KeyCorp (KeyBank) - 10-Q quarterly report FY2017 Q2

KeyCorp (KeyBank) - 10-Q quarterly report FY2017 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2017

Commission File Number 001-11302

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 ☒ 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 ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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	1,087,545,416 shares
Title of class	Outstanding at August 2, 2017

Table of Contents

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION



		Page Number
Item 1.	Financial Statements	59

	Consolidated Balance Sheets	59

	Consolidated Statements of Income	60

	Consolidated Statements of Comprehensive Income	61

	Consolidated Statements of Changes in Equity	62

	Consolidated Statements of Cash Flows	63

	Notes to Consolidated Financial Statements (Unaudited)	64

	Note 1. Basis of Presentation and Accounting Policies	64
	Note 2. Business Combination	68
	Note 3. Earnings Per Common Share	71
	Note 4. Loans and Loans Held for Sale	72
	Note 5. Asset Quality	73
	Note 6. Fair Value Measurements	84
	Note 7. Securities	96
	Note 8. Derivatives and Hedging Activities	100
	Note 9. Mortgage Servicing Assets	108
	Note 10. Variable Interest Entities	110
	Note 11. Income Taxes	112
	Note 12. Acquisition, Divestiture, and Discontinued Operations	113
	Note 13. Securities Financing Activities	117
	Note 14. Employee Benefits	118
	Note 15. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	119
	Note 16. Contingent Liabilities and Guarantees	120
	Note 17. Accumulated Other Comprehensive Income	123
	Note 18. Shareholders’ Equity	125
	Note 19. Line of Business Results	126

	Report of Ernst & Young LLP, Independent Registered Public Accounting Firm	130

Table of Contents



Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	4
	Introduction	4
	Terminology	4
	Forward-looking statements	6
	Selected financial data	7
	Economic overview	8
	Long-term financial targets	8
	Strategic developments	9
	Demographics	9
	Supervision and regulation	10
	Highlights of Our Performance	14
	Financial performance	14
	Results of Operations	19
	Net interest income	19
	Noninterest income	23
	Noninterest expense	25
	Income taxes	26
	Line of Business Results	27
	Key Community Bank summary of operations	27
	Key Corporate Bank summary of operations	28
	Other Segments	30
	Financial Condition	31
	Loans and loans held for sale	31
	Securities	36
	Other investments	38
	Deposits and other sources of funds	38
	Capital	38
	Risk Management	41
	Overview	41
	Market risk management	42
	Liquidity risk management	47
	Credit risk management	50
	Operational and compliance risk management	56
	Critical Accounting Policies and Estimates	57
	European Sovereign and Non-Sovereign Debt Exposures	58
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	131
Item 4.	Controls and Procedures	131



	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	131
Item 1A.	Risk Factors	131
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	131
Item 6.	Exhibits	133
	Signature	134

Table of Contents

PART I. FINANCIAL INFORMATION

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 periods ended June 30, 2017, and June 30, 2016. 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 “2016 Form 10-K” refer to our Form 10-K for the year ended December 31, 2016, which has been filed with the SEC and is available on its website (www.sec.gov) and 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.

Throughout the following discussion, industry-specific terms are used as defined below:


•	We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business and Austin. The education lending business and Austin have been accounted for as discontinued operations since 2009.


•	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 under the heading “Regulatory capital requirements – Capital planning and stress testing” in the section entitled “Supervision and Regulation” that begins on page 8 of our 2016 Form 10-K, the regulators are required to conduct a supervisory capital assessment of all BHCs with assets of at least $50 billion, including KeyCorp. As part of this capital adequacy review, banking regulators evaluate a component of Tier 1 capital, known as Common Equity Tier 1, under the Regulatory Capital Rules. The “Capital” section of this report under the heading “Capital adequacy” provides more information on total capital, Tier 1 capital, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how these measures are calculated.

Table of Contents

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



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

Table of Contents

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,” “assume,” “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 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 our actual results to differ from those described in forward-looking statements include, but are not limited to:


•	deterioration of commercial real estate market fundamentals;


•	defaults by our loan counterparties or clients;


•	adverse changes in credit quality trends;


•	declining asset prices;


•	our concentrated credit exposure in commercial and industrial loans;


•	the extensive and increasing regulation of the U.S. financial services industry;


•	operational or risk management failures by us or critical third parties;


•	changes in accounting policies, standards, and interpretations;


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


•	negative outcomes from claims or litigation;


•	the occurrence of natural or man-made disasters, conflicts, or terrorist attacks, or other adverse external events;


•	evolving capital and liquidity standards under applicable regulatory rules;


•	unanticipated changes in our liquidity position, including but not limited to, changes in our access to or the cost of funding and our ability to secure alternative funding sources;


•	downgrades in our credit ratings or those of KeyBank;


•	a reversal of the U.S. economic recovery due to financial, political, or other shocks;


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


•	deterioration of economic conditions in the geographic regions where we operate;


•	the soundness of other financial institutions;


•	tax reform and other changes in tax laws;


•	our ability to attract and retain talented executives and employees and to manage our reputational risks;


•	our ability to timely and effectively implement our strategic initiatives;


•	increased competitive pressure due to industry consolidation;


•	our ability to adapt our products and services to industry standards and consumer preferences;


•	unanticipated adverse effects of strategic partnerships or acquisitions and dispositions of assets or businesses;


•	our ability to realize the anticipated benefits of the First Niagara merger; and


•	our ability to develop and effectively use the quantitative models we rely upon in our business planning.

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 this report on Form 10-Q and our subsequent reports on Forms 8-K, 10-Q, and 10-K, 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.

Table of Contents

Selected financial data

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

Figure 1. Selected Financial Data



	2017						2016									Six months ended June 30,
dollars in millions, except per share amounts	Second			First			Fourth			Third			Second			2017			2016
FOR THE PERIOD
Interest income	$	1,117		$	1,050		$	1,062		$	890		$	684		$	2,167		$	1,367
Interest expense	144			132			124			110			87			276			166
Net interest income	973			918			938			780			597			1,891			1,201
Provision for credit losses	66			63			66			59			52			129			141
Noninterest income	653			577			618			549			473			1,230			904
Noninterest expense	995			1,013			1,220			1,082			751			2,008			1,454
Income (loss) from continuing operations before income taxes	565			419			270			188			267			984			510
Income (loss) from continuing operations attributable to Key	407			324			233			171			199			731			386
Income (loss) from discontinued operations, net of taxes ^(a)	5			—			(4		)	1			3			5			4
Net income (loss) attributable to Key	412			324			229			172			202			736			390
Income (loss) from continuing operations attributable to Key common shareholders	393			296			213			165			193			689			375
Income (loss) from discontinued operations, net of taxes ^(a)	5			—			(4		)	1			3			5			4
Net income (loss) attributable to Key common shareholders	398			296			209			166			196			694			379
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.36		$	.28		$	.20		$	.17		$	.23		$	.64		$	.45
Income (loss) from discontinued operations, net of taxes ^(a)	—			—			—			—			—			—			—
Net income (loss) attributable to Key common shareholders ^(b)	.37			.28			.20			.17			.23			.64			.45
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	.36			.27			.20			.16			.23			.63			.44
Income (loss) from discontinued operations, net of taxes — assuming dilution ^(a)	—			—			—			—			—			—			—
Net income (loss) attributable to Key common shareholders — assuming dilution ^(b)	.36			.27			.19			.17			.23			.63			.45
Cash dividends paid	.095			.085			.085			.085			.085			.180			.160
Book value at period end	13.02			12.71			12.58			12.78			13.08			13.02			13.08
Tangible book value at period end	10.40			10.21			9.99			10.14			11.81			10.40			11.81
Market price:
High	19.10			19.53			18.62			12.64			13.08			19.53			13.37
Low	16.91			16.54			12.00			10.38			10.21			16.54			9.88
Close	18.74			17.78			18.27			12.17			11.05			18.74			11.05
Weighted-average common shares outstanding (000)	1,076,203			1,068,609			1,067,771			982,080			831,899			1,083,486			829,640
Weighted-average common shares and potential common shares outstanding (000) ^(c)	1,093,039			1,086,540			1,083,717			994,660			838,496			1,099,294			836,778
AT PERIOD END
Loans	$	86,503		$	86,125		$	86,038		$	85,528		$	62,098		$	86,503		$	62,098
Earning assets	121,243			120,261			121,966			121,089			90,065			121,243			90,065
Total assets	135,824			134,476			136,453			135,805			101,150			135,824			101,150
Deposits	102,821			103,982			104,087			104,185			75,325			102,821			75,325
Long-term debt	13,261			12,324			12,384			12,622			11,388			13,261			11,388
Key common shareholders’ equity	14,228			13,951			13,575			13,831			11,023			14,228			11,023
Key shareholders’ equity	15,253			14,976			15,240			14,996			11,313			15,253			11,313
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets	1.23		%	.99		%	.69		%	.55		%	.82		%	1.11		%	.81		%
Return on average common equity	11.12			8.76			6.22			5.09			7.15			9.97			7.01
Return on average tangible common equity ^(d)	13.80			10.98			7.88			6.16			7.94			12.43			7.79
Net interest margin (TE)	3.30			3.13			3.12			2.85			2.76			3.21			2.83
Cash efficiency ratio ^(d)	59.3			65.8			76.2			80.0			69.0			62.4			67.8
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets	1.23		%	.98		%	.67		%	.55		%	.82		%	1.11		%	.80		%
Return on average common equity	11.26			8.76			6.10			5.12			7.26			10.04			7.08
Return on average tangible common equity ^(d)	13.98			10.98			7.73			6.20			8.06			12.52			7.87
Net interest margin (TE)	3.28			3.11			3.09			2.83			2.74			3.19			2.80
Loan-to-deposit ^(e)	87.2			85.6			85.2			84.7			85.3			87.2			85.3
CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets	11.23		%	11.14		%	11.17		%	11.04		%	11.18		%	11.23		%	11.18		%
Key common shareholders’ equity to assets	10.48			10.37			9.95			10.18			10.90			10.48			10.90
Tangible common equity to tangible assets ^(d)	8.56			8.51			8.09			8.27			9.95			8.56			9.95
Common Equity Tier 1 ^(d)	9.91			9.91			9.54			9.56			11.10			9.91			11.10
Tier 1 risk-based capital	10.73			10.74			10.89			10.53			11.41			10.73			11.41
Total risk-based capital	12.64			12.69			12.85			12.63			13.63			12.64			13.63
Leverage	9.95			9.81			9.90			10.22			10.59			9.95			10.59
TRUST ASSETS
Assets under management	$	37,613		$	37,417		$	36,592		$	36,752		$	34,535		$	37,613		$	34,535
OTHER DATA
Average full-time-equivalent employees	18,344			18,386			18,849			17,079			13,419			18,365			13,411
Branches	1,210			1,216			1,217			1,322			949			1,210			949

(a)

In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. As a result of this decision, we have accounted for this business as a discontinued operation. For further discussion regarding the income (loss) from discontinued operations, see Note 12 (“Acquisition, Divestiture, and Discontinued Operations”).


(b)	EPS may not foot due to rounding.


(c)	Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.

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(d)	See Figure 6 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity,” “Common Equity Tier 1,” 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.


(e)	Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits (excluding deposits in foreign office).

Economic Overview

GDP data suggests that the U.S. economy got off to a slow start in 2017, with 1.2% GDP growth in the first quarter of 2017 and 2.6% GDP growth in the second quarter of 2017. The initial estimate suggests growth in consumer spending bounced back to 2.8% in the second quarter of 2017 after slowing down to 1.9% in the first quarter of 2017. Gross private domestic investment, up 2.0%, also added to second quarter of 2017 growth after weighing on growth during the first quarter of 2017, down 1.2%. The IMF estimates that global growth is expected to rise from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018, on expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets.

Oil prices have fallen since the beginning of the year to $45 per barrel, but are above the lows in early 2016 when prices dropped to $25 per barrel. Although inventories remain elevated from a historical standpoint, recent declines may help clear the way for stronger appreciation in 2017 and help support America’s energy industry. The stock market reached new records in the second quarter of 2017, with the S&P 500 equity index up 8.2% since the end of 2016. A general rally has occurred following the November elections, based on expectations for growth-friendly economic policies from the new U.S. presidential administration.

581,000 new jobs were added in the U.S. during the second quarter of 2017. This was up from the first quarter of 2017, which saw gains of 498,000. However, bad weather accelerated hiring at the beginning of the year and a late Easter depressed payrolls in March of 2017, when employment increased by only 50,000 jobs. The unemployment rate edged higher to 4.4% as more workers entered the labor force. Despite steady gains and a tight labor market, wage growth has failed to accelerate, with earnings for all workers increasing by only 2.5% over the past year. This suggests that even though the labor market has tightened, it may not yet actually be at full employment as speculated, estimated at 4.6%. Headline inflation was up by 1.6% year over year in June 2017, below the Federal Reserve’s target of 2.0%, although the Federal Reserve has stated that it believes that this weakness is likely transitory. Core inflation was also subdued year over year, at 1.7%.

Thanks to the solid economy and still low interest rates, the housing market generally benefited in the second quarter of 2017. New home sales growth was up 6.4% compared to the second quarter of 2016, while existing home sales were up 1.6%. Prices are also up, with average new home prices up 4.2% from year ago levels, and existing home prices up 4.9%. Single family housing starts also posted respectable gains in the second quarter of 2017, up 9.0%, from the second quarter of 2016, although multi-family construction was down 14.6%.

The Federal Reserve raised the target range for the federal funds rate by 25 basis points in June 2017, to 1% to 1.25%. This was widely expected and consistent with the central bank’s plan to gradually normalize interest rates. The Federal Reserve said that economic activity has been rising moderately so far this year, an upgrade from the May statement that noted it had slowed. The statement acknowledged that job growth has moderated but remains strong. The Federal Reserve sounded more upbeat on consumer spending and business investment. Risks to the economic outlook were again described as roughly balanced. The Federal Open Market Committee meeting minutes also suggested that a reduction of the Federal Reserve’s balance sheet will begin later this year. The 10-year U.S. Treasury yield stood at 2.2% at the end of the second quarter of 2017, which was 29 basis points below the prior quarter.

Long-term financial targets

Our long-term financial targets are as follows:


•	Generate positive operating leverage and a cash efficiency ratio of less than 60%;


•	Maintain a moderate risk profile by targeting a net loan charge-offs to average loans ratio in the range of .40% to .60%; and


•	Achieve a return on tangible common equity ratio in the range of 13% to 15%.

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Figure 2 shows the evaluation of our long-term financial targets for the three months and six months ended June 30, 2017.

Figure 2. Evaluation of Our Long-Term Targets



	Key Metrics ^(a)	2Q17		YTD 2017		Targets
Positive operating leverage	Cash efficiency ratio ^(b)	59.3	%	62.4	%	< 60%
Positive operating leverage	Cash efficiency ratio excluding notable items ^(b)	59.4	%	59.9	%	< 60%
Moderate Risk Profile	Net loan charge-offs to average loans	.31	%	.29	%	.40 - .60%
Financial Returns	Return on average tangible common equity ^(c)	13.80	%	12.43	%	13.00 - 15.00%
Financial Returns	Return on average tangible common equity excluding notable items ^(c)	12.86	%	12.86	%	13.00 - 15.00%


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


(b)	Excludes intangible asset amortization; non-GAAP measure; see Figure 6 entitled “GAAP to Non-GAAP Reconciliations” for reconciliation.


(c)	Non-GAAP measure: see Figure 6 entitled “GAAP to Non-GAAP Reconciliations” for reconciliation.

Strategic developments

Our actions and results during the first six months of 2017 supported our corporate strategy described in the “Introduction” section under the “Corporate strategy” heading on page 35 of our 2016 Form 10-K.


•	We continued to generate positive operating leverage versus the prior year and our cash efficiency ratio improved to 59.3%, or 59.4%, excluding notable items. Revenue growth was driven by net interest income and fee-based businesses. We also achieved $400 million in annualized cost savings from First Niagara and remain on track to achieve $50 million in incremental savings by early 2018.


•	We made investments for growth across our franchise, including the acquisition of Key Merchant Services, LLC and the announced acquisition of HelloWallet.


•	Net loan charge-offs increased during the first six months of 2017 compared to the year-ago period due to loan growth over the past twelve months and credit quality migration in our commercial loan portfolio. Our net loan charge-offs were .29% of average loans for the first six months of 2017, below our targeted range.

•

Capital management remains a priority for 2017. As previously reported, share repurchases of up to $350 million were included in the 2016 capital plan, which was effective through the second quarter of 2017. We completed $94 million of Common Share repurchases, including $88 million of Common Share repurchases in the open market and $6 million of Common Share repurchases related to employee equity compensation programs in the second quarter of 2017 under this authorization. In April 2017, we submitted to the Federal Reserve and provided to the OCC our 2017 capital plan under the annual CCAR process. On June 28, 2017, the Federal Reserve announced that it did not object to our 2017 capital plan. Share repurchases of up to $800 million are included in the 2017 capital plan, which is effective from the third quarter of 2017 through the second quarter of 2018.

•

As previously reported, our 2016 capital plan proposed an increase in our quarterly common share dividend from $.085 to $.095 for the second quarter of 2017, which was approved by our Board in May 2017. In the fourth quarter of 2017, the Board plans to consider a potential increase in our quarterly common share dividend, up to $.105 per share, consistent with the 2017 capital plan. An additional potential increase in the quarterly common share dividend, up to $.12 per share, is expected to be considered by the Board for the second quarter of 2018.

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 and investment, lending, credit card, and personalized wealth management products and business advisory services. Key Community Bank offers personal property and casualty insurance, such as home, auto, renters, watercraft, and umbrella policies. Key Community Bank also purchases motor vehicle retail installment sales contracts relating to new or used automobiles and light and medium-duty trucks via a network of dealers who regularly originate these third party installment sales contracts. These products and services are provided primarily through our relationship managers and specialists working in our 15-state branch network, which is organized into ten internally defined geographic regions: Washington, Oregon/Alaska, Rocky Mountains, Indiana/Northwest Ohio/Michigan, Central/Southwest Ohio, East Ohio/Western Pennsylvania, Atlantic, Western New York, Eastern New York and New England. In addition, some of these product capabilities are delivered by Key Corporate Bank to clients of Key Community Bank.

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Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad 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 is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank 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 19 (“Line of Business Results”).

Supervision and regulation

The following discussion provides a summary of recent regulatory developments and should be read in conjunction with the disclosure included in our 2016 Form 10-K under the heading “Supervision and Regulation” in Item 1. Business and under the heading “II. Compliance Risk” in Item 1A. Risk Factors.

Regulatory capital requirement

In July 2013, the U.S. banking agencies adopted a final rule to implement the Basel III international capital framework (“Basel III”) with an effective date of January 1, 2015, and a multi-year transition period ending on December 31, 2018 (“Regulatory Capital Rules”). Consistent with Basel III, the Regulatory Capital Rules further restrict the type of instruments that may be recognized in Tier 1 and Tier 2 capital (including the phase out of trust preferred securities from tier 1 capital for BHCs above a certain asset threshold, like KeyCorp), establish a minimum Tier 1 Common Equity Capital ratio requirement of 4.5% and capital buffers to address procyclicality concerns and absorb losses during periods of financial stress, and refine several of the methodologies used for determining risk-weighted assets. The Regulatory Capital Rules provide additional requirements for large banking organizations with over $250 billion in total consolidated assets or $10 billion in foreign exposure, but those additional requirements do not apply to KeyCorp nor to KeyBank. Accordingly, for purposes of the Regulatory Capital Rules, KeyCorp and KeyBank are treated as “standardized approach” banking organizations.

The Basel III capital framework and the U.S. implementation of the Basel III capital framework are discussed in more detail in Item 1. Business of our 2016 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements.”

Under the Regulatory Capital Rules, “standardized approach” banking organizations, like KeyCorp, are required to meet the minimum capital and leverage ratios set forth in Figure 3 below. At June 30, 2017, Key had an estimated Common Equity Tier 1 Capital Ratio of 9.82% under the fully phased-in Regulatory Capital Rules. Also at June 30, 2017, 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 3.

Figure 3. Pro Forma Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In Regulatory Capital Rules



Ratios (including capital conservation buffer)	Key June 30, 2017 Pro forma		Minimum January 1, 2017		Phase-in Period	Minimum January 1, 2019
Common Equity Tier 1 ^(a)	9.82	%	4.5	%	None	4.5	%
Capital conservation buffer ^(b)			—		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	10.52	%	6.0	%	None	6.0
Tier 1 Capital + Capital conservation buffer			6.0		1/1/16-1/1/19	8.5
Total Capital	12.46	%	8.0	%	None	8.0
Total Capital + Capital conservation buffer			8.0		1/1/16-1/1/19	10.5
Leverage ^(c)	9.81	%	4.0	%	None	4.0


(a)	See Figure 6 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computation for estimated Common Equity Tier 1. The table reconciles the GAAP performance measure to the corresponding non-GAAP measure, which provides a basis for period-to-period comparisons.


(b)	Capital conservation buffer must consist of Common Equity Tier 1 capital. As a standardized approach banking organization, KeyCorp is not subject to the countercyclical capital buffer of up to 2.5% imposed upon an advanced approaches banking organization under the Regulatory Capital Rules.


(c)	As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018.

