates indicated.


in millions	September 30, 2013		December 31, 2012		September 30, 2012
Largest gross exposure (derivative asset) to an individual counterparty	$	129	$	182	$	197
Collateral posted by this counterparty		44		66		67
Derivative liability with this counterparty		123		191		216
Collateral pledged to this counterparty		45		82		91
Net exposure after netting adjustments and collateral		7		7		5

The following table summarizes the fair value of our derivative assets by type. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.


in millions	September 30, 2013		December 31, 2012		September 30, 2012
Interest rate	$	708	$	1,114	$	1,195
Foreign exchange		28		23		24
Energy and commodity		65		47		51
Credit		1		3		4

Derivative assets before collateral		802		1,187		1,274
Less: Related collateral		327		494		503

Total derivative assets	$	475	$	693	$	771

We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.

We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. At September 30, 2013, for derivatives that have associated bilateral collateral and master netting agreements, we had gross exposure of $584 million to broker-dealers and banks. We had net exposure of $121 million after the application of master netting agreements and cash collateral; our net exposure to broker-dealers and banks at September 30, 2013, was $20 million after considering $101 million of additional collateral held in the form of securities.

We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by buying and selling U.S. Treasuries and Eurodollar futures, and entering into offsetting positions and other derivative contracts. Due to the smaller size and magnitude of the individual contracts with clients, collateral generally is not exchanged in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a default reserve (included in “derivative assets”) in the amount of $12 million at September 30, 2013, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At December 31, 2012, the default reserve was $19 million. At September 30, 2013, for derivatives that have associated master netting agreements, we had gross exposure of $400 million to client counterparties. We had net exposure of $354 million on our derivatives with clients after the application of master netting agreements, collateral and the related reserve.

Credit Derivatives

We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations. We may also sell credit derivatives, mainly single name credit default swaps, to offset our purchased credit default swap position prior to maturity. We previously sold index credit default swaps to diversify the concentration risk within our loan portfolio.

The following table summarizes the fair value of our credit derivatives purchased and sold by type as of September 30, 2013, December 31, 2012 and September 30, 2012. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.


	September 30, 2013								December 31, 2012									September 30, 2012
in millions	Purchased			Sold		Net			Purchased			Sold			Net			Purchased			Sold			Net
Single name credit default swaps	$	(4	)	$	—	$	(4	)	$	(1	)	$	1			—		$	(6	)	$	4		$	(2	)
Traded credit default swap indices		(1	)		—		(1	)		—			—			—			(1	)		5			4
Other		—			—		—			—			(1	)	$	(1	)		—			(1	)		(1	)

Total credit derivatives	$	(5	)	$	—	$	(5	)	$	(1	)		—		$	(1	)	$	(7	)	$	8		$	1

Single name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (the “reference entity”) in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, identified in the credit derivative contract. As the seller of a single name credit derivative, we would be required to pay the purchaser the difference between the par value and the market price of the debt obligation (cash settlement) or receive the specified referenced asset in exchange for payment of the par value (physical settlement) if the underlying reference entity experiences a predefined credit event. For a single name credit derivative, the notional amount represents the maximum amount that a seller could be required to pay. If we effect a physical settlement and receive our portion of the related debt obligation, we will join other creditors in the liquidation process, which may enable us to recover a portion of the amount paid under the credit default swap contract. We also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit us to recover the amount we pay should a credit event occur.

A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. For a credit default swap index, the notional amount represents the maximum amount that a seller could be required to pay. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity. During 2012, we suspended trading in traded credit default swap indices for purposes of diversifying concentration risk within our loan portfolio.

The majority of transactions represented by the “other” category shown in the above table are risk participation agreements. In these transactions, the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participant’s credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterparty’s percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the swap agreement.

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at September 30, 2013, December 31, 2012, and September 30, 2012. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using a Moody’s credit ratings matrix known as Moody’s “Idealized” Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.


	September 30, 2013							December 31, 2012							September 30, 2012
dollars in millions	Notional Amount		Average Term (Years)		Payment / Performance Risk			Notional Amount		Average Term (Years)		Payment / Performance Risk			Notional Amount		Average Term (Years)		Payment / Performance Risk

Single name credit default swaps	$	67		0.91		21.26	%	$	146		0.92		11.62	%	$	420		2.00		4.32	%
Traded credit default swap indices		—		—		—			—		—		—			466		2.66		3.56
Other		16		5.11		8.72			23		5.35		10.77			27		5.32		11.53

Total credit derivatives sold	$	83		—		—		$	169		—		—		$	913		—		—

Credit Risk Contingent Features

We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties also have the right

to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At September 30, 2013, KeyBank’s ratings with Moody’s and S&P were “A3” and “A-,” respectively, and KeyCorp’s ratings with Moody’s and S&P were “Baa1” and “BBB+,” respectively. If there were a downgrade of our ratings, we could be required to post additional collateral under those ISDA Master Agreements where we are in a net liability position. As of September 30, 2013, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $376 million, which includes $339 million in derivative assets and $715 million in derivative liabilities. We had $375 million in cash and securities collateral posted to cover those positions as of September 30, 2013. The aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) as of September 30, 2013, held by KeyCorp that were in a net liability position totaled $7 million, which consists solely of $7 million in derivative liabilities. We had $5 million in cash and securities collateral posted to cover those positions as of September 30, 2013.

The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of September 30, 2013, December 31, 2012, and September 30, 2012. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of September 30, 2013, and take into account all collateral already posted. A similar calculation was performed for KeyCorp and additional collateral of $2 million would have been required as of September 30, 2013, and $3 million as of December 31, 2012 and September 30, 2012.


	September 30, 2013				December 31, 2012				September 30, 2012
in millions	Moody’s		S&P		Moody’s		S&P		Moody’s		S&P
KeyBank’s long-term senior unsecured credit ratings		A3		A-		A3		A-		A3		A-
One rating downgrade	$	6	$	6	$	6	$	6	$	6	$	6
Two rating downgrades		11		11		11		11		11		11
Three rating downgrades		11		11		11		11		13		13

KeyBank’s long-term senior unsecured credit rating currently is four ratings above noninvestment grade at Moody’s and S&P. If KeyBank’s ratings had been downgraded below investment grade as of September 30, 2013, payments of up to $13 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorp’s ratings had been downgraded below investment grade as of September 30, 2013, payments of up to $2 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.

8. Mortgage Servicing Assets

We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. A servicing asset is recorded if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market rate. Changes in the carrying amount of mortgage servicing assets are summarized as follows:


	Nine months ended September 30,
in millions	2013			2012
Balance at beginning of period	$	204		$	173
Servicing retained from loan sales		31			30
Purchases		144	^(a)		31
Amortization		(48	)		(46	)

Balance at end of period	$	331		$	188

Fair value at end of period	$	388		$	237

(a)	Amount includes $118 million in mortgage servicing assets that were acquired during the second and third quarters of 2013. See Note 11 (“Acquisitions and Discontinued Operations”) for further details regarding this acquisition.

The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our mortgage servicing assets during the third quarter of 2013 and 2012, along with the valuation techniques, are shown in the following table:


September 30, 2013		Significant	Range
dollars in millions	Valuation Technique	Unobservable Input	(Weighted-Average)
Mortgage servicing assets	Discounted cash flow	Prepayment speed	0.00 - 25.00% (6.20%)
		Expected defaults	1.10 - 3.00% (2.10%)
		Residual cash flows discount rate	7.00 - 15.00% (8.00%)
		Value assigned to escrow funds	0.35 - 3.58% (1.90%)
		Servicing cost	150 - 9,296 (1,039)
		Loan assumption rate	0.00 - 3.00% (1.54%)
		Percentage late	0.00 - 2.00% (0.33%)


September 30, 2012		Significant	Range
dollars in millions	Valuation Technique	Unobservable Input	(Weighted-Average)
Mortgage servicing assets	Discounted cash flow	Prepayment speed	0.00 - 25.00% (10.40%)
		Expected defaults	1.00 - 3.00% (2.40%)
		Residual cash flows discount rate	7.00 - 15.00% (9.20%)
		Value assigned to escrow funds	0.27 - 2.78% (1.50%)
		Servicing cost	950 - 20,200 (2,582)
		Loan assumption rate	0.00 - 3.00% (2.24%)
		Percentage late	0.00 - 2.00% (0.22%)

If these economic assumptions change or prove incorrect, the fair value of mortgage servicing assets may as a result change in the future. The volume of loans serviced, expected credit losses, and the value assigned to escrow deposits are critical to the valuation of servicing assets. At September 30, 2013, a 1.00% decrease in the value assigned to the escrow deposits would cause a $51 million decrease in the fair value of our mortgage servicing assets. An increase in the assumed default rate of commercial mortgage loans of 1.00% would cause a $2 million decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totalled $87 million for the nine-month period ended September 30, 2013 and $67 million for the nine-month period ended September 30, 2012. We have elected to account for servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the preceding table, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in “other income” on the income statement.

Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 125 of our 2012 Form 10-K and Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Education lending” in this report.

9. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:

•

The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

•

The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.

•

The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.

•

The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

Our VIEs are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.


	Consolidated VIEs				Unconsolidated VIEs
in millions	Total Assets		Total Liabilities		Total Assets		Total Liabilities		Maximum Exposure to Loss
September 30, 2013
LIHTC funds	$	24	$	23	$	97		—		—
Education loan securitization trusts		2,158		2,037		N/A		N/A		N/A
LIHTC investments		N/A		N/A		762		—	$	453

Our involvement with VIEs is described below.

Consolidated VIEs

LIHTC guaranteed funds. KAHC formed limited partnerships, known as funds, that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the funds and continue to earn asset management fees. The funds’ assets primarily are investments in LIHTC operating partnerships, which totaled $14 million at September 30, 2013. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations.

We have not formed new funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and to provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these funds. Additional information on return guarantee agreements with LIHTC investors is presented in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees.”

In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the funds’ profits and losses. At September 30, 2013, we estimated the settlement value of these third-party interests to be between zero and $16 million, while the recorded value, including reserves, totaled $27 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.

Education loan securitization trusts. In September 2009, we decided to exit the government-guaranteed education lending business. Therefore, we have accounted for this business as a discontinued operation. In the past, as part of our education lending business model, we originated and securitized education loans. As the transferor, we retained a portion of the risk in the form of a residual interest and also retained the right to service the securitized loans and receive servicing fees. We have not securitized any education loans since 2006.

We consolidated our ten outstanding education loan securitization trusts as of January 1, 2010. We were required to consolidate these trusts because we hold the residual interests and, as the master servicer, we have the power to direct the activities that most significantly influence the trusts’ economic performance. We elected to consolidate these trusts at fair value. The trust assets can be used only to settle the obligations or securities that the trusts issue; we cannot sell the assets or transfer the liabilities. The security holders or beneficial interest holders do not have recourse to us, and we do not have any liability recorded related to their securities. Further information regarding these education loan securitization trusts is provided in Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Education lending.”

Unconsolidated VIEs

LIHTC nonguaranteed funds. Although we hold significant interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. At September 30, 2013, assets of these unconsolidated nonguaranteed funds totaled $97 million. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.

LIHTC investments. Through Key Community Bank, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits.

At September 30, 2013, assets of these unconsolidated LIHTC operating partnerships totaled approximately $762 million. At September 30, 2013, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $353 million plus $100 million of tax credits claimed but subject to recapture. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. During the first nine months of 2013, we did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.

We have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $773 million at September 30, 2013. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and the obligation to absorb expected losses and right to receive residual returns. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 15 under the heading “Return guarantee agreement with LIHTC investors.”

Commercial and residential real estate investments and principal investments. Our Principal Investing unit and the Real Estate Capital line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” We are not currently applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB has indefinitely deferred the effective date of this guidance for such nonregistered investment companies.

10. Income Taxes

Income Tax Provision

In accordance with the applicable accounting guidance, the principal method established for computing the provision for income taxes in interim periods requires us to make our best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.

The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 20.1% for the third quarter of 2013, 26.7% for the second quarter of 2013, and 18.9% for the third quarter of 2012. The effective tax rates are below our combined federal and state statutory tax rate of 37.2% primarily due to income from investments in tax-advantaged assets such as corporate-owned life insurance and credits associated with investments in low-income housing projects. In addition, during the third quarters of 2013 and 2012, our effective tax rate was lower due to the early termination of certain leveraged leases that resulted in nontaxable gains pursuant to a prior settlement with the IRS.

Deferred Tax Asset

At September 30, 2013, from continuing operations, we had a federal deferred tax asset of $219 million and a state deferred tax asset of $9 million compared to a federal deferred tax asset of $129 million and a state deferred tax liability of $8 million at December 31, 2012, and a federal net deferred tax asset of $88 million and a state deferred tax liability of $24 million at September 30, 2012, included in “accrued income and other assets” on the balance sheet. To determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded, we conduct a quarterly assessment of all available evidence. This evidence includes, but is not limited to, taxable income in prior periods, projected future taxable income, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo change. Based on these criteria, we have a valuation allowance of $2 million at September 30, 2013, and $3 million at December 31, 2012, associated with certain state net operating loss carryforwards and state credit carryforwards. We did not have a valuation allowance at September 30, 2012.

Unrecognized Tax Benefits

As permitted under the applicable accounting guidance for income taxes, it is our policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

11. Acquisitions and Discontinued Operations

Acquisitions

Mortgage Servicing Rights On June 24, 2013, in the first of multiple closings, we acquired substantially all third party commercial loan servicing rights comprised of CMBS Master, Primary and Special Servicing as well as other servicing from Bank of America’s Global Mortgages & Securitized Products business. Simultaneously, we entered into a subservicing agreement with Berkadia Commercial Mortgage LLC related to all CMBS primary servicing. This acquisition was accounted for as a business combination and fulfilled part of our strategy to drive growth by building scale and becoming one of the top three largest servicers of commercial/multifamily loans in the U.S. and the fifth largest special servicer of CMBS. The acquisition date fair value of the MSRs acquired on June 24, 2013, which were included on our balance sheet at June 30, 2013, was approximately $117 million. Related to this acquisition of MSRs, a second and third closing occurred on July 22, 2013 and August 26, 2013 respectively. The acquisition date fair value of these separately acquired MSRs was $1 million. The total fair value of the MSRs acquired during the second and third quarter of 2013 and included in our September 30, 2013 financial results was $118 million. No goodwill was recognized as a result of this acquisition. A fourth and last closing occurred on October 7, 2013 that resulted in approximately $1 million of additional MSRs. These additional MSRs acquired subsequent to September 30, 2013 will be included in our fourth quarter financial results. Additional information regarding our mortgage servicing assets is provided in Note 8 (“Mortgage Servicing Assets”).

Key-Branded Credit Card Portfolio On August 1, 2012, we acquired Key-branded credit card assets from Elan Financial Services, Inc. This acquisition was accounted for as an asset purchase. The fair value of the credit card assets purchased was approximately $718 million at the acquisition date. We also recorded a purchased credit card relationship intangible asset of approximately $135 million and a rewards liability of approximately $9 million in the Community Bank reporting unit.

Western New York Branches On July 13, 2012, we acquired 37 retail banking branches in Western New York. This acquisition was accounted for as a business combination. The acquisition date fair value of the assets and deposits acquired was approximately $2 billion. We received loans with a fair value of $244 million (including $25 million of PCI loans), $8 million of premises and equipment and assumed $2 billion of deposits. Cash of $1.8 billion was received to assume the net liabilities, and we recorded a core deposit intangible asset of $40 million and a goodwill asset of $62 million in the Key Community Bank reporting unit during the third quarter of 2012. All of the goodwill related to this acquisition is expected to be deductible for tax purposes.

A second closing of this acquisition occurred on September 14, 2012, when we acquired credit card assets with a fair value of approximately $68 million and remitted a cash payment of $68 million to the seller. We also recorded a purchased credit card relationship intangible asset of approximately $1 million and a rewards liability of approximately $1 million in the Key Community Bank reporting unit. No additional goodwill resulted from the acquisition of these credit card assets.

Discontinued operations

Education lending. In September 2009, we decided to exit the government-guaranteed education lending business. As a result, we have accounted for this business as a discontinued operation.

“Income (loss) from discontinued operations, net of taxes” on the income statement includes (i) the changes in fair value of the assets and liabilities of the education loan securitization trusts and the loans at fair value in portfolio (discussed later in this note), and (ii) the interest income and expense from the loans and the securities of the trusts and the loans in portfolio at both amortized cost and fair value. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of noninterest income or expense. Interest income and expense related to the loans and securities are shown as a component of “Net interest income.”

The components of “income (loss) from discontinued operations, net of taxes” for the education lending business are as follows:


	Three months ended September 30,						Nine months ended September 30,
in millions	2013			2012			2013			2012
Net interest income	$	26		$	28		$	80		$	89
Provision (credit) for loan and lease losses		6			(2	)		10			4

Net interest income (expense) after provision for loan and lease losses		20			30			70			85
Noninterest income		(94	)		(21	)		(128	)		(41	)
Noninterest expense		6		$	9			20			27

Income (loss) before income taxes		(80	)		—			(78	)		17
Income taxes		(30	)		—			(29	)		6

Income (loss) from discontinued operations, net of taxes ^(a)	$	(50	)		—		$	(49	)	$	11

(a)

Includes after-tax charges of $9 million and $13 million for the three-month periods ended September 30, 2013 and 2012, and $30 and $39 million for the nine-month periods ended September 30, 2013 and 2012, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:


	September 30,		December 31,		September 30,
in millions	2013		2012		2012
Trust loans at fair value	$	2,135	$	2,369	$	2,513
Portfolio loans at fair value		148		157		71
Loans, net of unearned income of ($6), ($5) and ($2)		2,455		2,675		2,744
Less: Allowance for loan and lease losses		38		55		65

Net loans		4,700		5,146		5,263
Trust accrued income and other assets at fair value		23		26		29
Accrued income and other assets		64		60		68

Total assets	$	4,787	$	5,232	$	5,360


Trust accrued expense and other liabilities at fair value	$	21	$	22	$	25
Trust securities at fair value		2,016		2,159		2,310

Total liabilities	$	2,037	$	2,181	$	2,335

The discontinued education lending business consists of assets and liabilities in the securitization trusts (recorded at fair value), as well as loans in portfolio (recorded at fair value) and loans in portfolio (recorded at carrying value with appropriate valuation reserves) that are held outside the trusts.

At September 30, 2013, portfolio loans recorded at carrying value include 1,010 TDRs with a recorded investment of approximately $11 million (pre-modification and post-modification). A specifically allocated allowance of $1 million was assigned to these loans as of September 30, 2013. There have been no significant payment defaults. There are no significant commitments outstanding to lend additional funds to these borrowers. Additional information regarding TDR classification and ALLL methodology is provided in Note 4 (“Asset Quality”).

In the past, as part of our education lending business model, we originated and securitized education loans. The process of securitization involved taking a pool of loans from our balance sheet and selling them to a bankruptcy-remote QSPE, or trust. This trust then issued securities to investors in the capital markets to raise funds to pay for the loans. The interest generated on the loans pays holders of the securities issued. As the transferor, we retain a portion of the risk in the form of a residual interest and also retain the right to service the securitized loans and receive servicing fees.

As of January 1, 2010, we consolidated our ten outstanding securitization trusts since we hold the residual interests and are the master servicer with the power to direct the activities that most significantly influence the economic performance of the trusts.

The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or transfer the liabilities. The loans in the consolidated trusts consist of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to Key. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $121 million as of September 30, 2013. During the third quarter of 2013, we recorded an after-tax loss of $48 million related to the fair value of the loans and securities in these securitization trusts. This loss resulted in a reduction in the value of our economic interest in these trusts. We record all income and expense (including fair value adjustments) through the “income (loss) from discontinued operations, net of tax” line item in our income statement.

We elected to consolidate these trusts at fair value. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest. The fair value of the assets and liabilities of the trusts is determined by calculating the present value of the future expected cash flows. We rely on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts because observable market data is not available. See further discussion regarding our valuation process later in this note.

At September 30, 2013 there are $142 million of loans that were purchased from two of the outstanding securitizations trusts pursuant to the legal terms of these particular trusts. These loans are held as portfolio loans and continue to be accounted for at fair value. These portfolio loans were valued using an internal discounted cash flow model, which was affected by assumptions for defaults, loss severity, discount rates and prepayments. These portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining fair value. See the following discussion regarding our valuation process for these loans as well as the trust loans and securities. Portfolio loans accounted for at fair value had a value of $148 million at September 30, 2013, $157 million at December 31, 2012, and $71 million at September 30, 2012.

Corporate Treasury, within our Finance area, is responsible for the quarterly valuation process that determines the fair value of the loans and securities in our education loan securitization trusts as well as our student loans held in portfolio that are accounted for at fair value. Corporate Treasury provides these fair values to a Working Group Committee (“the Working Group”) comprising representatives from the line of business, Credit and Market Risk Management, Accounting, Business Finance (part of our Finance area), and Corporate Treasury. The Working Group is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 5 (“Fair Value Measurements”). The Working Group reviews all significant inputs and assumptions and approves the resulting fair values.

The Working Group reviews actual performance trends of the loans and securities on a quarterly basis and uses statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models that incorporate delinquency and charge-off trends along with economic outlooks assist the Working Group to forecast future defaults. The Working Group uses this information to formulate the credit outlook for each of the securitization trusts. Higher projected defaults, fewer expected recoveries, elevated prepayment speeds and higher discount rates would be expected to result in a lower fair value of the loans and securities in these securitization trusts as well as the portfolio loans at fair value. Default expectations and discount rate changes have the most significant impact on the fair values of the loans and securities. It is important to note that increased cash flow uncertainty, whether through higher defaults and prepayments or fewer recoveries, can result in higher discount rates for use in the fair value process for these loans and securities.

The valuation process for the education loan securitization trust and portfolio loans that are accounted for at fair value is based on a discounted cash flow analysis using a model purchased from a third party that is maintained by Corporate Treasury. The valuation process begins with loan-by-loan-level data that is aggregated into pools based on underlying loan structural characteristics (i.e., current unpaid principal balance, contractual term, interest rate). Cash flows for these loan pools are developed using a financial model that reflects certain assumptions for defaults, recoveries, status change and prepayments. A net earnings stream, taking into account cost of funding, is calculated and discounted back to the measurement date using an appropriate discount rate. This resulting amount is used to determine the present value of the loans, which represents their fair value to a market participant.

The unobservable inputs set forth in the following table are reviewed and approved by the Working Group on a quarterly basis. The Working Group determines these assumptions based on available data, discussions with appropriate individuals internal and external to Key, and the knowledge and experience of the Working Group members.

A similar discounted cash flow approach to that described above is used on a quarterly basis by Corporate Treasury to fair value the trust securities. In valuing these securities, the discount rates used are provided by a third-party valuation consultant. These discount rates are based primarily on secondary market spread indices for similar student loans and asset-backed securities and are developed by the consultant using market-based data. On a quarterly basis, the Working Group reviews the discount rate inputs used in the valuation process for reasonableness based on the historical and current market knowledge of the Working Group members.

A quarterly variance analysis reconciles valuation changes in the model used to calculate the fair value of the trust loans and securities and the portfolio loans at fair value. This quarterly analysis considers loan and securities runoff, yields, future default and recovery changes, and the timing of cash releases to us from the trusts. Back testing for expected defaults to

actual experience is also performed as the impact of future defaults has a significant impact on the fair value of these loans and securities over time. In addition, our internal model validation group periodically performs a review to ensure the accuracy and validity of the model for determining the fair value of these loans and securities.

The following table shows the significant unobservable inputs used to measure the fair value of the education loan securitization trust loans and securities and the portfolio loans accounted for at fair value as of September 30, 2013, December 31, 2012, and September 30, 2012:


September 30, 2013	Fair Value of Level 3		Valuation	Significant	Range
dollars in millions	Assets and Liabilities		Technique	Unobservable Input	(Weighted-Average)
Trust loans and portfolio loans accounted for at fair value	$	2,283	Discounted cash flow	Prepayment speed	4.00 - 13.50% (6.04%)
				Loss severity	2.00 - 79.50% (37.67%)
				Discount rate	2.00 - 10.50% (7.09%)
				Default rate	8.02 - 23.78% (15.97%)

Trust securities		2,016	Discounted cash flow	Discount rate	1.10 - 3.80% (2.64%)


December 31, 2012	Fair Value of Level 3		Valuation	Significant	Range
dollars in millions	Assets and Liabilities		Technique	Unobservable Input	(Weighted-Average)
Trust loans and portfolio loans accounted for at fair value	$	2,526	Discounted cash flow	Prepayment speed	4.00 - 26.00% (9.74%)
				Loss severity	2.00 - 80.00% (49.61%)
				Discount rate	2.40 - 10.50% (5.12%)
				Default rate	8.13 - 21.50% (13.44%)

Trust securities		2,159	Discounted cash flow	Discount rate	1.50 - 6.10% (4.14%)


September 30, 2012	Fair Value of Level 3		Valuation	Significant	Range
dollars in millions	Assets and Liabilities		Technique	Unobservable Input	(Weighted-Average)
Trust loans and portfolio loans accounted for at fair value	$	2,584	Discounted cash flow	Prepayment speed	4.00 - 26.00% (10.08%)
				Loss severity	2.00 - 80.00% (51.05%)
				Discount rate	2.60 - 10.50% (5.04%)
				Default rate	8.00 - 21.50% (12.60%)

Trust securities		2,310	Discounted cash flow	Discount rate	1.80 - 6.50% (4.30%)

The following table shows the consolidated trusts’ assets and liabilities at fair value and the portfolio loans at fair value and their related contractual values as of September 30, 2013. At September 30, 2013, loans held by the trusts with unpaid principal balances of $29 million ($28 million on a fair value basis) and portfolio loans at fair value with unpaid principal balances of $5 million ($5 million on a fair value basis) were 90 days or more past due. Loans held by the trusts aggregating $12 million ($12 million on a fair value basis) were in nonaccrual status, while portfolio loans at fair value in nonaccrual status aggregated to less than $1 million on both a contractual amount and fair value basis. Portfolio loans at carrying value that are 90 days or more past due were $38 million at September 30, 2013 and $47 million at September 30, 2012, respectively. Portfolio loans at carrying value in nonaccrual (and nonperforming) status were $9 million and $5 million at September 30, 2013, and 2012, respectively. Our policies 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 120 of our 2012 Form 10-K.


September 30, 2013	Contractual		Fair
in millions	Amount		Value
ASSETS
Portfolio loans	$	142	$	148
Trust loans		2,190		2,135
Trust other assets		23		23

LIABILITIES
Trust securities	$	2,200	$	2,016
Trust other liabilities		21		21

During the third quarter of 2013, additional market participant information about projected trends for default and recovery rates became available. Based on this information and our related internal analysis, certain assumptions related to valuing the loans and securities in these securitization trusts were adjusted. As a result, a $48 million after-tax loss was recognized during the third quarter of 2013 related to the fair value of the loans and securities in the education loan securitization trusts.

The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value, as well as the portfolio loans that are measured at fair value on a recurring basis.


September 30, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans		—		—	$	148	$	148
Trust loans		—		—		2,135		2,135
Trust other assets		—		—		23		23

Total assets on a recurring basis at fair value		—		—	$	2,306	$	2,306

LIABILITIES MEASURED ON A RECURRING BASIS
Trust securities		—		—	$	2,016	$	2,016
Trust other liabilities		—		—		21		21

Total liabilities on a recurring basis at fair value		—		—	$	2,037	$	2,037

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts and portfolio loans for the three and nine-month periods ended September 30, 2013.


	Portfolio			Trust			Trust						Trust
	Student			Student			Other			Trust			Other
in millions	Loans			Loans			Assets			Securities			Liabilities
Balance at December 31, 2012	$	157		$	2,369		$	26		$	2,159		$	22
Gains (losses) recognized in earnings ^(a)		—			6			—			130			—
Purchases		—			—			—			—			—
Sales		—			—			—			—			—
Issuances		—			—			—			—			—
Settlements		(9	)		(240	)		(3	)		(273	)		(1	)

Balance at September 30, 2013	$	148		$	2,135		$	23		$	2,016		$	21


Balance at June 30, 2013	$	151		$	2,317		$	24		$	2,118		$	21
Gains (losses) recognized in earnings ^(a)		—			(105	)		—			(14	)		—
Purchases		—			—			—			—			—
Sales		—			—			—			—			—
Issuances		—			—			—			—			—
Settlements		(3	)		(77	)		(1	)		(88	)		—

Balance at September 30, 2013	$	148		$	2,135		$	23		$	2,016		$	21

(a)	Gains (losses) were driven primarily by fair value adjustments.

Victory Capital Management and Victory Capital Advisors. On July 31, 2013, we completed the sale of our investment management subsidiary Victory Capital Management and its broker-dealer affiliate Victory Capital Advisors (collectively, “Victory”) to a private equity fund. As a result of this sale, we recorded an after-tax gain of $92 million as of September 30, 2013. The cash portion of the gain was $72 million. An additional gain may be recognized based on client consents received through January 31, 2014. Due to the lack of certainty in securing these remaining consents, there was no accrual for these consents included in the gain as of September 30, 2013. Since February 21, 2013 when we agreed to sell Victory, we have accounted for this business as a discontinued operation.