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Revised prompt corrective action framework

The federal prompt corrective action (“PCA”) framework under the FDIA groups FDIC-insured depository institutions into one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” for purposes of determining whether a bank should be required to establish a capital restoration plan and become subject to limitations on the bank’s activities, capital actions, and payment of management fees.

In addition to implementing Basel III in the United States, the Regulatory Capital Rules also revised the capital category thresholds under the PCA framework for FDIC-insured depository institutions such as KeyBank. The revised PCA framework table in Figure 4 identifies the capital category thresholds for a “well capitalized” and an “adequately capitalized” institution under the Regulatory Capital Rules.

Figure 4. "Well Capitalized" and "Adequately Capitalized" Capital Category Ratios under Revised PCA Framework



Prompt Corrective Action	Capital Category
Ratio	Well Capitalized ^(a)		Adequately Capitalized
Common Equity Tier 1 Risk-Based	6.5	%	4.5	%
Tier 1 Risk-Based	8.0		6.0
Total Risk-Based	10.0		8.0
Tier 1 Leverage ^(b)	5.0		4.0


(a)	A “well capitalized” institution also must not be subject to any written agreement, order, or directive to meet and maintain a specific capital level for any capital measure.


(b)	As a “standardized approach” banking organization, KeyBank is not subject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018.

We believe that, as of June 30, 2017, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements to be considered “well capitalized” for purposes of the revised PCA framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the PCA framework is intended to serve a limited supervisory function. Moreover, it is important to note that the PCA framework does not apply to BHCs, like KeyCorp.

Capital planning and stress testing

On January 30, 2017, the Federal Reserve released a final rule to revise the capital plan and stress test rules as they apply to large, noncomplex BHCs and U.S. intermediaries of foreign banks. Under the final rule, a large noncomplex BHC is one with total consolidated assets of more than $50 billion but less than $250 billion, and nonbank assets of less than $75 billion (“covered BHCs”). This includes KeyCorp.

The final rule provides relief from the compliance requirements associated with the Federal Reserve’s capital plan and stress test rules. Specifically, the final rule relieves covered BHCs from the qualitative assessment portion of the Federal Reserve’s CCAR program and modifies the reporting requirements for these organizations by reducing the reporting requirements applicable to covered BHCs under the FR Y-14A and by raising the materiality thresholds for specific portfolio reporting requirements.

The final rule also limits the amount of capital a covered BHC is authorized to distribute in excess of the amount set forth in its capital plan without Federal Reserve approval (the “de minimis exception”), and establishes a one-quarter blackout period during which a BHC is not permitted to submit a notice to use the de minimis exception or seek prior approval to make a capital distribution in an amount that exceeds the de minimis exception level. If exigent circumstances arise during the blackout period that require a capital distribution, a covered BHC may resubmit its capital plan and request expedited review from the Federal Reserve; however, the Federal Reserve is not required to expedite the review process.

The final rule also requires covered BHCs to measure nonbank assets on a monthly basis and report the monthly average to the Federal Reserve on a quarterly basis beginning March 31, 2017.

The final rule became effective 30 days after publication in the Federal Register, and therefore, the relief provided under the final rule from the qualitative assessment portion of the CCAR program is effective for the 2017 CCAR cycle.

On June 9, 2017, the Federal Reserve released a proposal and request for comment on certain information collection activities conducted under the series FR Y-14 schedules and reports that are used in connection with the CCAR program. As they would pertain to Key, the proposed revisions to the FR Y-14A and FR Y-14Q generally consist of modifications to reported items and

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instructions that would clarify the intended reporting of those items, and seek to further align reported items with the methodology, standards, and treatment in other regulatory reports or with the FR Y-14 schedules. In addition, the Federal Reserve has proposed to eliminate two schedules from the FR Y-14A to reduce the burden, but also to add a new sub-schedule to supplement the existing information collection around business plan change information. Other aspects of the proposal that do not pertain to Key would require the U.S. intermediate holding companies of foreign banks to apply the global market shock adjustment to certain reporting schedules under the FR Y-14A and FR Y-14Q.

The comment period for the proposed rule ends on August 8, 2017. If the proposal is adopted in final form, it is expected to have a neutral-to-low impact on Key’s reporting and compliance obligations.

Liquidity requirements

In October 2014, the federal banking agencies published a final rule to implement the Basel III liquidity coverage ratio (“Basel III LCR”) for U.S. banking organizations (the “Liquidity Coverage Rules”) that establishes a minimum LCR for certain internationally active bank and nonbank financial companies (excluding KeyCorp) and a modified version of the LCR (“Modified LCR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp). KeyBank will not be subject to the LCR or the Modified LCR under the Liquidity Coverage Rules unless the OCC affirmatively determines that application to KeyBank is appropriate in light of KeyBank’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system.

Under the Liquidity Coverage Rules, KeyCorp must calculate a Modified LCR on a monthly basis, and was required to satisfy a minimum Modified LCR requirement of 100% by January 1, 2017. At June 30, 2017, Key’s estimated Modified LCR was above 100%. In the future, KeyCorp may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position.

Net stable funding ratio

The federal banking agencies commenced the U.S. implementation of the Basel III net stable funding ratio (“NSFR”) in April and May 2016, with the release of a proposed rule to implement a NSFR requirement for certain internationally active banking organizations (excluding KeyCorp) and a modified version of the minimum NSFR requirement (“Modified NSFR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp), together with quarterly public disclosure requirements. The proposed rule would require banking organizations to satisfy a minimum NSFR requirement of 1.0 on an ongoing basis. However, banking organizations subject to the Modified NSFR (like KeyCorp) would be required to maintain a lower minimum amount of available stable funding, equal to 70% of the required stable funding under the NSFR. The proposed rule would be effective on January 1, 2018. The comment period for the NPR expired on August 5, 2016. If the proposed NSFR requirement is adopted as a final rule, then similar to actions taken in connection with the implementation of the Liquidity Coverage Rules, KeyCorp may adjust its balance sheet or modify product offerings to enhance its liquidity position.

Resolution and recovery planning

BHCs with at least $50 billion in total consolidated assets, like KeyCorp, are required to periodically submit to the Federal Reserve and FDIC a plan discussing how the company could be rapidly and efficiently resolved if the company failed or experienced material financial distress. Insured depository institutions with at least $50 billion in total consolidated assets, like KeyBank, are also required to submit a resolution plan to the FDIC. These plans are due annually. KeyCorp and KeyBank were not required to submit resolution plans for 2016 because the FDIC and Federal Reserve deferred such requirement until December 2017. By letter dated March 24, 2017, KeyCorp received guidance from the Federal Reserve and the FDIC regarding the information requirements for certain aspects of KeyCorp’s December 2017 resolution plan submission. That letter is publicly available on the Federal Reserve’s website, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170324a.htm.

The Federal Reserve and FDIC make available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, that submitted plans. The public section of the resolution plans of KeyCorp and KeyBank is available at http://www.federalreserve.gov/bankinforeg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/.

On September 28, 2016, the OCC released final guidelines that establish standards for recovery planning by certain large OCC-regulated institutions, including KeyBank. The guidelines require such institutions to establish a comprehensive framework for

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evaluating the financial effects of severe stress events, and recovery actions an institution may pursue to remain a viable, going concern during a period of severe financial stress. Under the final guidelines, an institution’s recovery plan must include triggers to alert the institution of severe stress events, escalation procedures, recovery options, and a process for periodic review and approval by senior management and the board of directors. The recovery plan should be tailored to the complexity, scope of operations, and risk profile of the institution.

Because KeyBank had average total consolidated assets of greater than $100 billion but less than $750 billion as reported on KeyBank’s Consolidated Reports of Condition and Income for the four most recent consecutive quarters prior to January 1, 2017, it must be in compliance with the guidelines not later than January 1, 2018.

Deposit insurance and assessments

As required under the Dodd-Frank Act, in March 2015, the FDIC approved a final rule to impose a surcharge on the quarterly deposit insurance assessments of insured depository institutions having total consolidated assets of at least $10 billion (like KeyBank). The surcharge is 4.5 cents per $100 of the institution’s assessment base (after making certain adjustments). The final rule became effective on July 1, 2016. As of July 1, 2016, KeyBank must pay a surcharge to assist in bringing the reserve ratio to the statutory minimum of 1.35%. Surcharges will continue through the quarter that the DIF reserve ratio reaches or exceeds 1.35%, but not later than December 31, 2018. If the reserve ratio does not reach 1.35% by December 31, 2018 (provided it is at least 1.15%), the FDIC will impose a shortfall assessment on March 31, 2019, on insured depository institutions with total consolidated assets of $10 billion or more (like KeyBank).

In December 2016, the FDIC issued a final rule that imposes recordkeeping requirements on insured depository institutions with two million or more deposit accounts (including KeyBank) in order to facilitate rapid payment of insured deposits to customers if the institutions were to fail. The rule requires those insured depository institutions to: (i) maintain complete and accurate data on each depositor’s ownership interest by right and capacity for all of the institution’s deposit accounts; and (ii) develop the capability to calculate the insured and uninsured amounts for each deposit owner within 24 hours of failure. The FDIC will conduct periodic testing of compliance with these requirements, and institutions subject to the rule must submit to the FDIC a certification of compliance, signed by the KeyBank CEO, and deposit insurance coverage summary report on or before the mandatory compliance date and annually thereafter. The final rule became effective on April 1, 2017, with a mandatory compliance date of April 1, 2020.

Single counterparty credit limits

In March 2016, the Federal Reserve issued an NPR proposing to establish single counterparty credit limits for BHCs with total consolidated assets of $50 billion or more. This proposal would implement a provision in the Dodd-Frank Act and replaces proposals on this subject issued by the Federal Reserve in 2011 and 2012. Under the proposal, a covered BHC (including KeyCorp) would not be allowed to have an aggregate net credit exposure to any unaffiliated counterparty that exceeds 25% of the consolidated capital stock and surplus of the covered BHC. Globally, systemically important banks and certain other large BHCs (excluding KeyCorp) would be subject to stricter limits under the proposal. A covered BHC such as KeyCorp would be required to comply with the proposed limits and quarterly reporting to show such compliance starting two years after the effective date of a final rule. The comment period for the NPR expired on June 3, 2016.

ERISA fiduciary standard

In April 2016, the Department of Labor published final rules and amendments to certain prohibited transaction exemptions regarding which service providers would be regarded as fiduciaries under ERISA for making investment advice recommendations to: (i) certain retirement plan fiduciaries, participants, or beneficiaries; and (ii) owners or beneficiaries of individual retirement accounts and health savings accounts, among other retirement plans. The purpose of the rules is to place fiduciary obligations, rather than the lesser legal obligations that currently apply, on these service providers. Accordingly, the rules subject any financial institution making recommendations for either the purchase or sale of investments in or rollover of the respective retirement plan to certain fiduciary obligations under ERISA such as an impartial conduct standard and not selling certain investment products whose compensation may raise a conflict of interest for the advisor without entering into a contract providing certain disclosures and legal remedies to the customer. Under the Department of Labor’s original rules, the impartial standard requirement for financial institutions and their advisors was to become effective April 10, 2017. However, in response to a Presidential Order, the Department of Labor extended the effective date to June 9, 2017. The contract provisions must be in place by January 1, 2018. The Department of Labor will continue to review whether to modify, further delay, or rescind these rules in whole or in part.

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Highlights of Our Performance

Financial performance

For the second quarter of 2017, we announced net income from continuing operations attributable to Key common shareholders of $393 million, or $.36 per common share. Our second quarter of 2017 results compare to net income from continuing operations attributable to Key common shareholders of $193 million, or $.23 per common share, for the second quarter of 2016. During the second quarter of 2017, our results included a number of notable items, including a gain related to our merchant services business, the finalization of purchase accounting, merger-related charges, and a charitable contribution. These notable items had a pre-tax net benefit of $43 million, or $.02 per common share, for the second quarter of 2017.

Second quarter 2017 net interest income included $100 million of purchase accounting accretion related to the acquisition of First Niagara, including $42 million related to the finalization of previous purchase accounting estimates.

Our taxable-equivalent net interest income was $987 million for the second quarter of 2017, and the net interest margin was 3.30%, compared to taxable-equivalent net interest income of $605 million and a net interest margin of 2.76% for the second quarter of 2016, reflecting the benefit from the First Niagara acquisition, including purchase accounting accretion, as well as higher earning asset yields and balances. For the full year of 2017, we expect net interest income to be in the range of $3.8 billion to $3.9 billion. Our outlook does not include any additional rate increases in 2017.

Our noninterest income was $653 million for the second quarter of 2017, compared to $473 million for the year-ago quarter. Growth was largely driven by the acquisition of First Niagara, as well as core business momentum and a $64 million one-time gain from acquiring the remaining ownership interest in a merchant services joint venture. Investment banking and debt placement fees grew $37 million, related to strong commercial mortgage banking, underwriting, and advisory fees. For the full year of 2017, we expect noninterest income to be in the range of $2.35 billion to $2.45 billion.

Our noninterest expense was $995 million for the second quarter of 2017, which included $44 million of merger-related charges. Merger-related charges for the quarter were made up of $31 million of personnel expense and $13 million of nonpersonnel expense, largely reflected in business services and professional fees and marketing expense. During the second quarter of 2016, we incurred $45 million of merger-related charges.

Excluding merger-related charges, noninterest expense was $245 million higher than the second quarter of last year. The increase from the prior year, reflected in both personnel and non-personnel expense, was primarily driven by the acquisition of First Niagara. Higher incentive compensation related to stronger capital markets performance also contributed to the year-over-year increase. For the full year of 2017, we expect noninterest expense excluding merger-related charges to be in the range of $3.7 billion to $3.8 billion.

Average loans were $86.5 billion for the second quarter of 2017, an increase of $25.4 billion compared to the second quarter of 2016, primarily reflecting the impact of the First Niagara acquisition as well as growth in commercial and industrial loans which was broad-based and spread across Key's commercial lines of business. During the second quarter of 2017, our Community Bank middle market segment lending grew 4% from the first quarter of 2016. We anticipate low-end of mid-single digit (4%-6%) loan growth from the fourth quarter of 2016, which translates to $87 billion to $88 billion for fiscal year 2017 average balances.

Average deposits totaled $102.8 billion for the second quarter of 2017, an increase of $28.9 billion compared to the year-ago quarter, primarily reflecting the acquisition of First Niagara and core retail and commercial deposit growth. Our consolidated loan-to-deposit ratio was 87.2% at June 30, 2017, compared to 85.3% at June 30, 2016. We anticipate average deposits to be in the range of $102.5 billion to $103 billion for the fiscal year 2017.

Our provision for credit losses was $66 million for the second quarter of 2017, compared to $52 million for the second quarter of 2016. Our allowance for loan and lease losses was $870 million, or 1.01% of total period-end loans, at June 30, 2017, compared to 1.38% at June 30, 2016. For the remainder of 2017, we expect the provision for credit losses to slightly exceed net loan charge-offs to provide for loan growth.

Net loan charge-offs for the second quarter of 2017 totaled $66 million, or .31% of average total loans, compared to $43 million, or .28%, for the second quarter of 2016. For the remainder of 2017, we expect net loan charge-offs to average loans to remain below our targeted range of 40 to 60 basis points.

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At June 30, 2017, our nonperforming loans totaled $507 million, which represented .59% of period-end portfolio loans, compared to $619 million, or 1.00% of period-end portfolio loans, at June 30, 2016. Nonperforming assets at June 30, 2017, totaled $556 million and represented .64% of period-end portfolio loans and OREO and other nonperforming assets, compared to $637 million, or 1.03% of period-end portfolio loans and OREO and other nonperforming assets, at June 30, 2016.

Our capital ratios remain strong. Our tangible common equity and Tier 1 risk-based capital ratios at June 30, 2017, are 8.56% and 10.73%, respectively, compared to 9.95% and 11.41%, respectively, at June 30, 2016. In addition, our Common Equity Tier 1 ratio is 9.91% at June 30, 2017, compared to 11.10% at June 30, 2016. The decrease in our capital ratios was driven by the acquisition of First Niagara.

We continue to return capital to our shareholders by repurchasing Common Shares and through our quarterly common share dividend. In the second quarter of 2017, we completed $94 million of Common Share repurchases, including $88 million of common share repurchases in the open market and $6 million of Common Share repurchases related to employee equity compensation programs and paid a cash dividend of $.095 per Common Share, under our 2016 capital plan authorization.

Figure 5 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 5. Results of Operations



	Three months ended						Six months ended
in millions, except per share amounts	6/30/2017		3/31/2017		6/30/2016		6/30/2017		6/30/2016
Summary of operations
Income (loss) from continuing operations attributable to Key	$	407	$	324	$	199	$	731	$	386
Income (loss) from discontinued operations, net of taxes ^(a)	5		—		3		5		4
Net income (loss) attributable to Key	$	412	$	324	$	202	$	736	$	390
Income (loss) from continuing operations attributable to Key	$	407	$	324	$	199	$	731	$	386
Less: Dividends on Preferred Stock	14		28		6		42		11
Income (loss) from continuing operations attributable to Key common shareholders	393		296		193		689		375
Income (loss) from discontinued operations, net of taxes ^(a)	5		—		3		5		4
Net income (loss) attributable to Key common shareholders	$	398	$	296	$	196	$	694	$	379
Per common share — assuming dilution
Income (loss) from continuing operations attributable to Key common shareholders	$	.36	$	.27	$	.23	$	.63	$	.44
Income (loss) from discontinued operations, net of taxes ^(a)	—		—		—		—		—
Net income (loss) attributable to Key common shareholders ^(b)	$	.36	$	.27	$	.23	$	.63	$	.45

(a)

In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. As a result of this decision, we have accounted for these business as a discontinued operation. For further discussion regarding the income (loss) from discontinued operations, see Note 12 (“Acquisition, Divestiture, and Discontinued Operations”).


(b)	EPS may not foot due to rounding.

Figure 6 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible common equity,” “Common Equity Tier 1,” “cash efficiency ratio,” certain financial measures excluding notable items, and “Common Equity Tier 1 under the Regulatory Capital Rules (estimates).”

Notable items include certain revenue or expense items that may occur in a reporting period which management does not consider indicative of ongoing financial performance. Management believes it is useful to consider certain financial metrics with and without merger-related charges and/or other notable items in order to enable a better understanding of Company results, increase comparability of period-to-period results, and to evaluate and forecast those results.

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes that these ratios may assist investors in analyzing Key’s capital position without regard to the effects of intangible assets and preferred stock. 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. The Federal Reserve focuses its assessment of capital adequacy on a component of Tier 1 capital known as Common Equity Tier 1. Because the Federal Reserve has long indicated that voting common shareholders’ equity (essentially Tier 1 risk-based capital less preferred stock and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Common Equity Tier 1 is consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail under the section “Supervision and Regulation” in Item 2 of this report, also make Common Equity Tier 1 a priority. The Regulatory Capital Rules change the regulatory capital standards that apply to BHCs by, among other changes, phasing out the treatment of trust preferred securities and cumulative preferred securities as Tier 1 eligible capital. Starting in 2016, our trust preferred securities are only included in Tier 2 capital. Since analysts and banking regulators may assess our capital adequacy using tangible common equity and Common Equity Tier 1, we believe it is useful to enable

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investors to assess our capital adequacy on these same bases. Figure 6 reconciles the GAAP performance measures to the corresponding non-GAAP measures.

As disclosed in Note 2 (“Business Combination”) and Note 12 (“Acquisition, Divestiture, and Discontinued Operations”), KeyCorp completed its purchase of First Niagara on August 1, 2016. The definitive agreement and plan of merger to acquire First Niagara was originally announced on October 30, 2015. As a result of this transaction, we’ve recognized merger-related charges. Figure 6 shows the computation of pre provision net revenue excluding notable items and return on average assets from continuing operations excluding notable items. For the second quarter of 2017, merger-related charges are included in the total for “notable items,” the detail of which is provided in Figure 6. We believe that eliminating the effects of the notable items makes it easier to analyze our results by presenting them on a more comparable basis with our prior results.

The cash efficiency ratio is a ratio of two non-GAAP performance measures. Accordingly, there is no directly comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset amortization from the calculation. We also disclose the cash efficiency ratio excluding notable items. 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, nor as a substitute for analyses of results as reported under GAAP.