The results of this discontinued business are included in “income (loss) from discontinued operations, net of taxes” on the income statement. The components of “income (loss) from discontinued operations, net of taxes” for Victory which includes the gain on the sale of this business on July 31, 2013 are as follows:


	Three months ended September 30,				Nine months ended September 30,
in millions	2013		2012		2013		2012
Noninterest income	$	155	$	26	$	212	$	84
Noninterest expense		16		22		59		67

Income (loss) before income taxes		139		4		153		17
Income taxes		52		1		57		6

Income (loss) from discontinued operations, net of taxes	$	87	$	3	$	96	$	11

The discontinued assets and liabilities of Victory included on the balance sheet are as follows:


	September 30,		December 31,		September 30,
in millions	2013		2012		2012
Cash and due from banks		—	$	1	$	1
Accrued income and other assets	$	31		27		18

Total assets	$	31	$	28	$	19


Accrued expense and other liabilities		—	$	38	$	33

Total liabilities		—	$	38	$	33

The only remaining asset of Victory is a $31 million Seller note that is accounted for at fair value and is classified as a Level 3 asset. The Seller note will be accounted for at fair value until December 31, 2013 when the contingency involving certain fund outflows will be resolved. Corporate Treasury is responsible for the quarterly valuation process that determines the fair value of this Seller note. Corporate Treasury determined the fair value of this Seller note at closing on July 31, 2013 and again on September 30, 2013 and will also fair value this note at December 31, 2013. This Seller note is valued using a discounted cash flow methodology that incorporates an appropriate discount rate based on the credit, market, and interest risks associated with this note. The discount rate used in valuing this Seller note is determined by using the Capital Asset Pricing Model that is derived using adjusted quarterly changes in the seven-year U.S. Treasury Rate and an average beta of Victory’s peers. The alpha used is equal to the one-year probability of default for similar risk-rated loans per our internal risk rating system and credit policy. The discount rate used for the Seller note at September 30, 2013 was 12.75%. A Mergers & Acquisitions Working Group, which is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 5, reviews the determination of the discount rate and approves the resulting fair value.

The following table presents the Victory Seller note that is measured at fair value on a recurring basis through December 31, 2013.


September 30, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Seller note		—		—	$	31	$	31

Total assets on a recurring basis at fair value		—		—	$	31	$	31

The following table shows the change in the fair value of the Level 3 Victory Seller note for the three-month period ended September 30, 2013.


in millions	Seller note
Balance at June 30, 2013		—
Gains (losses) recognized in earnings ^(a)	$	(1	)
Purchases		—
Sales		—
Issuances		32
Settlements		—

Balance at September 30, 2013	$	31

(a)	Gains (losses) were driven primarily by fair value adjustments.

Austin Capital Management, Ltd. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result, we have accounted for this business as a discontinued operation.


	Three months ended September 30,					Nine months ended September 30,
in millions	2013			2012		2013			2012
Noninterest expense	$	1			—	$	1		$	9

Income (loss) before income taxes		(1	)		—		(1	)		(9	)
Income taxes	$	(1	)		—		1			(3	)

Income (loss) from discontinued operations, net of taxes		—			—	$	(2	)	$	(6	)

The discontinued assets and liabilities of Austin included on the balance sheet are as follows:


	September 30,		December 31,		September 30,
in millions	2013		2012		2012
Cash and due from banks	$	20	$	22	$	21

Total assets	$	20	$	22	$	21


Accrued expense and other liabilities		—	$	1		—

Total liabilities		—	$	1		—

Combined discontinued operations. The combined results of the discontinued operations are as follows:


	Three months ended September 30,					Nine months ended September 30,
in millions	2013		2012			2013		2012
Net interest income	$	26	$	28		$	80	$	89
Provision (credit) for loan and lease losses		6		(2	)		10		4

Net interest income (expense) after provision for loan and lease losses		20		30			70		85
Noninterest income		61		5			84		43
Noninterest expense		23		31			80		103

Income (loss) before income taxes		58		4			74		25
Income taxes		21		1			29		9

Income (loss) from discontinued operations, net of taxes ^(a)	$	37	$	3		$	45	$	16

(a)

Includes after-tax charges of $9 million and $13 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $30 million and $39 million for the nine-month periods ended September 30, 2013 and 2012, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

The combined assets and liabilities of the discontinued operations are as follows:


	September 30,		December 31,		September 30,
in millions	2013		2012		2012
Cash and due from banks	$	20	$	23	$	22
Trust loans at fair value		2,135		2,369		2,513
Portfolio loans at fair value		148		157		71
Loans, net of unearned income of ($6), ($5), and ($2)		2,455		2,675		2,744
Less: Allowance for loan and lease losses		38		55		65

Net loans		4,700		5,146		5,263
Trust accrued income and other assets at fair value		23		26		29
Accrued income and other assets		95		87		86

Total assets	$	4,838	$	5,282	$	5,400


Trust accrued expense and other liabilities at fair value	$	21	$	22	$	25
Accrued expense and other liabilities		—		39		33
Trust securities at fair value		2,016		2,159		2,310

Total liabilities	$	2,037	$	2,220	$	2,368

12. Securities Financing Activities

We enter into repurchase and reverse repurchase agreements and securities borrowed transactions (securities financing agreements) primarily to finance our inventory positions, acquire securities to cover short positions, accommodate customers’ financing needs, and to settle other securities obligations. We account for these securities financing agreements as collateralized financing transactions. Repurchase and reverse repurchase agreements are recorded on the balance sheet at the amounts at which the securities will be subsequently sold or repurchased. Securities borrowed transactions are recorded on the balance sheet at the amounts of cash collateral advanced. While the right of setoff exists for our securities financing agreements, the assets and liabilities are reported on a gross basis. Repurchase agreements and securities borrowed transactions are included in “Accrued income and other assets” and reverse repurchase agreements in “Federal funds purchased and securities sold under repurchase agreements” on the balance sheet.

The following table summarizes our securities financing agreements as of September 30, 2013, December 31, 2012, and September 30, 2012:


	September 30, 2013
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments ^(a)			Collateral ^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	516	$	(176	)	$	(332	)	$	8
Securities borrowed		1		—			(1	)		—

Total	$	517	$	(176	)	$	(333	)	$	8


Offsetting of financial liabilities:
Repurchase agreements	$	464	$	(176	)	$	(288	)		—

Total	$	464	$	(176	)	$	(288	)		—


	December 31, 2012
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments ^(a)			Collateral ^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	271	$	(95	)	$	(172	)	$	4
Securities borrowed		—		—			—			—

Total	$	271	$	(95	)	$	(172	)	$	4


Offsetting of financial liabilities:
Repurchase agreements	$	228	$	(95	)	$	(133	)		—

Total	$	228	$	(95	)	$	(133	)		—


	September 30, 2012
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments ^(a)			Collateral ^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	294	$	(171	)	$	(118	)	$	5
Securities borrowed		3		—			(3	)		—

Total	$	297	$	(171	)	$	(121	)	$	5


Offsetting of financial liabilities:
Repurchase agreements	$	398	$	(171	)	$	(227	)		—

Total	$	398	$	(171	)	$	(227	)		—

(a)	Netting adjustments take into account the impact of master netting agreements that allow us to settle with a single counterparty on a net basis.

(b)	These adjustments take into account the impact of bilateral collateral agreements that allow us to offset the net positions with the related collateral. The application of collateral cannot reduce the net position below zero. Therefore, any excess collateral is not reflected above.

Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we have received from counterparties and either request additional collateral or return a portion of the collateral based on the value of those securities. We generally hold collateral in the form of highly rated securities issued by the U.S. Treasury and fixed income securities. In addition, we may need to provide collateral to counterparties under our repurchase agreements and securities borrowed transactions. In general, the collateral we pledge and receive can be sold or repledged by the secured parties.

13. Employee Benefits

Pension Plans

Effective December 31, 2009, we amended our cash balance pension plan and other defined benefit plans to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants’ existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions after freezing the plans.

During the third quarter of 2013, lump sum payments made under certain pension plans triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement loss reflected in the following table. We will also recognize a settlement loss in the fourth quarter of 2013 related to the additional lump sum payments made during the fourth quarter.

The components of net pension cost (benefit) for all funded and unfunded plans are as follows:


	Three months ended September 30,						Nine months ended September 30,
in millions	2013			2012			2013			2012
Interest cost on PBO	$	10		$	12		$	30		$	36
Expected return on plan assets		(17	)		(18	)		(51	)		(54	)
Amortization of losses		5			4			15			12
Settlement loss		25			—			25			—

Net pension cost (benefit)	$	23		$	(2	)	$	19		$	(6	)

Other Postretirement Benefit Plans

We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan.

We also maintained a death benefit plan that provided a death benefit for a very limited number of (i) former Key employees who retired from their employment with Key prior to 1994; (ii) former Key employees who elect a grandfathered pension benefit under the KeyCorp Cash Balance Pension Plan; and (iii) Key employees who otherwise were provided a historical death benefit at the time of their termination. The death benefit plan was non-contributory, and we used a separate VEBA trust to fund the plan. In the fourth quarter of 2012, we used the assets of the VEBA trust to purchase insurance through a policy issued by a third-party insurance provider to fully fund the death benefits under the plan. All grandfathered employees’ death benefits are fully funded, administered, and paid by the third-party insurance provider, and the insurance company has accepted all funding obligations and administrative liability for the grandfathered employees’ death benefits. We accordingly terminated the death benefit plan and the VEBA effective December 31, 2012.

The components of net postretirement benefit cost for all funded and unfunded plans are as follows:


	Three months ended September 30,						Nine months ended September 30,
in millions	2013			2012			2013			2012
Interest cost on APBO	$	1		$	1		$	3		$	3
Expected return on plan assets		(1	)		(1	)		(3	)		(3	)

Net postretirement benefit cost		—			—			—			—

The Patient Protection and Affordable Care Act and Education Reconciliation Act of 2010, which were both signed into law in March 2010, changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefits under Medicare Part D. As a result of these laws, these subsidy payments became taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes required the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. The changes to the tax law regarding these subsidies did not affect us as we did not have a deferred tax asset recorded for Medicare Part D subsidies received.

14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the mandatorily redeemable trust preferred securities.

We unconditionally guarantee the following payments or distributions on behalf of the trusts:

•

required distributions on the trust preferred securities;

•

the redemption price when a capital security is redeemed; and

•

the amounts due if a trust is liquidated or terminated.

The Regulatory Capital Rules, discussed in the “Supervision and regulation” portion of this report, implement a phase-out of trust preferred securities as Tier 1 capital, consistent with the requirements of the Dodd-Frank Act. For standardized approach banks such as Key, the phase-out period begins on January 1, 2015, and by 2016 will require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.

As of September 30, 2013, the trust preferred securities issued by the KeyCorp capital trusts represent $340 million, or 3.4% of our total qualifying Tier 1 capital, net of goodwill.

The trust preferred securities, common stock and related debentures are summarized as follows:


					Principal		Interest Rate			Maturity
	Trust Preferred				Amount of		of Trust Preferred			of Trust Preferred
	Securities,		Common		Debentures,		Securities and			Securities and
dollars in millions	Net of Discount ^(a)		Stock		Net of Discount ^(b)		Debentures ^(c)			Debentures
September 30, 2013
KeyCorp Capital I	$	156	$	6	$	162		1.014	%		2028
KeyCorp Capital II		102		4		106		6.875			2029
KeyCorp Capital III		133		4		137		7.750			2029

Total	$	391	$	14	$	405		4.834	%		—

December 31, 2012	$	417	$	14	$	431		5.025	%		—

September 30, 2012	$	423	$	14	$	437		5.095	%		—

(a)

The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include basis adjustments related to fair value hedges totaling $51 million at September 30, 2013, $77 million at December 31, 2012, and $83 million at September 30, 2012. See Note 7 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.

(b)

We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest, or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis points or 50 basis points in the case of redemption upon either a tax event or a capital treatment event for KeyCorp Capital III), plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price for KeyCorp Capital II and KeyCorp Capital III generally is slightly more favorable to us. The principal amount of certain debentures includes basis adjustments related to fair value hedges totaling $51 million at September 30, 2013, $77 million at December 31, 2012, and $83 million at September 30, 2012. See Note 7 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in Long-Term Debt on the balance sheet.

(c)	The interest rates for the trust preferred securities issued by KeyCorp Capital II and KeyCorp Capital III are fixed. KeyCorp Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. The total interest rates are weighted-average rates.

15. Contingent Liabilities and Guarantees

Legal Proceedings

The following discussion provides information on material developments in our legal proceedings during the third quarter of 2013. Additional information on our legal proceedings is available on: pages 186-188 of our 2012 Form 10-K, Note 16 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings;” on page 72 of our Form 10-Q for the quarter ended March 31, 2013, Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings”; and, on page 75 of our Form 10-Q for the quarter ended June 30, 2013, Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings.”

Metyk litigation . As previously reported, two putative class actions were filed on September 21, 2010 in the United States District Court for the Northern District of Ohio (the “Northern District of Ohio”). The plaintiffs in these cases sought to represent a class of all participants in our 401(k) Savings Plan and alleged that the defendants in the lawsuit breached fiduciary duties owed to them under ERISA. These two putative class action lawsuits were substantively consolidated with each other in a proceeding styled Thomas Metyk, et al . v. KeyCorp, et al . (“Metyk”). A substantially similar class action, Taylor v. KeyCorp, et al ., was dismissed from the Northern District of Ohio on August 12, 2010. This dismissal was affirmed by the United States Court of Appeals for the Sixth Circuit (the “Sixth Circuit”) on May 25, 2012. On January 29, 2013, the Northern District of Ohio entered its order granting the defendants’ motion to dismiss the plaintiffs’ consolidated complaint for failure to state a claim and entered its final judgment terminating the Metyk proceeding. On February 19, 2013, plaintiffs filed a motion to set aside the final judgment and to permit the plaintiffs to file an amended complaint. On April 30, 2013, the Northern District of Ohio denied the motion to set aside the final judgment. Metyk is currently on appeal before the Sixth Circuit.

Checking Account Overdraft Litigation . As previously reported, KeyBank was named a defendant in a putative class action seeking to represent a national class of KeyBank customers allegedly harmed by KeyBank’s overdraft practices. The case was transferred and consolidated for purposes of pretrial discovery and motion proceedings to a multidistrict proceeding styled In Re: Checking Account Overdraft Litigation pending in the United States District Court for the Southern District of Florida (the “District Court”). KeyBank filed a notice of appeal in regard to the denial of its motion to compel arbitration. On August 21, 2012, the United States Court of Appeals for the Eleventh Circuit (the “Eleventh Circuit”) vacated the District Court’s order denying KeyBank’s motion to compel arbitration and remanded the case for further consideration. On June 21, 2013, KeyBank filed with the District Court its renewed motion to compel arbitration and stay or dismiss litigation. On August 27, 2013, the District Court granted KeyBank’s renewed motion to compel arbitration and dismissed the case. Plaintiff filed his notice of appeal to the Eleventh Circuit on September 17, 2013.

Other litigation. In the ordinary course of business, we are subject to various other litigation, investigations and administrative proceedings. These other matters may involve claims for substantial monetary relief. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any other matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

Guarantees

We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at September 30, 2013. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” on page 128 of our 2012 Form 10-K.


	Maximum Potential
September 30, 2013	Undiscounted		Liability
in millions	Future Payments		Recorded
Financial guarantees:
Standby letters of credit	$	10,711	$	79
Recourse agreement with FNMA		1,254		5
Return guarantee agreement with LIHTC investors		16		16
Written put options ^(a)		2,165		29

Total	$	14,146	$	129

(a)	The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.

We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0-30% probability of payment), moderate (31-70% probability of payment) or high (71-100% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at September 30, 2013, is low.

Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At September 30, 2013, our standby letters of credit had a remaining weighted-average life of 3.1 years, with remaining actual lives ranging from less than one year to as many as eleven years.

Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability. At September 30, 2013, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 6.9 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $3.9 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at September 30, 2013. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan; any loss we incur could be offset by the amount of any recovery from the collateral.

Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the property’s confirmed LIHTC status throughout a fifteen-year compliance period. Typically, KAHC fulfills these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.

As shown in the previous table, KAHC maintained a reserve in the amount of $16 million at September 30, 2013, which we believe will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future payments due to investors for the return on and of their investments.

These guarantees have expiration dates that extend through 2018, but KAHC has not formed any new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 9 (“Variable Interest Entities”).

Written put options. In the ordinary course of business, we “write” interest rate caps and floors for commercial loan clients that have variable and fixed rate loans, respectively, with us and wish to mitigate their exposure to changes in interest rates. At September 30, 2013, our written put options had an average life of 1.8 years. These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the commercial loan client) based on changes in an

underlying variable that is related to an asset, a liability, or an equity security that the client holds (i.e., the commercial loan client). We are obligated to pay the client if the applicable benchmark interest rate is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, as further discussed in Note 7 (“Derivatives and Hedging Activities”). We typically mitigate our potential future payment obligations by entering into offsetting positions with third parties.

Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 7.

Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: either the risk profile of the debtor should provide an investment return, or we are supporting our underlying investment in the debtor. The terms of these default guarantees range from less than one year to as many as 5.7 years; some default guarantees do not have a contractual end date. Although no collateral is held, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor.

Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships.

Liquidity facilities that support asset-backed commercial paper conduits. At September 30, 2013, we did not have any liquidity facilities remaining outstanding with any unconsolidated third-party commercial paper conduits. Our prior liquidity facility, which expired during the second quarter of 2012, obligated us to provide aggregate funding of up to a certain amount in the event that a credit market disruption or other factors prevented the conduit from issuing commercial paper.

Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of these indemnities.

Intercompany guarantees. KeyCorp and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.

16. Accumulated Other Comprehensive Income

Our changes in accumulated other comprehensive income for the three and nine months ended September 30, 2013, are as follows:


	Unrealized gains			Unrealized gains			Foreign currency			Net pension and
	(losses) on available			(losses) on derivative			translation			postretirement
in millions	for sale securities			financial instruments			adjustment			benefit costs			Total
Balance at December 31, 2012	$	229		$	18		$	55		$	(426	)	$	(124	)

Other comprehensive income before reclassification		(228	)		(2	)		(8	)		24			(214	)

Amounts reclassified from accumulated other comprehensive income ^(a)		—			(27	)		(4	)		—			(31	)

Net current-period other comprehensive income		(228	)		(29	)		(12	)		24			(245	)

Balance at September 30, 2013	$	1		$	(11	)	$	43		$	(402	)	$	(369	)

Balance at June 30, 2013	$	82		$	(21	)	$	41		$	(420	)	$	(318	)

Other comprehensive income before reclassification		(81	)		20			2			18			(41	)

Amounts reclassified from accumulated other comprehensive income ^(a)		—			(10	)		—			—			(10	)

Net current-period other comprehensive income		(81	)		10			2			18			(51	)

Balance at September 30, 2013	$	1		$	(11	)	$	43		$	(402	)	$	(369	)

(a)	See table below for details about these reclassifications.

Our reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2013 are as follows:


Nine months ended September 30, 2013	Amount Reclassified from Accumulated Other			Affected Line Item in the Statement
in millions	Comprehensive Income			Where Net Income is Presented
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	52		Interest income — Loans
Interest rate		(7	)	Interest expense — Long term debt
Foreign exchange contracts		(3	)	Other income

		42		Income (loss) from continuing operations before income taxes
		15		Income taxes

	$	27		Income (loss) from continuing operations


Foreign currency translation adjustment
	$	7		Corporate services income

		7		Income (loss) from continuing operations before income taxes
		3		Income taxes

	$	4		Income (loss) from continuing operations


Three months ended September 30, 2013	Amount Reclassified from Accumulated Other			Affected Line Item in the Statement
in millions	Comprehensive Income			Where Net Income is Presented
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	17		Interest income — Loans
Interest rate		(3	)	Interest expense — Long term debt
Foreign exchange contracts		—		Other income

		14		Income (loss) from continuing operations before income taxes
		4		Income taxes

	$	10		Income (loss) from continuing operations

17. Shareholders’ Equity

Comprehensive Capital Plan

As previously reported and as authorized by Key’s Board of Directors and pursuant to our 2013 capital plan submitted to and not objected to by the Federal Reserve, we have authority to repurchase up to $426 million of our Common Shares in the open market or through privately negotiated transactions. Our Board of Directors at its September meeting approved the use of the cash portion of the net after-tax gain from the sale of Victory for additional Common Share repurchases, and we have received no objection from the Federal Reserve to use the cash portion of the net after-tax gain for this purpose. Common Share repurchases under the current authorization are expected to be executed through the first quarter of 2014. During the third quarter of 2013, we completed $198 million of Common Share repurchases on the open market under our 2013 capital plan. This amount included repurchases related to the cash portion of the net after-tax gain from the sale of Victory.

Consistent with the 2013 capital plan, the Board declared a quarterly dividend of $.055 per Common Share for the third quarter of 2013.

18. Line of Business Results

The specific lines of business that constitute each of the major business segments (operating segments) are described below.

Key Community Bank

Key Community Bank serves individuals and small to mid-sized businesses through its 13-state branch network.

Individuals are provided branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity, credit card and various types of installment loans. In addition, financial, estate and retirement planning, asset management services, and Delaware Trust capabilities are offered to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving, and related needs.

Small businesses are provided deposit, investment and credit products, and business advisory services. Mid-sized businesses are provided products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives, and foreign exchange.

Key Corporate Bank

Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in six industry sectors: consumer, energy, healthcare, industrial, public sector and real estate. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory and public finance. Key Corporate Bank also delivers many of its product capabilities to clients of Key Community Bank.

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Principal Investing and various exit portfolios.

Reconciling Items

Total assets included under “Reconciling Items” primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.

The table on the following pages shows selected financial data for our two major business segments for the three- and nine- month periods ended September 30, 2013 and 2012.

The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable to line of business results presented by other companies.

The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:

•

Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics.

•

Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line of business actually uses the services.

•

The consolidated provision for loan and lease losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated allowance for loan and lease losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 120 of our 2012 Form 10-K.

•

Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.2%.

•

Capital is assigned to each line of business based on regulatory requirements.

Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect enhanced alignment of expense base allocation drivers, changes in the risk profile of a particular business, or changes in our organizational structure.


Three months ended September 30,	Key Community Bank						Key Corporate Bank
dollars in millions	2013			2012			2013			2012
SUMMARY OF OPERATIONS
Net interest income (TE)	$	357		$	376		$	188		$	189
Noninterest income		194			199			189			181

Total revenue (TE) ^(a)		551			575			377			370
Provision (credit) for loan and lease losses		24			123			13			(3	)
Depreciation and amortization expense		19			16			10			12
Other noninterest expense		422			462			207			189

Income (loss) from continuing operations before income taxes (TE)		86			(26	)		147			172
Allocated income taxes and TE adjustments		32			(10	)		51			63

Income (loss) from continuing operations		54			(16	)		96			109
Income (loss) from discontinued operations, net of taxes		—			—			—			—

Net income (loss)		54			(16	)		96			109
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			—

Net income (loss) attributable to Key	$	54		$	(16	)	$	96		$	109

AVERAGE BALANCES ^(b)
Loans and leases	$	29,495		$	27,764		$	20,586		$	18,893
Total assets ^(a)		31,679			30,305			24,487			22,912
Deposits		49,652			49,269			16,125			12,879
OTHER FINANCIAL DATA
Net loan charge-offs ^(b)	$	27		$	91		$	7		$	8
Return on average allocated equity ^(b)		7.49	%		(2.25	)%		23.31	%		26.06	%
Return on average allocated equity		7.49			(2.25	)		23.31			26.06
Average full-time equivalent employees ^(c)		7,990			9,064			2,018			2,009


Nine months ended September 30,	Key Community Bank						Key Corporate Bank
dollars in millions	2013			2012			2013			2012
SUMMARY OF OPERATIONS
Net interest income (TE)	$	1,075		$	1,089		$	565		$	575
Noninterest income		582			556			567			543

Total revenue (TE) ^(a)		1,657			1,645			1,132			1,118
Provision (credit) for loan and lease losses		123			124			7			14
Depreciation and amortization expense		58			35			33			43
Other noninterest expense		1,280			1,333			596			593

Income (loss) from continuing operations before income taxes (TE)		196			153			496			468
Allocated income taxes and TE adjustments		73			57			179			171

Income (loss) from continuing operations		123			96			317			297
Income (loss) from discontinued operations, net of taxes		—			—			—			—

Net income (loss)		123			96			317			297
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			3

Net income (loss) attributable to Key	$	123		$	96		$	317		$	294

AVERAGE BALANCES ^(b)
Loans and leases	$	29,213		$	26,720		$	20,256		$	18,677
Total assets ^(a)		31,575			29,076			24,108			22,826
Deposits		49,492			48,242			15,241			12,287
OTHER FINANCIAL DATA
Net loan charge-offs ^(b)	$	116		$	184			—		$	43
Return on average allocated equity ^(b)		5.74	%		4.56	%		26.07	%		22.48	%
Return on average allocated equity		5.74			4.56			26.07			22.48
Average full-time equivalent employees ^(c)		8,336			8,756			1,968			2,023

(a)

Substantially all revenue generated by our major business segments is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software, and goodwill held by our major business segments, are located in the United States.

(b)	From continuing operations.

(c)	The number of average full-time equivalent employees has not been adjusted for discontinued operations.


Other Segments						Total Segments						Reconciling Items						Key
2013			2012			2013			2012			2013			2012			2013			2012

$	40		$	11		$	585		$	576		$	(1	)	$	2		$	584		$	578
	74			146			457			526			2			(8	)		459			518

	114			157			1,042			1,102			1			(6	)		1,043			1,096
	(8	)		(11	)		29			109			(1	)		—			28			109
	2			2			31			30			33			34			64			64
	14			33			643			684			9			(36	)		652			648

	106			133			339			279			(40	)		(4	)		299			275
	15			27			98			80			(33	)		(23	)		65			57

	91			106			241			199			(7	)		19			234			218
	—			—			—			—			37			3			37			3

	91			106			241			199			30			22			271			221
	(1	)		2			(1	)		2			—			—			(1	)		2

$	92		$	104		$	242		$	197		$	30		$	22		$	272		$	219


$	3,123		$	3,980		$	53,204		$	50,637		$	67		$	58		$	53,271		$	50,695
	26,899			27,020			83,065			80,237			444			568			83,509			80,805
	754			669			66,531			62,817			(548	)		(141	)		65,983			62,676

$	3		$	9		$	37		$	108			—		$	1		$	37		$	109
	55.73	%		53.32	%		18.65	%		14.87	%		(.55	)%		1.53	%		9.11	%		8.41	%
	55.73			53.32			18.65			14.87			2.34			1.77			10.54			8.52
	55			53			10,063			11,126			4,492			4,707			14,555			15,833


Other Segments						Total Segments						Reconciling Items						Key
2013			2012			2013			2012			2013			2012			2013			2012

$	120		$	10		$	1,760		$	1,674		$	(1	)	$	7		$	1,759		$	1,681
	163			336			1,312			1,435			1			(18	)		1,313			1,417

	283			346			3,072			3,109			—			(11	)		3,072			3,098
	(19	)		35			111			173			—			(1	)		111			172
	5			7			96			85			99			98			195			183
	49			82			1,925			2,008			(12	)		(107	)		1,913			1,901

	248			222			940			843			(87	)		(1	)		853			842
	18			15			270			243			(52	)		(47	)		218			196

	230			207			670			600			(35	)		46			635			646
	—			—			—			—			45			16			45			16

	230			207			670			600			10			62			680			662
	—			4			—			7			—			—			—			7

$	230		$	203		$	670		$	593		$	10		$	62		$	680		$	655


$	3,342		$	4,408		$	52,811		$	49,805		$	56		$	55		$	52,867		$	49,860
	27,210			28,120			82,893			80,022			534			682			83,427			80,704
	713			743			65,446			61,272			(417	)		(143	)		65,029			61,129

$	15		$	61		$	131		$	288			—		$	(1	)	$	131		$	287
	44.83	%		33.44	%		17.30	%		14.74	%		(.91	)%		1.29	%		8.23	%		8.43	%
	44.83			33.44			17.30			14.74			.26			1.74			8.82			8.64
	53			53			10,357			10,832			4,623			4,757			14,980			15,565

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of KeyCorp

We have reviewed the consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of September 30, 2013 and 2012, the related consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 2013 and 2012, and the related consolidated statements of changes in equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. These financial statements are the responsibility of Key’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended not presented herein, and we expressed an unqualified opinion on those consolidated financial statements in our report dated February 26, 2013, of Key. In our opinion, the accompanying consolidated balance sheet of Key as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


Cleveland, Ohio
October 31, 2013				/s/ Ernst & Young LLP

Item 2.

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

Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year to date periods ended September 30, 2013 and 2012. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the table of contents.

References to our “2012 Form 10-K” refer to our Form 10-K for the year ended December 31, 2012, which has been filed with the SEC and is available on its website ( www.sec.gov ) or on our website ( www.key.com/ir ).

Terminology

Throughout this discussion, 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 bank, KeyBank National Association.

We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.

•

We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business, Victory and Austin. The education lending business and Austin have been accounted for as discontinued operations since 2009. Victory was classified as a discontinued operation in our first quarter 2013 financial reporting as a result of the sale of this business that was announced on February 21, 2013 and closed on July 31, 2013.

•

Our exit loan portfolios are separate from our discontinued operations . These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments .

•

We engage in capital markets activities primarily through business conducted by our Key Corporate Bank segment . These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).

•

For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHC’s total risk-based capital must qualify as Tier 1 capital . Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described in the section entitled “Introduction” that begins on page 37 of our 2012 Form 10-K, the regulators conduct a review of capital adequacy for each of the country’s nineteen largest banking institutions, including KeyCorp. This regulatory assessment began in 2009 and has continued into 2013. As part of this capital adequacy review, banking regulators evaluated a component of Tier 1 capital, known as Tier 1 common equity . For a detailed explanation of total capital, Tier 1 capital and Tier 1 common equity and how they are calculated see the section entitled “Capital.”

Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 (“Basis of Presentation”).

Selected financial data

Our financial performance for each of the last five quarters is summarized in Figure 1.

Figure 1. Selected Financial Data


	2013									2012						Nine months ended September 30,
dollars in millions, except per share amounts	Third			Second			First			Fourth			Third			2013			2012
FOR THE PERIOD
Interest income	$	647		$	657		$	667		$	688		$	671		$	1,971		$	2,017
Interest expense		69			76			84			87			99			229			354
Net interest income		578			581			583			601			572			1,742			1,663
Provision (credit) for loan and lease losses		28			28			55			57			109			111			172
Noninterest income		459			429			425			439			518			1,313			1,417
Noninterest expense		716			711			681			734			712			2,108			2,084
Income (loss) from continuing operations before income taxes		293			271			272			249			269			836			824
Income (loss) from continuing operations attributable to Key		235			199			201			196			216			635			639
Income (loss) from discontinued operations, net of taxes ^(a)		37			5			3			7			3			45			16
Net income (loss) attributable to Key		272			204			204			203			219			680			655
Income (loss) from continuing operations attributable to Key common shareholders		229			193			196			190			211			618			623
Income (loss) from discontinued operations, net of taxes ^(a)		37			5			3			7			3			45			16
Net income (loss) attributable to Key common shareholders		266			198			199			197			214			663			639

PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.25		$	.21		$	.21		$	.21		$	.23		$	.68		$	.66
Income (loss) from discontinued operations, net of taxes ^(a)		.04			.01			—			.01			—			.05			.02
Net income (loss) attributable to Key common shareholders ^(d)		.29			.22			.22			.21			.23			.73			.68
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.25		$	.21		$	.21		$	.20		$	.22		$	.67		$	.66
Income (loss) from discontinued operations, net of taxes — assuming dilution ^(a)		.04			.01			—			.01			—			.05			.02
Net income (loss) attributable to Key common shareholders — assuming dilution ^(d)		.29			.22			.21			.21			.23			.72			.67
Cash dividends paid		.055			.055			.05			.05			.05			.16			.13
Book value at period end		11.05			10.89			10.89			10.78			10.64			11.05			10.64
Tangible book value at period end		9.92			9.77			9.78			9.67			9.54			9.92			9.54
Market price:
High		12.63			11.09			10.19			9.01			9.12			12.63			9.12
Low		11.05			9.29			8.29			7.96			7.46			8.29			6.80
Close		11.40			11.04			9.96			8.42			8.74			11.40			8.74
Weighted-average common shares outstanding (000)		901,904			913,736			920,316			925,725			936,223			911,918			943,378
Weighted-average common shares and potential common shares outstanding (000)		928,854			918,628			926,051			930,382			940,764			917,579			947,582

AT PERIOD END
Loans	$	53,597		$	53,101		$	52,574		$	52,822		$	51,419		$	53,597		$	51,419
Earning assets		77,085			76,717			75,066			75,055			72,139			77,085			72,139
Total assets		90,708			90,639			89,198			89,236			86,950			90,708			86,950
Deposits		68,535			67,721			64,654			65,993			64,188			68,535			64,188
Long-term debt		6,154			6,666			7,785			6,847			6,119			6,154			6,119
Key common shareholders’ equity		9,915			9,938			10,049			9,980			9,960			9,915			9,960
Key shareholders’ equity		10,206			10,229			10,340			10,271			10,251			10,206			10,251

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets		1.12	%		.95	%		.99	%		.96	%		1.06	%		1.02	%		1.06	%
Return on average common equity		9.13			7.72			7.96			7.58			8.45			8.27			8.48
Return on average tangible common equity ^(b)		10.18			8.60			8.87			8.45			9.43			9.22			9.40
Net interest margin (TE)		3.11			3.13			3.24			3.37			3.23			3.16			3.15
Cash efficiency ratio ^(b)		67.5			69.1			66.0			69.0			64.1			67.5			66.9

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets		1.22	%		.92	%		.94	%		.93	%		1.01	%		1.03	%		1.01	%
Return on average common equity		10.61			7.92			8.08			7.86			8.57			8.88			8.70
Return on average tangible common equity ^(b)		11.82			8.82			9.01			8.77			9.56			9.89			9.64
Net interest margin (TE)		3.06			3.07			3.16			3.29			3.14			3.10			3.07
Loan to deposit ^(c)		83.8			83.6			86.9			85.8			86.2			83.8			86.2

CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets		11.25	%		11.29	%		11.59	%		11.51	%		11.79	%		11.25	%		11.79	%
Key common shareholders’ equity to assets		10.94			10.96			11.27			11.18			11.45			10.94			11.45
Tangible common equity to tangible assets ^(b)		9.93			9.96			10.24			10.15			10.39			9.93			10.39
Tier 1 common equity ^(b)		11.17			11.18			11.40			11.36			11.30			11.17			11.30
Tier 1 risk-based capital		11.92			11.93			12.19			12.15			12.10			11.92			12.10
Total risk-based capital		14.37			14.65			15.02			15.13			15.17			14.37			15.17
Leverage		11.33			11.25			11.36			11.41			11.37			11.33			11.37

TRUST AND BROKERAGE ASSETS
Assets under management	$	36,110		$	35,544		$	35,714		$	34,744		$	35,587		$	36,110		$	35,587
Nonmanaged and brokerage assets		38,525			37,759			37,115			35,550			34,322			38,525			34,322

OTHER DATA
Average full-time-equivalent employees		14,555			14,999			15,396			15,589			15,833			14,980			15,565
Branches		1,044			1,052			1,084			1,088			1,087			1,044			1,087

(a)

(b)

See Figure 7 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity,” “Tier 1 common equity,” and “cash efficiency.” The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(c)	Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitizations trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office).

(d)	EPS may not foot due to rounding.

Forward-looking statements

From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “anticipate,” “intend,” “project,” “believe,” “estimate,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in our other documents filed with or furnished to the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media, and others.

Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ from those described in forward-looking statements include, but are not limited to:

•

continued strain on the global financial markets;

•

the slow progress of the U.S. economic recovery;

•

changes in trade, monetary and fiscal policies;

•

our ability to anticipate interest rate changes correctly and manage interest rate risk;

•

changes in local, regional and international business, economic or political;

•

current regulatory initiatives in the U.S., including the Dodd-Frank Act, subjecting us to new and more stringent regulatory requirements;

•

the increase in unemployment or deterioration in real estate asset values or their failure to recover for an extended period of time;

•

adverse changes in credit quality trends;

•

our ability to determine accurate values of certain assets and liabilities;

•

adverse behaviors in securities, public debt, and capital markets;

•

unanticipated changes in our liquidity position, including but not limited to changes in the cost of liquidity, our ability to enter the financial markets, and our ability to secure alternative sources of funding;

•

the soundness of other financial institutions;

•

our ability to satisfy new capital and liquidity standards such as those imposed by the Dodd-Frank Act and those adopted by the Basel Committee;

•

our ability to receive dividends from our subsidiary, KeyBank;

•

downgrades in our credit ratings and the credit ratings of KeyBank;

•

our ability to timely and effectively implement our strategic initiatives;

•

operational or risk management failures;

•

breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;

•

the occurrence of natural or man-made disasters or conflicts or terrorist attacks;

•

the adequacy of our risk management programs;

•

adverse judicial proceedings;

•

increased competitive pressure due to consolidation;

•

our ability to attract and retain talented executives and employees, to effectively sell additional products or services to new or existing customers, and to manage our reputational risks;

•

unanticipated adverse effects of acquisitions and dispositions of assets or businesses; and

•

other risks and uncertainties discussed in the section “Supervision and regulation” of this Form 10-Q, and Part 1, Item 1. Business under the heading “Supervision and Regulation” and Item 1A. Risk Factors in our 2012 Form 10-K.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including our reports on Forms 8-K, 10-K and 10-Q and our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov and on our website at www.key.com/ir.

Economic overview

Certain key economic indicators that we typically rely upon for this economic overview (such as monthly retail sales and GDP) were not available due to the recently experienced Federal government shutdown. The economic overview provided below is based on our analysis of the most recently available data.

Economic growth slowed in the third quarter, due in part to a rapid rise in interest rates that weighed on both business and residential fixed investment. Consumer spending growth was modest, with durable goods registering solid gains, but nondurables and services spending coming in relatively weak. Manufacturing was somewhat sluggish early in the quarter, but recovered to some extent as auto production accelerated. Markets remained focused on prospective Fed actions, with budget and debt ceiling negotiations reemerging as an important distraction toward the end of the quarter.

In the third quarter, weak income growth remained an important constraint on consumption, although pent-up demand and rising household wealth helped to offset this weak income growth. Spending was concentrated in durable goods, with vehicles sales averaging 15.2 million units in the third quarter of 2013, compared to 15.8 million in the second quarter of 2013. Based on July and August 2013 data, retail sales excluding autos improved a bit over disappointing second quarter results, but gains were modest. Consumer confidence soured, ending the third quarter at 79.7, down about 2.4 points from June 2013 and falling below 80 for the first time since May 2013. Energy prices were somewhat volatile through the third quarter of 2013, with oil prices rising due to the risk of a Western strike on Syria. This risk faded toward the end of the third quarter, however, and overall inflation remained low. Core personal consumption expenditures were up just 1.2% year-over-year as of August 2013.

Weak economic growth was finally reflected in labor market data, with average monthly job gains falling to an average of 143,000 during the third quarter of 2013, compared to average gains of 182,000 in the second quarter of 2013. Unemployment fell further, to 7.2% as of September 30, 2013, driven by declines in the labor force. Participation dropped to 63.2%, the lowest since 1978.

The pace of improvement in the housing market slowed notably in the third quarter. While higher mortgage rates are partially to blame, other factors are also impacting the market, including waning investment demand, labor and lot shortages, tight credit, and an overall limited number of first-time buyers. Affordability is another factor impacting demand. Housing prices have remained historically high, but have slipped recently in the face of higher mortgage rates and rapid home price

appreciation. Housing starts totaled a seasonally adjusted annual rate of 891,000 in August 2013, up 19% year-over-year but falling short of consensus expectations. Permits declined, providing downside risk to starts in coming months. Sales of existing homes continue to make steady progress, up 13% year-over-year as of August, while the trends in new home sales have weakened a bit, up 13% year-over-year, compared to 26% in the second quarter of 2013. Signs of a slowing market are not yet reflected in price indices, with the CoreLogic Home Price Index up 12.4% year-over-year in August 2013.

Speculation around the potential Federal Reserve tapering of asset purchases moved yields higher still in the third quarter of 2013. The yield on the 10-year U.S. Treasury started the quarter at 2.50%, peaked on September 5, 2013 at 2.98% and settled in at 2.86% on the eve of the FOMC meeting. On September 18, 2013, the day of the FOMC meeting, the markets were clearly surprised by the Federal Reserve’s decision to postpone tapering which was reflected in a 17 basis point decline in the 10-year yield to 2.69%. Concern over budget negotiations and the looming debt ceiling provided additional downward pressure on yields, with the yield on the 10-year Treasury ending the third quarter of 2013 at 2.64%.

Long-term financial goals

Our long-term financial goals are as follows:

•

Target a loan-to-core deposit ratio range of 90% to 100%;

•

Maintain a moderate risk profile by targeting a net charge-off ratio range of .40% to .60%;

•

Grow high quality and diverse revenue streams by targeting a net interest margin in excess of 3.50%, and ratio of noninterest income to total revenue of greater than 40%;

•

Create positive operating leverage and target a cash efficiency ratio in the range of 60% to 65%; and

•

Achieve a return on average assets in the range of 1.00% to 1.25%.

Figure 2 shows the evaluation of our long-term financial goals for the third quarter of 2013.

Figure 2. Evaluation of Our Long-Term Financial Goals


KEY Business Model	Key Metrics ^(a)	3Q13			YTD 2013			Targets			Action Plans
Core funded	Loan to deposit ratio ^(b)		84	%		84	%		90-100	%	• Use integrated model to grow relationships and loans
											• Improve deposit mix
Maintain a moderate risk profile	NCOs to average loans		.28	%		.33	%		.40-.60	%	• Focus on relationship clients
											• Exit noncore portfolios
	Provision to average loans		.21	%		.28	%				• Limit concentrations
											• Focus on risk-adjusted returns
Growing high quality, diverse revenue streams	Net interest margin		3.11	%		3.16	%		> 3.50	%	• Improve funding mix
											• Focus on risk-adjusted returns
	Noninterest income to total revenue		44	%		43	%		> 40	%	• Grow client relationships
											• Capitalize on Key’s total client solutions and cross-selling capabilities
Creating positive operating leverage	Cash efficiency ratio ^(c)		68	%		68	%				• Improve efficiency and effectiveness
	Adj. cash efficiency ratio (ex. Efficiency initiative charges) ^{(c), (d)}		64	%		65	%		60 - 65	%	• Better utilize technology
											• Change cost base to more variable from fixed
Executing our strategies	Return on average assets		1.12	%		1.02	%		1.00-1.25	%	• Execute our client insight-driven relationship model
											• Focus on operating leverage
											• Improved funding mix with lower cost core deposits

(a)	Calculated from continuing operations, unless otherwise noted.

(b)	Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitization trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office).

(c)	Excludes intangible asset amortization; Non-GAAP measure: see Figure 7 for reconciliation

(d)	Efficiency initiative charges include pension settlement.

Strategic developments

We initiated the following actions during the first nine months of 2013 to support our corporate strategy described in the “Introduction” section under the “Corporate Strategy” heading on page 41 of our 2012 Form 10-K.

•

We completed our acquisition of a commercial real estate servicing portfolio and special servicing business. This acquisition brought in over $1 billion in low-cost escrow deposits and further leverages our existing servicing platform. We are now the third largest servicer of commercial and multi-family loans and the fifth largest special servicer of CMBS in the U.S.

•

Our revenue benefited from solid loan growth, driven by an 11.1% increase from the prior year in commercial, financial, and agricultural loans, as well as improved trends in several of our fee-based businesses. These results reflect the success of our distinctive business model and our progress implementing our growth initiatives.

•

We achieved annualized run rate savings of $207 million, thus meeting our announced expense target that we set in June of 2012 to achieve annualized savings of $200 million. We consolidated eight branches during the third quarter of 2013, reaching 65 total consolidated branches since the launch of the efficiency initiative.

•

On July 31, 2013, Key closed the sale of Victory and completed the divestiture of this business. This sale resulted in an after-tax gain of $92 million; the cash portion of this gain was $72 million. Additional gain may be realized resulting from consents that may be received through January 2014.

•

During the third quarter of 2013, we completed $198 million of Common Share repurchases on the open market under our 2013 capital plan. This amount included repurchases related to the cash portion of the net after-tax gain from the sale of Victory. Common Share repurchases under the 2013 capital plan authorization are expected to be executed through the first quarter of 2014.

•

Consistent with the 2013 capital plan, the Board declared a quarterly dividend of $.055 per Common Share for the third quarter of 2013.

Demographics

We have two major business segments: Key Community Bank and Key Corporate Bank.

Key Community Bank serves individuals and small to mid-sized businesses by offering a variety of deposit, investment, lending, and personalized wealth management products and business advisory services. These products and services are provided through our relationship managers and specialists working in our 13-state branch network, which is organized into nine internally defined geographic regions: Oregon and Alaska, Washington, Rocky Mountains, Indiana, Western Ohio and Michigan, Eastern Ohio, Eastern New York, New England, and Western New York.

Figure 3 shows the geographic diversity of Key Community Bank’s average deposits, commercial loans, and home equity loans.

Figure 3. Key Community Bank Geographic Diversity


	Geographic Region
Three months ended September 30, 2013 dollars in millions	Oregon & Alaska			Washington			Rocky Mountains			Indiana			West Ohio/ Michigan			East Ohio			Eastern New York			New England			Western New York			NonRegion ^(a)			Total

Average deposits	$	4,273		$	6,600		$	4,764		$	2,301		$	4,422		$	8,564		$	8,081		$	2,940		$	4,998		$	2,709		$	49,652
Percent of total		8.6	%		13.3	%		9.6	%		4.6	%		8.9	%		17.2	%		16.3	%		5.9	%		10.1	%		5.5	%		100.0	%

Average commercial loans	$	1,640		$	1,850		$	1,639		$	804		$	1,189		$	2,052		$	1,764		$	766		$	534		$	2,791		$	15,029
Percent of total		10.9	%		12.3	%		10.9	%		5.3	%		7.9	%		13.7	%		11.7	%		5.1	%		3.6	%		18.6	%		100.0	%

Average home equity loans	$	1,359		$	1,894		$	1,574		$	474		$	844		$	1,275		$	1,298		$	634		$	786		$	109		$	10,247
Percent of total		13.3	%		18.5	%		15.4	%		4.6	%		8.2	%		12.4	%		12.7	%		6.2	%		7.7	%		1.0	%		100.0	%

(a)	Represents average deposits, commercial loan and home equity loan products centrally managed outside of our nine Key Community Bank regions.

Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in six industry sectors: consumer, energy, healthcare, industrial, public sector and real estate. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients, including syndicated finance, debt- and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory and public finance. Key Corporate Bank also delivers many of its product capabilities to clients of Key Community Bank.

Further information regarding the products and services offered by our Key Community Bank and Key Corporate Bank segments is included in this report in Note 18 (“Line of Business Results”).

Supervision and regulation

Regulatory reform developments

On July 21, 2010, the Dodd-Frank Act became law. It was intended to address perceived deficiencies and gaps in the regulatory framework for financial services in the U.S., reduce the risks of bank failures, better equip the nation’s regulators to guard against or mitigate any future financial crises, and manage systemic risk through increased supervision of bank and nonbank SIFIs, such as KeyCorp and KeyBank. Further discussion concerning the Dodd-Frank Act, related regulatory developments, and the risks that they present to Key is available under the heading “Supervision and Regulation” in Item 1. Business and under the heading “II. Compliance Risks” in Item 1A. Risk Factors of our 2012 Form 10-K. Many of the proposed rules referenced in our prior reports continue to remain pending. The following discussion provides a summary of relevant regulatory developments relating to the Dodd-Frank Act or that relate to our results this quarter.

Enhanced prudential standards and early remediation requirements

On January 5, 2012, the Federal Reserve published proposed Regulation YY — Enhanced Prudential Standards — as part of its efforts to implement enhanced prudential standards and early remediation requirements to be imposed upon SIFIs pursuant to the Dodd-Frank Act. It generally applies to SIFIs like KeyCorp and includes a wide range of measures addressing issues such as risk-based capital requirements and leverage limits, liquidity requirements, single-counterparty credit limits, risk management, supervisory and company-run stress testing requirements, and early remediation. The comment period on the proposed rule closed on April 30, 2013. We continue to monitor the implementation of this rule.

Debit card and interchange fees and routing

On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling in NACS v. Board of Governors of the Federal Reserve System , vacating the Federal Reserve’s Final Rule on Debit Card and Interchange Fees and Routing. Retail merchants and merchant groups challenged the Federal Reserve’s final rule, which had allowed debit card issuers to recover from merchants an interchange fee of $.21 per transaction, a fee of five basis points of the value of the transaction and an additional $.01 fraud prevention adjustment. The district court held that this fee structure, and the final rule’s requirements regarding the number of networks over which each debit card transaction can be processed, did not comply with the Durbin Amendment to the Dodd-Frank Act. On September 19, 2013, the Court of Appeals for the D.C. Circuit granted a joint motion by the parties for expedited appeal of the district court’s opinion. The parties are scheduled to file briefs with the court through December 2013. In the meantime, the final rule will remain in effect until resolution of the appeal by the circuit court. We continue to monitor these developments.

New regulatory capital rules

In July 2013, the Federal banking regulators approved the final Basel III capital framework for U.S. banking organizations (the “Regulatory Capital Rules”). Besides Basel III implementation in the U.S., the Regulatory Capital Rules also address two capital-related provisions of the Dodd-Frank Act: first, the provision requiring that the general risk-based and leverage capital requirements applicable to FDIC-insured deposit institutions that are not “advanced approaches” depository institutions (such as KeyBank) act as a floor for the requirements applicable to all BHCs (such as KeyCorp) as well as to all “advanced approaches” banking organizations; and, second, the provision requiring that references to external credit ratings be removed from the regulators’ rules and replaced with alternative standards of creditworthiness.

The Regulatory Capital Rules are lengthy and complex, and we are evaluating their impact on Key. In general, however, the Regulatory Capital Rules largely adhere to the NPRs as initially proposed in 2012 and replace the regulators’ Basel I-based general rules with a standardized approach based in substantial part upon the standardized approach in Basel II that was never adopted for U.S. banking organizations. The Regulatory Capital Rules also consolidate into a single regulation, with a single set of definitions used with common meanings, the regulators’ existing general risk-based capital rules, advanced approaches risk-based capital rules, leverage capital rules, and market risk rules.

Based on our preliminary analysis, there are at least three noteworthy changes from the NPRs that are in the Regulatory Capital Rules. The first change relates to the treatment of AOCI. This change permits banking organizations not subject to the advanced approaches provisions, such as Key, to make a one-time permanent election to opt-out of the requirement to include all components of AOCI (excluding accumulated net gains and losses on cash flow hedges related to items that are not fair-valued on the balance sheet) in common equity Tier 1 capital. The second change relates to the risk weightings for residential mortgage loans. Unlike the treatment of such loans under the NPRs that would have applied risk weightings to residential mortgages ranging from 35% to 200% based on the loan’s loan-to-value and product features associated with

higher risk, the Regulatory Capital Rules retain the current treatment for such exposures (i.e., 50% risk weight for most first-lien exposures that are prudently underwritten and performing according to their original terms and 100% risk weight for other residential mortgage exposures). The third change relates to the treatment of mortgage servicing assets (“MSAs”). Under the NPRs, the amount of a banking organization’s MSAs that could be included in regulatory capital could not exceed 90% of the fair value of its MSAs. If the amount of MSAs included in regulatory capital (after applying the individual 10% and 15% aggregate common equity Tier 1 deduction thresholds) was greater than 90% of the fair value of a banking organization’s MSAs, then the banking organization would have been required to deduct an additional amount of MSAs from regulatory capital until no more than 90% of the fair value of its MSAs was included. This 90% MSA fair value limitation was eliminated in the Regulatory Capital Rules. However, all amounts of MSAs not deducted under the 10% and 15% common equity Tier 1 deduction thresholds and included in regulatory capital must be assigned a 250% risk weight.

While the Regulatory Capital Rules are effective January 1, 2014, the mandatory compliance date for Key as a “standardized approach” banking organization begins on January 1, 2015 and is subject to transitional provisions extending to January 1, 2019.

New Minimum Capital Requirements

Under the Regulatory Capital Rules, banking organizations subject to the standardized approach provisions, like Key, will be required to meet the minimum capital and leverage ratios set forth in Figure 4, below. At September 30, 2013, Key had a Tier 1 common equity ratio of 11.17% under current Basel I. Also at September 30, 2013, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios, after adjustment for market risk, would be as set forth in Figure 4.

Figure 4. Estimated Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In Regulatory Capital Rules


Ratios (including Capital conservation buffer)	Key 9-30-2013 Estimated			Proposed Minimum 1-1-2015			Phase-in Period	Proposed Minimum 1-1-2019
Common Equity Tier 1		10.6	%		4.5	%	None		4.5	%
Capital conservation buffer ^(a)					—		1/1/16 - 1/1/19		2.5
Common Equity Tier 1 + Capital conservation buffer					4.5		1/1/16 - 1/1/19		7.0
Tier 1 Capital		10.9			6.0		None		6.0
Tier 1 Capital + Capital conservation buffer					4.5		1/1/16 - 1/1/19		8.5
Total Capital		13.4			8.0		None		8.0
Total Capital + Capital conservation buffer					8.0		1/1/16 - 1/1/19		10.5
Leverage ^(b)		10.5			4.0		None		4.0

(a)	Capital conservation buffer must consist of Common Equity Tier 1 capital. Key is not subject to the countercyclical capital buffer of up to 2.5% imposed under the advanced approaches portion of the Regulatory Capital Rules.

(b)

Key is not subject to the 3% supplemental leverage ratio requirement imposed under the advanced approaches portion of the Regulatory Capital Rules. A discussion of the Basel III liquidity framework is included in the section “Supervision and regulation” under Item 1. Business of our 2012 Form 10-K under the heading “Basel III Capital and Liquidity Framework”.

Revised Prompt Corrective Action Standards

Under the Regulatory Capital Rules, the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank will be revised effective January 1, 2015. Figure 5 identifies the proposed capital category threshold ratios for a well capitalized and an adequately capitalized institution under current law and the Regulatory Capital Rules.

Figure 5. Revised Prompt Corrective Action Well Capitalized and Adequately Capitalized Capital Category Ratios under the Regulatory Capital Rules


Prompt Corrective Action	Capital Category
	Well Capitalized						Adequately Capitalized
Ratio	Final Rule			Current			Final Rule			Current
Common Equity Tier 1 Risk-Based		6.5	%		N/A			4.5	%		N/A
Tier 1 Risk-Based		8.0			6.0	%		6.0			4.0	%
Total Risk-Based		10.0			10.0			8.0			8.0
Tier 1 Leverage ^(a)		5.0			5.0			4.0			3.0 or 4.0

(a)

KeyBank is not subject to the federal banking agencies’ proposed rule that would establish a prompt corrective action well capitalized threshold of 6% for the supplementary leverage ratio for subsidiary insured depository institution subsidiaries of certain large, interconnected BHCs, which proposed rule was published on August 20, 2013.

We believe that, as of September 30, 2013, KeyCorp and KeyBank would meet all capital adequacy requirements under the Regulatory Capital Rules on a fully phased-in basis if such requirements were currently effective. As previously indicated, the prompt corrective action requirements only apply to FDIC-insured depository institutions and not to BHCs. Nevertheless, if such prompt corrective action capital categories applied to BHCs, we believe that KeyCorp would meet all prompt corrective action capital and leverage ratio requirements for a well-capitalized capital category at September 30, 2013, under the Regulatory Capital Rules on a fully phased-in basis if such requirements were currently effective.

Liquidity coverage ratios

On October 24, 2013, the Federal Reserve approved an NPR that would create a minimum liquidity coverage ratio (“LCR”) for certain internationally active bank and nonbank financial companies (not including Key) and a modified version of the LCR (“Modified LCR”) for certain depository institution holding companies that are not internationally active (including KeyCorp). The NPR was developed by the Federal Reserve with the OCC and FDIC, which have not yet approved it. Under the current terms of the NPR, KeyBank will not be subject to the LCR or the Modified LCR unless the OCC determines that its application to KeyBank is appropriate in light of its asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system.

The LCR and Modified LCR created by the NPR are based on the Basel III liquidity framework and would be an enhanced prudential liquidity standard consistent with the Dodd-Frank Act. Under the NPR, KeyCorp would be required to maintain its high-quality liquid asset amount at not less than 100% of its total net cash flow outflow amount over a 21-calendar day period and the LCR and Modified LCR of 100% would be phased-in during a transition period beginning January 1, 2015 that continues until January 1, 2017.