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Figure 6. GAAP to Non-GAAP Reconciliations



		Three months ended															Six months ended
dollars in millions		6/30/2017			3/31/2017			12/31/2016			9/30/2016			6/30/2016			6/30/2017			6/30/2016
Tangible common equity to tangible assets at period-end
Key shareholders’ equity (GAAP)		$	15,253		$	14,976		$	15,240		$	14,996		$	11,313
Less:	Intangible assets^(a)	2,866			2,751			2,788			2,855			1,074
	Preferred Stock ^(b)	1,009			1,009			1,640			1,150			281
	Tangible common equity (non-GAAP)	$	11,378		$	11,216		$	10,812		$	10,991		$	9,958
Total assets (GAAP)		$	135,824		$	134,476		$	136,453		$	135,805		$	101,150
Less:	Intangible assets ^(a)	2,866			2,751			2,788			2,855			1,074
	Tangible assets (non-GAAP)	$	132,958		$	131,725		$	133,665		$	132,950		$	100,076
	Tangible common equity to tangible assets ratio (non-GAAP)	8.56		%	8.51		%	8.09		%	8.27		%	9.95		%
Common Equity Tier 1 at period-end
Key shareholders’ equity (GAAP)		$	15,253		$	14,976		$	15,240		$	14,996		$	11,313
Less:	Preferred Stock^(b)	1,009			1,009			1,640			1,150			281
	Common Equity Tier 1 capital before adjustments and deductions	14,244			13,967			13,600			13,846			11,032
Less:	Goodwill, net of deferred taxes	2,411			2,379			2,405			2,450			1,031
	Intangible assets, net of deferred taxes	257			194			155			216			30
	Deferred tax assets	5			11			4			6			1
	Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes	(145		)	(179		)	(185		)	101			129
	Accumulated gains (losses) on cash flow hedges, net of deferred taxes	(64		)	(76		)	(52		)	39			77
	Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes	(334		)	(335		)	(339		)	(359		)	(362		)
	Total Common Equity Tier 1 capital	$	12,114		$	11,973		$	11,612		$	11,393		$	10,126
Net risk-weighted assets (regulatory)		$	122,263		$	120,852		$	121,671		$	119,120		$	91,195
	Common Equity Tier 1 ratio (non-GAAP)	9.91		%	9.91		%	9.54		%	9.56		%	11.10		%
Notable items
Merger-related charges		$	(44	)	$	(81	)	$	(198	)	$	(207	)	(45		)	$	(125	)	$	(69	)
Merchant services gain		64			—			—			—			—			64			—
Purchase accounting finalization, net		43			—			—			—			—			43			—
Charitable contribution		(20		)	—			—			—			—			(20		)	—
Total notable items		$	43		$	(81	)	$	(198	)	$	(207	)	(45		)	$	(38	)	$	(69	)
Income taxes		16			(30		)	(74		)	(75		)	(17		)	(14		)	(26		)
Total notable items after tax		$	27		$	(51	)	$	(124	)	$	(132	)	(28		)	$	(24	)	$	(43	)
Average tangible common equity
Average Key shareholders’ equity (GAAP)		$	15,200		$	15,184		$	14,901		$	13,552		$	11,147		$	15,192		$	11,050
Less:	Intangible assets (average) ^(c)	2,756			2,772			2,874			2,255			1,076			2,764			1,077
	Preferred Stock (average)	1,025			1,480			1,274			648			290			1,251			290
	Average tangible common equity (non-GAAP)	$	11,419		$	10,932		$	10,753		$	10,649		$	9,781		$	11,177		$	9,683
Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)		$	393		$	296		$	213		$	165		$	193		$	689		$	375
Plus:	Notable items, after tax	(27		)	51			124			132			28			24			43
	Net income (loss) from continuing operations attributable to Key common shareholders after notable items (non-GAAP)	$	366		$	347		$	337		$	297		$	221		$	713		$	418
Average tangible common equity (non-GAAP)		11,419			10,932			10,753			10,649			9,781			11,177			9,683
Return on average tangible common equity from continuing operations (non-GAAP)		13.80		%	10.98		%	7.88		%	6.16		%	7.94		%	12.43		%	7.79		%
Return on average tangible common equity from continuing operations excluding notable items (non-GAAP)		12.86			12.87			12.47			11.10			9.09			12.86			8.68
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)		$	398		$	296		$	209		$	166		$	196		$	694		$	379
Average tangible common equity (non-GAAP)		11,419			10,932			10,753			10,649			9,781			11,177			9,683
Return on average tangible common equity consolidated (non-GAAP)		13.98		%	10.98		%	7.73		%	6.20		%	8.06		%	12.52		%	7.87		%
Cash efficiency ratio
Noninterest expense (GAAP)		$	995		$	1,013		$	1,220		$	1,082		$	751		$	2,008		$	1,454
Less:	Intangible asset amortization	22			22			27			13			7			44			15
Adjusted noninterest expense (non-GAAP)		$	973		$	991		$	1,193		$	1,069		$	744		$	1,964		$	1,439
Less:	Notable items ^(d)	60			81			207			189			45			141			69
Adjusted noninterest expense excluding notable items (non-GAAP)		$	913		$	910		$	986		$	880		$	699		$	1,823		$	1,370
Net interest income (GAAP)		$	973		$	918		$	938		$	780		$	597		$	1,891		$	1,201
Plus:	Taxable-equivalent adjustment	14			11			10			8			8			25			16
	Noninterest income (GAAP)	653			577			618			549			473			1,230			904
Total taxable-equivalent revenue (non-GAAP)		$	1,640		$	1,506		$	1,566		$	1,337		$	1,078		$	3,146		$	2,121
Plus:	Notable items ^(e)	(103		)	—			(9		)	18			—			(103		)	—
	Adjusted noninterest income excluding notable items (non-GAAP)	$	1,537		$	1,506		$	1,557		$	1,355		$	1,078		$	3,043		$	2,121
Cash efficiency ratio (non-GAAP)		59.3		%	65.8		%	76.2		%	80.0		%	69.0		%	62.4		%	67.8		%
Cash efficiency ratio excluding notable items (non-GAAP)		59.4			60.4			63.3			64.9			64.8			59.9			64.6
Return on average total assets from continuing operations excluding notable items
Income from continuing operations attributable to Key (GAAP)		$	407		$	324		$	233		$	171		$	199		$	731		$	386
Plus:	Notable items, after tax	(27		)	51			124			132			28			24			43
	Income from continuing operations attributable to Key excluding notable items, after tax (non-GAAP)	$	380		$	375		$	357		$	303		$	227		$	755		$	429
Average total assets from continuing operations (GAAP)		$	132,491		$	132,741		$	134,428		$	123,469		$	97,413		$	132,615		$	95,945
Return on average total assets from continuing operations excluding notable items (non-GAAP)		1.15		%	1.15		%	1.06		%	.98		%	.94		%	1.15		%	.90		%

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Figure 6. GAAP to Non-GAAP Reconciliations, continued



dollars in millions	Three months ended June 30, 2017
Common Equity Tier 1 under the Regulatory Capital Rules (estimates)
Common Equity Tier 1 under current Regulatory Capital Rules	$	12,114
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:
Deferred tax assets and other intangible assets ^(f)	(66		)
Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules ^(g)	$	12,048

Net risk-weighted assets under current Regulatory Capital Rules	$	122,263
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:
Mortgage servicing assets ^(h)	603
Volcker Funds	(149		)
All other assets	(17		)
Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules ^(g)	$	122,700

Common Equity Tier 1 ratio under the fully phased-in Regulatory Capital Rules ^(g)	9.82		%


(a)	For the three months ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, intangible assets exclude $33 million, $38 million, $42 million, $51 million, and $36 million, respectively, of period-end purchased credit card relationships.


(b)	Net of capital surplus.

(c)

For the three months ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, average intangible assets exclude $36 million, $40 million, $46 million, $47 million, and $38 million, respectively, of average purchased credit card relationships. For the six months ended June 30, 2017, and June 30, 2016, average intangible assets exclude $38 million and $40 million, respectively, of average purchased credit card receivables.


(d)	Notable items for the three months ended June 30, 2017, include $44 million of merger-related expense, a $20 million charitable contribution, and a credit of $4 million related to purchase accounting finalization.


(e)	Notable items for the three months ended June 30, 2017, include $64 million related to the merchant services gain and $39 million related to purchase accounting finalization.


(f)	Includes the deferred tax assets subject to future taxable income for realization, primarily tax credit carryforwards, as well as intangible assets (other than goodwill and mortgage servicing assets) subject to the transition provisions of the final rule.


(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); we are 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 at 250%.

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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 both the results across 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 all income were 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 7 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 TE net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing annualized TE net interest income by average earning assets.

TE net interest income was $987 million for the second quarter of 2017, and the net interest margin was 3.30%, compared to TE net interest income of $605 million and a net interest margin of 2.76% for the second quarter of 2016, reflecting benefit from the First Niagara acquisition, including purchase accounting accretion, as well as higher earning asset yields and balances.

Compared to the first quarter of 2017, TE net interest income increased by $58 million, and the net interest margin increased by 17 basis points. The increase in net interest income and the net interest margin reflects an increase in purchase accounting accretion and higher earning asset yields, partly offset by a decline in loan fees and higher interest-bearing deposit costs, largely the result of an increase in commercial deposit rates and growth in higher-yielding deposit products. Net interest income also benefited from one additional day in the second quarter of 2017.

For the six months ended June 30, 2017, TE net interest income was $1.9 billion and the net interest margin was 3.21%, compared to TE net interest income of $1.2 billion and a net interest margin of 2.83% for the prior year, reflecting the benefit from the First Niagara acquisition, growth in our core earning asset balances, and higher interest rates.

Average loans were $86.5 billion for the second quarter of 2017, an increase of $25.4 billion compared to the second quarter of 2016, primarily reflecting the impact of the First Niagara acquisition, as well as growth in commercial and industrial loans, which was broad-based and spread across our commercial lines of business. During the second quarter of 2017, Key finalized the fair value of the First Niagara acquired loan portfolio, adjusting the discount from $548 million to $603 million. At June 30, 2017, $345 million of the fair value discount remained.

Compared to the first quarter of 2017, average loans increased by $369 million. Commercial and industrial loans increased $664 million, with strength in middle market lending. Consumer loans decreased $110 million, mostly from continued declines in the home equity loan portfolio, largely the result of paydowns on home equity lines of credit.

Compared to the first quarter of 2017, average deposits increased by $701 million, driven by growth in certificates of deposits and NOW and money market deposit accounts, partly offset by a decline in escrow deposits. During the quarter, Key also experienced a shift in deposit mix from noninterest-bearing and low-cost interest-bearing deposits to higher-yielding deposit

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products. On a period end basis, total deposits decreased $1.1 billion compared to the linked-quarter, largely the result of seasonal deposit growth that occurred in the first quarter of 2017.

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Figure 7. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations



	Second Quarter 2017							First Quarter 2017
dollars in millions	Average Balance			Interest ^(a)		Yield/ Rate ^(a)		Average Balance			Interest ^(a)		Yield/ Rate ^(a)
ASSETS
Loans ^{(b), (c)}
Commercial and industrial ^(d)	$	40,666		$	409	4.04	%	$	40,002		$	373	3.77	%
Real estate — commercial mortgage	15,096			187		4.97		15,187			164		4.39
Real estate — construction	2,204			31		5.51		2,353			26		4.54
Commercial lease financing	4,690			50		4.33		4,635			44		3.76
Total commercial loans	62,656			677		4.34		62,177			607		3.95
Real estate — residential mortgage	5,509			52		3.77		5,520			54		3.94
Home equity loans	12,473			135		4.31		12,611			131		4.22
Consumer direct loans	1,743			31		7.07		1,762			30		6.97
Credit cards	1,044			29		11.04		1,067			29		11.06
Consumer indirect loans	3,077			38		5.02		2,996			37		4.91
Total consumer loans	23,846			285		4.77		23,956			281		4.75
Total loans	86,502			962		4.46		86,133			888		4.17
Loans held for sale	1,082			9		3.58		1,188			13		4.28
Securities available for sale ^{(b), (e)}	17,997			90		1.97		19,181			95		1.95
Held-to-maturity securities ^(b)	10,469			55		2.09		9,988			51		2.04
Trading account assets	1,042			7		3.00		968			7		2.75
Short-term investments	1,970			5		.96		1,610			3		.79
Other investments ^(e)	687			3		1.87		709			4		2.26
Total earning assets	119,749			1,131		3.78		119,777			1,061		3.57
Allowance for loan and lease losses	(864		)					(855		)
Accrued income and other assets	13,606							13,819
Discontinued assets	1,477							1,540
Total assets	$	133,968						$	134,281

LIABILITIES
NOW and money market deposit accounts	$	54,416		34		.25		$	54,295		32		.24
Savings deposits	6,854			4		.21		6,351			1		.10
Certificates of deposit ($100,000 or more)	6,111			19		1.23		5,627			16		1.16
Other time deposits	4,650			9		.77		4,706			9		.76
Total interest-bearing deposits	72,031			66		.36		70,979			58		.33
Federal funds purchased and securities sold under repurchase agreements	466			—		.23		795			1		.32
Bank notes and other short-term borrowings	1,216			4		1.43		1,802			5		1.06
Long-term debt ^{(f), (g)}	11,046			74		2.68		10,833			68		2.54
Total interest-bearing liabilities	84,759			144		.68		84,409			132		.63
Noninterest-bearing deposits	30,748							31,099
Accrued expense and other liabilities	1,782							2,048
Discontinued liabilities ^(g)	1,477							1,540
Total liabilities	118,766							119,096
EQUITY
Key shareholders’ equity	15,200							15,184
Noncontrolling interests	2							1
Total equity	15,202							15,185
Total liabilities and equity	$	133,968						$	134,281

Interest rate spread (TE)						3.10	%						2.94	%
Net interest income (TE) and net interest margin (TE)				987		3.30	%				929		3.13	%
TE adjustment ^(b)				14							11
Net interest income, GAAP basis				$	973						$	918


(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 TE 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 and industrial average balances include $117 million, $114 million, $119 million, $107 million, and $87 million of assets from commercial credit cards for the three months ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.

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Figure 7. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations



Fourth Quarter 2016							Third Quarter 2016							Second Quarter 2016
Average Balance			Interest ^(a)		Yield/ Rate ^(a)		Average Balance			Interest ^(a)		Yield/ Rate ^(a)		Average Balance			Interest ^(a)		Yield/ Rate ^(a)


$	39,495		$	365	3.68	%	$	37,318		$	317	3.38	%	$	32,630		$	270	3.32	%
14,771			168		4.50		12,879			126		3.91		8,404			80		3.85
2,222			37		6.72		1,723			21		4.67		869			8		3.78
4,624			50		4.34		4,508			38		3.33		3,949			37		3.77
61,112			620		4.04		56,428			502		3.54		45,852			395		3.47
5,554			57		4.17		4,453			45		3.96		2,253			22		4.11
12,812			129		3.99		11,968			122		4.07		10,098			102		4.04
1,785			31		6.84		1,666			30		7.20		1,599			26		6.53
1,088			29		10.78		996			27		10.80		792			21		10.58
3,009			42		5.50		2,186			28		5.23		554			9		6.56
24,248			288		4.73		21,269			252		4.73		15,296			180		4.74
85,360			908		4.24		77,697			754		3.86		61,148			575		3.78
1,323			11		3.39		1,152			10		3.48		611			5		3.18
20,145			92		1.82		17,972			88		1.99		14,268			74		2.08
9,121			44		1.95		6,250			30		1.86		4,883			24		1.98
892			6		2.54		860			4		2.12		967			6		2.28
3,717			5		.49		5,911			7		.48		5,559			6		.45
741			6		3.23		717			5		2.74		610			2		1.54
121,299			1,072		3.52		110,559			898		3.24		88,046			692		3.16
(855		)					(847		)					(833		)
13,984							13,757							10,200
1,610							1,676							1,738
$	136,038						$	125,145						$	99,151


$	55,444		31		.22		$	51,318		25		.20		$	39,687		16		.17
6,546			2		.10		4,521			1		.07		2,375			—		.02
5,428			15		1.11		4,204			12		1.15		3,233			11		1.39
4,849			9		.77		5,031			11		.85		3,252			7		.85
72,267			57		.32		65,074			49		.30		48,547			34		.29
592			1		.11		578			—		.16		337			—		.01
934			3		1.11		1,186			2		.91		694			3		1.39
10,914			63		2.38		10,415			59		2.31		9,294			50		2.25
84,707			124		.58		77,253			110		.57		58,872			87		.60
32,424							29,844							25,357
2,394							2,818							2,032
1,610							1,676							1,738
121,135							111,591							87,999

14,901							13,552							11,147
2							2							5
14,903							13,554							11,152
$	136,038						$	125,145						$	99,151

					2.94	%						2.67	%						2.56	%
			948		3.12	%				788		2.85	%				605		2.76	%
			10							8							8
			$	938						$	780						$	597


(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.

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Figure 8 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 8. Components of Net Interest Income Changes from Continuing Operations



	From three months ended June 30, 2016									From six months ended June 30, 2016
	to three months ended June 30, 2017									to six months ended June 30, 2017
in millions	Average Volume			Yield/ Rate			Net Change ^(a)			Average Volume			Yield/ Rate			Net Change ^(a)
INTEREST INCOME
Loans	$	269		$	118		$	387		$	534		$	171		$	705
Loans held for sale	4			—			4			8			1			9
Securities available for sale	19			(3		)	16			44			(8		)	36
Held-to-maturity securities	29			2			31			56			2			58
Trading account assets	—			1			1			2			(1		)	1
Short-term investments	(6		)	5			(1		)	(8		)	6			(2		)
Other investments	—			1			1			1			1			2
Total interest income (TE)	315			124			439			637			172			809
INTEREST EXPENSE
NOW and money market deposit accounts	7			11			18			15			20			35
Savings deposits	—			4			4			—			5			5
Certificates of deposit ($100,000 or more)	9			(1		)	8			18			(4		)	14
Other time deposits	3			(1		)	2			6			(1		)	5
Total interest-bearing deposits	19			13			32			39			20			59
Federal funds purchased and securities sold under repurchase agreements	—			—			—			—			1			1
Bank notes and other short-term borrowings	2			(1		)	1			5			(1		)	4
Long-term debt	10			14			24			24			22			46
Total interest expense	31			26			57			68			42			110
Net interest income (TE)	$	284		$	98		$	382		$	569		$	130		$	699


(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 9, noninterest income was $653 million for the second quarter of 2017, compared to $473 million for the year-ago quarter. For the six months ended June 30, 2017, noninterest income was $1.2 billion compared to $904 million for the same period one year ago. Noninterest income represented 40% and 39% of total revenue for the three and six months ended June 30, 2017, respectively, compared to 44% and 43% for the three and six months ended June 30, 2016, respectively.

The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.

Figure 9. Noninterest Income



	Three months ended June 30,				Change					Six months ended June 30,				Change
dollars in millions	2017		2016		Amount			Percent		2017		2016		Amount			Percent
Trust and investment services income	$	134	$	110	$	24		21.8	%	$	269	$	219	$	50		22.8	%
Investment banking and debt placement fees	135		98		37			37.8		262		169		93			55.0
Service charges on deposit accounts	90		68		22			32.4		177		133		44			33.1
Operating lease income and other leasing gains	30		18		12			66.7		53		35		18			51.4
Corporate services income	55		53		2			3.8		109		103		6			5.8
Cards and payments income	70		52		18			34.6		135		98		37			37.8
Corporate-owned life insurance income	33		28		5			17.9		63		56		7			12.5
Consumer mortgage income	6		3		3			100.0		12		5		7			140.0
Mortgage servicing fees	15		10		5			50.0		33		22		11			50.0
Net gains (losses) from principal investing	—		11		(11		)	N/M		1		11		(10		)	(90.9	)
Other income	85		22		63			286.4		116		53		63			118.9
Total noninterest income	$	653	$	473	$	180		38.1	%	$	1,230	$	904	$	326		36.1	%

Trust and investment services income

Trust and investment services income is one of our largest sources of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily

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generate these revenues are shown in Figure 10. For the three months ended June 30, 2017, trust and investment services income increased $24 million, or 21.8%, compared to the same period one year ago, primarily due to the acquisition of First Niagara and assets under management market growth. Compared to the first quarter of 2017, trust and investment services income decreased $1 million, or .7%, due to lower insurance and brokerage commissions.

For the six months ended June 30, 2017, trust and investment services income was up $50 million, or 22.8%, from the six months ended June 30, 2016, primarily due to the acquisition of First Niagara.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At June 30, 2017, our bank, trust, and registered investment advisory subsidiaries had assets under management of $37.6 billion, compared to $34.5 billion at June 30, 2016. The increase in assets under management, as shown in Figure 10, was primarily attributable to the acquisition of First Niagara and growth in equity investments.

Figure 10. Assets Under Management



in millions	June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016
Assets under management by investment type:
Equity	$	22,824	$	22,522	$	21,722	$	21,568	$	20,458
Securities lending	807		1,095		1,148		991		968
Fixed income	10,819		10,497		10,386		11,016		10,053
Money market	3,163		3,303		3,336		3,177		3,056
Total assets under management	$	37,613	$	37,417	$	36,592	$	36,752	$	34,535

Investment banking and debt placement fees

Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial adviser fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees increased $37 million, or 37.8%, for the second quarter of 2017, related to strong commercial mortgage banking, underwriting, and advisory fees. Compared to the first quarter of 2017, investment banking and debt placement fees increased $8 million, or 6.3%, related to strong advisory fees.

For the six months ended June 30, 2017, investment banking and debt placement fees increased $93 million, or 55.0%, from the same period one year ago. This increase is primarily due to improved capital market conditions and activity compared to the first six months of 2016.

Service charges on deposit accounts

Service charges on deposit accounts increased $22 million, or 32.4%, for the three months ended June 30, 2017, compared to the same period one year ago. The increase from the three months ended June 30, 2016, was primarily due to the acquisition of First Niagara. Compared to the first quarter of 2017, service charges on deposit accounts increased $3 million, or 3.4%, primarily due to an increase in account analysis and other fees.

For the six months ended June 30, 2017, service charges on deposits accounts increased $44 million, or 33.1%, from the first half of 2016. In all fee categories, this increase was primarily due to the acquisition of First Niagara.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $18 million, or 34.6%, from the year-ago quarter. This increase was primarily due to the acquisition of First Niagara and to higher purchase and prepaid card fees in Key Corporate Bank. Compared to the first quarter of 2017, cards and payments income increased $5 million, or 7.7%, due to increased volume driving higher interchange income.