New assessments, fees and other charges

As previously reported, Section 318 of the Dodd-Frank Act requires the Federal Reserve to charge SIFIs and institutions regulated by it new assessments, fees and other charges in connection with their examination, supervision, and regulation of such companies. On April 18, 2013, the Federal Reserve published a proposed rule to establish an annual assessment of SIFIs. The comment period on the proposed rule expired on June 16, 2013. On August 23, 2013, the Federal Reserve published its final rule establishing an annual assessment of SIFIs. The final rule outlines how the Federal Reserve determines which companies are assessed, estimates the total expenses that are necessary or appropriate to carry out its supervisory and regulatory responsibilities for such companies ($440 million for each of 2012, 2013, and 2014), determines the amount of each company’s assessment, and bills for and collects the assessments. Under the final rule, each calendar year starting with 2012 is an assessment period. For each assessment period after 2012, the Federal Reserve will notify each company of the amount of its assessment no later than July 15 of the year following the assessment period, with payments being due by September 30 of the year following the assessment period. For the 2012 assessment period, however, payment will not be collected until sometime in December 2013 but no later than December 15, 2013, with notice of the amount of the assessment being provided in late October 2013. Using the methodologies in the final rule, the Federal Reserve estimates that it would collect a total of approximately $440 million assessed with respect to approximately $20 trillion of aggregate total assessable assets. Based on this, Key estimates that its initial assessment under the final rule will be approximately $2.0 million.

Highlights of Our Performance

Financial performance

For the third quarter of 2013, we announced net income from continuing operations attributable to Key common shareholders of $229 million, or $.25 per Common Share. Our third quarter of 2013 results compare to net income from continuing operations attributable to Key common shareholders of $211 million, or $.22 per Common Share, for the third quarter of 2012.

Our taxable-equivalent net interest income was $584 million for the third quarter of 2013, and the net interest margin was 3.11%. These results compare to taxable-equivalent net interest income of $578 million and a net interest margin of 3.23% for the third quarter of 2012. Net interest income increased $6 million or 1.0% when compared to third quarter of 2012. The net interest margin this quarter was negatively impacted by lower earning asset yields and relatively high levels of liquidity, offset by lower funding costs. Over the next couple of quarters, we expect the net interest margin to be relatively stable to the reported third quarter level, with potential downward pressure dependent on levels of liquidity.

Our noninterest income was $459 million for the third quarter of 2013, compared to $518 million for the year-ago quarter. Other income declined $53 million due to a $54 million gain associated with the redemption of trust preferred securities one year ago. Operating lease income and other leasing gains also decreased $23 million, partially due to a $39 million gain on the early termination of leveraged leases one year ago compared to a $23 million gain on the early termination of leveraged leases in the current quarter. These decreases were partially offset by increases in trust and investment services income, cards and payments income, and net gains (losses) from principal investing of $6 million each.

Our noninterest expense was $716 million for the third quarter of 2013, compared to $712 million for the year-ago quarter, representing an increase of $4 million or 0.6%. Excluding the $41 million in expenses related to our efficiency initiative and the pension settlement charge compared to the $9 million in efficiency initiative expenses one year ago, noninterest expense was down $28 million from the prior year. Personnel expense increased $15 million. Employee benefits, a component of personnel expense, increased $24 million due to a $25 million pension settlement charge as a result of an increase in lump sum payments made from the pension plans. This increase in employee benefits was partially offset by a $5 million decrease in salaries and a $2 million decline in both incentive compensation and stock-based compensation. Nonpersonnel expense decreased $11 million from one year ago primarily due to a decline in business services and professional fees.

We achieved our efficiency initiative target by achieving $207 million in annualized expense savings. We plan to provide further information regarding the cost savings associated with our efficiency initiative when we announce our full year 2013 results in January 2014.

Average loans were $53.3 billion for the third quarter of 2013, an increase of $2.6 billion compared to the third quarter of 2012. Commercial, financial and agricultural loans grew by $2.4 billion over the year-ago quarter, with strong growth across our lending to business clients. In addition, home equity loans grew $409 million primarily as a result of lending campaigns launched in the Fall of 2012 and Spring of 2013. Credit cards also increased $268 million as a result of Key’s third quarter 2012 credit card portfolio acquisition. Loan growth was partially offset by declines in the equipment lease portfolio, which included the early termination of certain leveraged leases, and run-off of consumer loans in the designated exit portfolio. Our outlook for loan growth remains consistent with our prior guidance of mid-single digit, year-over-year growth, driven by commercial, financial and agricultural loans.

Average deposits, excluding deposits in foreign office, totaled $65.4 billion for the third quarter of 2013, an increase of $3.4 billion compared to the year-ago quarter. The growth was driven by corporate clients and the addition of escrow demand deposits from our servicing business acquisition. The overall growth resulted from an increase in demand deposits of $2.5 billion and interest-bearing non-time deposits of $2.7 billion. This deposit growth was partially offset by $1.8 billion of run-off of certificates of deposit and other time deposits.

Our provision for loan and lease losses was $28 million for the third quarter of 2013, compared to $109 million for the year-ago quarter. Our allowance for loan and lease losses was $868 million, or 1.62%, of total period-end loans at September 30, 2013, compared to 1.73% at September 30, 2012.

At September 30, 2013, our nonperforming loans totaled $541 million and represented 1.01% of period-end portfolio loans, compared to 1.27% at September 30, 2012. Nonperforming loans at September 30, 2012 included $38 million, the net carrying amount of secured loans reclassified as TDRs under updated regulatory guidance. The updated regulatory guidance requires loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged off to the collateral’s fair value, less selling costs, and classified as nonaccrual regardless of delinquency status. Nonperforming assets at September 30, 2013 totaled $579 million and represented 1.08% of period-end portfolio loans and OREO and other nonperforming assets, compared to 1.39% at September 30, 2012.

Our capital ratios remain strong. Our tangible common equity, Tier 1 common equity and Tier 1 risk-based capital ratios at September 30, 2013, are 9.93%, 11.17%, and 11.92%, respectively, compared to 10.39%, 11.30%, and 12.10%, respectively, at September 30, 2012. We continue to return capital to our shareholders by repurchasing Common Shares and through our quarterly Common Share dividend. In the third quarter of 2013, we repurchased $198 million of Common Shares under our 2013 capital plan, including repurchases related to the cash portion of the net after-tax gain from the sale of Victory. Our Board of Directors at its September meeting approved the use of the cash portion of the after-tax gain from the sale of Victory for additional Common Share repurchases, and we received no objection from the Federal Reserve to use the cash portion of the after-tax gain for this purpose.

Related to our discontinued operations, on July 31, 2013, we closed the sale of Victory and completed the divestiture of this business. This sale resulted in an after-tax gain of $92 million; the cash portion of this gain was $72 million. Additional gain may be realized resulting from consents received through January 2014. The gain on the Victory divestiture was partially

offset by a net after-tax loss of $48 million related to the fair value of the loans and securities in our ten education loan securitization trusts. During the third quarter of 2013, additional market participant information about projected trends for default and recovery rates became available. Based on this information and our related internal analysis, certain assumptions related to valuing the loans in these securitization trusts were adjusted.

Figure 6 shows our continuing and discontinued operating results for the current, past and year-ago quarters. Our financial performance for each of the past five quarters is summarized in Figure 1.

Figure 6. Results of Operations


	Three months ended						Nine months ended
in millions, except per share amounts	9-30-13		6-30-13		9-30-12		9-30-13		9-30-12
Summary of operations
Income (loss) from continuing operations attributable to Key	$	235	$	199	$	216	$	635	$	639
Income (loss) from discontinued operations, net of taxes ^(a)		37		5		3		45		16

Net income (loss) attributable to Key	$	272	$	204	$	219	$	680	$	655


Income (loss) from continuing operations attributable to Key	$	235	$	199	$	216	$	635	$	639
Less: Dividends on Series A Preferred Stock		6		6		5		17		16

Income (loss) from continuing operations attributable to Key common shareholders		229		193		211		618		623
Income (loss) from discontinued operations, net of taxes ^(a)		37		5		3		45		16

Net income (loss) attributable to Key common shareholders	$	266	$	198	$	214	$	663	$	639


Per common share — assuming dilution
Income (loss) from continuing operations attributable to Key common shareholders	$	.25	$	.21	$	.22	$	.67	$	.66
Income (loss) from discontinued operations, net of taxes ^(a)		.04		.01		—		.05		.02

Net income (loss) attributable to Key common shareholders ^(b)	$	.29	$	.22	$	.23	$	.72	$	.67

(a)

(a)	EPS may not foot due to rounding.

Figure 7 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible common equity” and “Tier 1 common equity.” Tier 1 common equity, a non-GAAP financial measure, is a component of Tier 1 risk-based capital. Tier 1 common equity is not formally defined by GAAP or prescribed in amount by federal banking regulations applicable to us before January 1, 2015. However, since analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1 common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 7 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. Since early 2009, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 common equity. Because the Federal Reserve has long indicated that voting common shareholders’ equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail under the section “Supervision and regulation” of this report, also make Tier 1 common equity a priority. The Regulatory Capital Rules change the regulatory capital standards that apply to BHCs by phasing out the treatment of trust preferred securities and cumulative preferred securities as Tier 1 eligible capital. By 2016, our trust preferred securities will only be included in Tier 2 capital.

The table also shows the computation for pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for loan and lease losses makes it easier to analyze our results by presenting them on a more comparable basis.

The cash efficiency ratio and adjusted cash efficiency ratio are ratios of two non-GAAP performance measures. As such, there are no directly comparable GAAP performance measures. The cash efficiency ratio performance measure removes the impact of our intangible asset amortization from the calculation. The adjusted cash efficiency ratio further removes the impact of the efficiency initiative and pension settlement charges. We believe these ratios provide greater consistency and comparability between our results and those of our peer banks. Additionally, these ratios are used by analysts and investors as they develop earnings forecasts and peer bank analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

100

Figure 7. GAAP to Non-GAAP Reconciliations


	Three months ended
dollars in millions	9-30-13			12-31-12			9-30-12
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP)	$	10,206		$	10,271		$	10,251
Less: Intangible assets ^(a)		1,017			1,027			1,031
Series A Preferred Stock ^(b)		282			291			291

Tangible common equity (non-GAAP)	$	8,907		$	8,953		$	8,929


Total assets (GAAP)	$	90,708		$	89,236		$	86,950
Less: Intangible assets ^(a)		1,017			1,027			1,031

Tangible assets (non-GAAP)	$	89,691		$	88,209		$	85,919


Tangible common equity to tangible assets ratio (non-GAAP)		9.93	%		10.15	%		10.39	%

Tier 1 common equity at period end
Key shareholders’ equity (GAAP)	$	10,206		$	10,271		$	10,251
Qualifying capital securities		340			339			339
Less: Goodwill		979			979			979
Accumulated other comprehensive income (loss) ^(c)		(409	)		(172	)		(109	)
Other assets ^(d)		96			114			121

Total Tier 1 capital (regulatory)		9,880			9,689			9,599
Less: Qualifying capital securities		340			339			339
Series A Preferred Stock ^(b)		282			291			291

Total Tier 1 common equity (non-GAAP)	$	9,258		$	9,059		$	8,969


Net risk-weighted assets (regulatory) ^(d)	$	82,913		$	79,734		$	79,363

Tier 1 common equity ratio (non-GAAP)		11.17	%		11.36	%		11.30	%

Pre-provision net revenue
Net interest income (GAAP)	$	578		$	601		$	572
Plus: Taxable-equivalent adjustment		6			6			6
Noninterest income (GAAP)		459			439			518
Less: Noninterest expense (GAAP)		716			734			712

Pre-provision net revenue from continuing operations (non-GAAP)	$	327		$	312		$	384


Average tangible common equity
Average Key shareholders’ equity (GAAP)	$	10,237		$	10,261		$	10,222
Less: Intangible assets (average) ^(e)		1,019			1,030			1,026
Series A Preferred Stock (average)		291			291			291

Average tangible common equity (non-GAAP)	$	8,927		$	8,940		$	8,905


Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)	$	229		$	190		$	211
Average tangible common equity (non-GAAP)		8,927			8,940			8,905

Return on average tangible common equity from continuing operations (non-GAAP)		10.18	%		8.45	%		9.43	%

Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)	$	266		$	197		$	214
Average tangible common equity (non-GAAP)		8,927			8,940			8,905

Return on average tangible common equity consolidated (non-GAAP)		11.82	%		8.77	%		9.56	%

Cash efficiency ratio
Noninterest expense (GAAP)	$	716		$	734		$	712
Less: Intangible asset amortization on credit cards (GAAP)		8			8			6
Other intangible asset amortization (GAAP)		4			4			3

Adjusted noninterest expense (non-GAAP)	$	704		$	722		$	703


Net interest income (GAAP)	$	578		$	601		$	572
Plus: Taxable-equivalent adjustment		6			6			6
Noninterest income (GAAP)		459			439			518

Total taxable-equivalent revenue (non-GAAP)	$	1,043		$	1,046		$	1,096


Cash efficiency ratio (non-GAAP)		67.5	%		69.0	%		64.1	%

Adjusted cash efficiency ratio net of efficiency initiative charges
Adjusted noninterest expense (non-GAAP)	$	704		$	722		$	703
Less: Efficiency initiative and pension settlement charges (non-GAAP)		41			16			9

Net adjusted noninterest expense (non-GAAP)	$	663		$	706		$	694


Total taxable-equivalent revenue (non-GAAP)	$	1,043		$	1,046		$	1,096

Adjusted cash efficiency ratio net of efficiency initiative charges (non-GAAP)		63.6	%		67.5	%		63.3	%

101

Figure 7. GAAP to Non-GAAP Reconciliations, continued


	Three months ended
dollars in millions	9-30-13
Tier 1 common equity under the Regulatory Capital Rules (estimates)
Tier 1 common equity under current regulatory rules	$	9,258
Adjustments from current regulatory rules to the Regulatory Capital Rules:
Deferred tax assets and other ^(f)		(140	)

Tier 1 common equity anticipated under the Regulatory Capital Rules ^(g)	$	9,118


Net risk-weighted assets under current regulatory rules	$	82,913
Adjustments from current regulatory rules to the Regulatory Capital Rules:
Loan commitments less than one year		496
Past due loans		244
Mortgage servicing assets ^(h)		576
Deferred tax assets ^(h)		240
Other		1,451

Total risk-weighted assets anticipated under the Regulatory Capital Rules	$	85,920


Tier 1 common equity ratio under the Regulatory Capital Rules ^(g)		10.61	%


	Nine months ended
dollars in millions	9-30-13			9-30-12
Pre-provision net revenue
Net interest income (GAAP)	$	1,742		$	1,663
Plus: Taxable-equivalent adjustment		17			18
Noninterest income (GAAP)		1,313			1,417
Less: Noninterest expense (GAAP)		2,108			2,084

Pre-provision net revenue from continuing operations (non-GAAP)	$	964		$	1,014


Average tangible common equity
Average Key shareholders’ equity (GAAP)	$	10,277		$	10,105
Less: Intangible assets (average) ⁽ⁱ⁾		1,023			964
Preferred Stock, Series A (average)		291			291

Average tangible common equity (non-GAAP)	$	8,963		$	8,850


Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)	$	618		$	623
Average tangible common equity (non-GAAP)		8,963			8,850

Return on average tangible common equity from continuing operations (non-GAAP)		9.22	%		9.40	%

Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)	$	663		$	639
Average tangible common equity (non-GAAP)		8,963			8,850

Return on average tangible common equity consolidated (non-GAAP)		9.89	%		9.64	%

Cash efficiency ratio
Noninterest expense (GAAP)	$	2,108		$	2,084
Less: Intangible asset amortization on credit cards (GAAP)		23			6
Other intangible asset amortization (GAAP)		11			5

Adjusted noninterest expense (non-GAAP)	$	2,074		$	2,073


Net interest income (GAAP)	$	1,742		$	1,663
Plus: Taxable-equivalent adjustment		17			18
Noninterest income (GAAP)		1,313			1,417

Total taxable-equivalent revenue (non-GAAP)	$	3,072		$	3,098


Cash efficiency ratio (non-GAAP)		67.5	%		66.9	%

Adjusted cash efficiency ratio net of efficiency initiative charges
Adjusted noninterest expense (non-GAAP)	$	2,074		$	2,073
Less: Efficiency initiative and pension settlement charges (non-GAAP)		93			9

Net adjusted noninterest expense (non-GAAP)	$	1,981		$	2,064


Total taxable-equivalent revenue (non-GAAP)	$	3,072		$	3,098

Adjusted cash efficiency ratio net of efficiency initiative charges (non-GAAP)		64.5	%		66.6	%

(a)	Three months ended September 30, 2013, December 31, 2012 and September 30, 2012 exclude $99 million, $123 million and $130 million, respectively, of period end purchased credit card receivable intangible assets.

(b)	Net of capital surplus for the three months ended September 30, 2013.

102

(c)

Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

(d)

Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at September 30, 2013, December 31, 2012, and September 30, 2012.

(e)	Three months ended September 30, 2013, December 31, 2012 and September 30, 2012 exclude $103 million, $126 million and $86 million, respectively, of average ending purchased credit card receivable intangible assets.

(f)	Includes the deferred tax asset subject to future taxable income for realization, primarily tax credit carryforwards.

(g)	The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies’ Regulatory Capital Rules (as fully phased-in on January 1, 2019); Key is subject to the Regulatory Capital Rules under the “standardized approach.”

(h)	Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%.

(i)	Nine months ended September 30, 2013 and September 30, 2012 excludes $110 million and $29 million, respectively, of average ending purchased credit card receivable intangible assets.

Results of Operations

Net interest income

One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

•

the volume, pricing, mix and maturity of earning assets, and interest-bearing liabilities;

•

the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;

•

the use of derivative instruments to manage interest rate risk;

•

interest rate fluctuations and competitive conditions within the marketplace; and

•

asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “taxable-equivalent basis” (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that — if taxed at the statutory federal income tax rate of 35% — would yield $100.

Figure 8 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of taxable-equivalent net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin is calculated by dividing annualized taxable-equivalent net interest income by average earning assets.

Taxable-equivalent net interest income was $584 million for the third quarter of 2013, and the net interest margin was 3.11%. These results compare to taxable-equivalent net interest income of $578 million and a net interest margin of 3.23% for the third quarter of 2012. The increase in net interest income was primarily due to a decline of $5 million of recognized unamortized lease origination costs related to the early termination of leveraged leases in the third quarter of 2013 compared to the third quarter of 2012. The decrease in the net interest margin was primarily a result of earning asset yields falling faster than the cost of funds over the past year.

Average earning assets for the third quarter of 2013 totaled $74.8 billion, compared to $71.8 billion for the third quarter of 2012. Commercial, financial and agricultural loans grew by $2.4 billion over the year-ago quarter, with strong growth across Key’s lending to business clients. In addition, home equity loans grew $409 million primarily as a result of lending campaigns launched in the Fall of 2012 and Spring of 2013. Credit cards also increased $268 million as a result of Key’s third quarter 2012 credit card portfolio acquisition. Loan growth was partially offset by declines in the equipment lease portfolio, which included the early termination of certain leveraged leases, and run-off of consumer loans in the designated exit portfolio.

As shown in Figure 8, the yield was impacted by lower spreads on commercial loans and lower security yields.

103

Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations

Third Quarter 2013

Second Quarter 2013

dollars in millions

Average
Balance

Interest ^(a)

Yield/
Rate ^(a)

Average
Balance

Interest ^(a)

Yield/
Rate ^(a)

ASSETS

Loans ^(b),
(c)

Commercial, financial and agricultural ^(d)

23,864

213

3.54

23,480

212

3.63

Real estate — commercial mortgage

7,575

4.06

7,494

4.14

Real estate — construction

1,073

4.24

1,049

4.30

Commercial lease financing

4,633

3.14

4,747

3.96

Total commercial loans

37,145

338

3.61

36,770

349

3.80

Real estate — residential mortgage

2,193

4.43

2,176

4.53

Home equity:

Key Community Bank

10,247

101

3.92

9,992

3.93

Other

364

7.72

389

7.66

Total home equity loans

10,611

108

4.05

10,381

105

4.07

Consumer other — Key Community Bank

1,435

7.24

1,392

7.35

Credit cards

700

11.77

697

11.91

Consumer other:

Marine

1,120

6.26

1,206

6.24

Other

8.72

8.58

Total consumer other

1,187

6.40

1,280

6.37

Total consumer loans

16,126

199

4.93

15,926

196

4.94

Total loans

53,271

537

4.00

52,696

545

4.15

Loans held for sale

456

4.06

513

3.93

Securities available for sale ^{(b), (e)}

12,926

2.37

13,296

2.47

Held-to-maturity securities ^(b)

4,796

1.84

4,144

1.87

Trading account assets

747

2.52

749

2.31

Short-term investments

1,615

.20

2,722

.23

Other investments ^(e)

1,022

2.67

1,048

2.61

Total earning assets

74,833

653

3.49

75,168

662

3.54

Allowance for loan and lease losses

(873

)

(890

)

Accrued income and other assets

9,549

9,770

Discontinued assets

5,061

5,096

Total assets

88,570

89,144

LIABILITIES

NOW and money market deposit accounts

32,736

.15

32,849

.17

Savings deposits

2,520

—

.04

2,545

—

.04

Certificates of deposit ($100,000 or more) ^(f)

2,785

1.67

2,975

1.79

Other time deposits

3,957

1.24

4,202

1.35

Deposits in foreign office

621

—

.20

573

.24

Total interest-bearing deposits

42,619

.35

43,144

.39

Federal funds purchased and securities sold under repurchase agreements

1,837

.08

1,845

—

.14

Bank notes and other short-term borrowings

383

1.98

367

1.84

Long-term debt ^{(f), (g)}

3,504

3.41

4,401

3.25

Total interest-bearing liabilities

48,343

.56

49,757

.62

Noninterest-bearing deposits

23,364

22,297

Accrued expense and other liabilities

1,626

1,653

Discontinued liabilities ^(g)

4,968

5,089

Total liabilities

78,301

78,796

EQUITY

Key shareholders’ equity

10,237

10,314

Noncontrolling interests

Total equity

10,269

10,348

Total liabilities and equity

88,570

89,144

Interest rate spread (TE)

2.93

2.92

Net interest income (TE) and net interest margin (TE)

584

3.11

586

3.13

TE adjustment ^(b)

Net interest income, GAAP basis

578

581

(a)	Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology.

(b)	Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(c)	For purposes of these computations, nonaccrual loans are included in average loan balances.

(d)

Commercial, financial, and agricultural average balance for the three months ended September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012 includes $96 million, $96 million, $91 million, $90 million, and $54 million, respectively, of assets from commercial credit cards.

104

Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations


First Quarter 2013							Fourth Quarter 2012								Third Quarter 2012
Average Balance		Interest ^(a)		Yield/ Rate ^(a)			Average Balance			Interest ^(a)		Yield/ Rate ^(a)			Average Balance			Interest ^(a)		Yield/ Rate ^(a)

$	23,317	$	218		3.78	%	$	22,436		$	213		3.77	%	$	21,473		$	203		3.76	%
	7,616		79		4.24			7,555			82		4.35			7,463			83		4.40
	1,034		11		4.27			1,070			14		4.94			1,116			12		4.55
	4,843		47		3.92			4,869			49		4.01			5,026			39		3.13

	36,810		355		3.92			35,930			358		3.96			35,078			337		3.83
	2,173		25		4.58			2,164			26		4.70			2,092			25		4.80

	9,787		96		3.97			9,807			98		3.99			9,734			99		4.02
	413		8		7.70			411			9		8.23			468			9		7.73

	10,200		104		4.12			10,218			107		4.16			10,202			108		4.19
	1,343		25		7.58			1,339			32		9.63			1,297			32		9.65
	704		22		12.61			714			23		13.15			432			17		15.38

	1,311		20		6.29			1,403			22		6.16			1,493			22		6.28
	85		2		7.98			91			1		8.25			101			3		8.02

	1,396		22		6.39			1,494			23		6.29			1,594			25		6.39

	15,816		198		5.00			15,929			211		5.30			15,617			207		5.26

	52,626		553		4.26			51,859			569		4.37			50,695			544		4.27
	469		4		3.27			618			5		3.47			532			5		3.28
	12,065		81		2.74			11,980			84		2.95			12,608			94		3.07
	3,816		18		1.94			4,036			19		1.94			4,251			21		1.94
	710		6		3.44			606			3		1.91			693			4		2.10
	2,999		2		.22			2,090			2		.27			1,868			1		.24
	1,059		9		3.59			1,088			12		4.05			1,134			8		3.01

	73,744		673		3.67			72,277			694		3.85			71,781			677		3.78
	(896)							(898	)							(883	)
	9,867							9,878								9,907
	5,216							5,350								5,471

$	87,931						$	86,607							$	86,276


$	31,946		14		.18		$	31,058			14		.18		$	30,176			14		.19
	2,473		1		.05			2,408			—		.06			2,378			1		.06
	2,911		14		1.99			2,992			16		2.15			3,420			22		2.53
	4,451		16		1.42			4,714			18		1.52			5,158			23		1.76
	454		—		.25			874			1		.21			666			—		.21

	42,235		45		.43			42,046			49		.47			41,798			60		.57

	1,913		1		.15			1,702			1		.16			1,822			1		.17
	387		1		1.75			306			2		1.97			390			1		1.53
	4,671		37		3.51			3,301			35		4.84			3,793			37		4.43

	49,206		84		.70			47,355			87		.73			47,803			99		.83
	21,400							21,889								20,878
	1,799							1,747								1,900
	5,213							5,321								5,449

	77,618							76,312								76,030

	10,279							10,261								10,222
	34							34								24

	10,313							10,295								10,246

$	87,931						$	86,607							$	86,276

					2.97	%							3.12	%							2.95	%

			589		3.24	%					607		3.37	%					578		3.23	%

			6								6								6

		$	583							$	601							$	572

(e)	Yield is calculated on the basis of amortized cost.

(f)	Rate calculation excludes basis adjustments related to fair value hedges.

(g)	A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations.

105

Figure 9 shows how the changes in yields or rates and average balances from the prior year period affected net interest income. The section entitled “Financial Condition” contains additional discussion about changes in earning assets and funding sources.

Figure 9. Components of Net Interest Income Changes from Continuing Operations


	From three months ended September 30, 2012 to three months ended September 30, 2013									From nine months ended September 30, 2012 to nine months ended September 30, 2013
in millions	Average Volume			Yield/ Rate			Net Change ^(a)			Average Volume			Yield/ Rate			Net Change ^(a)
INTEREST INCOME
Loans	$	27		$	(34	)	$	(7	)	$	95		$	(70	)	$	25
Loans held for sale		(1	)		1			—			(2	)		1			(1	)
Securities available for sale		2			(19	)		(17	)		(24	)		(54	)		(78	)
Held-to-maturity securities		3			(2	)		1			13			(3	)		10
Trading account assets		—			1			1			—			—			—
Short-term investments		—			—			—			1			(1	)		—
Other investments		(1	)		(1	)		(2	)		(3	)		—			(3	)

Total interest income (TE)		30			(54	)		(24	)		80			(127	)		(47	)

INTEREST EXPENSE
NOW and money market deposit accounts		1			(2	)		(1	)		4			(5	)		(1	)
Savings deposits		—			(1	)		(1	)		—			—			—
Certificates of deposit ($100,000 or more)		(4	)		(6	)		(10	)		(16	)		(23	)		(39	)
Other time deposits		(5	)		(6	)		(11	)		(18	)		(26	)		(44	)

Total interest-bearing deposits		(8	)		(15	)		(23	)		(30	)		(54	)		(84	)
Federal funds purchased and securities sold under repurchase agreements		—			—			—			—			(1	)		(1	)
Bank notes and other short-term borrowings		—			1			1			(1	)		1			—
Long-term debt		(3	)		(5	)		(8	)		(24	)		(16	)		(40	)

Total interest expense		(11	)		(19	)		(30	)		(55	)		(70	)		(125	)

Net interest income (TE)	$	41		$	(35	)	$	6		$	135		$	(57	)	$	78

(a)	The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

Noninterest income

As shown in Figure 10, noninterest income was $459 million for the third quarter of 2013, compared to $518 million for the year-ago quarter, a decrease of $59 million, or 11.4%. Other income declined $53 million due to a $54 million gain associated with the redemption of trust preferred securities one year ago. Operating lease income and other leasing gains also decreased $23 million, partially due to a $39 million gain on the early termination of leveraged leases one year ago compared to a $23 million gain on the early termination of leveraged leases in the current quarter. These decreases were partially offset by increases in trust and investment services income, cards and payments income, and net gains (losses) from principal investing of $6 million each.

For the nine months ended September 30, 2013, noninterest income decreased $104 million, or 7.3%, from the same period one year ago. Operating lease income and other leasing gains decreased $91 million primarily due to a $90 million gain on the early termination of leveraged leases in the prior year compared to a $23 million gain on the early termination of leveraged leases in the current year. Other income also declined $41 million due to a $54 million gain associated with the redemption of trust preferred securities in the prior year. Net gains (losses) from principal investing also decreased $38 million. These decreases were partially offset by increases in investment banking and debt placement fees of $32 million, cards and payments income of $25 million, and trust and investment services income of $15 million.