For the six months ended June 30, 2017, cards and payments income was $135 million, an increase of $37 million, or 37.8%, from the same period one year ago. This increase was primarily due to the acquisition of First Niagara and higher purchase and prepaid card fees in Key Corporate Bank.

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Other income

Other income, which consists primarily of gains on sales of loans held for sale, other service charges, and certain dealer trading income, was up $63 million, or 286.4%, from the year-ago quarter. Compared to the first quarter of 2017, other income increased $54 million, or 174.2%. This increase was primarily attributable to a $64 million one-time gain from acquiring the remaining ownership in a merchant services joint venture.

For the six months ended June 30, 2017, other income was up $63 million, or 118.9%, from the same period one year ago. This increase was driven by a $64 million one-time gain related to our merchant services business.

Noninterest expense

As shown in Figure 11, noninterest expense was $995 million for the second quarter of 2017 compared to $751 million for the second quarter of 2016. The second quarter of 2017 included $44 million of merger-related charges compared to $45 million for the second quarter of 2016.

For the six months ended June 30, 2017, noninterest expense was $2.0 billion compared to $1.5 billion for the same period one year ago. Merger-related charges for the six months ended June 30, 2017, were $125 million compared to $69 million for the same period one year ago.

Figure 11. Noninterest Expense



	Three months ended June 30,				Change					Six months ended June 30,				Change
dollars in millions	2017		2016		Amount			Percent		2017		2016		Amount		Percent
Personnel ^(a)	$	551	$	427	$	124		29.0	%	$	1,107	$	831	$	276	33.2	%
Net occupancy	78		59		19			32.2		165		120		45		37.5
Computer processing	55		45		10			22.2		115		88		27		30.7
Business services and professional fees	45		40		5			12.5		91		81		10		12.3
Equipment	27		21		6			28.6		54		42		12		28.6
Operating lease expense	21		14		7			50.0		40		27		13		48.1
Marketing	30		22		8			36.4		51		34		17		50.0
FDIC assessment	21		8		13			162.5		41		17		24		141.2
Intangible asset amortization	22		7		15			214.3		44		15		29		193.3
OREO expense, net	3		2		1			50.0		5		3		2		66.7
Other expense	142		106		36			34.0		295		196		99		50.5
Total noninterest expense	$	995	$	751	$	244		32.5	%	$	2,008	$	1,454	$	554	38.1	%
Merger-related charges ^(b)	44		45		(1		)	(2.2	)	125		69		56		81.2
Total noninterest expense excluding merger-related charges ^(c)	$	951	$	706	$	245		34.7	%	$	1,883	$	1,385	$	498	36.0	%

Average full-time equivalent employees ^(d)	18,344		13,419		4,925			36.7	%	18,365		13,411		4,954		36.9	%


(a)	Additional detail provided in Figure 13 entitled “Personnel Expense.”


(b)	Additional detail provided in Figure 12 entitled “Merger-Related Charges.”


(c)	Non-GAAP measure.


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

Figure 12. Merger-Related Charges



	Three months ended June 30,					Change					Six months ended June 30,				Change
dollars in millions	2017			2016		Amount			Percent		2017		2016		Amount			Percent
Personnel	$	31		$	35	$	(4	)	(11.4	)%	$	61	$	51	$	10		19.6	%
Net occupancy	(1		)	—		(1		)	N/M		4		—		4			N/M
Business services and professional fees	6			5		1			20.0		11		12		(1		)	(8.3	)
Computer processing	2			—		2			N/M		7		—		7			N/M
Marketing	6			3		3			100.0		12		4		8			200.0
Other nonpersonnel expense	—			2		(2		)	N/M		30		2		28			N/M
Noninterest expense	44			45		(1		)	(2.2	)	125		69		56			81.2
Total merger-related charges	$	44		$	45	$	(1	)	(2.2	)%	$	125	$	69	$	56		81.2	%

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Personnel

As shown in Figure 13, personnel expense, the largest category of our noninterest expense, increased by $124 million, or 29.0%, for the second quarter of 2017 compared to the year-ago quarter. This increase was primarily driven by the acquisition of First Niagara. Higher incentive compensation related to stronger capital markets performance also contributed to the year-over-year increase. Compared to the first quarter of 2017, personnel expense decreased $5 million, or .9%. Incentive and stock-based compensation and salaries expense increased but were more than offset by lower employee benefits expense.

For the six months ended June 30, 2017, personnel expense was up $276 million, or 33.2%, from the first half of 2016. This increase was primarily driven by the acquisition of First Niagara and higher incentive and stock-based compensation related to stronger capital markets performance.

Figure 13. Personnel Expense



	Three months ended June 30,				Change					Six months ended June 30,				Change
dollars in millions	2017		2016		Amount			Percent		2017		2016		Amount		Percent
Salaries and contract labor	$	332	$	266	$	66		24.8	%	$	656	$	510	$	146	28.6	%
Incentive and stock-based compensation	137		101		36			35.6		264		190		74		38.9
Employee benefits	76		58		18			31.0		172		126		46		36.5
Severance	6		2		4			200.0		15		5		10		200.0
Total personnel expense	$	551	$	427	$	124		29.0	%	$	1,107	$	831	$	276	33.2	%
Merger-related charges	31		35		(4		)	(11.4	)	61		51		10		N/M
Total personnel expense excluding merger-related charges	$	520	$	392	$	128		32.7	%	$	1,046	$	780	$	266	34.1	%

Net occupancy

Net occupancy expense increased $19 million, or 32.2%, for the second quarter of 2017, compared to the same period one year ago. This increase was primarily due to the acquisition of First Niagara. Compared to the first quarter of 2017, net occupancy expense decreased $9 million, or 10.3%, primarily attributable to lower property reserve expenses and seasonal trends.

For the six months ended June 30, 2017, net occupancy expense increased $45 million, or 37.5%, from the six months ended June 30, 2016, primarily due to the acquisition of First Niagara.

Other expense

Other expense comprises various miscellaneous expense items. The $36 million, or 34.0%, increase in the current quarter compared to the same period one year ago reflects the impact of the First Niagara acquisition and other miscellaneous expenses. Other notable items which impacted the second quarter included a $20 million charitable contribution and $4 million benefit from purchase accounting finalization, both of which are reflected in other expense. Compared to the first quarter of 2017, other expense decreased $11 million, or 7.2%, primarily due to decreases in other miscellaneous expenses.

For the six months ended June 30, 2017, other expense increased $99 million, or 50.5%, from the six months ended June 30, 2016, primarily due to the impact of First Niagara, an increase in other miscellaneous expenses, and the $20 million charitable contribution made in the six months ended June 30, 2017.

Income taxes

We recorded tax expense from continuing operations of $158 million for the second quarter of 2017 and $69 million for the second quarter of 2016. For the six months ended June 30, 2017, we recorded tax expense from continuing operations of $252 million, compared to $125 million for the same period one year ago.

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 and credits associated with renewable energy and low-income housing investments, and make periodic adjustments to our tax reserves. Tax expense for the three months ended June 30, 2017, and June 30, 2016, was affected by net discrete income tax benefits of $3 million and detriments of $6 million, respectively. The tax expense for the second quarter of 2017 was also impacted due to notable items of $1 million. Excluding those expenses, the tax expense for the second quarter of 2017 was $157 million.

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Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived is included in Note 13 (“Income Taxes”) beginning on page 170 of our 2016 Form 10-K.

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 19 (“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 14 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 six-month periods ended June 30, 2017, and June 30, 2016.

Figure 14. Major Business Segments — Taxable-Equivalent Revenue from Continuing Operations and Income (Loss) from Continuing Operations Attributable to Key



	Three months ended June 30,						Change					Six months ended June 30,						Change
dollars in millions	2017			2016			Amount			Percent		2017			2016			Amount			Percent
REVENUE FROM CONTINUING OPERATIONS (TE)
Key Community Bank	$	1,012		$	598		$	414		69.2	%	$	1,919		$	1,194		$	725		60.7	%
Key Corporate Bank	596			451			145			32.2		1,174			876			298			34.0
Other Segments	35			31			4			12.9		64			52			12			23.1
Total Segments	1,643			1,080			563			52.1		3,157			2,122			1,035			48.8
Reconciling Items ^(a)	(3		)	(2		)	(1		)	N/M		(11		)	(1		)	(10		)	N/M
Total	$	1,640		$	1,078		$	562		52.1	%	$	3,146		$	2,121		$	1,025		48.3	%
INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY
Key Community Bank	$	197		$	80		$	117		146.3	%	$	343		$	154		$	189		122.7	%
Key Corporate Bank	222			135			87			64.4		404			253			151			59.7
Other Segments	28			25			3			12.0		49			39			10			25.6
Total Segments	447			240			207			86.3		796			446			350			78.5
Reconciling Items ^(a)	(40		)	(41		)	1			N/M		(65		)	(60		)	(5		)	N/M
Total	$	407		$	199		$	208		104.5	%	$	731		$	386		$	345		89.4	%

(a) Reconciling items consist primarily of the unallocated portion of merger-related charges and items not allocated to the business segments because

they do not reflect their normal operations.

Key Community Bank summary of operations


•	Positive operating leverage from prior year


•	Net income increased $117 million, or 146.3%, from prior year


•	Average commercial and industrial loans increased $5.4 billion, or 41.2%, from the prior year


•	Average deposits increased $25.9 billion, or 48.2%, from the prior year

As shown in Figure 15, Key Community Bank recorded net income attributable to Key of $197 million for the second quarter of 2017, compared to $80 million for the year-ago quarter, benefiting from momentum in Key's core businesses, as well as the impact of the First Niagara acquisition.

TE net interest income increased by $284 million, or 72.4%, from the second quarter of 2016. The increase was primarily attributable to the acquisition of First Niagara, as well as benefit from the Federal Reserve rate increase. Average loans and leases increased $16.5 billion, or 53.3%, largely driven by a $5.4 billion, or 41.2%, increase in commercial and industrial loans. Additionally, average deposits increased $25.9 billion, or 48.2%, from one year ago.

Noninterest income increased $130 million, or 63.1%, from the year-ago quarter, driven by the acquisition of First Niagara, including the addition of Key Insurance and Benefits Services. Strength in cards and payments and higher assets under management balances from market growth also contributed to the increase. The increase in other noninterest income was largely driven by the one-time gain related to Key’s merchant services business.

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The provision for credit losses increased by $22 million, or 88.0%, and net loan charge-offs increased $30 million, from the second quarter of 2016, primarily related to the acquisition of First Niagara.

Noninterest expense increased by $207 million, or 46.5%, from the year-ago quarter, largely driven by the acquisition of First Niagara, as well as an increase in core business activity and investments. Personnel expense increased $76 million, while non-personnel expense increased by $131 million, including higher intangible amortization expense and higher FDIC assessment expense.

Figure 15. Key Community Bank



	Three months ended June 30,				Change				Six months ended June 30,				Change
dollars in millions	2017		2016		Amount		Percent		2017		2016		Amount		Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	676	$	392	$	284	72.4	%	$	1,306	$	791	$	515	65.1	%
Noninterest income	336		206		130		63.1		613		403		210		52.1
Total revenue (TE)	1,012		598		414		69.2		1,919		1,194		725		60.7
Provision for credit losses	47		25		22		88.0		94		66		28		42.4
Noninterest expense	652		445		207		46.5		1,279		883		396		44.8
Income (loss) before income taxes (TE)	313		128		185		144.5		546		245		301		122.9
Allocated income taxes (benefit) and TE adjustments	116		48		68		141.7		203		91		112		123.1
Net income (loss) attributable to Key	$	197	$	80	$	117	146.3	%	$	343	$	154	$	189	122.7	%
AVERAGE BALANCES
Loans and leases	$	47,431	$	30,936	$	16,495	53.3	%	$	47,235	$	30,863	$	16,372	53.0	%
Total assets	51,419		32,963		18,456		56.0		51,192		32,910		18,282		55.6
Deposits	79,716		53,794		25,922		48.2		79,556		53,299		26,257		49.3
Assets under management at period end	$	37,613	$	34,535	$	3,078	8.9	%	$	37,613	$	34,535	$	3,078	8.9	%

ADDITIONAL KEY COMMUNITY BANK DATA



	Three months ended June 30,						Change				Six months ended June 30,				Change
dollars in millions	2017			2016			Amount		Percent		2017		2016		Amount		Percent
NONINTEREST INCOME
Trust and investment services income	$	99		$	73		$	26	35.6	%	$	197	$	146	$	51	34.9	%
Services charges on deposit accounts	77			56			21		37.5		152		110		42		38.2
Cards and payments income	60			46			14		30.4		116		89		27		30.3
Other noninterest income	100			31			69		222.6		148		58		90		155.2
Total noninterest income	$	336		$	206		$	130	63.1	%	$	613	$	403	$	210	52.1	%
AVERAGE DEPOSITS OUTSTANDING
NOW and money market deposit accounts	$	45,243		$	30,144		$	15,099	50.1	%	$	45,135	$	29,788	$	15,347	51.5	%
Savings deposits	5,293			2,365			2,928		123.8		5,281		2,353		2,928		124.4
Certificates of deposits ($100,000 or more)	4,016			2,383			1,633		68.5		3,948		2,251		1,697		75.4
Other time deposits	4,640			3,245			1,395		43.0		4,666		3,221		1,445		44.9
Noninterest-bearing deposits	20,524			15,657			4,867		31.1		20,526		15,686		4,840		30.9
Total deposits	$	79,716		$	53,794		$	25,922	48.2	%	$	79,556	$	53,299	$	26,257	49.3	%
HOME EQUITY LOANS
Average balance	$	12,330		$	9,908
Combined weighted-average loan-to-value ratio (at date of origination)	71		%	71		%
Percent first lien positions	60			61
OTHER DATA
Branches	1,210			949
Automated teller machines	1,589			1,236

Key Corporate Bank summary of operations


•	Positive operating leverage compared to prior year


•	Average loan and lease balances up $9.1 billion, or 32.0%, from the prior year


•	Revenue up $145 million, or 32.2%, from the prior year


•	Investment banking and debt placement fees up $40 million, or 42.6%, from prior year

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As shown in Figure 16, Key Corporate Bank recorded net income attributable to Key of $222 million for the second quarter of 2017, compared to $135 million for the same period one year ago.

Taxable-equivalent net interest income increased by $91 million, or 41.2%, compared to the second quarter of 2016 driven by higher earning asset yields and balances. Average loan and lease balances increased $9.1 billion, or 32.0%, from the year-ago quarter, primarily driven by the First Niagara acquisition as well as growth in commercial and industrial loans. Average deposit balances increased $2.0 billion, or 10.5%, from the year-ago quarter, mostly driven by the First Niagara acquisition.

Noninterest income was up $54 million, or 23.5%, from the prior year. This growth was mostly due to $40 million of higher investment banking and debt placement fees related to stronger commercial mortgage banking, underwriting, and advisory fees, as well as an increase of $7 million in operating lease income and other leasing gains related to higher originations. Additional increases of $4 million in both cards and payments income and other noninterest income were partially offset by a $2 million decrease in trust and investment services income.

The provision for credit losses decreased $11 million, or 36.7%, compared to the second quarter of 2016 due to $8 million of lower net loan charge-offs and improvement in the oil and gas portfolio.

Noninterest expense increased by $40 million, or 15.4%, from the second quarter of 2016. The increase from the prior year, reflected in both personnel and nonpersonnel expense, was largely driven by the acquisition of First Niagara, higher performance-based compensation and various other items, including operating lease, FDIC, and cards and payments expenses.

Figure 16. Key Corporate Bank



	Three months ended June 30,					Change					Six months ended June 30,						Change
dollars in millions	2017		2016			Amount			Percent		2017			2016			Amount			Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	312	$	221		$	91		41.2	%	$	616		$	439		$	177		40.3	%
Noninterest income	284		230			54			23.5		558			437			121			27.7
Total revenue (TE)	596		451			145			32.2		1,174			876			298			34.0
Provision for credit losses	19		30			(11		)	(36.7	)	36			73			(37		)	(50.7	)
Noninterest expense	299		259			40			15.4		601			496			105			21.2
Income (loss) before income taxes (TE)	278		162			116			71.6		537			307			230			74.9
Allocated income taxes and TE adjustments	56		29			27			93.1		134			56			78			139.3
Net income (loss)	$	222	$	133		$	89		66.9		$	403		$	251		$	152		60.6
Less: Net income (loss) attributable to noncontrolling interests	—		(2		)	2			N/M		(1		)	(2		)	1			N/M
Net income (loss) attributable to Key	$	222	$	135		$	87		64.4	%	$	404		$	253		$	151		59.7	%
AVERAGE BALANCES
Loans and leases	$	37,750	$	28,607		$	9,143		32.0	%	$	37,744		$	28,164		$	9,580		34.0	%
Loans held for sale	1,000		591			409			69.2		1,048			701			347			49.5
Total assets	44,177		33,908			10,269			30.3		44,175			33,658			10,517			31.2
Deposits	21,146		19,129			2,017			10.5	%	21,075			18,602			2,473			13.3	%

ADDITIONAL KEY CORPORATE BANK DATA



	Three months ended June 30,				Change					Six months ended June 30,				Change
dollars in millions	2017		2016		Amount			Percent		2017		2016		Amount			Percent
NONINTEREST INCOME
Trust and investment services income	$	35	$	37	$	(2	)	(5.4	)%	$	72	$	73	$	(1	)	(1.4	)%
Investment banking and debt placement fees	134		94		40			42.6		258		164		94			57.3
Operating lease income and other leasing gains	22		15		7			46.7		43		28		15			53.6

Corporate services income	38		40		(2		)	(5.0	)	75		78		(3		)	(3.8	)
Service charges on deposit accounts	13		12		1			8.3		25		23		2			8.7
Cards and payments income	10		6		4			66.7		19		9		10			111.1
Payments and services income	61		58		3			5.2		119		110		9			8.2

Mortgage servicing fees	12		10		2			20.0		28		22		6			27.3
Other noninterest income	20		16		4			25.0		38		40		(2		)	(5.0	)
Total noninterest income	$	284	$	230	$	54		23.5	%	$	558	$	437	$	121		27.7	%

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Other Segments

Other Segments consist of Corporate Treasury, Key’s Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $28 million for the second quarter of 2017, compared to $25 million for the same period last year, driven by increases in operating lease income and other leasing gains and corporate-owned life insurance income.

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Financial Condition

Loans and loans held for sale

At June 30, 2017, total loans outstanding from continuing operations were $86.5 billion, compared to $86.0 billion at December 31, 2016. Loans related to the discontinued operations of the education lending business and excluded from total loans were $1.4 billion at June 30, 2017, and $1.6 billion at December 31, 2016. 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 page 107 of our 2016 Form 10-K.

During the second quarter of 2017, Key finalized the fair value of the First Niagara acquired loan portfolio, adjusting the discount from $548 million to $603 million. At June 30, 2017, $345 million of the fair value discount remained. For more information on the financial sattement impact of the finalization of the First Niagara acquired loan portforlio, see Note 2 (“Business Combination”).

Commercial loan portfolio

Commercial loans outstanding were $62.6 billion at June 30, 2017, an increase of $723 million, or 1.2%, compared to December 31, 2016, primarily driven by an increase in commercial and industrial loans. Figure 17 provides our commercial loan portfolios by industry classification at June 30, 2017, and December 31, 2016.

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Figure 17. Commercial Loans by Industry



June 30, 2017	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
dollars in millions	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
Industry classification:
Agricultural	$	671	$	163	$	70	$	904	1.4	%
Automotive	2,269		474		86		2,829		4.6
Business products	1,837		151		58		2,046		3.3
Business services	2,605		163		270		3,038		4.9
Commercial real estate	5,237		10,969		25		16,231		25.9
Construction materials and contractors	1,745		337		124		2,206		3.5
Consumer discretionary	3,784		547		403		4,734		7.6
Consumer services	2,854		950		231		4,035		6.4
Equipment	1,633		141		137		1,911		3.1
Financial	3,888		84		319		4,291		6.9
Healthcare	3,104		2,479		446		6,029		9.6
Materials manufacturing and mining	1,953		125		139		2,217		3.5
Media	509		23		52		584		.9
Oil and gas	914		19		50		983		1.6
Public exposure	2,350		62		1,062		3,474		5.5
Technology	499		6		10		515		.8
Transportation	1,439		261		886		2,586		4.1
Utilities	3,147		6		369		3,522		5.6
Other	476		21		—		497		.8
Total	$	40,914	$	16,981	$	4,737	$	62,632	100.0	%

December 31, 2016	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
dollars in millions	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
Industry classification:
Agricultural	$	844	$	194	$	151	$	1,189	1.9	%
Automotive	2,139		491		74		2,704		4.4
Business products	1,243		152		31		1,426		2.3
Business services	2,648		179		303		3,130		5.1
Commercial real estate	4,759		11,235		2		15,996		25.8
Construction materials and contractors	1,282		307		79		1,668		2.7
Consumer discretionary	3,367		539		314		4,220		6.8
Consumer services	2,281		749		66		3,096		5.0
Equipment	1,582		107		87		1,776		2.9
Financial	3,864		95		296		4,255		6.9
Healthcare	3,487		2,577		526		6,590		10.6
Materials manufacturing and mining	2,743		276		212		3,231		5.2
Media	478		18		70		566		.9
Oil and gas	1,094		27		62		1,183		1.9
Public exposure	2,621		311		1,204		4,136		6.7
Technology	485		6		34		525		.8
Transportation	940		148		923		2,011		3.3
Utilities	3,441		26		251		3,718		6.0
Other	470		19		—		489		.8
Total	$	39,768	$	17,456	$	4,685	$	61,909	100.0	%

Commercial and industrial. Our commercial and industrial loans represented 47% of our total loan portfolio at June 30, 2017, and 46% at December 31, 2016, and are the largest component of our total loans. These loans are originated by both Key Corporate Bank and Key Community Bank and consist of fixed and variable rate loans to our large, middle market, and small business clients.