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Figure 10. Noninterest Income


	Three months ended September 30,				Change						Nine months ended September 30,				Change
dollars in millions	2013		2012		Amount			Percent			2013		2012		Amount			Percent
Trust and investment services income	$	100	$	94	$	6			6.4	%	$	295	$	280	$	15			5.4	%
Investment banking and debt placement fees		86		83		3			3.6			249		217		32			14.7
Service charges on deposit accounts		73		74		(1	)		(1.4	)		213		212		1			.5
Operating lease income and other leasing gains		43		66		(23	)		(34.8	)		85		176		(91	)		(51.7	)
Corporate services income		44		39		5			12.8			132		127		5			3.9
Cards and payments income		43		37		6			16.2			122		97		25			25.8
Corporate-owned life insurance income		26		26		—			—			87		86		1			1.2
Consumer mortgage income		3		11		(8	)		(72.7	)		16		29		(13	)		(44.8	)
Net gains (losses) from principal investing		17		11		6			54.5			32		70		(38	)		(54.3	)
Other income ^(a)		24		77		(53	)		(68.8	)		82		123		(41	)		(33.3	)

Total noninterest income	$	459	$	518	$	(59	)		(11.4	)%	$	1,313	$	1,417	$	(104	)		(7.3	)%

(a)	Included in this line item is our “Dealer trading and derivatives income (loss).” Additional detail is provided in Figure 11.

Figure 11. Dealer Trading and Derivatives Income (Loss)


	Three months ended September 30,						Change						Nine months ended September 30,						Change
dollars in millions	2013			2012			Amount			Percent			2013			2012			Amount			Percent
Dealer trading and derivatives income (loss), proprietary ^(a), (b)	$	(7	)	$	4		$	(11	)		N/M	%	$	(12	)	$	(1	)	$	(11	)		N/M	%
Dealer trading and derivatives income (loss), nonproprietary ^(b)		10			(9	)		19			N/M			27			3			24			800.0

Total dealer trading and derivatives income (loss)	$	3		$	(5	)	$	8			N/M	%	$	15		$	2		$	13			650.0	%

(a)

For the quarter ended September 30, 2013, income of $2 million related to foreign exchange and interest rate derivative trading was offset by losses related to fixed income, equity securities trading, energy derivative trading, and credit portfolio management activities. For the quarter ended September 30, 2012, fixed income and equity securities trading activities constitute the majority of this amount. Income related to foreign exchange and interest rate derivative trading was less than $1 million and was offset by losses from our credit portfolio management activities.

(b)

The allocation between proprietary and nonproprietary is made based upon whether the trade is conducted for the benefit of Key or Key’s clients rather than based upon the proposed rulemaking under the Volcker Rule. The prohibitions and restrictions on proprietary trading activities contemplated by the Volcker Rule and the rules proposed thereunder are not yet final. Therefore, the ultimate impact of the rules proposed under the Volcker Rule is not yet known.

107

The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.

Trust and investment services income

Trust and investment services income is our largest source of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 12. For the three and nine months ended September 30, 2013, trust and investment services income increased $6 million, or 6.4%, and $15 million, or 5.4%, respectively, as compared to the same periods one year ago.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At September 30, 2013, our bank, trust and registered investment advisory subsidiaries had assets under management of $36.1 billion, compared to $35.6 billion at September 30, 2012. As shown in Figure 12, an increase in the equity portfolio was partially offset by decreases in the securities lending, fixed income, and money market portfolios. Our securities lending business has been declining due to our de-emphasis of this business resulting in lower transaction volumes, client departures, and fewer assets under management.

Figure 12. Assets Under Management


	2013						2012
in millions	Third		Second		First		Fourth		Third
Assets under management by investment type:
Equity	$	19,761	$	19,658	$	19,659	$	18,013	$	18,266
Securities lending		3,740		3,202		2,879		3,147		3,900
Fixed income		9,997		10,066		10,697		10,872		10,621
Money market		2,612		2,618		2,479		2,712		2,800

Total	$	36,110	$	35,544	$	35,714	$	34,744	$	35,587


Proprietary mutual funds included in assets under management:
Equity		—		—	$	40	$	38	$	40
Fixed income		—	$	188		230		244		261

Total		—	$	188	$	270	$	282	$	301

Investment banking and debt placement fees

Investment banking and debt placement fees, consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees increased $3 million, or 3.6%, from the year-ago quarter and $32 million, or 14.7%, from the nine-month period ended one year ago primarily due to increased levels of debt and equity financings and advisor fees.

Operating lease income and other leasing gains

Operating lease income and other leasing gains decreased $23 million, or 34.8%, for the third quarter of 2013 and $91 million, or 51.7%, for the nine months ended September 30, 2013 as compared to the same periods one year ago. The decrease in the current quarter was partially due to a $39 million gain on the early termination of leveraged leases one year ago compared to a $23 million gain on the early termination of leveraged leases in the current quarter. The year-to-date decline was partially due to a $90 million gain on the early termination of leveraged leases in the prior year compared to a $23 million gain on the early termination of leveraged leases in the current year. Product run-off also contributed to the decreases in operating lease income and other leasing gains. Accordingly, as shown in Figure 13, operating lease expense also declined for the nine-month period ended September 30, 2013.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $6 million, or 16.2%, from the year-ago quarter and $25 million, or 25.8%, for the nine months ended September 30, 2013, primarily due to the third quarter 2012 credit card portfolio acquisition.

Other income

Other income, which consists primarily of gain on sale of certain loans; mortgage servicing revenue, net of amortization; other service charges; and certain dealer trading income, decreased $53 million, or 68.8%, from the year-ago quarter and $41 million, or 33.3%, for the nine months ended September 30, 2013 as compared to the same period one year ago. This decline was due to a $54 million gain on the redemption of certain trust preferred securities in the third quarter of 2012.

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Noninterest expense

As shown in Figure 13, noninterest expense was $716 million for the third quarter of 2013, compared to $712 million for the year-ago quarter, representing an increase of $4 million or 0.6%. Excluding the $41 million in expenses related to our efficiency initiative and the pension settlement charge compared to the $9 million in efficiency initiative expenses one year ago, noninterest expense was down $28 million from prior year. Personnel expense increased $15 million compared to the year-ago quarter. Employee benefits, a component of personnel expense, increased $24 million from the third quarter of 2012 due to a $25 million pension settlement charge as a result of an increase in lump sum payments made from the pension plans. This increase in employee benefits was partially offset by a $5 million decrease in salaries and a $2 million decline in both incentive compensation and stock-based compensation. Nonpersonnel expense decreased $11 million from one year ago primarily due to a decline in business services and professional fees.

For the nine months ended September 30, 2013, noninterest expense increased $24 million, or 1.2%, compared to the same period one year ago. Personnel expense increased $63 million due to an increase in severance expense primarily associated with our efficiency initiative, as well as increases in employee benefits due to a pension settlement charge and incentive compensation. Nonpersonnel expense decreased $39 million from one year ago. Business services and professional fees declined $27 million, and marketing expense and other expense each decreased $15 million. These declines were partially offset by an increase in intangible asset amortization of $23 million primarily as a result of the 2012 acquisitions of the credit card portfolio and Western New York branches. The provision (credit) for losses on lending-related commitments increased $13 million. Net occupancy also increased $11 million primarily due to charges related to the consolidation of 46 branches during the first nine months of 2013.

The amount of noninterest expense for the nine months ended September 30, 2013, attributable to our 2012 acquisitions was $79 million spread across several expense categories, compared to $47 million for the prior year. For the nine months ended September 30, 2013, costs associated with our efficiency initiative, including the pension settlement charge, totaling $93 million were also incurred compared to $9 million in the prior year.

Figure 13. Noninterest Expense


	Three months ended September 30,					Change						Nine months ended September 30,					Change
dollars in millions	2013		2012			Amount			Percent			2013		2012			Amount			Percent
Personnel	$	414	$	399		$	15			3.8	%	$	1,211	$	1,148		$	63			5.5	%
Net occupancy		66		65			1			1.5			202		191			11			5.8
Computer processing		38		42			(4	)		(9.5	)		116		126			(10	)		(7.9	)
Business services and professional fees		37		48			(11	)		(22.9	)		109		136			(27	)		(19.9	)
Equipment		25		27			(2	)		(7.4	)		78		80			(2	)		(2.5	)
Operating lease expense		14		13			1			7.7			37		45			(8	)		(17.8	)
Marketing		16		18			(2	)		(11.1	)		33		48			(15	)		(31.3	)
FDIC assessment		7		7			—			—			23		23			—			—
Intangible asset amortization on credit cards		8		6			2			33.3			23		6			17			283.3
Other intangible asset amortization		4		3			1			33.3			11		5			6			120.0
Provision (credit) for losses on lending-related commitments		3		(8	)		11			N/M			11		(2	)		13			N/M
OREO expense, net		1		1			—			—			5		14			(9	)		(64.3	)
Other expense		83		91			(8	)		(8.8	)		249		264			(15	)		(5.7	)

Total noninterest expense	$	716	$	712		$	4			.6	%	$	2,108	$	2,084		$	24			1.2	%


Average full-time equivalent employees ^(a)		14,555		15,833			(1,278	)		(8.1	)%		14,980		15,565			(585	)		(3.8	)%

(a)	The number of average full-time-equivalent employees has not been adjusted for discontinued operations.

The following discussion explains the composition of certain elements of our noninterest expense and the factors that caused those elements to change.

Personnel

As shown in Figure 14, personnel expense, the largest category of our noninterest expense, increased by $15 million, or 3.8%, when compared to the year-ago quarter. Employee benefits increased $24 million, or 44.4%, primarily due to a pension settlement charge of $25 million. This increase in employee benefits was partially offset by decreases in salaries, incentive compensation, and stock-based compensation. For the nine months ended September 30, 2013, personnel expense increased $63 million, or 5.5%, compared to the same period one year ago. Incentive compensation accruals increased $22 million, or 10.5%. Severance expense and employee benefits each increased $21 million, or 175% and 12.2%, respectively, as a result of staff reductions related to our efficiency initiative. Employee benefits included a $25 million pension settlement

109

charge. In addition, higher levels of contract labor on technology initiatives resulted in an $11 million, or 24.4%, increase. These increases were partially offset by a decrease in stock-based compensation of $9 million, or 25%, when compared to the same period one year ago.

Figure 14. Personnel Expense


	Three months ended September 30,				Change						Nine months ended September 30,				Change
dollars in millions	2013		2012		Amount			Percent			2013		2012		Amount			Percent
Salaries	$	222	$	227	$	(5	)		(2.2	)%	$	671	$	674	$	(3	)		(.4	)%
Technology contract labor, net		19		20		(1	)		(5.0	)		56		45		11			24.4
Incentive compensation		81		83		(2	)		(2.4	)		231		209		22			10.5
Employee benefits		78		54		24			44.4			193		172		21			12.2
Stock-based compensation		8		10		(2	)		(20.0	)		27		36		(9	)		(25.0	)
Severance		6		5		1			20.0			33		12		21			175.0

Total personnel expense	$	414	$	399	$	15			3.8	%	$	1,211	$	1,148	$	63			5.5	%

Operating lease expense

Operating lease expense increased $1 million, or 7.7%, from the year-ago quarter and decreased $8 million, or 17.8%, from the nine-month period ended one year ago. This year-to-date decline was attributable to product run-off. Income related to the rental of leased equipment is presented in Figure 10 as “operating lease income and other leasing gains.”

Intangible asset amortization

Intangible asset amortization increased $3 million compared to the year-ago quarter and $23 million for the nine months ended September 30, 2013, as compared to the same period one year ago as a result of the third quarter 2012 acquisitions of the credit card portfolio and 37 branches in Western New York.

Other expense

Other expense is comprised of various miscellaneous expense items. The $8 million, or 8.8% decrease in the current quarter compared to the year-ago quarter and the $15 million, or 5.7%, decrease in the first nine months of 2013 as compared to the same period one year ago reflects fluctuations in several of those line items.

Income taxes

We recorded tax expense from continuing operations of $59 million for the third quarter of 2013, $72 million for the second quarter of 2013 and $50 million for the third quarter of 2012. For the first nine months of 2013, we recorded tax expense from continuing operations of $201 million compared to tax expense of $177 million for the same period last year.

Our federal tax expense (benefit) differs from the amount that would be calculated using the federal statutory tax rate, primarily because we generate income from investments in tax-advantaged assets, such as corporate-owned life insurance, earn credits associated with investments in low-income housing projects, and make periodic adjustments to our tax reserves. In addition, during the third quarter, our effective tax rate was lower due to the early termination of certain leveraged leases that resulted in nontaxable gains pursuant to a prior settlement with the IRS.

Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived are included in Note 12 (“Income Taxes”) on page 175 of our 2012 Form 10-K.

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Line of Business Results

This section summarizes the financial performance and related strategic developments of our two major business segments (operating segments), Key Community Bank and Key Corporate Bank. Note 18 (“Line of Business Results”) describes the products and services offered by each of these business segments, provides more detailed financial information pertaining to the segments and explains “Other Segments” and “Reconciling Items.”

Figure 15 summarizes the contribution made by each major business segment to our “taxable-equivalent revenue from continuing operations” and “income (loss) from continuing operations attributable to Key” for the three- and nine-month periods ended September 30, 2013 and 2012.

Figure 15. Major Business Segments — Taxable-Equivalent (TE) Revenue from Continuing Operations and Income (Loss) from Continuing Operations Attributable to Key


	Three months ended September 30,						Change						Nine months ended September 30,						Change
dollars in millions	2013			2012			Amount			Percent			2013			2012			Amount			Percent
REVENUE FROM CONTINUING OPERATIONS (TE)
Key Community Bank	$	551		$	575		$	(24	)		(4.2	)%	$	1,657		$	1,645		$	12			.7	%
Key Corporate Bank		377			370			7			1.9			1,132			1,118			14			1.3
Other Segments		114			157			(43	)		(27.4	)		283			346			(63	)		(18.2	)

Total Segments		1,042			1,102			(60	)		(5.4	)		3,072			3,109			(37	)		(1.2	)
Reconciling Items		1			(6	)		7			N/M			—			(11	)		11			N/M

Total	$	1,043		$	1,096		$	(53	)		(4.8	)%	$	3,072		$	3,098		$	(26	)		(.8	)%


INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY
Key Community Bank	$	54		$	(16	)	$	70			N/M			123		$	96		$	27			28.1	%
Key Corporate Bank		96			109			(13	)		(11.9	)%	$	317			294			23			7.8
Other Segments		92			104			(12	)		(11.5	)		230			203			27			13.3

Total Segments		242			197			45			22.8			670			593			77			13.0
Reconciling Items		(7	)		19			(26	)		N/M			(35	)		46			(81	)		N/M

Total	$	235		$	216		$	19			8.8	%	$	635		$	639		$	(4	)		(.6	)%

Key Community Bank summary of operations

•

Continued credit card penetration and successful integration of branches in Western New York

•

Nine consecutive quarters of average loan growth

•

Core deposits up $2.3 billion, or 5.5%, from the prior year

As shown in Figure 16, Key Community Bank recorded net income attributable to Key of $54 million for the third quarter of 2013, compared to a net loss attributable to Key of $16 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $19 million, or 5.1%, from the third quarter of 2012 due to declines in the deposit spread in the current period as a result of the continued low-rate environment. Average loans and leases grew 6.2% while average deposits increased .8% from one year ago.

Noninterest income declined by $5 million, or 2.5%, from the year-ago quarter. Consumer mortgage income decreased $8 million, and other income declined $3 million. These decreases were partially offset by increases in cards and payments income and trust and investment services income of $3 million each.

The provision for loan and lease losses decreased by $99 million, or 80.5%, from the third quarter of 2012. During the third quarter of 2012, the application of updated regulatory guidance related to debts discharged through Chapter 7 bankruptcy increased the provision $45 million, and the acquisition of the credit card portfolio and Western New York branches increased the provision $32 million. Net loan charge-offs decreased $64 million from the same period one year ago, partially due to the application of the updated regulatory guidance in the third quarter of 2012 as discussed above.

Noninterest expense declined by $37 million, or 7.7 %, from the year-ago quarter as a result of Key’s efficiency initiative. Personnel expense decreased $17 million primarily due to declines in salaries, incentive compensation, and employee benefits. Nonpersonnel expense declined $20 million primarily due to declines in business services and professional fees, computer processing, and internally-allocated costs.

111

Figure 16. Key Community Bank


	Three months ended September 30,					Change						Nine months ended September 30,				Change
dollars in millions	2013		2012			Amount			Percent			2013		2012		Amount			Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	357	$	376		$	(19	)		(5.1	)%	$	1,075	$	1,089	$	(14	)		(1.3	)%
Noninterest income		194		199			(5	)		(2.5	)		582		556		26			4.7

Total revenue (TE)		551		575			(24	)		(4.2	)		1,657		1,645		12			.7
Provision (credit) for loan and lease losses		24		123			(99	)		(80.5	)		123		124		(1	)		(.8	)
Noninterest expense		441		478			(37	)		(7.7	)%		1,338		1,368		(30	)		(2.2	)

Income (loss) before income taxes (TE)		86		(26	)		112			N/M			196		153		43			28.1
Allocated income taxes (benefit) and TE adjustments		32		(10	)		42			N/M			73		57		16			28.1

Net income (loss) attributable to Key	$	54	$	(16	)	$	70			N/M		$	123	$	96	$	27			28.1	%


AVERAGE BALANCES
Loans and leases	$	29,495	$	27,764		$	1,731			6.2	%	$	29,213	$	26,720	$	2,493			9.3	%
Total assets		31,679		30,305			1,374			4.5			31,575		29,076		2,499			8.6
Deposits		49,652		49,269			383			.8			49,492		48,242		1,250			2.6

Assets under management at period end	$	25,574	$	23,246		$	2,328			10.0	%	$	25,574	$	23,246	$	2,328			10.0	%

ADDITIONAL KEY COMMUNITY BANK DATA


	Three months ended September 30,						Change						Nine months ended September 30,				Change
dollars in millions	2013			2012			Amount			Percent			2013		2012		Amount			Percent
NONINTEREST INCOME
Trust and investment services income	$	68		$	65		$	3			4.6	%	$	201	$	185	$	16			8.6	%
Services charges on deposit accounts		61			62			(1	)		(1.6	)		179		177		2			1.1
Cards and payments income		36			33			3			9.1			107		84		23			27.4
Other noninterest income		29			39			(10	)		(25.6	)		95		110		(15	)		(13.6	)

Total noninterest income	$	194		$	199		$	(5	)		(2.5	)%	$	582	$	556	$	26			4.7	%

AVERAGE DEPOSITS OUTSTANDING
NOW and money market deposit accounts	$	26,564		$	24,991		$	1,573			6.3	%	$	26,340	$	23,964	$	2,376			9.9	%
Savings deposits		2,510			2,368			142			6.0			2,503		2,144		359			16.7
Certificates of deposits ($100,000 or more)		2,264			2,936			(672	)		(22.9	)		2,401		3,214		(813	)		(25.3	)
Other time deposits		3,949			5,137			(1,188	)		(23.1	)		4,194		5,594		(1,400	)		(25.0	)
Deposits in foreign office		278			292			(14	)		(4.8	)		277		292		(15	)		(5.1	)
Noninterest-bearing deposits		14,087			13,545			542			4.0			13,777		13,034		743			5.7

Total deposits	$	49,652		$	49,269		$	383			.8	%	$	49,492	$	48,242	$	1,250			2.6	%

HOME EQUITY LOANS
Average balance	$	10,247		$	9,734
Weighted-average loan-to-value ratio (at date of origination)		71	%		71	%
Percent first lien positions		58			54

OTHER DATA
Branches		1,044			1,087
Automated teller machines		1,350			1,620

Key Corporate Bank summary of operations

•

Investment banking and debt placement fees increased 3.7% from the prior year

•

Average loan balances up 9% from the prior year

•

Average deposits up 25.2% from the prior year

As shown in Figure 17, Key Corporate Bank recorded net income attributable to Key of $96 million for the third quarter of 2013, compared to $109 million for the same period one year ago.

Taxable-equivalent net interest income decreased by $1 million, or .5%, compared to the third quarter of 2012. Average earning assets increased $1.7 billion, or 8.3%, from the year-ago quarter, driving a $7 million increase in earning asset spread. Average deposit balances increased $3.2 billion, or 25.2%, from the year-ago quarter, driven by third-party servicing acquisitions and increased public sector deposits. However, these increases in balances were offset by declines in the deposit spread as a result of the continued low-rate environment.

112

Noninterest income increased by $8 million, or 4.4%, from the third quarter of 2012. Increases in investment banking and debt placement fees, corporate services, and other income were partially offset by a decrease in operating lease income and other leasing gains compared to the year-ago quarter.

The provision for loan and lease losses was a charge of $13 million compared to a credit of $3 million for the third quarter of 2012 due to loan growth and lower levels of recovery.

Noninterest expense increased by $16 million, or 8%, from the third quarter of 2012. This increase was driven by a $2 million charge in the provision (credit) for losses on lending-related commitments compared to a credit of $6 million for the third quarter of 2012. Internally-allocated costs were also higher in the current quarter than one year ago.

Figure 17. Key Corporate Bank


	Three months ended September 30,					Change						Nine months ended September 30,				Change
dollars in millions	2013		2012			Amount			Percent			2013		2012		Amount			Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	188	$	189		$	(1	)		(.5	)%	$	565	$	575	$	(10	)		(1.7	)%
Noninterest income		189		181			8			4.4			567		543		24			4.4

Total revenue (TE)		377		370			7			1.9			1,132		1,118		14			1.3
Provision (credit) for loan and lease losses		13		(3	)		16			N/M			7		14		(7	)		(50.0	)
Noninterest expense		217		201			16			8.0			629		636		(7	)		(1.1	)

Income (loss) before income taxes (TE)		147		172			(25	)		(14.5	)		496		468		28			6.0
Allocated income taxes and TE adjustments		51		63			(12	)		(19.0	)		179		171		8			4.7

Net income (loss)		96		109			(13	)		(11.9	)		317		297		20			6.7
Less: Net income (loss) attributable to noncontrolling interests		—		—			—			—			—		3		(3	)		N/M

Net income (loss) attributable to Key	$	96	$	109		$	(13	)		(11.9	)%	$	317	$	294	$	23			7.8	%


AVERAGE BALANCES
Loans and leases	$	20,586	$	18,893		$	1,693			9.0	%	$	20,256	$	18,677	$	1,579			8.5	%
Loans held for sale		422		441			(19	)		(4.3	)		433		487		(54	)		(11.1	)
Total assets		24,487		22,912			1,575			6.9			24,108		22,826		1,282			5.6
Deposits		16,125		12,879			3,246			25.2			15,241		12,287		2,954			24.0

Assets under management at period end	$	10,536	$	12,341		$	(1,805	)		(14.6	)%	$	10,536	$	12,341	$	(1,805	)		(14.6	)%

ADDITIONAL KEY CORPORATE BANK DATA


	Three months ended September 30,				Change						Nine months ended September 30,				Change
dollars in millions	2013		2012		Amount			Percent			2013		2012		Amount			Percent
NONINTEREST INCOME
Trust and investment services income	$	31	$	31		—			—		$	95	$	97	$	(2	)		(2.1	)%
Investment banking and debt placement fees		85		82	$	3			3.7	%		246		210		36			17.1
Operating lease income and other leasing gains		14		21		(7	)		(33.3	)		45		66		(21	)		(31.8	)

Corporate services income		34		28		6			21.4			96		96		—			—
Service charges on deposit accounts		11		12		(1	)		(8.3	)		33		35		(2	)		(5.7	)
Cards and payments income		6		6		—			—			15		16		(1	)		(6.3	)

Payments and services income		51		46		5			10.9			144		147		(3	)		(2.0	)

Other noninterest income		8		1		7			700.0			37		23		14			60.9

Total noninterest income	$	189	$	181	$	8			4.4	%	$	567	$	543	$	24			4.4	%

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Key’s Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $92 million for the third quarter of 2013, compared to net income attributable to Key of $104 million for the same period last year. These results were primarily attributable to a decrease in other income due to a $54 million gain on the redemption of certain trust preferred securities. The net gain resulting from the early termination of leveraged leases was $15 million (a $23 million gain in operating lease income and other leasing gains less an $8 million charge for the write-off of capitalized loan origination costs) in the third quarter of 2013 compared to a net gain of $26 million in the third quarter of 2012, which also contributed to the decline in other segments. These decreases were partially offset by an increase in net interest income of $24 million, adjusted for the impact of the leveraged lease terminations discussed above, and a decline in noninterest expense of $19 million.

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Financial Condition

Loans and loans held for sale

At September 30, 2013, total loans outstanding from continuing operations were $53.6 billion, compared to $52.8 billion at December 31, 2012 and $51.4 billion at September 30, 2012. Loans related to the discontinued operations of the education lending business, which are excluded from total loans at September 30, 2013, December 31, 2012, and September 30, 2012, totaled $4.7 billion, $5.2 billion, and $5.3 billion, respectively. The increase in our outstanding loans from continuing operations over the past twelve months results primarily from increased lending activity in our commercial, financial and agricultural portfolio along with the previously discussed credit card portfolio and branch acquisition. For more information on balance sheet carrying value, see Note 1 (“Summary of Significant Accounting Policies”) under the headings “Loans” and “Loans Held for Sale” on pages 119-120 of our 2012 Form 10-K.

Commercial loan portfolio

Commercial loans outstanding were $37.5 billion at September 30, 2013, an increase of $1.9 billion, or 5%, compared to September 30, 2012.

Commercial, financial and agricultural . Our commercial, financial and agricultural loans, also referred to as “Commercial and Industrial,” represented 45% of our total loan portfolio at September 30, 2013, 44% at December 31, 2012, and 43% at September 30, 2012, and are the largest component of our total loans. These loans are originated by both Key Corporate Bank and Key Community Bank and are comprised of fixed and variable rate loans to our large, middle market and small business clients.

Figure 18 provides our commercial, financial and agricultural loans by industry classification for the periods ended September 30, 2013, December 31, 2012, and September 30, 2012.

Figure 18. Commercial, Financial and Agricultural Loans


	September 30, 2013					December 31, 2012					September 30, 2012
dollars in millions	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Industry classification:
Services	$	5,769		23.7	%	$	5,610		24.1	%	$	5,302		24.1	%
Manufacturing		4,140		17.0			4,196		18.1			3,961		18.0
Public utilities		1,789		7.4			1,424		6.1			1,223		5.6
Financial services		2,163		8.9			2,236		9.6			2,176		9.9
Wholesale trade		1,951		8.0			1,604		6.9			1,680		7.7
Retail trade		1,024		4.2			889		3.8			818		3.7
Mining		617		2.5			761		3.3			833		3.8
Dealer floor plan		1,027		4.2			1,216		5.2			1,035		4.7
Property management		784		3.2			798		3.4			761		3.5
Transportation		959		4.0			851		3.7			774		3.5
Building contractors		521		2.1			459		2.0			448		2.0
Agriculture/forestry/fishing		513		2.1			584		2.5			555		2.5
Insurance		164		.7			112		.5			113		.5
Public administration		335		1.4			446		1.9			439		2.0
Communications		231		1.0			183		.8			239		1.1
Individuals		2		—			1		—			2		—
Other		2,328		9.6			1,872		8.1			1,620		7.4

Total	$	24,317		100.0	%	$	23,242		100.0	%	$	21,979		100.0	%

Commercial, financial and agricultural loans increased $2.3 billion, or 11%, from the same period last year with Key Corporate Bank increasing $1.8 billion and Key Community Bank up $404 million. We have experienced growth in new high credit quality loan commitments, and utilization with clients in our middle market segment, and as well as in our Institutional and Capital Markets business. While there was loan growth in several industry classifications compared to the year ago quarter, the most significant growth occurred in the public utilities industry classification, which increased by 46.3%. Our two largest industry classifications — services and manufacturing — increased by 8.8% and 4.5%, respectively, when compared to the year ago quarter. The services and manufacturing industries represented 23.7% and 17.0%, respectively, of the total commercial, financial and agricultural loan portfolio at September 30, 2013, compared to 24.1% and 18.0%, respectively, at September 30, 2012. At the end of each of the quarterly periods provided in Figure 18 above, loans in the services and manufacturing industry classifications accounted for over 40% of our total commercial, financial and agricultural loan portfolio.

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Services and manufacturing are focus areas where we maintain dedicated industry verticals that are staffed by relationship managers who possess deep industry experience and knowledge. Our loans in the services classification grew by $467 million, or 8.8%, compared to last year. The growth in the services loan portfolio was largely related to increases in lending to large corporate, middle market, and business banking clients and was partially offset by decreases in loans to clients in private bank and real estate. Loans in the manufacturing classification grew by $179 million, or 4.5%, compared to the same period one year ago. Increases in lending to large corporate, middle market, and business banking clients accounted for the majority of the growth in this classification.

Commercial real estate loans . Our commercial real estate (“CRE”) lending business is conducted through two primary sources: our 13-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of CRE located both within and beyond the branch system. This line of business deals primarily with nonowner-occupied properties (generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties) and accounted for approximately 55% of our average year-to-date commercial real estate loans, compared to 54% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of commercial real estate.

CRE loans represent 16% of our total loan portfolio at September 30, 2013 compared to 17% one year ago. These loans include both owner and nonowner occupied properties which at September 30, 2013 represented 23% of our commercial loan portfolio compared to 24% one year ago. These loans were $8.6 billion at September 30, 2013 and September 30, 2012. We have been de-risking the portfolio by changing our focus from developers to owners of completed and stabilized CRE.

Figure 19 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 19, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.

As shown in Figure 19, at September 30, 2013, our CRE portfolio included mortgage loans of $7.5 billion and construction loans of $1.1 billion, representing 14% and 2%, respectively, of our total loans. At September 30, 2013, nonowner-occupied loans represented 66% of our total CRE loans and owner-occupied loans represented 34% of our total CRE loans. The average size of mortgage loans originated during the third quarter of 2013 was $3.5 million, and our largest mortgage loan at September 30, 2013, had a balance of $66.3 million. At September 30, 2013, our average construction loan commitment was $5.2 million. Our largest construction loan commitment was $56.7 million, and our largest construction loan amount outstanding was $55.7 million.

Also shown in Figure 19, 66% of our CRE loans at September 30, 2013 were for nonowner-occupied properties compared to 64% at September 30, 2012. Approximately 16% of these loans were construction loans at both September 30, 2013 and 2012. Typically, these properties are not fully leased at the origination of the loan. The borrower relies upon additional leasing through the life of the loan to provide the cash flow necessary to support debt service payments. A significant decline in economic growth, and in turn, rental rates and occupancy would adversely affect our portfolio of construction loans.

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Figure 19. Commercial Real Estate Loans


September 30, 2013	Geographic Region												Total		Percent of Total			Construction		Commercial Mortgage
dollars in millions	West		Southwest		Central		Midwest		Southeast		Northeast		Total		Percent of Total			Construction		Commercial Mortgage

Nonowner-occupied:
Retail properties	$	144	$	127	$	148	$	79	$	304	$	131	$	933		10.8	%	$	140	$	793
Multifamily properties		303		140		396		431		597		195		2,062		24.0			517		1,545
Health facilities		178		—		175		121		118		234		826		9.6			11		815
Office buildings		144		8		87		141		21		98		499		5.8			43		456
Warehouses		199		—		19		89		119		109		535		6.2			46		489
Manufacturing facilities		—		—		1		6		66		3		76		.9			2		74
Hotels/Motels		13		5		—		22		48		15		103		1.2			—		103
Residential properties		12		—		24		36		23		26		121		1.4			75		46
Land and development		43		—		11		12		14		18		98		1.2			48		50
Other		93		—		18		46		71		195		423		4.9			21		402

Total nonowner-occupied		1,129		280		879		983		1,381		1,024		5,676		66.0			903		4,773
Owner-occupied		1,166		20		341		725		42		632		2,926		34.0			155		2,771

Total	$	2,295	$	300	$	1,220	$	1,708	$	1,423	$	1,656	$	8,602		100.0	%	$	1,058	$	7,544


Nonowner-occupied:
Nonperforming loans	$	5	$	18		—	$	8		—	$	12	$	43		N/M		$	14	$	29
Accruing loans past due 90 days or more		7		—		—		2		—		1		10		N/M			1		9
Accruing loans past due 30 through 89 days		—		—		—		3		14		2		19		N/M			2		17


West –		Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington and Wyoming
Southwest –		Arizona, Nevada and New Mexico
Central –		Arkansas, Colorado, Oklahoma, Texas and Utah
Midwest –		Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin
Southeast –		Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington D.C. and West Virginia
Northeast –		Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont

In the first nine months of 2013, nonperforming loans related to nonowner-occupied properties decreased by $84 million from December 31, 2012 to $43 million at September 30, 2013, and also decreased by $88 million when compared to September 30, 2012. Our nonowner occupied commercial real estate portfolio has increased by 2.9%, or approximately $159 million, since September 30, 2012.

If the economic recovery stalls, it may weaken the commercial real estate market fundamentals (i.e., vacancy rates, the stability of rental income and asset values), leading to reduced cash flow to support debt service payments. Reduced client cash flow would adversely affect our ability to collect such payments. Accordingly, the value of our commercial real estate loan portfolio could be adversely affected.

Commercial lease financing . We conduct commercial lease financing arrangements through our Key Equipment Finance line of business and have both the scale and array of products to compete in the equipment lease financing business. Commercial lease financing receivables represented 12% of commercial loans at September 30, 2013, and 14% at September 30, 2012.

Commercial loan modification and restructuring

We modify and extend certain commercial loans in the normal course of business for our clients. Loan modifications vary and are handled on a case by case basis with strategies responsive to the specific circumstances of each loan and borrower. In many cases, borrowers have other resources and can reinforce the credit with additional capital, collateral, guarantees or income sources.

Modifications are negotiated to achieve mutually agreeable terms that maximize loan credit quality while at the same time meeting our clients’ financing needs. Modifications made to loans of creditworthy borrowers not experiencing financial difficulties and under circumstances where ultimate collection of all principal and interest is not in doubt are not classified as TDRs. In accordance with applicable accounting guidance, a loan is classified as a TDR only when the borrower is experiencing financial difficulties and a creditor concession has been granted.

Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. Loan extensions are sometimes coupled with these primary concession types. Because economic conditions have improved modestly and we have restructured loans to provide the optimal opportunity for successful repayment by the borrower, certain of our restructured loans have returned to accrual status and consistently performed under the restructured loan terms over the past year.

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If the loan terms are extended at less than normal market rates for similar lending arrangements, our Asset Recovery Group is consulted to help determine if any concession granted would result in designation as a TDR. Transfer to our Asset Recovery Group is considered for any commercial loan determined to be a TDR. During the third quarter of 2013, there were $53 million of new restructured commercial loans.

For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 4 (“Asset Quality”).

Figure 20. Commercial TDRs by Note Type and Accrual Status


in millions	September 30, 2013		June 30, 2013		March 31, 2013		December 31, 2012		September 30, 2012
Commercial TDRs by Note Type
Tranche A	$	135	$	102	$	101	$	117	$	166

Total Commercial TDRs	$	135	$	102	$	101	$	117	$	166


Commercial TDRs by Accrual Status
Nonaccruing	$	84	$	50	$	52	$	96	$	114
Accruing		51		52		49		21		52

Total Commercial TDRs	$	135	$	102	$	101	$	117	$	166

We often use an A-B note structure for our TDRs, breaking the existing loan into two tranches. First, we create an A note. As the objective of this TDR note structure is to achieve a fully performing and well-rated A note, we focus on sizing that note to a level that is supported by cash flow available to service debt at current market terms and consistent with our customary underwriting standards. This note structure typically will include a debt coverage ratio of 1.2 or better of cash flow to monthly payments of market interest, and principal amortization of generally not more than 25 years. (These metrics are adjusted from time to time based upon changes in long-term markets and “take out underwriting standards” of our various lines of business.) Appropriately sized A notes are more likely to return to accrual status, allowing us to resume recognizing interest income. As the borrower’s payment performance improves, these restructured notes typically also allow for an upgraded internal quality risk rating classification. Moreover, the borrower retains ownership and control of the underlying collateral (typically, commercial real estate), the borrower’s capital structure is strengthened (often to the point that fresh capital is attracted to the transaction), and local markets are spared distressed/fire sales.

The B note typically is an interest-only note with no required amortization until the property stabilizes and generates excess cash flow. This excess cash flow customarily is applied directly to the principal of the A note. We evaluate the B note when we consider returning the A note to accrual status. In many cases, the B note is charged off at the same time the A note is returned to accrual status. Alternatively, both A and B notes may be simultaneously returned to accrual if credit metrics are supportive.

Restructured nonaccrual loans may be returned to accrual status based on a current, well documented evaluation of the credit, which would include analysis of the borrower’s financial condition, prospects for repayment under the modified terms, and alternate sources of repayment such as the value of loan collateral. We wait a reasonable period (generally a minimum of six months) to establish the borrower’s ability to sustain historical repayment performance before returning the loan to accrual status. Sustained historical repayment performance prior to the restructuring also may be taken into account. The primary consideration for returning a restructured loan to accrual status is the reasonable assurance that the full contractual principal balance of the loan and the ongoing contractually required interest payments will be fully repaid. Although our policy is a guideline, considerable judgment is required to review each borrower’s circumstances.

All loans processed as TDRs, including A notes and any non-charged-off B notes, are reported as TDRs during the calendar year in which the restructure took place.

Additional information regarding TDRs is provided in Note 4 (“Asset Quality”).

Extensions . Project loans typically are refinanced into the permanent commercial loan market at maturity, but sometimes they are modified and extended. Extension terms take into account the specific circumstances of the client relationship, the status of the project, and near-term prospects for both the client and the collateral. In all cases, pricing and loan structure are

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reviewed and, where necessary, modified to ensure the loan has been priced to achieve a market rate of return and loan terms that are appropriate for the risk. Typical enhancements include one or more of the following: principal paydown, increased amortization, additional collateral, increased guarantees, and a cash flow sweep. Some maturing construction loans have automatic extension options built in; in those cases, pricing and loan terms cannot be altered.

Loan pricing is determined based on the strength of the borrowing entity and the strength of the guarantor, if any. Therefore, pricing for an extended loan may remain the same because the loan is already priced at or above current market.

We do not consider loan extensions in the normal course of business (under existing loan terms or at market rates) as TDRs, particularly when ultimate collection of all principal and interest is not in doubt and no concession has been made. In the case of loan extensions where either collection of all principal and interest is uncertain or a concession has been made, we would analyze such credit under the accounting guidance to determine whether it qualifies as a TDR. Extensions that qualify as TDRs are measured for impairment under the applicable accounting guidance.

Guarantors . We conduct a detailed guarantor analysis (1) for all new extensions of credit, (2) at the time of any material modification/extension, and (3) typically annually, as part of our on-going portfolio and loan monitoring procedures. This analysis requires the guarantor entity to submit all appropriate financial statements, including balance sheets, income statements, tax returns, and real estate schedules.

While the specific steps of each guarantor analysis may vary, the high level objectives include determining the overall financial conditions of the guarantor entities, including: size, quality, and nature of asset base; net worth (adjusted to reflect our opinion of market value); leverage; standing liquidity; recurring cash flow; contingent and direct debt obligations; and near term debt maturities.

Borrower and guarantor financial statements are required at least annually within 90-120 days of the calendar/fiscal year end. Income statements and rent rolls for project collateral are required quarterly. We may require certain information, such as liquidity, certifications, status of asset sales or debt resolutions, and real estate schedules to be provided more frequently.

We routinely seek performance from guarantors of impaired debt if the guarantor is solvent. We may not seek to enforce the guaranty if we are precluded by bankruptcy or we determine the cost to pursue a guarantor exceeds the value to be returned given the guarantor’s verified financial condition. We often are successful in obtaining either monetary payment or the cooperation of our solvent guarantors to help mitigate loss, cost and the expense of collections.

As of September 30, 2013, we had $5.5 million of mortgage and construction loans that had a loan-to-value ratio greater than 1.0, and were accounted for as performing loans. These loans were not considered impaired due to one or more of the following factors: (i) underlying cash flow adequate to service the debt at a market rate of return with adequate amortization; (ii) a satisfactory borrower payment history; and (iii) acceptable guarantor support.

Consumer loan portfolio

Consumer loans outstanding increased by $244 million, or 2%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 97% of this portfolio at September 30, 2013, is derived from our Key Community Bank within our 13 state footprint. The remainder of the portfolio, which has been in an exit mode since the fourth quarter of 2007, was originated from the Consumer Finance line of business and is now included in Other Segments. Home equity loans in Key Community Bank increased by $517 million, or 5%, over the past twelve months as a result of stabilized home values, improved employment, and favorable borrowing conditions.

As shown in Figure 16, we hold the first lien position for approximately 58% of the Key Community Bank home equity portfolio at September 30, 2013, and 54% at September 30, 2012. For consumer loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent Fair Isaac Corporation scores as well as original and updated loan-to-value ratio. This information is used in establishing the ALLL. Our methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” that begins on page 120 of our 2012 Form 10-K.

Regulatory guidance issued in January 2012 addressed specific risks and required actions within home equity portfolios associated with second lien loans. At September 30, 2013, 42% of our home equity portfolio is secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.

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Figure 21 summarizes our home equity loan portfolio by source at the end of each of the last five quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.

Figure 21. Home Equity Loans


	2013									2012
dollars in millions	Third			Second			First			Fourth			Third
SOURCES OF PERIOD END LOANS
Key Community Bank	$	10,285		$	10,173		$	9,809		$	9,816		$	9,768
Other		353			375			401			423			409

Total	$	10,638		$	10,548		$	10,210		$	10,239		$	10,177

Nonperforming loans at period end	$	211		$	221		$	217		$	231	^(a), (b)	$	189	^(a) ^, ^(b)
Net loan charge-offs for the period		14			19			20			(7	)		67
Yield for the period ^(c)		4.05	%		4.07	%		4.12	%		4.16	%		4.19	%

(a)

Includes $48 million of performing home equity second liens that are subordinate to first liens and 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January 2012.

(b)	Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in regulatory guidance that was updated in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.

(c)	From continuing operations.

Loans held for sale

As shown in Note 3 (“Loans and Loans Held for Sale”), our loans held for sale increased to $699 million at September 30, 2013 from $599 million at December 31, 2012 and totaled $628 million at September 30, 2012.

At September 30, 2013, loans held for sale included $608 million of commercial mortgages, which increased by $124 million from September 30, 2012, $23 million of residential mortgage loans, which decreased $94 million from September 30, 2012, and $68 million of commercial, financial, and agricultural loans, which increased $55 million from September 30, 2012.

Loan sales

As shown in Figure 22, during the first nine months of 2013, we sold $2.6 billion of commercial real estate loans, $738 million of residential real estate loans, $288 million of commercial lease financing loans, and $236 million of commercial loans. Most of these sales came from the held-for-sale portfolio; however, $150 million of these loan sales related to the held-to-maturity portfolio.

Loan sales classified as held for sale generated net gains of $91 million in the first nine months of 2013 and are included in “investment banking and debt placement fees” and “other income” on the income statement.

Among the factors that we consider in determining which loans to sell are:

•

our business strategy for particular lending areas;

•

whether particular lending businesses meet established performance standards or fit with our relationship banking strategy;

•

our A/LM needs;

•

the cost of alternative funding sources;

•

the level of credit risk;

•

capital requirements; and

•

market conditions and pricing.

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Figure 22 summarizes our loan sales for the first nine months of 2013 and all of 2012.

Figure 22. Loans Sold (Including Loans Held for Sale)


in millions	Commercial		Commercial Real Estate		Commercial Lease Financing		Residential Real Estate		Total
2013
Third quarter	$	17	$	923	$	129	$	184	$	1,253
Second quarter		181		815		90		226		1,312
First quarter		38		880		69		328		1,315

Total	$	236	$	2,618	$	288	$	738	$	3,880

2012
Fourth quarter	$	38	$	1,233	$	53	$	493	$	1,817
Third quarter		46		787		47		503		1,383
Second quarter		24		808		26		379		1,237
First quarter		36		715		22		400		1,173

Total	$	144	$	3,543	$	148	$	1,775	$	5,610

Figure 23 shows loans that are either administered or serviced by us, but not recorded on the balance sheet. The table includes loans that have been sold.

Figure 23. Loans Administered or Serviced


in millions	September 30, 2013		June 30, 2013		March 31, 2013		December 31, 2012		September 30, 2012
Commercial real estate loans ^(a)	$	199,464	$	172,398	$	109,173	$	107,630	$	98,309
Commercial lease financing		623		548		516		520		519
Commercial loans		345		352		353		343		333

Total	$	200,432	$	173,298	$	110,042	$	108,493	$	99,161

(a)	The increase in commercial real estate loans in the third quarter and second quarter of 2013 includes $27 billion and $63.2 billion, respectively, of loans associated with commercial servicing portfolio acquired on June 24, 2013.

In the event of default by a borrower, we are subject to recourse with respect to approximately $1.3 billion of the $200 billion of loans administered or serviced at September 30, 2013. Additional information about this recourse arrangement is included in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with FNMA.”

We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as “other income”) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing of commercial real estate loans.

Securities

Our securities portfolio totaled $17.4 billion at September 30, 2013, compared to $16 billion at December 31, 2012, and $16.1 billion at September 30, 2012. Available-for-sale securities were $12.6 billion at September 30, 2013, compared to $12.1 billion at December 31, 2012, and $12 billion at September 30, 2012. Held-to-maturity securities were $4.8 billion at September 30, 2013, compared to $3.9 billion at December 31, 2012, and $4.1 billion at September 30, 2012. Essentially all of our held-to-maturity securities portfolio was invested in CMOs at September 30, 2013.

As shown in Figure 24, all of our mortgage-backed securities, which include both securities available for sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in highly liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 5 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques” and Note 6 (“Securities”).

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Figure 24. Mortgage-Backed Securities by Issuer


in millions	September 30, 2013		December 31, 2012		September 30, 2012
FHLMC	$	7,467	$	7,923	$	8,002
FNMA		6,129		5,246		5,314
GNMA		3,760		2,746		2,700

Total ^(a)	$	17,356	$	15,915	$	16,016

(a)	Includes securities held in the available-for-sale and held-to-maturity portfolios.

Securities available for sale

The majority of our securities available-for-sale portfolio consists of CMOs, which are debt securities secured by a pool of mortgages or mortgage-backed securities. CMOs generate interest income and serve as collateral to support certain pledging agreements. At September 30, 2013, we had $12.5 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $12 billion at December 31, 2012, and $11.9 billion at September 30, 2012.

We periodically evaluate our securities available-for-sale portfolio in light of established A/LM objectives, changing market conditions that could affect the profitability of the portfolio, and the level of interest rate risk to which we are exposed. These evaluations may cause us to take steps to adjust our overall balance sheet positioning.

In addition, the size and composition of our securities available-for-sale portfolio could vary with our needs for liquidity and the extent to which we are required (or elect) to hold these assets as collateral to secure public funds and trust deposits. Although we generally use debt securities for this purpose, other assets, such as securities purchased under resale agreements or letters of credit, are used occasionally when they provide a lower cost of collateral or more favorable risk profiles.

Throughout 2012 and in the first nine months of 2013, our investing activities continued to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times during this time period served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities, as well as the Western New York branch acquisition in July 2012 (including credit card assets obtained in September 2012) and the acquisition of Key-branded credit card assets in August 2012.

Figure 25 shows the composition, yields and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 6 (“Securities”).

Figure 25. Securities Available for Sale


dollars in millions	States and Political Subdivisions			Collateralized Mortgage Obligations ^(a)			Other Mortgage- Backed Securities ^(a)			Other Securities ^(b)		Total			Weighted- Average Yield
September 30, 2013
Remaining maturity:
One year or less	$	1		$	498		$	1			—	$	500			3.24	%
After one through five years		16			10,193			749		$	24		10,982			2.42
After five through ten years		24			1,088			7			—		1,119			1.67
After ten years		—			—			5			—		5			5.75
Fair value	$	41		$	11,779		$	762		$	24	$	12,606			—
Amortized cost		40			11,810			733			20		12,603			2.38	%
Weighted-average yield ^(c)		6.07	%		2.30	%		3.51	%		—		2.38	% ^(d)		—
Weighted-average maturity		5.1 years			3.7 years			2.9 years			1.3 years		3.7 years			—
December 31, 2012
Fair value	$	49		$	11,464		$	538		$	43	$	12,094			—
Amortized cost		47			11,148			491			42		11,728			2.91	%
September 30, 2012
Fair value	$	54		$	11,283		$	598		$	27	$	11,962			—
Amortized cost		52			10,949			543			25		11,569			3.15	%

(a)	Maturity is based upon expected average lives rather than contractual terms.

(b)	Includes primarily marketable equity securities.

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(c)	Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(d)	Excludes $24 million of securities at September 30, 2013, that have no stated yield.

Held-to-maturity securities

Federal Agency CMOs constitute essentially all of our held-to-maturity securities. The remaining balance is comprised of foreign bonds and capital securities. Figure 26 shows the composition, yields and remaining maturities of these securities.

Figure 26. Held-to-Maturity Securities


dollars in millions	Collateralized Mortgage Obligations			Other Securities			Total			Weighted- Average Yield ^(a)
September 30, 2013
Remaining maturity:
One year or less		—		$	7		$	7			4.14	%
After five through ten years	$	4,669			13			4,682			1.84
After one through five years		146			—			146			1.84
Amortized cost	$	4,815		$	20		$	4,835			1.84	%
Fair value		4,710			20			4,730			—

Weighted-average yield		1.84	%		2.58	% ^(b)		1.84	% ^(b)		—
Weighted-average maturity		4.0 years			2.0 years			4.0 years			—
December 31, 2012
Amortized cost	$	3,913		$	18		$	3,931			1.92	%
Fair value		3,974			18			3,992			—
September 30, 2012
Amortized cost	$	4,135		$	18		$	4,153			1.92	%
Fair value		4,194			18			4,212			—

(a)	Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(b)	Excludes $5 million of securities at September 30, 2013, that have no stated yield.

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Other investments

Principal investments — investments in equity and mezzanine instruments made by our Principal Investing unit — represented 58% of other investments at September 30, 2013. They include direct investments (investments made in a particular company) as well as indirect investments (investments made through funds that include other investors). Principal investments are predominantly made in privately held companies and are carried at fair value ($585 million at September 30, 2013, $627 million at December 31, 2012, and $669 million at September 30, 2012).

In addition to principal investments, “other investments” include other equity and mezzanine instruments, such as certain real estate-related investments that are carried at fair value, as well as other types of investments that generally are carried at cost.

Most of our other investments are not traded on an active market. We determine the fair value at which these investments should be recorded based on the nature of the specific investment and all available relevant information. This review may encompass such factors as the issuer’s past financial performance and future potential, the values of public companies in comparable businesses, the risks associated with the particular business or investment type, current market conditions, the nature and duration of resale restrictions, the issuer’s payment history, our knowledge of the industry, third-party data and other relevant factors. During the first nine months of 2013, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $32 million, which includes $5 million of net unrealized gains. These net gains are recorded as “net gains (losses) from principal investing” on the income statement. Additional information regarding these investments is provided in Note 5 (“Fair Value Measurements”).

Deposits and other sources of funds

Domestic deposits are our primary source of funding. During the third quarter of 2013, average domestic deposits were $65.4 billion and represented 87% of the funds we used to support loans and other earning assets, compared to $62 billion and 86% during the same quarter of 2012. The composition of our average deposits is shown in Figure 8 in the section entitled “Net interest income.”

The increase in average domestic deposits in the third quarter of 2013, compared to the third quarter of 2012, was driven by corporate clients and the addition of escrow deposits from our servicing business acquisition. The overall growth resulted from an increase in demand deposits of $2.5 billion and interest-bearing non-time deposits of $2.7 billion. This deposit growth was partially offset by $1.8 billion of run-off from one year ago in certificates of deposit and other time deposits. Improved funding mix and previous maturities of our certificates of deposit have reduced the cost of total domestic deposits from .38% for the third quarter of 2012 to .22% for the third quarter of 2013.

Wholesale funds, consisting of deposits in our foreign office and short-term borrowings, averaged $2.8 billion during third quarter of 2013, compared to $2.9 billion during third quarter of 2012. The change from 2012 resulted from a $45 million decrease in foreign office deposits, a $7 million decrease in bank notes and other short-term borrowings, and a $15 million increase in federal funds purchased and securities sold under agreements to repurchase.

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Capital

At September 30, 2013, our shareholders’ equity was $10.2 billion, down $65 million from December 31, 2012. The following sections discuss certain factors that contributed to this change. For other factors that contributed to the change, see the Consolidated Statements of Changes in Equity.

CCAR and capital actions

As part of its ongoing supervisory process, the Federal Reserve requires BHCs like KeyCorp to submit an annual comprehensive capital plan and to update that plan to reflect material changes in a firm’s risk profile, business strategies, or corporate structure, including but not limited to changes in planned capital actions. As previously reported, on January 7, 2013, we submitted to the Federal Reserve and provided to the OCC under the annual CCAR process our 2013 capital plan. On March 14, the Federal Reserve announced that it did not object to our 2013 capital plan. At its March 2013 meeting, our Board authorized up to $426 million of Common Share repurchases in the open market or through privately negotiated transactions. The authorization was expressly in addition to any amounts remaining under preexisting authority. Common Share repurchases under the current authorization are expected to be executed through the first quarter of 2014.

Our Board of Directors at its September meeting approved the use of the cash portion of the after-tax gain from the sale of Victory for additional Common Share repurchases, and we received no objection from the Federal Reserve to use the cash portion of the after-tax gain for this purpose. During the third quarter of 2013, we completed $198 million of Common Share repurchases on the open market under our 2013 capital plan. This amount included repurchases related to the cash portion of the net after-tax gain from the sale of Victory.

Dividends

Consistent with the 2013 capital plan, during the third quarter of 2013, we made a dividend payment of $.055 per Common Share, or $49 million, on our Common Shares. We made dividend payments of $.055 per Common Share, or $49 million, and $.05 per Common Share, or $47 million, during the second and first quarters of 2013, respectively. Changes to future dividends may be evaluated by the Board of Directors based upon our earnings, financial condition, and other factors, including regulatory review. Further information regarding the capital plan process and CCAR is included in the “Supervision and Regulation” section of our 2012 Form 10-K in Item 1. Business under the heading “Capital Assessment and Review of Capital Actions.”

During the third quarter of 2013, we also made a dividend payment of $1.9375 per share, or $6 million, on our Series A Preferred Stock.

Common shares outstanding

Our Common Shares are traded on the NYSE under the symbol KEY with 30,803 holders of record at September 30, 2013. Our book value per Common Share was $11.05 based on 897.8 million shares outstanding at September 30, 2013, compared to $10.78 based on 925.8 million shares outstanding at December 31, 2012, and $10.64 based on 936.2 million shares outstanding at September 30, 2012. At September 30, 2013, our tangible book value per Common Share was $9.92 compared to $9.67 at December 31, 2012, and $9.54 at September 30, 2012.

Figure 27 shows activities that caused the change in outstanding Common Shares over the past five quarters.

Figure 27. Changes in Common Shares Outstanding

2013

2012

in thousands

Third

Second

First

Fourth

Third

Shares outstanding at beginning of period

912,883

922,581

925,769

936,195

945,473

Common shares issued (repurchased)

(16,364

)

(10,786

)

(6,790

)

(10,530

)

(9,639

)

Shares reissued (returned) under employee benefit plans

1,302

1,088

3,602

104

361

Shares outstanding at end of period

897,821

912,883

922,581

925,769

936,195

As shown above, Common Shares outstanding decreased by 15.1 million shares during the third quarter of 2013 from share repurchases under our 2013 capital plan and the net activity in our employee benefit plans.

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At September 30, 2013, we had 119.1 million treasury shares, compared to 91.2 million treasury shares at December 31, 2012, and 80.8 million treasury shares at September 30, 2012. Going forward we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.

Information on repurchases of Common Shares by KeyCorp is included in Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this report.

Capital adequacy

Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remain in excess of regulatory requirements at September 30, 2013. Our capital and liquidity are intended to position us to weather an adverse credit cycle while continuing to serve our clients’ needs, as well as to adjust to the Regulatory Capital Rules described in this report under the heading “Supervision and regulation”. Our shareholders’ equity to assets ratio was 11.25% at September 30, 2013, compared to 11.51% at December 31, 2012, and 11.79% at September 30, 2012. Our tangible common equity to tangible assets ratio was 9.93% at September 30, 2013, compared to 10.15% at December 31, 2012, and 10.39% at September 30, 2012.

Banking industry regulators prescribe minimum capital ratios for BHCs like KeyCorp and their banking subsidiaries. Risk-based capital guidelines require a minimum level of capital as a percent of “risk-weighted assets.” Risk-weighted assets consist of total assets plus certain off-balance sheet and market risk items, subject to adjustment for predefined credit risk factors. Currently, banks and BHCs must maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00% and total capital as a percent of risk-weighted assets of 8.00%. As of September 30, 2013, our Tier 1 risk-based capital ratio and our total risk-based capital ratios were 11.92% and 14.37%, respectively, compared to 12.15% and 15.13%, respectively, at December 31, 2012 and 12.10% and 15.17%, respectively, at September 30, 2012.

Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. BHCs that either have the highest supervisory rating or have implemented the Federal Reserve’s risk-adjusted measure for market risk — as we have — must maintain a minimum leverage ratio of 3.00%. All other BHCs must maintain a minimum ratio of 4.00%. As of September 30, 2013, our leverage ratio was 11.33%, compared to 11.41% at December 31, 2012 and 11.37% at September 30, 2012.