Commercial and industrial loans increased $1.1 billion, or 2.9%, from December 31, 2016, with Key Corporate Bank increasing $459 million, Key Community Bank up $731 million, and Other Segments decreasing $44 million. This growth was partially attributable to growth within our middle market segment driven by increased production and productivity.

Our largest commercial and industrial loan industry classification, commercial real estate, increased by 10.0%, when compared to December 31, 2016. We experienced growth in our transportation, business products, and construction materials and contractors commercial and industrial loan classifications, increasing 53.1%, 47.8%, and 36.1%, respectively, from December 31, 2016. Partially offsetting these increases, the materials manufacturing and mining and healthcare commercial and industrial loan classifications, which represented approximately 5% and 8%, respectively, of the commercial and industrial loan portfolio at June 30, 2017, decreased 28.8% and 11.0%, respectively, from December 31, 2016.

Commercial real estate loans. Our commercial real estate lending business is conducted through two primary sources: our 15-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of commercial real estate 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

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from nonaffiliated third parties) and accounted for approximately 70% of our average year-to-date commercial real estate loans for the three months ended June 30, 2017, and June 30, 2016. KeyBank Real Estate Capital generally focuses on larger owners and operators of commercial real estate.

Commercial real estate loans totaled $17.0 billion at June 30, 2017, and December 31, 2016, and represented 20% of our total loan portfolio at June 30, 2017, and December 31, 2016, respectively. The $475 million decrease from December 31, 2016, was due to an increase in paydowns and payoffs in our real estate—commercial mortgage loan portfolio. These loans, which include both owner- and nonowner-occupied properties, represented 27% or our commercial loan portfolio at June 30, 2017, and 28% at December 31, 2016.

Figure 18 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 18, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.

As presented in Figure 18, at June 30, 2017, our commercial real estate portfolio included commercial mortgage loans of $14.8 billion and construction loans of $2.2 billion, representing 17% and 3%, respectively, of our total loans. At June 30, 2017, nonowner-occupied loans represented 16% of our total loans and owner-occupied loans represented 4% of our total loans. The average size of commercial mortgage loans originated during the second quarter of 2017 was $4.8 million, and our largest commercial mortgage loan at June 30, 2017, had a balance of $98 million. At June 30, 2017, our average construction loan commitment was $9.3 million, our largest construction loan commitment was $65 million, and our largest construction loan amount outstanding was $60.6 million.

Also shown in Figure 18, 79% of our commercial real estate loans at June 30, 2017, were for nonowner-occupied properties compared to 78% at December 31, 2016. Approximately 15% of these loans were construction loans at June 30, 2017, and 17% were construction loans at December 31, 2016. 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 in rental rates and occupancy, would adversely affect our portfolio of construction loans.

Figure 18. Commercial Real Estate Loans



	Geographic Region ^(a)														Total		Percent of Total		Construction		Commercial Mortgage
dollars in millions	West		Southwest		Central		Midwest		Southeast		Northeast		National		Total		Percent of Total		Construction		Commercial Mortgage
June 30, 2017
Nonowner-occupied:
Retail properties	$	209	$	123	$	123	$	328	$	257	$	796	$	238	$	2,074	12.2	%	$	245	$	1,829
Multifamily properties	298		156		723		589		979		2,248		113		5,106		30.1		1,234		3,872
Health facilities	259		—		143		217		321		1,138		144		2,222		13.1		99		2,123
Office buildings	186		7		96		157		252		1,065		37		1,800		10.6		165		1,635
Warehouses	87		21		115		93		107		369		36		828		4.9		76		752
Manufacturing facilities	5		—		2		35		14		73		37		166		1.0		25		141
Hotels/Motels	14		—		16		5		25		201		18		279		1.6		32		247
Residential properties	1		—		—		2		2		193		—		198		1.1		78		120
Land and development	12		—		1		3		11		102		—		129		.8		56		73
Other	54		11		26		38		44		344		98		615		3.6		67		548
Total nonowner-occupied	1,125		318		1,245		1,467		2,012		6,529		721		13,417		79.0		2,077		11,340
Owner-occupied	954		7		259		599		183		1,562		—		3,564		21.0		91		3,473
Total	$	2,079	$	325	$	1,504	$	2,066	$	2,195	$	8,091	$	721	16,981		100.0	%	$	2,168	$	14,813
December 31, 2016
Total	$	2,032	$	291	$	1,508	$	2,281	$	2,304	$	8,340	$	700	$	17,456			$	2,345	$	15,111
June 30, 2017
Nonowner-occupied:
Nonperforming loans	1		—		—		6		12		13		—		32		N/M		7		25
Accruing loans past due 90 days or more	—		—		—		3		2		5		—		10		N/M		—		10
Accruing loans past due 30 through 89 days	3		—		—		4		—		17		—		24		N/M		2		22

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(a)Regions are defined as follows



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
National –	Accounts in three or more regions

Nonperforming loans related to nonowner-occupied properties increased by $10 million from December 31, 2016, to $32 million at June 30, 2017. Our nonowner-occupied commercial real estate portfolio has decreased by 1.8%, or approximately $244 million, since December 31, 2016. The decline reflects overall business activity and payoffs in our KeyBank Real Estate Capital line of business.

Commercial lease financing. We conduct commercial lease financing arrangements through our KEF line of business. Commercial lease financing receivables represented 8% of commercial loans at June 30, 2017, and December 31, 2016.

Commercial TDRs

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 other income sources. For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 5 (“Asset Quality”), and the section titled “Loans and loans held for sale” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 57 of our 2016 Form 10-K.

Figure 19. Commercial TDRs by Accrual Status



in millions	June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016
Commercial TDRs by Accrual Status
Nonaccruing	$	106	$	70	$	51	$	67	$	33
Accruing	18		16		16		18		20
Total Commercial TDRs	$	124	$	86	$	67	$	85	$	53

Consumer loan portfolio

Consumer loans outstanding decreased by $258 million, or 1.1%, from December 31, 2016, mostly related to continued decline in the home equity loan portfolio, largely the result of paydowns on home equity lines of credit.

The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 99% of this portfolio at June 30, 2017, was originated from our Key Community Bank within our 15-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.

As shown in Figure 15, we held the first lien position for approximately 60% of the Key Community Bank home equity portfolio at June 30, 2017, and 61% at June 30, 2016. At June 30, 2017, 40% of the Key Community Bank home equity portfolio was secured by second lien mortgages. For consumer loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent FICO scores as well as original and updated loan-to-value ratios. 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” beginning on page 109 of our 2016 Form 10-K.

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Loans held for sale

As shown in Note 4 (“Loans and Loans Held for Sale”), our loans held for sale increased to $1.7 billion at June 30, 2017, from $1.1 billion at December 31, 2016. At June 30, 2017, loans held for sale included $338 million of commercial and industrial loans, which increased $319 million from December 31, 2016; $1.3 billion of commercial mortgage loans, which increased $310 million from December 31, 2016; $63 million of residential mortgage loans, which increased $1 million from December 31, 2016; and $10 million of commercial lease financing, which increased $10 million from December 31, 2016.

Loan sales

As shown in Figure 20, during the first six months of 2017, we sold $4.1 billion of commercial real estate loans, $424 million of residential real estate loans, $97 million of commercial lease financing loans, and $254 million of commercial loans. Most of these sales came from the held-for-sale portfolio; however, $77 million of these loan sales related to the held-to-maturity portfolio.

Loan sales classified as held for sale generated net gains of $74 million in the first six months of 2017 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.

Figure 20 summarizes our loan sales for the first six months of 2017 and all of 2016.

Figure 20. Loans Sold (Including Loans Held for Sale)



in millions	Commercial		Commercial Real Estate		Commercial Lease Financing		Residential Real Estate		Total
2017
Second quarter	205		2,097		14		230		2,546
First quarter	$	49	$	2,011	$	83	$	194	$	2,337
Total	$	254	$	4,108	$	97	$	424	$	4,883
2016
Fourth quarter	$	83	$	2,521	$	93	$	232	$	2,929
Third quarter	105		1,791		52		260		$	2,208
Second quarter	83		1,518		121		111		$	1,833
First quarter	46		925		88		89		$	1,148
Total	$	317	$	6,755	$	354	$	692	$	8,118

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Figure 21 shows loans that are either administered or serviced by us, but not recorded on the balance sheet; this includes loans that were sold.

Figure 21. Loans Administered or Serviced



in millions	June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016
Commercial real estate loans	$	218,667	$	218,387	$	218,135	$	213,998	$	213,879
Residential mortgage	4,345		4,272		4,198		—		—
Education loans	1,019		1,067		1,122		1,172		1,226
Commercial lease financing	833		916		899		930		930
Commercial loans	446		427		418		1,461		355
Total	$	225,310	$	225,069	$	224,772	$	217,561	$	216,390

In the event of default by a borrower, we are subject to recourse with respect to approximately $2.8 billion of the $225.3 billion of loans administered or serviced at June 30, 2017. Additional information about this recourse arrangement is included in Note 16 (“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 “mortgage servicing fees”) 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 $28.7 billion at June 30, 2017, compared to $30.4 billion at December 31, 2016. Available-for-sale securities were $18.0 billion at June 30, 2017, compared to $20.2 billion at December 31, 2016. Held-to-maturity securities were $10.6 billion at June 30, 2017, and $10.2 billion at December 31, 2016.

As shown in Figure 22, 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 traded in 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 6 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques,” and Note 7 (“Securities”).

Figure 22. Mortgage-Backed Securities by Issuer



in millions	June 30, 2017		December 31, 2016
FHLMC	$	5,876	$	6,415
FNMA	8,764		9,879
GNMA	13,809		13,920
Total ^(a)	$	28,449	$	30,214

(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 federal agency CMOs and mortgage-backed securities. CMOs are debt securities secured by a pool of mortgages or mortgage-backed securities. These mortgage securities generate interest income, serve as collateral to support certain pledging agreements, and provide liquidity value under regulatory requirements. At June 30, 2017, we had $17.8 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $20.0 billion at December 31, 2016.

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, the regulatory environment, 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.

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Our investing activities continue 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 provide the liquidity necessary to address our funding requirements. These funding requirements include ongoing loan growth and occasional debt maturities. At other times, we may make additional investments that go beyond the replacement of maturities or mortgage security cash flows as our liquidity position and/or interest rate risk management strategies may require. Lastly, our focus on investing in high quality liquid assets, including GNMA securities, is related to liquidity management strategies to satisfy regulatory requirements.

Figure 23 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 7 (“Securities”).

Figure 23. Securities Available for Sale



dollars in millions	U.S. Treasury, Agencies, and Corporations			States and Political Subdivisions			Agency Residential Collateralized Mortgage Obligations ^(a)			Agency Residential Mortgage-backed Securities ^(a)			Agency Commercial Mortgage-backed Securities			Other Securities ^(b)			Total				Weighted-Average Yield ^(c)
June 30, 2017
Remaining maturity:
One year or less	$	9		$	3		$	127		$	20		—			—			$	159			2.98	%
After one through five years	45			8			13,126			1,204			$	1,807		$	10		16,200				2.05
After five through ten years	113			—			1,038			394			90			9			1,644				2.08
After ten years	1			—			—			20			—			—			21				2.92
Fair value	$	168		$	11		$	14,291		$	1,638		$	1,897		$	19		$	18,024			—
Amortized cost	170			10			14,469			1,646			1,941			17			18,253				2.06	%
Weighted-average yield ^(c)	1.79		%	6.19		%	2.04		%	2.11		%	2.23		%	—		^(d)	2.06		%	^(d)	—
Weighted-average maturity	4.7 years			2.1 years			3.8 years			3.9 years			4.1 years			3.4 years			3.9 years				—
December 31, 2016
Fair value	$	184		$	11		$	16,408		$	1,846		$	1,743		$	20		$	20,212			—
Amortized cost	188			11			16,652			1,857			1,778			21			20,507				2.00	%


(a)	Maturity is based upon expected average lives rather than contractual terms.


(b)	Includes primarily marketable equity securities.


(c)	Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate of 35%.


(d)	Excludes $19 million of securities at June 30, 2017, that have no stated yield.

Held-to-maturity securities

Federal agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance comprises primarily foreign bonds. Figure 24 shows the composition, yields, and remaining maturities of these securities.

Figure 24. Held-to-Maturity Securities



dollars in millions	Agency Residential Collateralized Mortgage Obligations			Agency Residential Mortgage-backed Securities			Agency Commercial Mortgage-backed Securities			Other Securities			Total			Weighted-Average Yield^(a)
June 30, 2017
Remaining maturity:
One year or less	$	64		—			—			—			$	64		2.32	%
After one through five years	7,029			—			$	593		$	15		7,637			1.99
After five through ten years	1,123			$	630		576			—			2,329			2.43
After ten years	—			—			608			—			608			2.66
Amortized cost	$	8,216		$	630		$	1,777		$	15		$	10,638		2.13	%
Fair value	8,071			627			1,750			15			10,463			—
Weighted-average yield	1.96		%	2.69		%	2.69		%	2.85		%	2.13		%	—
Weighted-average maturity	3.9 years			6.9 years			7.8 years			2.1 years			4.7 years			—
December 31, 2016
Amortized cost	$	8,404		$	629		$	1,184		$	15		$	10,232		2.05	%
Fair value	8,232			624			1,136			15			10,007			—


(a)	Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate of 35%.

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Other investments

Principal investments — investments in equity and debt instruments made by our principal investing unit — represented 21% of other investments at June 30, 2017, and 25% at December 31, 2016. 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. The fair value of the direct investments was $15 million at June 30, 2017, and $27 million at December 31, 2016, while the fair value of the indirect investments was $148 million at June 30, 2017, and $158 million at December 31, 2016. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. The Federal Reserve extended the conformance period to July 21, 2017, for all banking entities with respect to covered funds. On January 13, 2017, Key filed for an additional extension for illiquid funds, to retain certain indirect investments until the earlier of the date on which the investment is conformed or is expected to mature, or July 21, 2022. The application for an extension was approved on February 14, 2017. As of June 30, 2017, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. For more information about the Volcker Rule, see the discussion in Item 1 under the heading “Other Regulatory Developments under the Dodd-Frank Act — ‘Volcker Rule’” in the section entitled “Supervision and Regulation” beginning on page 16 of our 2016 Form 10-K.

Prior to June 30, 2017, “other investments” included real estate-related investments that were carried at fair value, as well as other types of investments that generally were carried at cost, in addition to principal investments. These real estate-related investments were valued $6 million at December 31, 2016. Additional information pertaining to the equity investment is included in the “Assets and Liabilities Measured at Fair Value on a Recurring Basis” section of Note 6 (“Fair Value Measurements”).

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 six months of 2017, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $1 million, which includes $13 million of net unrealized losses. 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 6 (“Fair Value Measurements”).

Deposits and other sources of funds

Domestic deposits are our primary source of funding. The composition of our average deposits is shown in Figure 7 in the section entitled “Net interest income.” During the second quarter of 2017, average deposits totaled $102.8 billion, an increase of $28.9 billion compared to the year-ago quarter, primarily reflecting the acquisition of First Niagara and core retail and commercial deposit growth. Compared to the first quarter of 2017, average deposits increased by $701 million, driven by growth in certificates of deposits and NOW and money market deposit accounts, partly offset by a decline in escrow deposits. During the quarter, Key also experienced a shift in deposit mix from noninterest-bearing and low-cost interest-bearing deposits to higher-yielding deposit products. On a period end basis, total deposits decreased $1.1 billion compared to the linked-quarter, largely the result of seasonal deposit growth that occurred in the first quarter of 2017. As of June 30, 2017, period-end deposits represented 87.2% of the funds we used to support loans and other earning assets, compared to 85.2% at December 31, 2016.

Wholesale funds, consisting of short-term borrowings, averaged $1.7 billion during the second quarter of 2017, compared to $1.0 billion during the second quarter of 2016. The change from the second quarter of 2016 was caused by increases of $129 million in federal funds purchased and securities sold under repurchase agreements, and $522 million in bank notes and other short-term borrowings.

Capital

At June 30, 2017, our shareholders’ equity was $15.3 billion, up $13 million from December 31, 2016. 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 and Note 18 (“Shareholders' Equity”).

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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 the BHC’s risk profile, business strategies, or corporate structure, including but not limited to changes in planned capital actions. The 2016 capital plan, which was effective through the second quarter of 2017, included a Common Share repurchase program of up to $350 million, which included repurchases to offset issuances of common shares under our employee compensation plans. We completed $94 million of Common Share repurchases, including $88 million of Common Share repurchases in the open market and $6 million of Common Share repurchases related to employee equity compensation programs in the second quarter of 2017 under this authorization.

In April 2017, we submitted to the Federal Reserve and provided to the OCC our 2017 capital plan under the annual CCAR process. On June 28, 2017, the Federal Reserve announced that it did not object to our 2017 capital plan. For more information on our 2017 capital plan actions, see Note 18 (“Shareholders' Equity “).

Dividends

As previously reported, our 2016 capital plan proposed an increase in our quarterly common share dividend from $.085 to $.095 per Common Share for the second quarter of 2017 which was approved by our Board in May 2017. Other changes to future dividends may be evaluated by the Board based upon our earnings, financial condition, and other factors, including regulatory review. Further information regarding the capital planning process and CCAR is included under the heading “Capital planning and stress testing” in the “Supervision and Regulation” section beginning on page 12 of our 2016 Form 10-K.

Consistent with the 2016 capital plan, we made a dividend payment of $.095 per share, or $104 million, on our Common Shares during the second quarter of 2017.

During the second quarter of 2017, we made the following dividend payments on our preferred stock:


•	$12.50 per depositary share, or $6 million, on the depositary shares related to our Series D Preferred Stock; and


•	$.382813 per depositary share, or $8 million, on the depositary shares related to our Series E Preferred Stock.

Common shares outstanding

Our Common Shares are traded on the NYSE under the symbol KEY with 33,735 holders of record at June 30, 2017. Our book value per Common Share was $13.02 based on 1.093 billion shares outstanding at June 30, 2017, compared to $12.58 per Common Share based on 1.079 billion shares outstanding at December 31, 2016. At June 30, 2017, our tangible book value per Common Share was $10.40, compared to $9.99 per Common Share at December 31, 2016.

Figure 25 shows activities that caused the change in outstanding common shares over the past five quarters.

Figure 25. Changes in Common Shares Outstanding



	2017				2016
in thousands	Second		First		Fourth		Third		Second
Shares outstanding at beginning of period	1,097,479		1,079,314		1,082,055		842,703		842,290
Open market repurchases and return of shares under employee compensation plans	(5,072	)	(8,673	)	(4,380	)	(5,240	)	—
Shares issued under employee compensation plans (net of cancellations)	332		6,270		1,642		4,857		413
Series A Preferred Stock exchanged for common shares	—		20,568		—		—		—
Common shares issued to acquire First Niagara	—		—		(3	)	239,735		—
Shares outstanding at end of period	1,092,739		1,097,479		1,079,314		1,082,055		842,703

As shown above, Common Shares outstanding decreased by 4.7 million shares during the second quarter of 2017. This decrease was primarily due to common share repurchases under our 2016 capital plan.

At June 30, 2017, we had 164.0 million treasury shares, compared to 177.4 million treasury shares at December 31, 2016. 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.

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Capital adequacy

Capital adequacy is an important indicator of financial stability and performance. All of KeyCorp’s capital ratios remained in excess of regulatory requirements at June 30, 2017. Our capital and liquidity levels are intended to position us to weather an adverse credit cycle while continuing to serve our clients’ needs, as well as to meet the Regulatory Capital Rules described in the “Supervision and regulation” section of Item 2 of this report. Our shareholders’ equity to assets ratio was 11.23% at June 30, 2017, compared to 11.17% at December 31, 2016. Our tangible common equity to tangible assets ratio was 8.56% at June 30, 2017, compared to 8.09% at December 31, 2016.

The capital modifications mandated by the Regulatory Capital Rules, which became effective on January 1, 2015, for KeyCorp, require higher and better-quality capital and introduced a new capital measure, “Common Equity Tier 1.” The Rules phased out

the treatment of certain capital securities and cumulative preferred securities as eligible Tier 1 capital. The phase-out period, which began January 1, 2015, for “standardized approach” banking organizations such as KeyCorp, resulted in our trust preferred securities issued by the KeyCorp capital trusts and acquired from First Niagara, being treated only as Tier 2 capital starting in 2016. The new minimum capital and leverage ratios under the Regulatory Capital Rules, together with the estimated ratios of KeyCorp at June 30, 2017, calculated on a fully phased-in basis, are set forth under the heading “New minimum capital and leverage ratio requirements” in the “Supervision and regulation” section in Item 2 of this report. Beginning with the implementation of the Regulatory Capital Rules, deferred tax assets that arise from net operating loss and tax credit carryforwards are deductible from Common Equity Tier 1 on a phase-in basis.