The adoption of the Regulatory Capital Rules changes the regulatory capital standards that apply to BHCs by phasing out the treatment of capital securities and cumulative preferred securities as eligible Tier 1 capital. The phase-out period, beginning January 1, 2015, will result in our trust preferred securities issued by the KeyCorp capital trusts being treated only as Tier 2 capital by 2016. These changes apply the same leverage and risk-based capital requirements that apply to depository institutions to BHCs, savings and loan holding companies, and nonbank financial companies identified as systemically important. The section titled “Supervision and regulation” of this report contains more detailed information regarding the Regulatory Capital Rules, and the section titled “Supervision and Regulation” under Item 1. Business of our 2012 Form 10-K contains additional information regarding capital.

As of September 30, 2013, our Tier 1 risk-based capital ratio, leverage ratio, and total risk-based capital ratio were 11.92%, 11.33%, and 14.37%, respectively. The trust preferred securities issued by the KeyCorp capital trusts contribute $340 million or 41, 39, and 41 basis points to our Tier 1 risk-based capital ratio, Tier 1 leverage ratio, and total risk-based capital ratio, respectively, as of September 30, 2013. The new minimum capital ratios together with the estimated capital ratios of Key at September 30, 2013, calculated on a fully phased-in basis under the Regulatory Capital Rules are set forth in Figure 4 of this report.

Federal bank regulators group FDIC-insured depository institutions into five categories, ranging from “well-capitalized” to “critically undercapitalized.” A “well-capitalized” institution must meet or exceed the prescribed threshold ratios of 6.00% for Tier 1 risk-based capital, 5.00% for Tier 1 leverage capital, and 10.00% for total risk-based capital and must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. If these provisions applied to BHCs, we believe we would qualify as “well-capitalized” at September 30, 2013, and we believe there has not been any change in condition or event since that date that would cause a change in capital category. Analysis on an estimated basis, accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and therefore as Tier 2 instead) as of September 30, 2013, also determines that we would qualify as “well-capitalized” under current regulatory guidelines (Basel I), with the estimated Tier 1 risk-based capital ratio, estimated leverage ratio, and estimated total risk-based capital ratio being 11.51%, 10.95%, and 14.37%, respectively. Figure 5 in the “Supervision and regulation” section above, describes the new threshold capital ratios for a “well capitalized” and an “adequately capitalized” institution under the

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Regulatory Capital Rules. The regulatory defined capital categories serve a limited supervisory function. Investors should not use our estimated ratios as a representation of our overall financial condition or prospects of KeyCorp. A discussion of the regulatory capital standards and other related capital adequacy regulatory standards is included in the section “Supervision and Regulation” under Item 1. Business of our 2012 Form 10-K under the heading “Capital.”

Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations. As a result of the financial crisis, the Federal Reserve has intensified its assessment of capital adequacy on a component of Tier 1 risk-based capital, known as Tier 1 common equity, and its review of the consolidated capitalization of systemically important financial companies, including KeyCorp. The capital modifications mandated by the Regulatory Capital Rules are consistent with the renewed focus on Tier 1 common equity and the consolidated capitalization of banks, BHCs, and covered nonbank financial companies, which resulted from the financial crisis. Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations; this measure is considered to be a non-GAAP financial measure. Figure 7 in the “Highlights of Our Performance” section reconciles Key shareholders’ equity, the GAAP performance measure, to Tier 1 common equity, the corresponding non-GAAP measure. Our Tier 1 common equity ratio was 11.17% at September 30, 2013, compared to 11.36% at December 31, 2012, and 11.30% at September 30, 2012.

Generally, for risk-based capital purposes, deferred tax assets that are dependent upon future taxable income are limited to the lesser of: (i) the amount of deferred tax assets that a financial institution expects to realize within one year of the calendar quarter-end date, based on its projected future taxable income for the year, or (ii) 10% of the amount of an institution’s Tier 1 capital. At September 30, 2013, December 31, 2012, and September 30, 2012, we had no net deferred tax assets deducted from Tier 1 capital and risk-weighted assets. At September 30, 2013, for Key’s consolidated operations, we had a federal net deferred tax asset of $197 million and a state deferred tax asset of $7 million compared to a federal deferred tax asset of $83 million and a state deferred tax liability of $13 million at December 31, 2012, and a federal deferred tax asset of $41 million and a state deferred tax liability of $29 million at September 30, 2012. We have recorded a valuation allowance of $2 million against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.

Regulatory Capital Rules

The Regulatory Capital Rules provide for the phase-out of Tier 1 capital treatment for capital securities beginning in January 2015. As a result, our outstanding trust preferred securities will, by 2016, become Tier 2 capital. The “Supervision and regulation” section of this report contains a more detailed discussion of the Regulatory Capital Rules. Figure 5 in the “Supervision and regulation” section above discloses the new minimum capital ratios together with the estimated capital ratios of Key at September 30, 2013, calculated on a fully phased-in basis under the Regulatory Capital Rules. Given our strong capital position, we expect to be able to satisfy the capital framework established under the Regulatory Capital Rules on our compliance date of January 1, 2015.

Figure 28 represents the details of our regulatory capital position at September 30, 2013, December 31, 2012, and September 30, 2012, under the existing Basel I standards.

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Figure 28. Capital Components and Risk-Weighted Assets


	September 30,			December 31,			September 30,
dollars in millions	2013			2012			2012
TIER 1 CAPITAL
Key shareholders’ equity	$	10,206		$	10,271		$	10,251
Qualifying capital securities		340			339			339
Less: Goodwill		979			979			979
Accumulated other comprehensive income ^(a)		(409	)		(172	)		(109	)
Other assets ^(b)		96			114			121

Total Tier 1 capital		9,880			9,689			9,599

TIER 2 CAPITAL
Allowance for losses on loans and liability for losses on lending-related commitments ^(c)		946			972			995
Net unrealized gains on equity securities available for sale		1			—			—
Qualifying long-term debt		1,087			1,405			1,444

Total Tier 2 capital		2,034			2,377			2,439

Total risk-based capital	$	11,914		$	12,066		$	12,038


TIER 1 COMMON EQUITY
Tier 1 capital	$	9,880		$	9,689		$	9,599
Less: Qualifying capital securities		340			339			339
Series A Preferred Stock		282			291			291

Total Tier 1 common equity	$	9,258		$	9,059		$	8,969


RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet	$	65,080		$	63,995		$	63,012
Risk-weighted off-balance sheet exposure		17,528			16,575			16,687
Less: Goodwill		979			979			979
Other assets ^(b)		355			368			470
Plus: Market risk-equivalent assets		1,639			511			1,115

Gross risk-weighted assets		82,913			79,734			79,365
Less: Excess allowance for loan and lease losses		—			—			2

Net risk-weighted assets	$	82,913		$	79,734		$	79,363


AVERAGE QUARTERLY TOTAL ASSETS	$	88,498		$	86,239		$	85,856


CAPITAL RATIOS
Tier 1 risk-based capital		11.92	%		12.15	%		12.10	%
Total risk-based capital		14.37			15.13			15.17
Leverage ^(d)		11.33			11.41			11.37
Tier 1 common equity		11.17			11.36			11.30

(a)

(b)

Other assets deducted from Tier 1 capital and risk-weighted assets consist of disallowed deferred tax assets, disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at September 30, 2013, December 31, 2012, and September 30, 2012.

(c)

The allowance for loan and lease losses included in Tier 2 capital is limited by regulation to 1.25% of the sum of gross risk-weighted assets plus low level exposures and residual interests calculated under the direct reduction method, as defined by the Federal Reserve. The allowance for loan and lease losses includes $38 million, $55 million, and $66 million at September 30, 2013, December 31, 2012, and September 30, 2012, respectively, of allowance classified as “discontinued assets” on the balance sheet.

(d)

This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible assets described in footnote (b), and (iii) deductible portions of nonfinancial equity investments; plus assets derecognized as an offset to AOCI resulting from the adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans.

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Risk Management

Overview

Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, liquidity, market, compliance, operational, strategic, and reputation risks. Our risk management activities are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. Certain of these risks are defined and discussed in greater detail in the remainder of this section.

The KeyCorp Board of Directors (the “Board”) serves in an oversight capacity ensuring that Key’s risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board understands Key’s risk philosophy, approves the risk appetite, inquires about risk practices, reviews the portfolio of risks, compares the actual risks to the risk appetite and is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately. The Board challenges management and ensures accountability.

The Board’s Audit Committee assists the Board in oversight of financial statement integrity, regulatory and legal compliance, independent auditors’ qualifications and independence and all risk review functions including internal audit. The Audit Committee discusses policies related to risk assessment and risk management and the processes related to risk review and compliance. The Audit Committee has responsibility over financial reporting, compliance risk and legal matters, the implementation, management and evaluation of operational risk controls and information, security and fraud risk, and associated reputation and strategic risks.

The Board’s Risk Committee assists the Board in oversight of strategies, policies, procedures and practices relating to the management of credit risk, market risk, interest rate risk, and liquidity risk, including the actions taken to mitigate these risks, as well as reputational and strategic risks. The Risk Committee also oversees the maintenance of appropriate regulatory and economic capital, reviews the Enterprise Risk Management (ERM) reports, and approves any material changes to the charter of the ERM Committee.

The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.

Our ERM Committee, chaired by the Chief Executive Officer and comprised of other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework and governance structure for the management of risks across the entire company. The ERM Committee reports to the Board’s Risk Committee. Annually, the Board reviews and approves the ERM Program, as well as the risk appetite and corporate risk tolerances for major risk categories. We use a risk-adjusted capital framework to manage risks. This framework is approved and managed by the ERM Committee.

Tier 2 Risk Governance Committees support the ERM Committee by identifying early warning events and trends, escalating emerging risks and discussing forward-looking assessments. Membership of the Risk Governance Committees includes representatives from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing and reporting risk information. Risk Review provides the Third Line of Defense in their role to provide independent assessment and testing of the effectiveness, appropriateness and adherence to KeyCorp’s risk management policies, practices and controls.

The Chief Risk Officer ensures that relevant risk information is properly integrated into strategic and business decisions, ensures appropriate ownership of risks, provides input into performance and compensation decisions, assesses aggregate enterprise risk, monitors capabilities to manage critical risks, and executes appropriate Board and stakeholder reporting.

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Federal banking regulators continue to emphasize with financial institutions the importance of relating capital management strategy to the level of risk at each institution. We believe our internal risk management processes help us achieve and maintain capital levels that are commensurate with our business activities and risks, and conform to regulatory expectations.

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Market risk management

The cash flows and values of financial instruments change as a function of changes in market rates or prices, such as interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, or volatilities. These factors influence prospective yields, values, or prices associated with the instrument. For example, the value of a fixed-rate bond will decline when market interest rates increase, while the cash flows associated with a variable rate loan will increase when interest rates increase. The holder of a financial instrument is exposed to market risk when either the cash flows or the value of the instrument is tied to such external factors.

We manage our market risk differently based on whether the financial instrument is associated with trading or nontrading operations and activities. Our trading positions are carried at fair value with changes recorded in the income statement. These positions are subject to various market-based risk factors that impact the fair value of the financial instruments in the trading category. Our traditional banking loan and deposit products as well as long-term debt and certain short-term borrowings are nontrading positions. These positions are generally carried at the principal amount outstanding for assets and the amount owed for liabilities. The nontrading positions are subject to changes in economic value due to varying market conditions, primarily changes in interest rates.

Trading market risk

Key incurs market risk as a result of trading, investing, and client facilitation activities, principally within our investment banking and capital markets business. Key has exposures to a wide range of interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed income markets and maintaining positions in these instruments. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks. The majority of our positions are traded in active markets.

Management of trading market risks . Market risk management is an integral part of Key’s risk culture. The Market Risk Committee, headed by our Chief Market Risk Officer, along with the Risk Committee of our Board and the ERM Committee (collectively, the “Committees”) provide oversight of the management of trading market risks. Market risk policies and procedures have been defined and approved by the Market Risk Committee and take into account our tolerance for risk and consideration for the business environment. The Committees regularly review and discuss market risk reports prepared by our Market Risk Management group (“MRM”) that contain our market risk exposures and results of monitoring activities.

MRM is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. MRM conducts stress tests for each covered position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.

Covered positions . We monitor the market risk of our covered positions, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. The trading account includes on-and off-balance sheet positions in financial instruments acquired with the intent to profit from price variations. All positions in the trading account are recorded at fair value, and changes in fair value are reflected in our consolidated statements of income. Information regarding our fair value policies, procedures and methodologies is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” on page 122 of our 2012 Form 10-K and Note 5 (“Fair Value Measurements”) in this report. Instruments that are used to hedge nontrading activities, such as bank issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities do not meet the definition of a covered position. MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.

Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions, and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.

•

Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments include positions in municipal bonds, bonds backed by the U.S. government, agency

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and corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury, money markets, and certain collateralized CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks.

•

Foreign exchange includes foreign currency spots, forwards and options. We enter into contracts for these types of instruments primarily to accommodate the needs of clients. These activities result in exposures to foreign currency risk.

•

Interest rate derivatives include interest rate swaps, caps and floors, which are transacted primarily to accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio create exposures to interest rate risk.

•

Credit derivatives include credit default swaps, which are used to mitigate loan portfolio credit risk, and credit default swap indexes, which are used to manage the credit risk exposure associated with anticipated sales of certain commercial real estate loans. The transactions within the credit derivatives portfolio result in exposure to credit risk.

VaR and stressed VaR . VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to assess the extreme conditions on market risk within our trading portfolios. MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.

We use a VaR simulation model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions. Historical scenarios are customized for specific covered positions, and numerous risk factors are incorporated in the calculation. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level. Two years of historical data were used in the simulation during 2012. Beginning in February 2013, the simulation uses historical data from the previous year, as we believe it more appropriately reflects the current market conditions and the risks associated with our portfolios. This change resulted in a decrease in VaR results of approximately 2% at the 95% confidence level and 15% at the 99% confidence level. We also utilize factors to estimate the exposures that contain optionality features, such as options and cancellable provisions.

The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s Risk Management Group on an annual basis. The Model Risk Management Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee.

MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to observed daily profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. Actual losses did not exceed daily trading VaR on any day during the quarters ended September 30, 2013 and 2012.

We do not engage in correlation trading, or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.

The aggregate VaR at the 99% confidence level for all covered positions was $1.7 million at September 30, 2013, and $1.9 million at September 30, 2012. The decrease in aggregate VaR was primarily due to reduced exposures in credit derivatives as well as the change from using two years of historical data to one year for the VaR simulation, which was partially offset by an increase in the interest rate derivatives and fixed income VaR. Figure 29 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the third quarter of 2013 and 2012.

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Figure 29. VaR for Significant Portfolios of Covered Positions

2013

2012

Three months ended September 30,

in millions

High

Low

Mean

September 30,

High

Low

Mean

September 30,

Trading account assets:

Fixed income

1.0

0.3

0.6

0.8

0.8

0.2

0.4

0.6

Derivatives:

Interest rate

0.4

0.2

0.3

0.4

0.4

0.1

0.2

0.1

Foreign exchange

0.1

—

0.2

—

0.1

—

Credit

0.5

0.2

0.4

1.4

0.9

1.2

1.0

Stressed VaR is calculated using our general VaR results at the 99% confidence level and applying certain assumptions. The aggregate stressed VaR for all covered positions was $5.0 million at September 30, 2013. Figure 30 summarizes our stressed VaR for significant portfolios of covered positions for the third quarter of 2013 as used for market risk capital charge calculation purposes. Stressed VaR was not calculated for market risk regulatory capital purposes during 2012.

Figure 30. Stressed VaR for Significant Portfolios of Covered Positions

2013

Three months ended September 30,

in millions

High

Low

Mean

September 30,

Trading account assets:

Fixed income

3.1

0.8

1.8

2.5

Derivatives:

Interest rate

1.2

0.7

1.0

1.1

Foreign exchange

0.3

—

0.1

—

Credit

1.6

0.6

1.1

1.2

Internal capital adequacy assessment . Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk equivalent asset position, which consists of a VaR component, stressed VaR component, and a specific risk add-on. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors. Specific risk is measured through a standardized approach for positions where the VaR model does not capture specific risk. Specific risk calculations are run quarterly by MRM, and approved by the Chief Market Risk Officer. The VaR, stressed VaR, and specific risk components are added together to arrive at a total market risk equivalent assets calculation.

Nontrading market risk

Most of our market risk is derived from interest rate fluctuations. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. Such fluctuations may result from changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite, and within Board approved policy limits.

Interest rate risk positions are influenced by a number of factors including the balance sheet positioning that arises out of consumer preferences for loan and deposit products, economic conditions, the competitive environment within our markets and changes in market interest rates that affect client activity and our hedging, investing, funding and capital positions. The primary components of interest rate risk exposure consist of gap risk, basis risk, yield curve risk and option risk.

•

“Gap risk ” is the exposure to changes in interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (for example, deposits used to fund loans) do not mature or reprice at the same time.

•

“Basis risk” is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes.

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•

“Yield curve risk” is the exposure to non-parallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets they fund do not price or reprice to the same term point on the yield curve.

•

“Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or early prepayments are not mitigated with an offsetting position or appropriate compensation.

Oversight of nontrading market risk is governed by the Risk Committee of our Board, the ERM Committee and the ALCO. These committees regularly review various reports, including interest rate risk summaries, trends, peer comparisons, variance analyses, projections, and sensitivity analyses. The reviews generate a discussion of positions, trends and directives on interest rate risk and inform a number of our decisions. Guidance for the oversight and management of interest rate risk is provided through the asset/liability management policy, which is governed by the ALCO. We communicate with individuals within and outside of the company on a daily basis to discuss emerging issues.

Net interest income simulation analysis . The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments, including a most likely macro-economic scenario. Simulation modeling assumes that residual risk exposures will be managed to within the risk appetite.

We measure the amount of net interest income at risk by simulating the change in net interest income that would occur if the federal funds target rate were to gradually increase or decrease over the next twelve months, and term rates were to move in a similar fashion. Our standard rate scenarios encompass a gradual increase or decrease of 200 basis points, but due to the low interest rate environment, we have modified the standard to a gradual decrease of 25 basis points over two months with no change over the following ten months. After calculating the amount of net interest income at risk to interest rate changes, we compare that amount with the base case of an unchanged interest rate environment. We also perform regular stress tests and sensitivities on the model inputs that could materially change the resulting risk assessments. One set of stress tests and sensitivities assesses the effect of interest rate inputs on simulated exposures. Assessments are performed using different shapes of the yield curve, including a sustained flat yield curve, an inverted slope yield curve, changes in credit spreads, an immediate parallel change in market interest rates, and changes in the relationship of money market interest rates. Another set of stress tests and sensitivities assesses the effect of loan and deposit assumptions and assumed discretionary strategies on simulated exposures. Assessments are performed on changes to the following assumptions: the pricing of deposits without contractual maturities; changes in lending spreads; prepayments on loans and securities; other loan and deposit balance shifts; investment, funding and hedging activities; and liquidity and capital management strategies.

Simulation analysis produces only a sophisticated estimate of interest rate exposure based on judgments related to assumption inputs into the simulation model. We tailor assumptions to the specific interest rate environment and yield curve shape being modeled, and validate those assumptions on a regular basis. Our simulations are performed with the assumption that interest rate risk positions will be actively managed through the use of on- and off-balance sheet financial instruments to achieve the desired residual risk profile. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.

Figure 31 presents the results of the simulation analysis at September 30, 2013, and 2012. At September 30, 2013, our simulated exposure to changes in interest rates was moderately asset sensitive. Policy limits for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual increase or decrease in short-term interest rates over the next twelve months would adversely affect net interest income over the same period by more than 4%. As shown in Figure 31, we are operating within these limits.

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Figure 31. Simulated Change in Net Interest Income


September 30, 2013
Basis point change assumption (short-term rates)	-25		+200
ALCO policy limits	-4.00	%	-4.00	%

Interest rate risk assessment	-1.21	%	2.13	%



September 30, 2012
Basis point change assumption (short-term rates)	-25		+200
ALCO policy limits	-4.00	%	-4.00	%

Interest rate risk assessment	-.85	%	1.39	%

The results of additional sensitivity analysis of alternate interest rate paths and loan and deposit behavior assumptions indicates that net interest income could increase or decrease from the base simulation results presented in Figure 31. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and assumption inputs for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. The unprecedented low level of interest rates increases the uncertainty when modeling future deposit balances and repricing behavior. As shown in Figure 31, our sensitivity testing of both assumptions and variables suggests an increase or decrease of 50 basis points in our simulated exposure to a gradual 200 basis point increase in rates is reasonable at this time. Increases in both short term and intermediate term rates would benefit net interest income over time.

To support continued progress toward maximum employment and price stability, the FOMC expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens, and in particular expects to keep the federal funds rate at exceptionally low levels. Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase prior to any increase in the federal funds rate. Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.

We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a twelve-month horizon. To capture longer-term exposures, we calculate exposures to changes to the EVE as discussed in the following section.

Economic value of equity modeling . EVE complements net interest income simulation analysis as it estimates risk exposure beyond twelve-, twenty-four and thirty-six month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the base case of an unchanged interest rate environment. Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in certain yield curve term points, we have modified the standard declining rate scenario to an immediate 100 basis point decrease. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines.

Management of interest rate exposure . We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing securities, issuing term debt with floating or fixed interest rates, and using derivatives — predominantly in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities.

Figure 32 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a “receive fixed/pay variable” interest rate swap. The volume, maturity and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 7 (“Derivatives and Hedging Activities”).

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Figure 32. Portfolio Swaps by Interest Rate Risk Management Strategy


	September 30, 2013
						Weighted-Average								September 30, 2012
dollars in millions	Notional Amount		Fair Value			Maturity (Years)		Receive Rate			Pay Rate			Notional Amount		Fair Value
Receive fixed/pay variable — conventional A/LM ^(a)	$	9,300	$	12			2.5		.7	%		.2	%	$	12,740	$	101
Receive fixed/pay variable — conventional debt		4,160		259			4.2		3.3			.3			3,519		463
Pay fixed/receive variable — conventional debt		208		(6	)		10.9		.3			3.0			281		(29	)


Total portfolio swaps	$	13,668	$	265	^(b)		3.1		1.5	%		.3	%	$	16,540	$	535	^(b)

(a)	Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities.

(b)	Excludes accrued interest of $32 million and $38 million for September 30, 2013 and 2012, respectively.

Liquidity risk management

We define “liquidity” as the ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions.

Governance structure

We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entity’s capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding.

Oversight of the liquidity risk management process is governed by the Board’s Risk Committee, the KeyBank Board of Directors, the ERM Committee and the ALCO. These groups regularly review various liquidity reports, including liquidity and funding summaries, liquidity trends, peer comparisons, variance analyses, liquidity projections, hypothetical funding erosion stress tests and goal tracking reports. The reviews generate a discussion of positions, trends and directives on liquidity risk and shape a number of our decisions. When liquidity pressure is elevated, positions are monitored more closely and reporting is more intensive. We communicate with individuals within and outside of the company on a daily basis to discuss emerging issues.

Factors affecting liquidity

Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general may adversely affect the cost and availability of normal funding sources.

Our credit ratings at September 30, 2013, are shown in Figure 33. We believe that these credit ratings, under normal conditions in the capital markets, will enable the parent company or KeyBank to issue fixed income securities to investors.

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Figure 33. Credit Ratings

Senior

Subordinated

Series A

Short-Term

Long-Term

Capital

Preferred

September 30, 2013

Borrowings

Debt

Securities

Stock

KEYCORP (THE PARENT COMPANY)

Standard & Poor’s

A-2

BBB+

BBB

BBB-

Moody’s

P-2

Baa1

Baa2

Baa3

Ba1

Fitch

A-

BBB+

BB+

DBRS

R-2(high)

BBB(high)

BBB

BB(low)

KEYBANK

Standard & Poor’s

A-2

A-

BBB+

N/A

Moody’s

P-2

Baa1

N/A

Fitch

A-

BBB+

N/A

DBRS

R-1(low)

A(low)

BBB(high)

N/A

Managing liquidity risk

We regularly monitor our funding sources and measure our capacity to obtain funds in a variety of scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for both KeyCorp and KeyBank. In a “heightened monitoring mode,” we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed.

We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain a liquidity reserve through balances in our liquid asset portfolio. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at September 30, 2013, totaled $9.8 billion, consisting of $6.3 billion of unpledged securities, $1.1 billion of securities available for secured funding at the Federal Home Loan Bank of Cincinnati, and $2.4 billion of net balances of federal funds sold and balances in our Federal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as of September 30, 2013, our unused borrowing capacity secured by loan collateral was $15.6 billion at the Federal Reserve Bank of Cleveland and $2.7 billion at the Federal Home Loan Bank of Cincinnati.

Long-term liquidity strategy

Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Key’s client-based relationship strategy provides for a strong core deposit base which, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan to deposit ratio as a metric to monitor these strategies. Our target loan to deposit ratio is 90-100% (at September 30, 2013, our loan to deposit ratio was 84%), which we calculate as total loans, loans held for sale, and nonsecuritized discontinued loans divided by domestic deposits.

Sources of liquidity

Our primary sources of liquidity include customer deposits, wholesale funding and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or liquid assets. Conversely, excess cash generated by operating, investing and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.

Liquidity programs

We have several liquidity programs, which are described in Note 15 (“Long-Term Debt”) on page 184 of our 2012 Form 10-K, that enable the parent company and KeyBank to raise funds in the public and private markets when the capital markets are functioning normally. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. Each of the programs is replaced or renewed as needed. There are no restrictive financial covenants in any of these programs.

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KeyBank maintains a $20 billion Global Bank Note Program that allows KeyBank to issue notes, domestically and abroad, with original maturities of seven days or more for senior notes or five years or more for subordinated notes. These notes may be denominated in U.S. dollars or in foreign currencies. Each note will be the sole obligation of KeyBank.

In the first nine months of 2013, Key’s outstanding note balance decreased by $693 million. On January 29, 2013, Key issued $1 billion of Senior Bank Notes due February 1, 2018 under the Global Bank Note Program. These Notes have a coupon of 1.65% per annum and are not redeemable prior to maturity. Key also had maturities of $26 million in Euro medium-term notes and repayments of $750 million in Federal Home Loan Bank advances. KeyCorp had maturities of $750 million in medium-term notes.

Liquidity for KeyCorp

The primary source of liquidity for the parent is from subsidiary dividends, primarily from KeyBank NA. The parent company has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries’ obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and pay dividends to shareholders.

We use a cash coverage metric as the primary measure to assess parent company liquidity. The cash coverage metric measures the months into the future where projected obligations can be met with the current amount of liquidity to meet all projected obligations. We generally issue term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. At September 30, 2013, KeyCorp held $1.4 billion in short-term investments, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.

Typically, the parent company meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year, up to the date of dividend declaration. During the first nine months of 2013, KeyBank paid the parent $300 million in dividends, while the nonbank subsidiaries did not make any dividend payments to the parent. The parent did not make any capital infusions to KeyBank during the first nine months of 2013. As of September 30, 2013, KeyBank has capacity to pay $209 million in dividends to KeyCorp without prior regulatory approval.

Our liquidity position and recent activity

Over the past twelve months our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of an increase in unpledged securities, growth in deposits related to the acquisition of the commercial mortgage servicing portfolio and special servicing business, and net customer loan and deposit flows. The liquid asset portfolio continues to exceed the amount we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution. The issuance of $1 billion of Senior Bank Notes in January 2013 provided additional liquidity to support normal business flows and maintain our liquid asset portfolio within target levels.

From time to time, KeyCorp or KeyBank may seek to retire, repurchase or exchange outstanding debt, capital securities, preferred shares or Common Shares through cash purchase, privately negotiated transactions or other means. We periodically repurchase Common Shares in the open market or through privately negotiated transactions under our 2013 capital plan authorized by our Board and not objected to by the Federal Reserve. Additional information on repurchases of Common Shares by KeyCorp is included in Part II, Item 2. Unregistered Sales of Equity Securities or Use of Proceeds of this report. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements and other factors. The amounts involved may be material, individually or collectively.

We generate cash flows from operations and from investing and financing activities. We have approximately $165 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of September 30, 2013. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in

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approximately $12 million in taxes to be paid. If we were to cease operations in all international tax jurisdictions, the total amount of taxes to be paid would increase to approximately $32 million. Accordingly, we have included the total amount as a deferred tax liability at September 30, 2013.

The consolidated statements of cash flows summarize our sources and uses of cash by type of activity for the nine-month periods ended September 30, 2013, and 2012.

Credit risk management

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities and enter into financial derivative contracts, all of which have related credit risk.

Credit policy, approval and evaluation

We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves both retail and commercial credit policies. These policies are communicated throughout the organization to foster a consistent approach to granting credit.

Our credit risk management team is responsible for credit approval, is independent of our lines of business, and consists of senior officers who have extensive experience in structuring and approving loans. Only credit risk management members are authorized to grant significant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, but most major lending units have been assigned specific thresholds to keep exceptions at a manageable level.