As of January 1, 2016, KeyCorp (and its banking subsidiaries) were each required to maintain, on a consolidated basis, a minimum Common Equity Tier 1 capital ratio of 4.5%, Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%. At June 30, 2017, our Common Equity Tier 1 capital ratio, Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio were 9.91%, 10.73%, 12.64%, and 9.95%, respectively, compared to 9.54%, 10.89%, 12.85%, and 9.90%, respectively, at December 31, 2016. Information regarding the regulatory capital ratios of KeyCorp’s banking subsidiaries is presented annually, in Note 23 (“Shareholders' Equity”) beginning on page 198 of our 2016 Form 10-K. Figure 26 presents more detail on the risk based capital ratios.

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Figure 26. Capital Components and Risk-Weighted Assets



	dollars in millions	June 30, 2017			December 31, 2016
COMMON EQUITY TIER 1
Key shareholders’ equity (GAAP)		$	15,253		$	15,240
Less:	Preferred Stock ^(a)	1,009			1,640
	Common Equity Tier 1 capital before adjustments and deductions	14,244			13,600
Less:	Goodwill, net of deferred taxes	2,411			2,405
	Intangible assets, net of deferred taxes	257			155
	Deferred tax assets	5			4
	Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes	(145		)	(185		)
	Accumulated gains (losses) on cash flow hedges, net of deferred taxes	(64		)	(52		)
	Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes	(334		)	(339		)
	Total Common Equity Tier 1 capital	$	12,114		$	11,612
TIER 1 CAPITAL
Common Equity Tier 1		$	12,114		$	11,612
Additional Tier 1 capital instruments and related surplus		1,009			1,640
Non-qualifying capital instruments subject to phase-out		—			—
Less:	Deductions	2			3
	Total Tier 1 capital	13,121			13,249
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus		1,389			1,450
Allowance for losses on loans and liability for losses on lending-related commitments ^(b)		941			939
Net unrealized gains on available-for-sale preferred stock classified as an equity security		—			—
Less:	Deductions	—			—
	Total Tier 2 capital	2,330			2,389
	Total risk-based capital	$	15,451		$	15,638
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet		$	95,627		$	94,959
Risk-weighted off-balance sheet exposure		25,296			25,848
Market risk-equivalent assets		1,340			864
Gross risk-weighted assets		122,263			121,671
Less:	Excess allowance for loan and lease losses	—			—
	Net risk-weighted assets	$	122,263		$	121,671
AVERAGE QUARTERLY TOTAL ASSETS		$	131,832		$	133,795
CAPITAL RATIOS
Tier 1 risk-based capital		10.73		%	10.89		%
Total risk-based capital		12.64			12.85
Leverage ^(c)		9.95			9.90
Common Equity Tier 1 ^(d)		9.91			9.54


(a)	Net of capital surplus.


(b)	The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the institution’s standardized total risk-weighted assets (excluding its standardized market risk-weighted assets). The ALLL includes $21 million and $24 million of allowance classified as “discontinued assets” on the balance sheet at June 30, 2017, and December 31, 2016, respectively.


(c)	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 and deferred tax assets, and (iii) other deductions from assets for leverage capital purposes.


(d)	Non-GAAP measure: see Figure 6 for reconciliation.

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, compliance, operational, liquidity, market, reputation, strategic, and model risks. Our risk management activities are focused on ensuring that we properly identify, measure, and manage such risks across the entire enterprise to maintain safety and soundness, and to maximize profitability.

The Board serves in an oversight capacity, ensuring that Key’s risks are managed in a manner that is not only effective and balanced, but also 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 requirements, independent auditors’ qualifications and independence, and the performance of the internal audit function and independent auditors. The Audit Committee meets with management and approves significant policies relating to the risk areas overseen by

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the Audit Committee. The Audit Committee has responsibility over all risk review functions, including internal audit, as well as financial reporting, legal matters, and fraud risk. The Audit Committee also receives reports on enterprise risk. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases.

The Board’s Risk Committee assists the Board in oversight of strategies, policies, procedures, and practices relating to the assessment and management of enterprise-wide risk, including credit, market, liquidity, model, operational, compliance, reputation, and strategic risks. The Risk Committee also assists the Board in overseeing risks related to capital adequacy, capital planning, and capital actions. The Risk Committee reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, which includes review of the ERM Policy, including the Risk Appetite Statement, and management and ERM reports. The Risk Committee also approves any material changes to the charter of the ERM Committee and significant policies relating to risk management.

The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. 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 comprising 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 Policy, as well as the risk appetite, including 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. Risk Governance Committees include attendees 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, our internal audit function, provides the Third Line of Defense in its role to provide independent assessment and testing of the effectiveness of, appropriateness of, 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.

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.

Market risk management

Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, and volatilities will reduce Key’s income and the value of its portfolios. 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 are exposed to market risk both in our trading and nontrading activities, which include asset and liability management 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 affect 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.

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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 businesses. 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 of 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 Risk Committee of our Board provides oversight of trading market risks. The ERM Committee and the Market Risk Committee regularly review and discuss market risk reports prepared by our MRM that contain our market risk exposures and results of monitoring activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment.

The MRM, as the second line of defense, is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. The MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. The 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 as defined in Market Risk Rule, 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. 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 110 of our 2016 Form 10-K and Note 6 (“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. The MRM is responsible for identifying our portfolios as either covered or noncovered. 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 may include positions in municipal bonds, bonds backed by the U.S. government, agency and corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks.


•	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 generally include credit default swap indices, 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 counterparty credit risk and market 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 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 historical simulation VaR 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 and other non-covered positions. Historical

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scenarios are customized for specific positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. 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.

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 internal model validation 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.

Actual losses for the total covered positions did not exceed aggregate daily VaR on any day during the quarters ended June 30, 2017, and June 30, 2016. The 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 daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. 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 $1.2 million at June 30, 2017, and $.8 million at June 30, 2016. The increase in aggregate VaR was primarily due to the increased exposure in our fixed income and CMBS portfolios. Figure 27 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended June 30, 2017, and June 30, 2016. During these periods, none of our significant portfolios daily trading VaR numbers exceeded their VaR limits. Only one of our significant portfolios stress VaR number exceeded the stress VaR limit on May 4, 2017. This was an immaterial stress VaR limit breach for Fixed Income portfolio. We followed our escalation procedures and the breach was immediately remediated during the same business day.

Figure 27. VaR for Significant Portfolios of Covered Positions



	2017								2016
	Three months ended June 30,								Three months ended June 30,
in millions	High		Low		Mean		June 30,		High		Low		Mean		June 30,
Trading account assets:
Fixed income	$	1.3	$	.4	$	.7	$	.6	$	1.2	$	.4	$	.6	$	.4
Derivatives:
Interest rate	$	.1	$	.1	$	.1	$	.1	$	.2	$	—	$	.1	$	.1
Credit	1.5		.2		.6		.3		.2		—		.1		.2

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 $4.5 million at June 30, 2017, and $2.7 million at June 30, 2016. Figure 28 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended June 30, 2017, and June 30, 2016, as used for market risk capital charge calculation purposes.

Figure 28. Stressed VaR for Significant Portfolios of Covered Positions



	2017								2016
	Three months ended June 30,								Three months ended June 30,
in millions	High		Low		Mean		June 30,		High		Low		Mean		June 30,
Trading account assets:
Fixed income	$	4.0	$	1.7	$	2.7	$	2.9	$	2.9	$	1.1	$	1.8	$	1.2
Derivatives:
Interest rate	$	.3	$	.2	$	.2	$	.3	$	.3	$	.1	$	.1	$	.2
Credit	2.6		.4		1.1		.8		.8		.1		.2		.8

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 amount, which consists of a VaR component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on, which are added together to arrive at total market risk equivalent assets. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market

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risk factors and is measured through a standardized approach. Specific risk calculations are run quarterly by the MRM, and approved by the Chief Market Risk Officer.

Nontrading market risk

Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. 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 customer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, 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 reprice risk, basis risk, yield curve risk, and option risk.


•	Reprice risk is the exposure to changes in the level of interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (e.g., 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 indices and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indices.


•	Yield curve risk is the exposure to nonparallel 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 that 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 prepayments are not mitigated with an offsetting position or appropriate compensation.

The management of nontrading market risk is centralized within Corporate Treasury. The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and the ALCO review reports on the components of interest rate risk described above as well as sensitivity analyses of these exposures. These committees have various responsibilities related to managing nontrading market risk, including recommending, approving, and monitoring strategies that maintain risk positions within approved tolerance ranges. The A/LM policy provides the framework for the oversight and management of interest rate risk and is administered by the ALCO. Internal and external emerging issues are monitored on a daily basis. The MRM, as the second line of defense, provides additional oversight.

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, and balance sheet growth projections based on a most likely macroeconomic view. While simulation modeling assumes that residual risk exposures are managed within the risk appetite and Board approved policy limits, the results also reflect management’s desired interest rate risk positioning. Achieving the current modeled position typically requires purchases of investment securities to replace security cash flows and the execution of new interest rate swaps to replace maturing interest rate swaps. The simulation model estimates the amount of net interest income at risk by simulating the change in net interest income that would occur if interest rates were to gradually increase or decrease over the next 12 months. Our standard rate scenarios encompass a gradual, parallel increase or decrease of 200 basis points, but due to the low interest rate environment, we have modified the standard decrease scenario to a gradual, parallel decrease of 125 basis points over eight months with no change over the following four 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.

Figure 29 presents the results of the simulation analysis at June 30, 2017, and June 30, 2016. At June 30, 2017, our simulated impact to changes in interest rates was modestly asset–sensitive. In June 2017, the Federal Reserve increased the range for the

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Federal Funds Target Rate, which led to an increase in the magnitude of the declining rate scenario to 125 basis points. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual, parallel 200 basis point increase or 125 basis point decrease in interest rates over the next 12 months would adversely affect net interest income over the same period by more than 5.5%. As a result of the change in the Federal Reserve’s June 2017 interest rate increase, our modeled exposure to declining rates increased. As shown in Figure 29, we are operating within these levels as of June 30, 2017.

Figure 29. Simulated Change in Net Interest Income



June 30, 2017
Basis point change assumption (short-term rates)	-125		+200
Tolerance level	-5.50	%	-5.50	%
Interest rate risk assessment	-4.94	%	.91	%
June 30, 2016
Basis point change assumption (short-term rates)	-50		+200
Tolerance level	-4.00	%	-4.00	%
Interest rate risk assessment	-3.37	%	2.22	%

Simulation analysis produces a sophisticated estimate of interest rate exposure based on judgments related to assumptions input into the model. We tailor certain assumptions to the specific interest rate environment and yield curve shape being modeled, and validate those assumptions on a regular basis. 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, changes in management’s desired interest rate risk positioning, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.

We also perform regular stress tests and sensitivity analyses on the model inputs that could materially change the resulting risk assessments. Assessments are performed using different shapes of the yield curve, including steepening or flattening of the yield curve, changes in credit spreads, immediate changes in market interest rates, and changes in the relationship of money market interest rates. Assessments are also performed on changes to the following assumptions: loan and deposit balances, the pricing of deposits without contractual maturities, changes in lending spreads, prepayments on loans and securities, investment, funding and hedging activities, and liquidity and capital management strategies.

The results of additional assessments indicate that net interest income could increase or decrease from the base simulation results presented in Figure 29. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. The modeling is sensitive to the volume of fixed-rate assets and liabilities incorporated. The modeling currently assumes approximately $24.7 billion of investment security purchases and swap executions over the next three years. For every immediate reduction in fixed-rate assets of $1 billion, the modeled benefit to rising rates would increase by approximately 30 basis points. The low level of interest rates increases the uncertainty of assumptions for deposit balance behavior and deposit repricing relationships to market interest rates. Our historical deposit repricing betas in the last rising rate cycle ranged between 50% and 60% for interest-bearing deposits, and we continue to make similar assumptions in our modeling, with the modeled betas varying by customer segment and product type. Recent deposit repricing has been lower than our modeled assumptions. In the modeling, if the deposit beta for the first 25 basis point increase in the Federal Funds Target Rate was zero, then returned to the standard modeled betas for the next 175 basis points of rate increases, our modeled asset sensitive benefit would increase by approximately 200 basis points. The sensitivity testing of assumptions supports our confidence that actual results are likely to be within 100 basis points of modeled results.

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. Treasury discretionary activities related to funding, investing, and hedging may also change as a result of changes in customer business flows, or changes in management’s desired interest rate risk positioning. 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 12-month horizon. To capture longer-term exposures, we calculate exposures to changes of 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 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities

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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 the current 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 125 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 as of June 30, 2017.

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 30 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 8 (“Derivatives and Hedging Activities”).

Figure 30. Portfolio Swaps by Interest Rate Risk Management Strategy



	June 30, 2017
							Weighted-Average					June 30, 2016
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)	$	15,800	$	(67	)		1.8	1.1	%	1.1	%	$	14,630	$	165
Receive fixed/pay variable — conventional debt	9,178		64				2.9	1.6		1.1		8,005		353
Pay fixed/receive variable — conventional debt	50		(6		)		11.0	1.1		3.6		50		(12		)
Total portfolio swaps	$	25,028	$	(9	)	^{(b), (c)}	2.2	1.3	%	1.1	%	$	22,685	$	506		^(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 $89 million and $54 million at June 30, 2017, and June 30, 2016, respectively.


(c)	Excludes variation margin payments for CME-cleared trades of $34 million at June 30, 2017.

Liquidity risk management

Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business opportunities 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.

The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Board, the ERM Committee, the ALCO, and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The MRM, as the Second Line of Defense, provides additional oversight. Our current liquidity risk management practices are in compliance with the Federal Reserve’s Enhanced Prudential Standards and the OCC’s Heightened Standards for Large Insured National Banks.

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These committees regularly review 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. To ensure that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis.

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 June 30, 2017, are shown in Figure 31. We believe these credit ratings, under normal conditions in the capital markets, would enable KeyCorp or KeyBank to issue fixed income securities to investors.

Figure 31. Credit Ratings



June 30, 2017	Short-Term Borrowings	Long-Term Deposits	Senior Long-Term Debt	Subordinated Long-Term Debt	Capital Securities	Preferred Stock
KEYCORP (THE PARENT COMPANY)
Standard & Poor’s	A-2	N/A	BBB+	BBB	BB+	BB+
Moody’s	P-2	N/A	Baa1	Baa1	Baa2	Baa3
Fitch Ratings, Inc.	F1	N/A	A-	BBB+	BB+	BB
DBRS, Inc.	R-2(high)	N/A	BBB(high)	BBB	BBB	BB(high)

KEYBANK
Standard & Poor’s	A-2	N/A	A-	BBB+	N/A	N/A
Moody’s	P-1	Aa3	A3	Baa1	N/A	N/A
Fitch Ratings, Inc.	F1	A	A-	BBB+	N/A	N/A
DBRS, Inc.	R-1(low)	A(low)	A(low)	BBB(high)	N/A	N/A

Managing liquidity risk

Most of our liquidity risk is derived from our lending activities, which inherently place funds into illiquid assets. Liquidity risk is also derived from our deposit gathering activities and the ability of our customers to withdraw funds that do not have a stated maturity or to withdraw funds before their contractual maturity. The assessments of liquidity risk are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board-approved policy limits.

We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical 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 on-balance sheet liquid reserves referred to as our liquid asset portfolio, which consists of high quality liquid assets. 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 June 30, 2017, totaled $23.4 billion, consisting of $20.9 billion of unpledged securities, $352 million of securities available for secured funding at the FHLB, and $2.2 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 June 30, 2017, our unused borrowing capacity secured by loan collateral was $23.4 billion at the Federal

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Reserve Bank of Cleveland and $6.0 billion at the FHLB. During the second quarter of 2017, Key’s outstanding FHLB of Cincinnati advances were increased by $343 million as term advances were added.

Final U.S. liquidity coverage ratio

Under the Liquidity Coverage Rules, we are required to calculate the Modified LCR for Key. For the second quarter of 2017, our Modified LCR was above 100%. In the future, we may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position.

Additional information about the LCR is included in the “Supervision and regulation” section under the heading “Liquidity requirements” in Item 2 of this report.

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 that, 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 June 30, 2017, our loan-to-deposit ratio was 87%) 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 on-balance sheet liquid reserves. 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 19 (“Long-Term Debt”) beginning on page 191 of our 2016 Form 10-K, that are designed to enable KeyCorp and KeyBank to raise funds in the public and private debt markets. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. These liquidity programs are reviewed from time to time by the Board and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs.

On June 9, 2017, KeyBank issued $600 million of 2.40% Senior Bank Notes due June 9, 2022, under its Global Bank Note Program.

Liquidity for KeyCorp

The primary source of liquidity for KeyCorp is from subsidiary dividends, primarily from KeyBank. KeyCorp 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 parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the months into the future where projected obligations can be met with the current amount of liquidity. KeyCorp generally issues term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash in an amount sufficient to meet projected debt maturities over at least the next 24 months. At June 30, 2017, KeyCorp held $2.3 billion in cash, 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, KeyCorp meets its liquidity requirements through regular dividends from KeyBank and other non-bank subsidiaries, 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

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declaration. During the second quarter of 2017, KeyBank paid $125 million in dividends to KeyCorp. As of June 30, 2017, KeyBank had regulatory capacity to pay $746 million in dividends to KeyCorp without prior regulatory approval.

Our liquidity position and recent activity

Over the past quarter, 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. The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution.

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. Additional 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 and in Part II, Item 5. “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” on page 28 of our 2016 Form 10-K. 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 $166 million of cash, cash equivalents, and short-term investments in international tax jurisdictions as of June 30, 2017. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $3 million in taxes to be paid. We have included the appropriate amount as a deferred tax liability at June 30, 2017.

The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the six-month periods ended June 30, 2017, and June 30, 2016.

Credit risk management

Credit risk is the risk of loss 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 and the Commercial Credit Policy Committee approve retail and commercial credit policies. Significant policies are reviewed periodically with our Executive Risk Management Committee and the Risk Committee of our Board of Directors on a prescribed schedule. These policies are communicated throughout the organization to foster a consistent approach to granting credit.

Our credit risk management team and individuals within our lines of business to whom credit risk management has delegated authority are responsible for credit approval. Individuals with assigned credit authority are authorized to grant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, however, a corporate tolerance has been established to keep exceptions at an acceptable level based upon portfolio and economic considerations.

Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned to commercial loans at the time of origination, verified by the credit risk management team and periodically reevaluated thereafter. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected loss 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 loss 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.

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We maintain an active concentration management program to monitor concentration risk in our credit portfolios. For aggregate credit relationships, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower. Our legal lending limit is approximately $2.1 billion. However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of June 30, 2017, we had nine client relationships with loan commitments net of credit default swaps of more than $200 million. The average amount outstanding on these nine individual net obligor commitments was $51 million at June 30, 2017. 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 excess portfolio credit risk. We utilize credit default swaps on a limited basis to transfer a portion of the credit risk associated with a particular extension of credit to a third party. At June 30, 2017, we used credit default swaps with a notional amount of $183 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 June 30, 2017, we did not have any sold credit default swaps outstanding.

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.

Allowance for loan and lease losses

At June 30, 2017, the ALLL was $870 million, or 1.01% of period-end loans, compared to $858 million, or 1.00%, at December 31, 2016. The allowance includes $36 million that was specifically allocated for impaired loans of $391 million at June 30, 2017, compared to $37 million that was specifically allocated for impaired loans of $501 million at December 31, 2016. For more information about impaired loans, see Note 5 (“Asset Quality”). At June 30, 2017, the ALLL was 171.6% of nonperforming loans, compared to 137.3% at December 31, 2016.

Selected asset quality statistics for each of the past five quarters are presented in Figure 32. The factors that drive these statistics are discussed in the remainder of this section.

Figure 32. Selected Asset Quality Statistics from Continuing Operations



	2017						2016
dollars in millions	Second			First			Fourth			Third			Second
Net loan charge-offs	$	66		$	58		$	72		$	44		$	43
Net loan charge-offs to average total loans	.31		%	.27		%	.34		%	.23		%	.28		%
Allowance for loan and lease losses	$	870		$	870		$	858		$	865		$	854
Allowance for credit losses^(a)	918			918			913			918			904
Allowance for loan and lease losses to period-end loans	1.01		%	1.01		%	1.00		%	1.01		%	1.38		%
Allowance for credit losses to period-end loans	1.06			1.07			1.06			1.07			1.46
Allowance for loan and lease losses to nonperforming loans ^(b)	171.6			151.8			137.3			119.6			138.0
Allowance for credit losses to nonperforming loans ^(b)	181.1			160.2			146.1			127.0			146.0
Nonperforming loans at period end ^(b)	$	507		$	573		$	625		$	723		$	619
Nonperforming assets at period end ^(b)	556			623			676			760			637
Nonperforming loans to period-end portfolio loans ^(b)	.59		%	.67		%	.73		%	.85		%	1.00		%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets ^(b)	.64			.72			.79			.89			1.03


(a)	Includes the ALLL plus the liability for credit losses on lending-related unfunded commitments.

(b)

Nonperforming loan balances exclude $835 million, $812 million, $865 million, $959 million, and $11 million of PCI loans at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively. The June 30, 2017 PCI loan balances increased from the March 31, 2017 balances, as a result of the finalization of the First Niagara Acquisition Date loan valuation, which increased the PCI Acquisition Date fair value by $105 million from the provisional estimate recorded in the 2016 10-K.

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” beginning on page 109 of our 2016 Form 10-K. Briefly, our allowance applies expected loss rates to existing loans with similar risk characteristics. We exercise judgment to assess any adjustment to the expected loss rates for the impact of factors such as changes in economic conditions, lending policies including underwriting standards, and the level of credit risk associated with specific industries and markets.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million or greater, we conduct further analysis to determine the probable loss content and assign a specific

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allowance to the loan. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at June 30, 2017, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

As shown in Figure 33, our ALLL from continuing operations increased by $12 million, or 1.4%, from December 31, 2016. Our allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors, such as changes in economic conditions, underwriting standards, and concentrations of credit. Our commercial ALLL increased by $24 million, or 3.3%, from December 31, 2016, primarily because of loan growth in certain segments of the commercial loan portfolio as well as credit quality migration. Our consumer ALLL decreased by $12 million, or 8.4%, from December 31, 2016, primarily due to continued improvement in credit quality metrics, including improved delinquency trends, which have decreased expected loss rates. These trends align with the continued stability in the economy and labor markets, proactive credit risk management practices, and strong credit quality originations.

Our liability for credit losses on lending-related commitments decreased by $7 million from December 31, 2016, to $48 million at June 30, 2017. When combined with our ALLL, our total allowance for credit losses represented 1.06% of period-end loans at June 30, 2017, and December 31, 2016.

Figure 33. Allocation of the Allowance for Loan Lease Losses



	June 30, 2017						December 31, 2016
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
Commercial and industrial	$	528	60.7	%	47.3	%	$	508	59.2	%	46.2	%
Commercial real estate:
Commercial mortgage	144		16.6		17.1		144		16.8		17.6
Construction	28		3.2		2.5		22		2.6		2.7
Total commercial real estate loans	172		19.8		19.6		166		19.4		20.3
Commercial lease financing	40		4.6		5.5		42		4.9		5.4
Total commercial loans	740		85.1		72.4		716		83.5		71.9
Real estate — residential mortgage	9		1.0		6.4		17		2.0		6.5
Home equity loans	42		4.8		14.4		54		6.3		14.7
Consumer direct loans	25		2.9		2.0		24		2.8		2.1
Credit cards	44		5.1		1.2		38		4.4		1.3
Consumer indirect loans	10		1.1		3.6		9		1.0		3.5
Total consumer loans	130		14.9		27.6		142		16.5		28.1
Total loans ^(a)	$	870	100.0	%	100.0	%	$	858	100.0	%	100.0	%


(a)	Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $21 million, and $24 million at June 30, 2017, and December 31, 2016, respectively.

Our provision for credit losses was $66 million for the second quarter of 2017, compared to $52 million for the second quarter of 2016. Compared to the first six months of 2016, oil and gas prices have stabilized, leading to improved credit quality metrics. We continue to reduce 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 loan charge-offs.

Net loan charge-offs

Net loan charge-offs for the second quarter of 2017 totaled $66 million, or .31% of average loans, compared to net loan charge-offs of $43 million, or .28%, for the same period last year. Figure 34 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 35.

Over the past 12 months, net loan charge-offs increased $23 million. This increase is attributable to growth in our loan portfolio and lower levels of recoveries coupled with high levels of charge-offs over the same period.

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Figure 34. Net Loan Charge-offs from Continuing Operations^(a)



	2017						2016
dollars in millions	Second			First			Fourth			Third			Second
Commercial and industrial	$	38		$	27		$	37		$	15		$	32
Real estate — Commercial mortgage	3			—			2			(1		)	(4		)
Real estate — Construction	—			(1		)	—			8			—
Commercial lease financing	1			5			—			5			1
Total commercial loans	42			31			39			27			29
Real estate — Residential mortgage	3			(4		)	2			—			1
Home equity loans	4			5			4			2			3
Consumer direct loans	6			9			8			5			4
Credit cards	10			10			9			8			7
Consumer indirect loans	1			7			10			2			(1		)
Total consumer loans	24			27			33			17			14
Total net loan charge-offs	$	66		$	58		$	72		$	44		$	43
Net loan charge-offs to average loans	.31		%	.27		%	.34		%	.23		%	.28		%
Net loan charge-offs from discontinued operations — education lending business	$	2		$	4		$	4		$	3		$	4


(a)	Credit amounts indicate that recoveries exceeded charge-offs.

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Figure 35. Summary of Loan and Lease Loss Experience from Continuing Operations



	Three months ended June 30,						Six months ended June 30,
dollars in millions	2017			2016			2017			2016
Average loans outstanding	$	86,502		$	61,148		$	86,318		$	60,652
Allowance for loan and lease losses at beginning of period	$	870		$	826		$	858		$	796
Loans charged off:
Commercial and industrial	40			35			72			61

Real estate — commercial mortgage	3			2			3			3
Real estate — construction	—			—			—			—
Total commercial real estate loans ^(a)	3			2			3			3
Commercial lease financing	1			3			8			6
Total commercial loans ^(b)	44			40			83			70
Real estate — residential mortgage	4			1			2			3
Home equity loans	9			7			17			17
Consumer direct loans	8			6			18			12
Credit cards	12			8			23			16
Consumer indirect loans	5			2			16			6
Total consumer loans	38			24			76			54
Total loans charged off	82			64			159			124
Recoveries:
Commercial and industrial	2			3			7			6

Real estate — commercial mortgage	—			6			—			8
Real estate — construction	—			—			1			1
Total commercial real estate loans ^(a)	—			6			1			9
Commercial lease financing	—			2			2			2
Total commercial loans ^(b)	2			11			10			17
Real estate — residential mortgage	1			—			3			2
Home equity loans	5			4			8			7
Consumer direct loans	2			2			3			3
Credit cards	2			1			3			2
Consumer indirect loans	4			3			8			4
Total consumer loans	14			10			25			18
Total recoveries	16			21			35			35
Net loan charge-offs	(66		)	(43		)	(124		)	(89		)
Provision (credit) for loan and lease losses	66			71			136			147
Allowance for loan and lease losses at end of period	$	870		$	854		$	870		$	854
Liability for credit losses on lending-related commitments at beginning of period	$	48		$	69		$	55		$	56
Provision (credit) for losses on lending-related commitments	—			(19		)	(7		)	(6		)
Liability for credit losses on lending-related commitments at end of period ^(c)	$	48		$	50		$	48		$	50
Total allowance for credit losses at end of period	$	918		$	904		$	918		$	904
Net loan charge-offs to average total loans	.31		%	.28		%	.29		%	.30		%
Allowance for loan and lease losses to period-end loans	1.01			1.38		%	1.01			1.38
Allowance for credit losses to period-end loans	1.06			1.46		%	1.06			1.46
Allowance for loan and lease losses to nonperforming loans	171.6			138.0		%	171.6			138.0
Allowance for credit losses to nonperforming loans	181.1			146.0		%	181.1			146.0

Discontinued operations — education lending business:
Loans charged off	$	4		$	6		$	10		$	15
Recoveries	2			2			4			5
Net loan charge-offs	$	(2	)	$	(4	)	$	(6	)	$	(10	)


(a)	See Figure 18 entitled “Commercial Real Estate Loans” and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.


(b)	See Figure 17 entitled “Commercial Loans by Industry” and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.


(c)	Included in “accrued expense and other liabilities” on the balance sheet.

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Nonperforming assets

Figure 36 shows the composition of our nonperforming assets. These assets totaled $556 million at June 30, 2017, and represented .64% of period-end portfolio loans, OREO, and other nonperforming assets, compared to $676 million, or .79%, at December 31, 2016. See Note 1 (“Summary of Significant Accounting Policies”) under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” beginning on page 108 of our 2016 Form 10-K for a summary of our nonaccrual and charge-off policies.

Figure 36. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations



dollars in millions	June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016
Commercial and industrial	$	178		$	258		$	297		$	335		$	321
Real estate — commercial mortgage	34			32			26			32			14
Real estate — construction	4			2			3			17			25
Total commercial real estate loans ^(a)	38			34			29			49			39
Commercial lease financing	11			5			8			13			10
Total commercial loans ^(b)	227			297			334			397			370
Real estate — residential mortgage	58			54			56			72			54
Home equity loans	208			207			223			225			189
Consumer direct loans	2			3			6			2			1
Credit cards	2			3			2			3			2
Consumer indirect loans	10			9			4			24			3
Total consumer loans	280			276			291			326			249
Total nonperforming loans ^(c)	507			573			625			723			619
OREO	48			49			51			35			15
Other nonperforming assets	1			1			—			2			3
Total nonperforming assets ^(c)	$	556		$	623		$	676		$	760		$	637
Accruing loans past due 90 days or more	$	85		$	79		$	87		$	49		$	70
Accruing loans past due 30 through 89 days	340			312			404			317			203
Restructured loans — accruing and nonaccruing ^(d)	333			302			280			304			277
Restructured loans included in nonperforming loans ^(d)	193			161			141			149			133
Nonperforming assets from discontinued operations — education lending business	5			4			5			5			5
Nonperforming loans to period-end portfolio loans ^(c)	.59		%	.67		%	.73		%	.85		%	1.00		%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets ^(c)	.64			.72		%	.79		%	.89		%	1.03		%


(a)	See Figure 18 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.


(b)	See Figure 17 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.


(c)	Nonperforming loan balances exclude $835 million, $812 million, $865 million, $959 million, and $11 million of PCI loans at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.


(d)	Restructured loans (i.e., TDRs) 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.

As shown in Figure 36, nonperforming assets at June 30, 2017, decreased $120 million from December 31, 2016. This decrease was reflected in both our commercial and consumer loan portfolios.

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Figure 37 shows the types of activity that caused the change in our nonperforming loan balance during each of the last five quarters.

Figure 37. Summary of Changes in Nonperforming Loans from Continuing Operations



	2017						2016
in millions	Second			First			Fourth			Third			Second
Balance at beginning of period	$	573		$	625		$	723		$	619		$	676
Loans placed on nonaccrual status	143			218			170			78			124
Nonperforming loans acquired from First Niagara	—			—			(31		)	150			—
Charge-offs	(82		)	(77		)	(81		)	(53		)	(64		)
Loans sold	—			(8		)	(9		)	—			—
Payments	(84		)	(59		)	(30		)	(32		)	(75		)
Transfers to OREO	(8		)	(11		)	(21		)	(5		)	(6		)
Transfers to other nonperforming assets	—			—			—			—			—
Loans returned to accrual status	(35		)	(115		)	(96		)	(34		)	(36		)
Balance at end of period ^(a)	$	507		$	573		$	625		$	723		$	619


(a)	Nonperforming loan balances exclude $835 million, $812 million, $865 million, $959 million, and $11 million of PCI loans at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.

Operational and compliance 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 are subject to heightened prudential standards and regulation. This heightened level of regulation has increased our operational risk. 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. The Compliance Risk Committee serves the same function in managing compliance 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 and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Risk and Audit Committees and independently supports the Risk Committee’s oversight of these controls.

Cybersecurity

We maintain comprehensive Cyber Incident Response Plans, and we devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, or cause other damage. We and many other U.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable online banking services and prevent banking transactions. We also periodically experience other attempts to breach the security of our systems and data. These cyberattacks have not, to date, resulted in any material disruption of our operations or material harm to our customers, and have not had a material adverse effect on our results of operations.

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Cyberattack risks may also occur with our third-party technology service providers, and may interfere with their ability to fulfill their contractual obligations to us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of operations. Recent high-profile cyberattacks have targeted retailers and other businesses for the purpose of acquiring the confidential information (including personal, financial, and credit card information) of customers, some of whom are customers of ours. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by us and our clients.

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 106 of our 2016 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 ALLL; 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 92 through 95 of our 2016 Form 10-K.

At June 30, 2017, $20.0 billion, or 15%, of our total assets were measured at fair value on a recurring basis. Approximately 99% of these assets, before netting adjustments, were classified as Level 1 or Level 2 within the fair value hierarchy. At June 30, 2017, $1.2 billion, or 1%, of our total liabilities were measured at fair value on a recurring basis. All of these liabilities were classified as Level 1 or Level 2.

At June 30, 2017, $21 million, or less than 1% of our total assets were measured at fair value on a nonrecurring basis. All of these assets were classified as Level 3. At June 30, 2017, there were no liabilities measured at fair value on a nonrecurring basis.

During the first six months of 2017, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.

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European Sovereign and Nonsovereign Debt Exposures

Our total European sovereign and Nonsovereign debt exposure is presented in Figure 38.

Figure 38. European Sovereign and Nonsovereign Debt Exposures



June 30, 2017	Short-and Long- Term Commercial Total ^(a)		Foreign Exchange and Derivatives with Collateral ^(b)			Net Exposure
in millions
France:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		$	(3	)	$	(3	)
Nonsovereign non-financial institutions	$	9	—			9
Total	9		(3		)	6
Germany:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	33		—			33
Total	33		—			33
Italy:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	13		—			13
Total	13		—			13
Netherlands:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	5		—			5
Total	5		—			5
Spain:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	8		—			8
Total	8		—			8
Switzerland:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	51		—			51
Total	51		—			51
United Kingdom:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		218			218
Nonsovereign non-financial institutions	37		—			37
Total	37		218			255
Other Europe: ^(c)
Sovereigns	—		—			—
Nonsovereign financial institutions	—		—			—
Nonsovereign non-financial institutions	2		—			2
Total	2		—			2
Total Europe:
Sovereigns	—		—			—
Nonsovereign financial institutions	—		215			215
Nonsovereign non-financial institutions	158		—			158
Total	$	158	$	215		$	373


(a)	Represents our outstanding leases.


(b)	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, Greece, Hungary, Iceland, Ireland, Lithuania, Luxembourg, Malta, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. 100% of our current exposure in Other Europe is in Austria, Belgium, Romania, and Sweden.

Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; these exposures are actively monitored by management. We do not have at-risk exposures in the rest of the world.

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Item 1. Financial Statements

Consolidated Balance Sheets



in millions, except per share data	June 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and due from banks	$	601		$	677
Short-term investments	2,522			2,775
Trading account assets	1,081			867
Securities available for sale	18,024			20,212
Held-to-maturity securities (fair value: $10,463 and $10,007)	10,638			10,232
Other investments	732			738
Loans, net of unearned income of $777 and $826	86,503			86,038
Less: Allowance for loan and lease losses	(870		)	(858		)
Net loans	85,633			85,180
Loans held for sale ^(a)	1,743			1,104
Premises and equipment	919			978
Operating lease assets	691			540
Goodwill	2,464			2,446
Other intangible assets	435			384
Corporate-owned life insurance	4,100			4,068
Derivative assets	636			803
Accrued income and other assets	4,147			3,864
Discontinued assets (including $2 and $3 of portfolio loans at fair value, see Note 12)	1,458			1,585
Total assets	$	135,824		$	136,453
LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	53,342		$	54,590
Savings deposits	7,056			6,491
Certificates of deposit ($100,000 or more)	6,286			5,483
Other time deposits	4,605			4,698
Total interest-bearing deposits	71,289			71,262
Noninterest-bearing deposits	31,532			32,825
Total deposits	102,821			104,087
Federal funds purchased and securities sold under repurchase agreements	1,780			1,502
Bank notes and other short-term borrowings	924			808
Derivative liabilities	308			636
Accrued expense and other liabilities	1,475			1,796
Long-term debt	13,261			12,384
Total liabilities	120,569			121,213
EQUITY
Preferred stock	1,025			1,665
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,256,702,081, and 1,256,702,081 shares	1,257			1,257
Capital surplus	6,310			6,385
Retained earnings	9,878			9,378
Treasury stock, at cost (163,963,417 and 177,388,429 shares)	(2,711		)	(2,904		)
Accumulated other comprehensive income (loss)	(506		)	(541		)
Key shareholders’ equity	15,253			15,240
Noncontrolling interests	2			—
Total equity	15,255			15,240
Total liabilities and equity	$	135,824		$	136,453


(a)	Total loans held for sale include real estate — residential mortgage loans held for sale at fair value of $63 million at June 30, 2017, and $62 million at December 31, 2016.

See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Income



dollars in millions, except per share amounts	Three months ended June 30,					Six months ended June 30,
(Unaudited)	2017		2016			2017		2016
INTEREST INCOME
Loans	$	948	$	567		$	1,825	$	1,129
Loans held for sale	9		5			22		13
Securities available for sale	90		74			185		149
Held-to-maturity securities	55		24			106		48
Trading account assets	7		6			14		13
Short-term investments	5		6			8		10
Other investments	3		2			7		5
Total interest income	1,117		684			2,167		1,367
INTEREST EXPENSE
Deposits	66		34			124		65
Federal funds purchased and securities sold under repurchase agreements	—		—			1		—
Bank notes and other short-term borrowings	4		3			9		5
Long-term debt	74		50			142		96
Total interest expense	144		87			276		166
NET INTEREST INCOME	973		597			1,891		1,201
Provision for credit losses	66		52			129		141
Net interest income after provision for credit losses	907		545			1,762		1,060
NONINTEREST INCOME
Trust and investment services income	134		110			269		219
Investment banking and debt placement fees	135		98			262		169
Service charges on deposit accounts	90		68			177		133
Operating lease income and other leasing gains	30		18			53		35
Corporate services income	55		53			109		103
Cards and payments income	70		52			135		98
Corporate-owned life insurance income	33		28			63		56
Consumer mortgage income	6		3			12		5
Mortgage servicing fees	15		10			33		22
Net gains (losses) from principal investing	—		11			1		11
Other income ^(a)	85		22			116		53
Total noninterest income	653		473			1,230		904
NONINTEREST EXPENSE
Personnel	551		427			1,107		831
Net occupancy	78		59			165		120
Computer processing	55		45			115		88
Business services and professional fees	45		40			91		81
Equipment	27		21			54		42
Operating lease expense	21		14			40		27
Marketing	30		22			51		34
FDIC assessment	21		8			41		17
Intangible asset amortization	22		7			44		15
OREO expense, net	3		2			5		3
Other expense	142		106			295		196
Total noninterest expense	995		751			2,008		1,454
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	565		267			984		510
Income taxes	158		69			252		125
INCOME (LOSS) FROM CONTINUING OPERATIONS	407		198			732		385
Income (loss) from discontinued operations, net of taxes $0 and $0 (see Note 12)	5		3			5		4
NET INCOME (LOSS)	412		201			737		389
Less: Net income (loss) attributable to noncontrolling interests	—		(1		)	1		(1		)
NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	412	$	202		$	736	$	390
Income (loss) from continuing operations attributable to Key common shareholders	$	393	$	193		$	689	$	375
Net income (loss) attributable to Key common shareholders	398		196			694		379
Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.36	$	.23		$	.64	$	.45
Income (loss) from discontinued operations, net of taxes	—		—			—		—
Net income (loss) attributable to Key common shareholders ^(b)	.37		.23			.64		.45
Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.36	$	.23		$	.63	$	.44
Income (loss) from discontinued operations, net of taxes	—		—			—		—
Net income (loss) attributable to Key common shareholders ^(b)	.36		.23			.63		.45
Cash dividends declared per common share	$	.095	$	.085		$	.180	$	.160
Weighted-average common shares outstanding (000)	1,076,203		831,899			1,083,486		829,640
Effect of convertible preferred stock	—		—			—		—
Effect of common share options and other stock awards	16,836		6,597			15,808		7,138
Weighted-average common shares and potential common shares outstanding (000) ^(c)	1,093,039		838,496			1,099,294		836,778


(a)	For the three months ended June 30, 2017, net securities gains totaled $1 million. For the three months ended June 30, 2016, net securities gains (losses) totaled less than $1 million. For the three months ended June 30, 2017, and June 30, 2016, we did not have any impairment losses related to securities.


(b)	EPS may not foot due to rounding.


(c)	Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.