Loan grades are assigned at the time of origination, verified by the credit risk management team and periodically reevaluated thereafter. 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 rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure and collateral, including credit risk mitigants, affect the expected recovery assessment.

Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan grading and scoring processes.

We maintain an active concentration management program to encourage diversification in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the strength of the borrower. Our legal lending limit is approximately $1.6 billion for any individual borrower. However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of September 30, 2013, we had five client relationships with loan commitments net of credit default swaps of more than $200 million. The average amount outstanding on these five individual net obligor commitments was $38 million at September 30, 2013. In general, our philosophy is to maintain a diverse portfolio with regard to credit exposures.

We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate credit risk. We utilize credit default swaps to transfer a portion of the credit risk associated with a particular extension of credit to a third party. At September 30, 2013, we used credit default swaps with a notional amount of $652 million to manage the credit risk associated with specific commercial lending obligations. We may also sell credit derivatives — primarily single name credit default swaps — to offset our purchased credit default swap position prior to maturity. At September 30, 2013, we had sold credit default swaps outstanding with a total notional amount of $67 million.

Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the “corporate services income” and “other income” components of noninterest income.

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We may also manage the loan portfolio using portfolio swaps and bulk purchases and sales. Our overarching goal is to manage the loan portfolio within a specified range of asset quality.

Allowance for loan and lease losses

At September 30, 2013, the ALLL was $868 million, or 1.62% of loans, compared to $888 million, or 1.73%, at September 30, 2012. The allowance includes $47 million that was specifically allocated for impaired loans of $411 million at September 30, 2013, compared to $39 million that was allocated for impaired loans of $428 million one year ago. For more information about impaired loans, see Note 4 (“Asset Quality”). At September 30, 2013, the allowance for loan and lease losses was 160.4% of nonperforming loans, compared to 136.0% at September 30, 2012.

Selected asset quality statistics for each of the past five quarters are presented in Figure 34. The factors that drive these statistics are discussed in the remainder of this section.

Figure 34. Selected Asset Quality Statistics from Continuing Operations


	2013									2012
dollars in millions	Third			Second			First			Fourth			Third
Net loan charge-offs	$	37		$	45		$	49		$	58		$	109
Net loan charge-offs to average loans		.28	%		.34	%		.38	%		.44	%		.86	%
Allowance for loan and lease losses to annualized net loan charge-offs		591.3			485.3			449.4			384.9			204.8
Allowance for loan and lease losses	$	868		$	876		$	893		$	888		$	888
Allowance for credit losses ^(a)		908			913			925			917			931
Allowance for loan and lease losses to period-end loans		1.62	%		1.65	%		1.70	%		1.68	%		1.73	%
Allowance for credit losses to period-end loans		1.69			1.72			1.76			1.74			1.81
Allowance for loan and lease losses to nonperforming loans		160.4			134.4			137.4			131.8			136.0
Allowance for credit losses to nonperforming loans		167.8			140.0			142.3			136.1			142.6
Nonperforming loans at period end ^(b)	$	541		$	652		$	650		$	674		$	653
Nonperforming assets at period end		579			693			705			735			718
Nonperforming loans to period-end portfolio loans		1.01	%		1.23	%		1.24	%		1.28	%		1.27	%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets		1.08			1.30			1.34			1.39			1.39

(a)	Includes the allowance for loan and lease losses plus the liability for credit losses on lending-related unfunded commitments.

(b)	September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012 amounts exclude $18 million, $19 million, $22 million, $23 million, and $25 million, respectively, of PCI loans acquired in July 2012.

We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology used is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 102 of our 2012 10-K. Briefly, we apply expected loss rates to existing loans with similar risk characteristics and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

For all commercial and consumer 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 probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the recorded investment of the loan with the estimated present value of its expected 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. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at September 30, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

As shown in Figure 35, our ALLL decreased by $20 million, or 2%, during the past twelve months. This contraction was associated with the improvement in credit quality of the loan portfolio, which has trended more favorably over the past twenty-four months. The quality of new loan originations and decreasing NPLs and net charge-offs has resulted in a reduction in our general allowance. Our delinquency trends have declined during 2012 and thus far in 2013 due to a modest level of loan growth, relatively stable conditions in the economic environment, and continued run off in our exit loan portfolio, and reflects our effort to maintain a moderate enterprise risk tolerance. Our liability for credit losses on lending-related commitments decreased by $3 million to $40 million at September 30, 2013, compared to the same period one year ago. When combined with our allowance for loan and lease losses, our total allowance for credit losses represented 1.69% of loans at the end of the third quarter of 2013, compared to 1.81% at the end of the third quarter of 2012.

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Figure 35. Allocation of the Allowance for Loan and Lease Losses


	September 30, 2013								December 31, 2012								September 30, 2012
dollars in millions	Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans
Commercial, financial and agricultural	$	370		42.6	%		45.4	%	$	327		36.8	%		44.0	%	$	318		35.8	%		42.7	%
Commercial real estate:
Commercial mortgage		172		19.8			14.1			198		22.3			14.6			221		24.9			14.6
Construction		36		4.2			1.9			41		4.6			1.9			47		5.3			2.1

Total commercial real estate loans		208		24.0			16.0			239		26.9			16.5			268		30.2			16.7
Commercial lease financing		64		7.4			8.5			55		6.2			9.3			66		7.4			9.6

Total commercial loans		642		74.0			69.9			621		69.9			69.8			652		73.4			69.0
Real estate — residential mortgage		35		4.0			4.1			30		3.4			4.1			25		2.8			4.2
Home equity:
Community Banking		82		9.5			19.2			105		11.8			18.6			89		10.0			19.0
Other		14		1.6			.6			25		2.8			.8			24		2.7			.8

Total home equity loans		96		11.1			19.8			130		14.6			19.4			113		12.7			19.8
Consumer other — Community Banking		27		3.1			2.7			38		4.3			2.5			32		3.6			2.6
Credit cards		34		3.9			1.3			26		2.9			1.4			26		2.9			1.4
Consumer other:
Marine		31		3.6			2.0			39		4.4			2.6			36		4.1			2.8
Other		3		.3			.2			4		.5			.2			4		.5			.2

Total consumer other		34		3.9			2.2			43		4.9			2.8			40		4.6			3.0

Total consumer loans		226		26.0			30.1			267		30.1			30.2			236		26.6			31.0

Total loans ^(a)	$	868		100.0	%		100.0	%	$	888		100.0	%		100.0	%	$	888		100.0	%		100.0	%

(a)	Excludes allocations of the allowance for loan and lease losses in the amount of $38 million, $55 million, and $65 million at September 30, 2013, December 31, 2012, and September 30, 2012, respectively, related to the discontinued operations of the education lending business.

Our provision (credit) for loan and lease losses was $28 million for third quarter of 2013, compared to $109 million for the year-ago quarter. Our net loan charge-offs were $37 million for the third quarter 2013 compared to $109 million for the third quarter of 2012. Our net charge-offs for the third quarter of 2012 included $45 million of charge-offs reported in accordance with updated regulatory guidance requiring loans and leases discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged-off to the collateral’s fair market value less selling costs and classified as nonaccrual regardless of their delinquency. Additionally, we continue to reduce our exit loans and leases, as well as our exposure in our higher-risk businesses, including the residential properties portion of our construction loan portfolio, Marine/RV financing, and other selected leasing portfolios through the sale of certain loans, payments from borrowers or net charge-offs. We anticipate that net loan charge-offs will remain at, or below, the lower end of our targeted range of 40 to 60 basis points of average loans for the balance of the current year and for our provision (credit) for loan and lease losses to be near this same level.

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Net loan charge-offs

Net loan charge-offs for the third quarter of 2013 totaled $37 million, or .28% of average loans, compared to net loan charge-offs of $109 million, or .86%, for the same period last year. Third quarter of 2012 included $45 million (.35% of average loans) of incremental net loan charge-offs reported in accordance with updated regulatory guidance requiring loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged off to the collateral’s fair market value less selling costs and classified as nonaccrual regardless of their delinquency status. Figure 36 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 37.

Over the past twelve months, net loan charge-offs decreased $72 million. This decrease is attributable to improvement in asset quality statistics as shown in Figure 38 and updated regulatory guidance that went into effect for us in the third quarter of 2012. As shown in Figure 39, our exit loan portfolio contributed a total of $1 million in net loan charge-offs for the third quarter of 2013. Net loan charge-offs for the second quarter of 2013 in our exit loan portfolio were $10 million. The decrease in net loan charge-offs in our exit loan portfolio were primarily driven by lower levels of net loan charge-offs in the consumer exit loan portfolios.

Figure 36. Net Loan Charge-offs from Continuing Operations ^(a)


	2013									2012
dollars in millions	Third			Second			First			Fourth			Third
Commercial, financial and agricultural	$	4		$	8		$	2		$	(8	)	$	7
Real estate — Commercial mortgage		(8	)		(2	)		8			28			21
Real estate — Construction		(6	)		1			(7	)		3			2
Commercial lease financing		15			(2	)		2			3			(8	)

Total commercial loans		5			5			5			26			22
Home equity — Key Community Bank		12			14			16			(18	)		62
Home equity — Other		2			5			4			11			5
Credit cards		8			6			8			9			2
Marine		1			5			3			14			6
Other		9			10			13			16			12

Total consumer loans		32			40			44			32			87

Total net loan charge-offs	$	37		$	45		$	49		$	58		$	109


Net loan charge-offs to average loans		.28	%		.34	%		.38	%		.44	%		.86	%

Net loan charge-offs from discontinued operations — education lending business	$	9		$	7		$	12		$	15		$	12

(a)	Credit amounts indicate that recoveries exceeded charge-offs.

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Figure 37. Summary of Loan and Lease Loss Experience from Continuing Operations


	Three months ended September 30,						Nine months ended September 30,
dollars in millions	2013			2012			2013			2012
Average loans outstanding	$	53,271		$	50,695		$	52,867		$	49,860

Allowance for loan and lease losses at beginning of period	$	876		$	888		$	888		$	1,004
Charge-offs:
Commercial, financial and agricultural ^(a)		15			16			44			65

Real estate — commercial mortgage		2			23			18			69
Real estate — construction		—			3			2			19

Total commercial real estate loans ^(b)		2			26			20			88
Commercial lease financing		17			—			25			20

Total commercial loans		34			42			89			173
Real estate — residential mortgage		3			6			13			19
Home equity:
Key Community Bank		14			65			50			113
Other		4			6			16			23

Total home equity loans		18			71			66			136
Consumer other — Key Community Bank		8			9			24			29
Credit cards		9			2			25			2
Consumer other:
Marine		5			11			22			41
Other		1			—			3			4

Total consumer other		6			11			25			45

Total consumer loans		44			99			153			231

Total loans charged off		78			141			242			404

Recoveries:
Commercial, financial and agricultural ^(a)		11			9			30			40

Real estate — commercial mortgage		10			2			20			18
Real estate — construction		6			1			14			3

Total commercial real estate loans ^(b)		16			3			34			21
Commercial lease financing		2			8			10			18

Total commercial loans		29			20			74			79
Real estate — residential mortgage		1			—			1			2
Home equity:
Key Community Bank		2			3			8			7
Other		2			1			5			4

Total home equity loans		4			4			13			11
Consumer other — Key Community Bank		1			2			5			5
Credit cards		1			—			3			—
Consumer other:
Marine		4			5			13			18
Other		1			1			2			2

Total consumer other		5			6			15			20

Total consumer loans		12			12			37			38

Total recoveries		41			32			111			117

Net loans and leases charged off		(37	)		(109	)		(131	)		(287	)
Provision (credit) for loan and lease losses		28			109			111			172
Foreign currency translation adjustment		1			—			—			(1	)

Allowance for loan and lease losses at end of period	$	868		$	888		$	868		$	888

Liability for credit losses on lending-related commitments at beginning of period	$	37		$	51		$	29		$	45
Provision (credit) for losses on lending-related commitments		3			(8	)		11			(2	)

Liability for credit losses on lending-related commitments at end of period ^(c)	$	40		$	43		$	40		$	43

Total allowance for credit losses at end of period	$	908		$	931		$	908		$	931

Net loan charge-offs to average loans		.28	%		.86	%		.33	%		.77	%
Allowance for loan and lease losses to annualized net loan charge-offs		591.3			204.8			495.6			231.6
Allowance for loan and lease losses to period-end loans		1.62			1.73			1.62			1.73
Allowance for credit losses to period-end loans		1.69			1.81			1.69			1.81
Allowance for loan and lease losses to nonperforming loans		160.4			136.0			160.4			136.0
Allowance for credit losses to nonperforming loans		167.8			142.6			167.8			142.6

Discontinued operations — education lending business:
Charge-offs	$	14		$	17		$	42		$	56
Recoveries		5			5			14			13

Net loan and lease charge-offs	$	(9	)	$	(12	)	$	(28	)	$	(43	)

(a)	See Figure 18 and the accompanying discussion in the “Loans and leases held for sale” section for more information related to our commercial, financial and agricultural portfolio.

(b)	See Figure 19 and the accompanying discussion in the “Loans and leases held for sale” section for more information related to our commercial real estate portfolio.

(c)	Included in “Accrued expense and other liabilities” on the balance sheet.

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Nonperforming assets

Figure 38 shows the composition of our nonperforming assets. These assets totaled $579 million at September 30, 2013, and represented 1.08% of portfolio loans, OREO and other nonperforming assets, compared to $735 million, or 1.39%, at December 31, 2012, and $718 million, or 1.39%, at September 30, 2012. See Note 1 under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” beginning on page 120 of our 2012 Form 10-K for a summary of our nonaccrual and charge-off policies.

Figure 38. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations


	September 30,			June 30,			March 31,			December 31,			September 30,
dollars in millions	2013			2013			2013			2012			2012
Commercial, financial and agricultural	$	102		$	146		$	142		$	99		$	132

Real estate — commercial mortgage		58			106			114			120			134
Real estate — construction		17			26			27			56			53

Total commercial real estate loans		75			132			141			176			187
Commercial lease financing		22			14			12			16			18

Total commercial loans		199			292			295			291			337
Real estate — residential mortgage ^(a)		98			94			96			103			83
Home equity:
Key Community Bank		198			205			199			210			171
Other		13			16			18			21			18

Total home equity loans ^(a)		211			221			217			231			189
Consumer other — Key Community Bank		2			3			3			2			3
Credit cards		4			11			13			11			8
Consumer other:
Marine		25			30			25			34			31
Other		2			1			1			2			2

Total consumer other		27			31			26			36			33

Total consumer loans		342			360			355			383			316

Total nonperforming loans ^(b)		541			652			650			674			653
Nonperforming loans held for sale		13			14			23			25			19
OREO		15			18			21			22			29
Other nonperforming assets		10			9			11			14			17

Total nonperforming assets	$	579		$	693		$	705		$	735		$	718

Accruing loans past due 90 days or more	$	90		$	80		$	83		$	78		$	89
Accruing loans past due 30 through 89 days		288			251			368			424			354
Restructured loans — accruing and nonaccruing ^(c)		349			311			294			320			323
Restructured loans included in nonperforming loans ^(c)		228			195			178			249			217
Nonperforming assets from discontinued operations — education lending business		23			19			15			20			22
Nonperforming loans to period-end portfolio loans		1.01	%		1.23	%		1.24	%		1.28	%		1.27	%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets		1.08			1.30			1.34			1.39			1.39

(a)	All of the increase in real estate — residential mortgage and $26 million of the increase in total home equity loans from September 30, 2012 to December 31, 2012 was related to regulatory guidance issued in the second and third quarters of 2012.

(b)	September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012 amounts exclude $18 million, $19 million, $22 million, $23 million, and $25 million, respectively, of PCI loans acquired in July 2012.

(c)

Restructured loans (i.e., troubled debt restructurings) are those for which Key, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance. The majority of the increase in restructured loans included in nonperforming loans during the second half of 2012 was a result of updated regulatory guidance in the third quarter of 2012.

As shown in Figure 38, nonperforming assets decreased during the third quarter of 2013. Most of the reduction came from nonperforming loans in our commercial real estate loan portfolios, commercial, financial, and agricultural portfolio, and Home equity — Key Community Bank portfolio, partially offset by an increase in nonperforming loans in the commercial lease financing portfolio. As shown in Figure 39, our exit loan portfolio accounted for $56 million, or 10%, of our total nonperforming assets at September 30, 2013, compared to $63 million, or 9%, at June 30, 2013.

At September 30, 2013, the carrying amount of our commercial nonperforming loans outstanding represented 61% of their contractual amount owed, total nonperforming loans outstanding represented 74% of their 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 nonperforming loans.

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Figure 39 shows the composition of our exit loan portfolio at September 30, 2013 and June 30, 2013, the net charge-offs recorded on this portfolio for the third quarter of 2013 and the second quarter of 2013, and the nonperforming status of these loans at September 30, 2013 and June 30, 2013. The exit loan portfolio represented 4% of total loans and loans held for sale at September 30, 2013. Additional information about loan sales is included in this report under the heading “Loans held for sale” and “Loan sales.”

Figure 39. Exit Loan Portfolio from Continuing Operations


														Balance on
	Balance				Change			Net Loan						Nonperforming
	Outstanding				9-30-13 vs.			Charge-offs						Status
in millions	9-30-13		6-30-13		6-30-13			9-30-13 ^(c)			6-30-13 ^(c)			9-30-13		6-30-13
Residential properties — homebuilder	$	26	$	26		—			—		$	1		$	8	$	8
Marine and RV floor plan		25		28	$	(3	)		—			—			6		7
Commercial lease financing ^(a)		796		931		(135	)	$	(2	)		(2	)		1		1

Total commercial loans		847		985		(138	)		(2	)		(1	)		15		16
Home equity — Other		353		375		(22	)		2			5			14		16
Marine		1,083		1,160		(77	)		1			5			25		31
RV and other consumer		71		69		2			—			1			2		—

Total consumer loans		1,507		1,604		(97	)		3			11			41		47

Total exit loans in loan portfolio	$	2,354	$	2,589	$	(235	)	$	1		$	10		$	56	$	63

Discontinued operations — education lending business (not included in exit loans above) ^(b)	$	4,738	$	4,992	$	(254	)	$	9		$	7		$	23	$	19

(a)	Includes (1) the business aviation, commercial vehicle, office products, construction and industrial leases; (2) Canadian lease financing portfolios; and (3) all remaining balances related to LILO, SILO, service contract leases and qualified technological equipment leases.

(b)	Includes loans in Key’s education loan securitization trusts.

(c)	Credit amounts indicate that recoveries exceeded charge-offs.

The types of activity that caused the change in our nonperforming loans during each of the last five quarters are summarized in Figure 40. Loans placed on nonaccrual status decreased $115 million during third quarter of 2013 compared to the third quarter 2012, due to the third quarter of 2012 classification of loans discharged through Chapter 7 bankruptcy previously discussed, as well as continued improvement in market liquidity.

Figure 40. Summary of Changes in Nonperforming Loans from Continuing Operations


	2013									2012
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	652		$	650		$	674		$	653		$	657
Loans placed on nonaccrual status		161			160			278			288			276
Charge-offs		(78	)		(74	)		(91	)		(104	)		(141	)
Loans sold		(61	)		(5	)		(42	)		(44	)		(43	)
Payments		(43	)		(36	)		(83	)		(78	)		(74	)
Transfers to OREO		(2	)		(7	)		(7	)		(7	)		(10	)
Transfers to nonperforming loans held for sale		—			—			—			(8	)		—
Transfers to other nonperforming assets		—			—			—			(1	)		—
Loans returned to accrual status		(88	)		(36	)		(79	)		(25	)		(12	)

Balance at end of period ^(a)	$	541		$	652		$	650		$	674		$	653

(a)	September 30, 2013, June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012 amounts exclude $18 million, $19 million, $22 million, $23 million, and $25 million, respectively, of PCI loans acquired in July 2012.

The types of activity that caused the change in our nonperforming loans held for sale during each of the last five quarters are summarized in Figure 41.

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Figure 41. Summary of Changes in Nonperforming Loans Held for Sale from Continuing Operations


	2013									2012
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	14		$	23		$	25		$	19		$	38
Transfers in		—			—			—			8			—
Net advances / (payments)		(1	)		(1	)		—			(1	)		(1	)
Loans sold		—			(8	)		—			(1	)		(17	)
Transfers to OREO		—			—			—			—			(1	)
Valuation adjustments		—			—			(2	)		—			—

Balance at end of period	$	13		$	14		$	23		$	25		$	19

The types of activity that contributed to the change in our OREO during each of the last five quarters are summarized in Figure 42.

Figure 42. Summary of Changes in Other Real Estate Owned, Net of Allowance, from Continuing Operations


	2013									2012
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	18		$	21		$	22		$	29		$	28
Properties acquired — nonperforming loans		2			7			7			7			11
Valuation adjustments		(1	)		(2	)		(3	)		(2	)		(2	)
Properties sold		(4	)		(8	)		(5	)		(12	)		(8	)

Balance at end of period	$	15		$	18		$	21		$	22		$	29

145

Operational risk management

Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the internet to conduct our business activities.

Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key will be subject to heightened prudential standards and regulation due to their systemic importance. This heightened level of regulation will increase our operational risk. We have created work teams to respond to and analyze the regulatory requirements that have been or will be promulgated as a result of the enactment of the Dodd-Frank Act. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation or foregone opportunities.

We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.

The Operational Risk Management Program provides the framework for the structure, governance, roles and responsibilities as well as the content to manage operational risk for Key. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee, a senior management committee, oversees our level of operational risk and directs and supports our operational infrastructure and related activities. This committee and the Operational Risk Management function are an integral part of our ERM Program. Our Risk Review function periodically assesses the overall effectiveness of our Operational Risk Management Program and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Audit Committee, and independently supports the Audit Committee’s oversight of these controls.

Critical Accounting Policies and Estimates

Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical: not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”) beginning on page 117 of our 2012 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance.

In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may prove to be inaccurate, or we may find it necessary to change them.

We rely heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan and lease losses; contingent liabilities, guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities that involve valuation methodologies. In addition, we may employ outside valuation experts to assist us in determining fair values of certain assets and liabilities. A brief discussion of each of these areas appears on pages 120 through 128 of our 2012 Form 10-K.

At September 30, 2013, $15.1 billion, or 16.6%, of our total assets were measured at fair value on a recurring basis. Approximately 96.0% of these assets, before netting adjustments, were classified as Level 1 or Level 2 within the fair value hierarchy. At September 30, 2013, $1.5 billion, or 1.9%, of our total liabilities were measured at fair value on a recurring basis. Substantially all of these liabilities were classified as Level 1 or Level 2.

During the third quarter of 2013, $37 million, or .1%, of our total assets were measured at fair value on a nonrecurring basis. Substantially all of these assets were classified as Level 3. At September 30, 2013, there were no liabilities measured at fair value on a nonrecurring basis.

146

In addition, the education lending securitization trusts assets and liabilities were included on the balance sheet at September 30, 2013 at fair value, in the amount of $2.2 billion and $2.0 billion, respectively.

During the first nine months of 2013, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.

147

European Sovereign Debt Exposures

Our total European sovereign and non-sovereign debt exposure is presented in Figure 43.

Figure 43. European Sovereign and Non-sovereign Debt Exposures


September 30, 2013 in millions	Short- and Long- Term Commercial Total ^(a)		Foreign Exchange and Derivatives with Collateral ^(b)			Net Exposure
France:
Sovereigns		—		—			—
Non-sovereign financial institutions		—	$	(9	)	$	(9	)
Non-sovereign non-financial institutions	$	73		—			73

Total		73		(9	)		64
Germany:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		312		—			312

Total		312		—			312
Greece:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Iceland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Ireland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		7		—			7

Total		7		—			7
Italy:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		128		—			128

Total		128		—			128
Netherlands:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		131		—			131

Total		131		—			131
Portugal:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Spain:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		106		—			106

Total		106		—			106
Switzerland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		3			3
Non-sovereign non-financial institutions		73		—			73

Total		73		3			76
United Kingdom:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		1			1
Non-sovereign non-financial institutions		212		—			212

Total		212		1			213
Other Europe: ^(c)
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		137		—			137

Total		137		—			137
Total Europe:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		(5	)		(5	)
Non-sovereign non-financial institutions		1,179		—			1,179

Total	$	1,179	$	(5	)	$	1,174

(a)	This column represents our outstanding leases.

(b)

This column represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients’ trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls.

(c)

Other Europe consists of the following countries: Austria, Belarus, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, Hungary, Lithuania, Luxembourg, Malta, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. Approximately 97% of our exposure in Other Europe is in Belgium, Finland, and Sweden.

Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities. At-risk exposures in the rest of the world, which are actively monitored by management, total less than $1 million.

148

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The information presented in the “Market risk management” section of the Management’s Discussion & Analysis of Financial Condition & Results of Operations is incorporated herein by reference.

Item 4. Controls and Procedures

As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp’s disclosure controls and procedures. Based upon that evaluation, KeyCorp’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report, in ensuring that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. No changes were made to KeyCorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorp’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

As of September 30, 2013, KeyCorp and its subsidiaries are defendants or putative defendants in a variety of legal proceedings, in the form of regulatory/government investigations as well as private, civil litigation and arbitration proceedings. The private, civil litigations range from individual actions involving a single plaintiff to class action lawsuits. Investigations involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These legal proceedings are at varying stages of adjudication, arbitration or investigation and involve a variety of claims (including common law tort, contract claims, securities, ERISA, and consumer protection claims). At times, these legal proceedings may present novel claims or legal theories.

On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For those matters where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Because the outcome of legal proceedings is inherently uncertain, based on information currently available to us, advice of counsel, and the availability of insurance coverage and indemnification from third parties, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operation for a particular period, depending upon the size of the loss or our income for that particular period.

The information presented in the Legal Proceedings section of Note 15 (“Contingent Liabilities and Guarantees”) of the Notes to our Consolidated Financial Statements is incorporated herein by reference.

Item 1A.

Risk Factors

For a discussion of certain risk factors affecting us, see the section titled “Supervision and Regulation” in Part I, Item 1. Business, on pages 7-19 of our 2012 Form 10-K, Part 1, Item 1A. Risk Factors, on pages 19-31 of our 2012 Form 10-K, the section titled “Supervision and regulation” in this Form 10-Q, and our disclosure regarding forward-looking statements in this Form 10-Q.

149

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp through cash purchase, privately negotiated transactions or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions and other factors. The amounts involved may be material.

As previously reported and as authorized by Key’s Board of Directors and pursuant to Key’s 2013 capital plan submitted to and not objected to by the Federal Reserve, Key has authority to repurchase up to $426 million of our Common Shares in the open market or through privately negotiated transactions. Common Share repurchases under the current authorization are expected to be executed through the first quarter of 2014.

Our Board of Directors at its September meeting approved the use of the cash portion of the net after-tax gain from the sale of Victory for additional Common Share repurchases, and we received no objection from the Federal Reserve to use the cash portion of the net after-tax gain for this purpose. During the third quarter of 2013, Key completed $198 million of Common Share repurchases on the open market under Key’s 2013 capital plan. This amount included repurchases related to the cash portion of the net after-tax gain from the sale of Victory.

The following table summarizes Key’s repurchases of its Common Shares for the three months ended September 30, 2013.


Calendar month	Total number of shares repurchased ^(a)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased as part of publicly announced plans or programs ^(b)
July 1 — 31		2,181,055	$	12.32		2,109,275		37,338,234
August 1 — 31		13,475,995		12.10		13,460,398		24,601,628
September 1 — 30		816,960		11.76		794,185		30,408,137

Total		16,474,010	$	12.12		16,363,858

(a)	Includes Common Share repurchases in the open market and Common Shares deemed surrendered by employees in connection with Key’s stock compensation and benefit plans to satisfy tax obligations.

(b)	Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp Common Shares on July 31, 2013 at $12.28, August 31, 2013 at $11.67, and September 30, 2013 at $11.40, plus our previously existing program shares available of 13,922,496.

Item 6.

Exhibits


15		Acknowledgment of Independent Registered Public Accounting Firm.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from KeyCorp’s Form 10-Q Report for the quarterly period ended September 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

Information Available on Website

KeyCorp makes available free of charge on its website, www.key.com , its 2012 Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after KeyCorp electronically files such material with, or furnishes it to, the SEC.

150

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						KEYCORP

						(Registrant)

Date: October 31, 2013

						By: Robert L. Morris
						Chief Accounting Officer

151

TABLE OF CONTENTS

Part I. Financial Informationprint Item 1. Financial Statementsprint Item 2. Management S Discussion & Analysis Of Financial Condition & Results Of Operationsprint Item Is Included in The 10%/15% Exceptions Bucket Calculation and Is Risk-weighted At 250%print Item 3. Quantitative and Qualitative Disclosure About Market Riskprint Item 4. Controls and Proceduresprint Part II. Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

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