See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Comprehensive Income



in millions	Three months ended June 30,					Six months ended June 30,
(Unaudited)	2017		2016			2017			2016
Net income (loss)	$	412	$	201		$	737		$	389
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $20, $35, $24, and $111	34		59			40			187
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $4, $22, ($11), and $56	7		36			(17		)	94
Foreign currency translation adjustments, net of income taxes of $3, $1, $4, and $4	6		2			7			7
Net pension and postretirement benefit costs, net of income taxes of $1, $1, $3, and $5	1		2			5			3
Total other comprehensive income (loss), net of tax	48		99			35			291
Comprehensive income (loss)	460		300			772			680
Less: Comprehensive income attributable to noncontrolling interests	—		(1		)	1			(1		)
Comprehensive income (loss) attributable to Key	$	460	$	301		$	771		$	681

See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Changes in Equity



	Key Shareholders’ Equity
dollars in millions, except per share amounts (Unaudited)	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, 2015	2,900		835,751		$	290		$	1,017	$	3,922		$	8,922		$	(3,000	)	$	(405	)	$	13
Net income (loss)													390									(1		)
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $111																			187
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $56																			94
Foreign currency translation adjustments, net of income taxes of $4																			7
Net pension and postretirement benefit costs, net of income taxes of $5																			3
Deferred compensation										(4		)
Cash dividends declared on common shares ($.160 per share)													(135		)
Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)													(11		)
Common shares reissued (returned) for stock options and other employee benefit plans			6,952							(83		)				119
Net contribution from (distribution to) noncontrolling interests																						(7		)
BALANCE AT JUNE 30, 2016	2,900		842,703		$	290		$	1,017	$	3,835		$	9,166		$	(2,881	)	$	(114	)	$	5

BALANCE AT DECEMBER 31, 2016	17,421		1,079,314		$	1,665		$	1,257	$	6,385		$	9,378		$	(2,904	)	$	(541	)	$	—
Net income (loss)													736									1
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $24																			40
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($11)																			(17		)
Foreign currency translation adjustments, net of income taxes of $4																			7
Net pension and postretirement benefit costs, net of income taxes of $3																			5
Deferred compensation										7
Cash dividends declared on common shares ($.18 per share)													(194		)
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)													(6		)
Cash dividends declared on Noncumulative Series C Preferred Stock ($.539063 per share)													(7		)
Cash dividends declared on Noncumulative Series D Preferred Stock ($25.00 per depository share)													(13		)
Cash dividends declared on Noncumulative Series E Preferred Stock ($.778386 per depositary share)													(16		)
Open market common share repurchases			(10,602	)												(196		)
Employee equity compensation program common share repurchases			(3,143	)												(59		)
Series A Preferred Stock exchanged for common shares	(2,900	)	20,568		(290		)			(49		)				338
Redemption of Series C Preferred Stock	(14,000	)			(350		)
Common shares reissued (returned) for stock options and other employee benefit plans			6,602							(33		)				110
Net contribution from (distribution to) noncontrolling interests																						1
BALANCE AT JUNE 30, 2017	521		1,092,739		$	1,025		$	1,257	$	6,310		$	9,878		$	(2,711	)	$	(506	)	$	2

See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Cash Flows



in millions	Six months ended June 30,
(Unaudited)	2017			2016
OPERATING ACTIVITIES
Net income (loss)	$	737		$	389
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for credit losses	129			141
Depreciation and amortization expense, net	198			124
Accretion of acquired loans	133			—
Increase in cash surrender value of corporate-owned life insurance	(56		)	(49		)
Stock-based compensation expense	51			36
FDIC reimbursement (payments), net of FDIC expense	(2		)	—
Deferred income taxes (benefit)	212			27
Proceeds from sales of loans held for sale	4,881			2,940
Originations of loans held for sale, net of repayments	(5,435		)	(2,691		)
Net losses (gains) on sales of loans held for sale	(74		)	(31		)
Net losses (gains) from principal investing	(1		)	(11		)
Net losses (gains) and writedown on OREO	2			2
Net losses (gains) on leased equipment	(9		)	1
Net securities losses (gains)	(1		)	—
Net losses (gains) on sales of fixed assets	14			3
Net decrease (increase) in trading account assets	(214		)	(177		)
Other operating activities, net	(1,154		)	20
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(589		)	724
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired	(74		)	—
Net decrease (increase) in short-term investments, excluding acquisitions	253			(3,892		)
Purchases of securities available for sale	(723		)	(1,614		)
Proceeds from sales of securities available for sale	915			—
Proceeds from prepayments and maturities of securities available for sale	2,036			1,565
Proceeds from prepayments and maturities of held-to-maturity securities	890			586
Purchases of held-to-maturity securities	(1,297		)	(523		)
Purchases of other investments	(69		)	(24		)
Proceeds from sales of other investments	70			77
Proceeds from prepayments and maturities of other investments	2			1
Net decrease (increase) in loans, excluding acquisitions, sales and transfers	(832		)	(2,429		)
Proceeds from sales of portfolio loans	77			72
Proceeds from corporate-owned life insurance	25			22
Purchases of premises, equipment, and software	(24		)	(30		)
Proceeds from sales of premises and equipment	—			—
Proceeds from sales of OREO	19			7
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	1,268			(6,182		)
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions	(1,266		)	4,279
Net increase (decrease) in short-term borrowings	394			142
Net proceeds from issuance of long-term debt	950			1,578
Payments on long-term debt	(17		)	(509		)
Open market common share repurchases	(196		)	—
Employee equity compensation program common share repurchases	(59		)	—
Redemption of Preferred Stock Series C	(350		)	—
Net proceeds from reissuance of common shares	25			3
Cash dividends paid	(236		)	(146		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(755		)	5,347
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS	(76		)	(111		)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD	677			607
CASH AND DUE FROM BANKS AT END OF PERIOD	$	601		$	496
Additional disclosures relative to cash flows:
Interest paid	$	281		$	190
Income taxes paid (refunded)	60			59
Noncash items:
Reduction of secured borrowing and related collateral	$	21		$	33
Loans transferred to portfolio from held for sale	19			6
Loans transferred to held for sale from portfolio	29			28
Loans transferred to OREO	19			10

See Notes to Consolidated Financial Statements (Unaudited).

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Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation and Accounting Policies

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 affect 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 10 (“Variable Interest Entities”) for information on our involvement with VIEs.

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

We believe that the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2016 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.

Accounting Guidance Adopted in 2017

Consolidation. In October 2016, the FASB issued new accounting guidance that amends the previous consolidation guidance issued in February 2015, to require a decision maker that holds an interest in a VIE through an entity under common control to only consider its proportionate indirect interest in the VIE in determining whether the decision maker is the VIE’s primary beneficiary. This new guidance eliminates the requirement that a decision maker treat the common control party’s interest in the VIE as if the decision maker held the interest itself, an approach referred to as “full attribution.” The new guidance was effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) on a retrospective basis. The adoption of this accounting guidance did not affect our financial condition or results of operations.

Stock-based compensation. In March 2016, the FASB issued new accounting guidance that simplifies the accounting for several aspects of share-based payment transactions, including the related income tax consequences, the classification of awards as either equity or liabilities, and the presentation on the statement of cash flows. This accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us). The method of transition was dependent upon the particular amendment within the new guidance. During the six months ended June 30, 2017, we recognized $22 million in excess tax benefits within “income taxes” on our income statement that pertained to share-based payment arrangements. In prior periods, such excess tax benefits were recorded within “capital surplus” on our balance sheet. Under the new guidance, generally, if our share price increases over an award’s vesting period, the resulting tax windfall will decrease “income taxes.” In a like manner, if our share price decreases over an award’s vesting period, the resulting tax shortfall will increase “income taxes.” This change also removed the impact of the excess tax benefits and deficiencies from the calculation of diluted EPS and is required to be applied on a prospective basis. The adoption of this accounting standard did not materially affect our statement of cash flows, nor did it affect retained earnings as of the beginning of the period of adoption. We elected to retain our existing accounting policy of estimating award forfeitures upon the award’s grant date.

Equity method investments. In March 2016, the FASB issued new accounting guidance that simplifies the transition to equity method accounting by eliminating the requirement for an investor to make retroactive adjustments to the investment, results of

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operations, and retained earnings on a step-by-step basis when an investment becomes qualified for equity method accounting. Instead, when an investment qualifies for the equity method due to an increase in ownership or degree of influence, an equity method investor is required to add the cost of acquiring the additional interest to the current basis of the previously held interest, and to adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. This accounting guidance became effective prospectively for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us). The adoption of this accounting guidance did not affect our financial condition or results of operations. This guidance will only affect our financial condition or results of operations if there is an applicable change in an investment resulting in the investment’s qualifying for equity method accounting.

Derivatives and hedging. In March 2016, the FASB issued new accounting guidance that requires an entity to use a four-step decision model when assessing contingent call (put) options that can accelerate the payment of principal on debt instruments to determine whether they are clearly and closely related to their debt hosts. This accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) on a modified retrospective basis. The adoption of this accounting guidance did not affect our financial condition or results of operations.

Derivatives and hedging. In March 2016, the FASB issued new accounting guidance that clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, by itself, require dedesignation, but all other hedge accounting criteria must be met. This accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us) and was implemented using a prospective method. The adoption of this accounting guidance did not affect our financial condition or results of operations.

Accounting Guidance Pending Adoption at June 30, 2017

Compensation. In May 2017, the FASB issued new accounting guidance that clarifies when changes to terms and conditions for share-based payment awards should be accounted for as modifications. According to the new guidance, entities should apply the modification guidance unless the fair value of the modified award is the same as the fair value of the original award immediately before modification, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before modification and the classification of the modified award (as equity or liability instrument) is the same as the classification of the original award immediately before modification. This accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). The guidance should be applied on a prospective basis. Early adoption is permitted, including in interim periods. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.

Receivables. In March 2017, the FASB issued new accounting guidance that shortens the amortization period to the earliest call date for certain callable debt securities held at a premium. Securities held at a discount will continue to be amortized to maturity. This accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019, for us). The guidance should be applied on a modified retrospective basis using a cumulative-effect adjustment. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.

Compensation. In March 2017, the FASB issued new accounting guidance that requires service cost to be included in the same line item as certain other compensation costs related to services rendered by employees. We record compensation costs under personnel expense on the income statement. Other elements of net benefit cost should be presented separately. This accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). The guidance should be applied on a retrospective basis. Early adoption is permitted within the first interim period if the entity issues interim financial statements. The adoption of this guidance will result in a reclass of certain net benefit cost components from personnel expense to other expense on the income statement. There would be no material impact to our financial condition or results of operations.

Other income. In February 2017, the FASB issued new accounting guidance that clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The guidance clarifies that financial assets may be within scope of the derecognition guidance if they are promised to a counterparty in a contract and substantially all the fair value of the assets in the contract are concentrated in nonfinancial assets, which are collectively referred to as in substance nonfinancial assets. The guidance requires entities to derecognize a nonfinancial asset or in substance nonfinancial asset when a counterparty obtains controls of it, and in a partial sale transaction when it does not have a controlling financial interest in the legal entity that holds the asset and when it transfers control of the asset. This accounting guidance is effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). The guidance may be applied on a retrospective or modified retrospective basis. Early adoption is permitted for interim and annual reporting periods beginning

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after December 15, 2016. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Goodwill and Other Intangibles. In January 2017, the FASB issued new accounting guidance that simplifies the test for goodwill impairment by eliminating the second step of the current two-step method. Under the new guidance, entities will compare the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, the entity is required to recognize an impairment charge for this amount. Current guidance requires an entity to proceed to a second step, whereby the entity would determine the fair value of its assets and liabilities. The new method applies to all reporting units. The option to perform a qualitative assessment is still allowable. This accounting guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Business combinations. In January 2017, the FASB issued accounting guidance that clarifies the definition of a business and removes the requirement for a market participant to consider whether it could replace missing elements in an integrated set of assets and activities. The guidance states that if substantially all of the fair value of the assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This accounting guidance will be effective for annual and interim reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us) and should be implemented using a prospective approach. Early application is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, as long as the transaction has not been reported in financial statements that have been issued or made available for issuance, and for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occurs before the issuance date or effective date of the amendments, as long as the transaction has not been reported in financial statements that have been issued or made available for issuance. This guidance will not affect our financial condition or results of operations unless we acquire or dispose of a business subsequent to the date of adoption.

Statement of cash flows. In November 2016, the FASB issued accounting guidance requiring restricted cash and restricted cash equivalents to be included with other cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statement of cash flows. This accounting guidance will be effective for annual and interim reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us) and should be implemented using a retrospective approach. Early adoption is permitted. The adoption of this accounting guidance may affect the presentation in our Consolidated Statements of Cash Flows.

Income taxes. In October 2016, the FASB issued accounting guidance requiring an entity to recognize any deferred taxes from an intra-entity transfer of an asset other than inventory when the transfer occurs. This accounting guidance will be effective for annual and interim reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us) and should be implemented using a modified retrospective approach. Early adoption is permitted but only as of the beginning of an annual reporting period for which financial statements have not yet been issued. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Statement of cash flows. In August 2016, the FASB issued new accounting guidance that clarifies how cash receipts and cash payments in certain specific transactions should be presented and classified in the statement of cash flows. These specific transactions include, but are not limited to, debt prepayment or extinguishment costs, contingent considerations made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions from equity method investees. This guidance also clarifies that in instances of cash flows with multiple aspects that cannot be separately identified, classification should be based on the activity that is likely to be the predominant source of or use of cash flow. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us) and should be implemented using a retrospective approach. Early adoption is permitted. The adoption of this accounting guidance may affect the presentation in our Consolidated Statements of Cash Flows.

Financial instruments. In June 2016, the FASB issued new accounting guidance that changes the methodology for recognizing credit losses related to financial instruments. Under current GAAP, a credit loss is not recognized until it is probable that the loss has been incurred. The new accounting guidance eliminates that threshold and expands the information required for an entity to consider when developing an estimate of expected credit losses, including the use of forecast information. Entities will be required to present financial assets measured on an amortized cost basis at the net amount that is expected to be collected. This new guidance will impact the accounting for our loans, debt securities available for sale, and liability for credit losses on unfunded lending-related commitments, as well as purchased financial assets with a more-than-insignificant amount of credit

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deterioration since origination. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2018. This guidance must be implemented using a modified retrospective basis except that a prospective approach must be used for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach also should be used for purchased financial assets with credit deterioration. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations and related disclosures.

Leases. In February 2016, the FASB issued new accounting guidance that requires a lessee to recognize a liability to make lease payments, and a right-of-use asset representing its right to use an underlying asset during the lease term for both finance and operating leases. The definition of a lease was modified to exemplify the concept of control over an asset identified in the lease. Lease classification criteria remain substantially similar to criteria in current lease guidance. The guidance defines which payments can be used in determining lease classification. For short-term leases with a term of 12 months or less, lessees can make a policy election not to recognize lease assets and lease liabilities. Lessor accounting is largely unchanged. Leveraged leases that commenced before the effective date of the new guidance are grandfathered. New disclosures are required, and certain practical expedients are allowed upon adoption. This accounting and disclosure guidance will be effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019, for us) and should be implemented using the modified retrospective approach. Early adoption is permitted. We are currently working to identify our complete lease population, including potential embedded leases. We expect the adoption of this standard to result in additional assets and liabilities, as we will be required to recognize operating leases on our Consolidated Balance Sheet. Other implementation matters to be addressed include, but are not limited to, the determination of effects on our financial and capital ratios and the quantification of the impacts that this accounting guidance may have on our financial condition or results of operations.

Financial instruments. In January 2016, the FASB issued new accounting guidance that requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the balance sheet or in the footnotes. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in OCI. We have not elected to measure any of our liabilities at fair value, and therefore, this aspect of the guidance is not applicable to us. This accounting and disclosure guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). For the guidance that is applicable to us, the accounting will be implemented on a modified retrospective basis though a cumulative-effect adjustment to the balance sheet, except for the guidance related to equity securities without readily determinable fair values, which should be applied on a prospective basis. Except under certain instances, early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.

Revenue recognition. In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step model to be followed in making this determination. This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. We have elected to implement this new accounting guidance using a cumulative-effect approach. We have identified the revenue line items within scope of the new guidance and are currently finalizing our in-depth contract testing related to card and ATM fees, investment management and trust fees, insurance commissions and fees and investment services fees. Based on the completed contract reviews thus far, the adoption of this accounting guidance is not expected to have a material effect on our financial condition nor results of operations. We are still evaluating the related disclosures and gross versus net reporting of revenues and expenses related to card interchange arrangements as well as underwriting services provided by our broker-dealer.

2. Business Combination

First Niagara

On August 1, 2016 (the “Acquisition Date”), we acquired all of the outstanding common shares of First Niagara, the parent company of First Niagara Bank, for total consideration of approximately $4.0 billion and thereby acquired First Niagara Bank’s approximately 390 branch locations across New York, Pennsylvania, Connecticut, and Massachusetts. The merger with First Niagara enabled us to expand in the New England market and into the Pennsylvania market, improve our core deposit base, and add additional scale in our banking operations. The results of First Niagara’s operations are included in our consolidated financial statements from the Acquisition Date.

Under the terms of the merger agreement, each outstanding share of First Niagara common stock was converted into the right

to receive 0.680 KeyCorp Common Shares and $2.30 in cash, for a total per-share value of $10.26, based on the $11.70 closing price of KeyCorp’s stock on July 29, 2016. In the aggregate, First Niagara stockholders received 240 million shares of KeyCorp common stock. Also under the terms of the merger agreement, First Niagara employee stock options and restricted stock awards converted into options to purchase and receive KeyCorp common stock. These options and restricted stock awards had a fair value of $26 million on the Acquisition Date. Our methodology for valuing employee stock options is disclosed in Note 16 (“Stock-Based Compensation”) under the heading “Stock Options” on page 179 of our 2016 Form 10-K. Our methodology for valuing restricted stock awards is disclosed in Note 16 (“Stock-Based Compensation”) under the heading “Long-Term Incentive Compensation Program” on page 180 of our 2016 Form 10-K.

In addition, at the time of the merger, each share of First Niagara preferred stock, Series B, was converted into the right to receive a share of KeyCorp preferred stock, Series C, a newly created series of KeyCorp preferred stock. Additional information on this series of preferred stock is provided in Note 18 (“Shareholders' Equity”) of this report.

On October 7, 2016, First Niagara Bank merged with and into KeyBank, with KeyBank as the surviving entity. Systems and client conversion also occurred during the fourth quarter of 2016 in connection with the bank merger.

The acquisition of First Niagara constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, the liabilities assumed, and the consideration paid were recorded at their estimated fair value as of the Acquisition Date.

The following table provides the final purchase price calculation as of the Acquisition Date and the identifiable assets purchased and the liabilities assumed at their fair value. These fair value measurements were based on internal and third-party valuations.



in millions
Consideration paid:
KeyCorp common stock issued			$	2,831
Cash payments to First Niagara stockholders			811
Exchange of First Niagara preferred stock for KeyCorp preferred stock			350
Total consideration paid			$	3,992

Statement of Net Assets Acquired at Fair Value:
ASSETS
Cash and due from banks and short-term investments	$	620
Investment securities	9,012
Other investments	297
Loans	23,590
Premises and equipment	245
Other intangible assets	385
Accrued income and other assets	1,467
Total assets	$	35,616

LIABILITIES
Deposits	$	28,994
Bank notes and other short-term borrowings	2,698
Accrued expense and other liabilities	490
Long-term debt	846
Total liabilities	$	33,028

Net identifiable assets acquired			2,588
Goodwill			$	1,404

Measurement Period Adjustments

We estimated the fair value of loans acquired from First Niagara by utilizing the discounted cash flow method within the income approach. This methodology aggregates the purchased loans by category and risk rating. Cash flows for each category were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of First Niagara’s ALLL associated with the loans we acquired. The valuation of the acquired loans was final at June 30, 2017.

Based on the final valuations, we updated our fair values within our Consolidated Balance Sheet with a corresponding adjustment to goodwill. These changes are reflected in the following table:



in millions
Acquired Asset	Balance Sheet Line Item	Provisional Estimate		Final		Increase (Decrease)
Loans	Loans	$	23,645	$	23,590	$	(55	)
Tax adjustment on previous fair value measurement ^(a)	Accrued income and other assets	1,449		1,467		18
Unfunded lending-related commitments	Accrued expense and other liabilities	67		65		(2		)
Deferred compensation ^(a)	Accrued expense and other liabilities	39		41		2


(a)	The fair value adjustment did not have any impact on the income statement for the three and six months ended June 30, 2017.

The finalization of the fair values also impacted various income statement line items on the Consolidated Statements of Income. The amounts shown in the table below represent the increase (decrease) in the respective line items for the previous reporting period had the final fair value been recorded at the Acquisition Date.



in millions		Portion Related to
Acquired Asset	Income Statement Line Item	Previous Reporting Period ^(a)
Loans	Interest income	$	42
Loans	Provision for credit losses	1
Loans	Other noninterest income	(3		)
Unfunded lending-related commitments	Other noninterest income	(4		)


(a)	Represents the change in amount that should have been reported compared to what was actually reported in the December 31, 2016, Consolidated Statements of Income.

The following table presents the PCI loans receivable balance at the First Niagara Acquisition Date:



in millions	PCI
Contractual required payments receivable	$	1,434
Nonaccretable difference	173
Expected cash flows	1,261
Accretable yield	172
Fair value	$	1,089

At the First Niagara Acquisition Date, the contractually-required payments receivable on the purchased performing loans totaled $22.5 billion, with a corresponding estimated fair value of $22.0 billion. The estimated cash flows not expected to be collected at the Acquisition Date were $500 million. These amounts do not include loans held for sale and the loans that were divested as part of the 18 First Niagara Bank branches that were sold on September 9, 2016.

Intangible assets consisted of the core deposit intangible, the commercial purchased credit card relationships, the consumer purchased credit card relationships, and other intangible assets. The core deposit intangible asset of $356 million recognized as part of the First Niagara merger is being amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The commercial purchased credit card relationships recognized as part of the First Niagara merger are being amortized over their estimated useful life of approximately six years utilizing an accelerated method. The consumer purchased credit card relationships recognized as part of the First Niagara merger are being amortized over their estimated useful life of approximately nine years utilizing an accelerated method.

Goodwill of $1.4 billion was recorded as a result of the transaction and is not amortized for book purposes. Of this total, $1.1 billion of goodwill was assigned to our Key Community Bank segment and $280 million of goodwill was assigned to our Key Corporate Bank segment. The goodwill recorded is not deductible for tax purposes. The following table shows the changes in the carrying amount of goodwill by reporting unit.



in millions	Key Community Bank			Key Corporate Bank			Total
BALANCE AT DECEMBER 31, 2015	$	979		$	81		$	1,060
Acquisition of First Niagara	1,109			277			1,386
BALANCE AT DECEMBER 31, 2016	2,088			358			2,446
Tax adjustment on previous fair value measurements	(15		)	(4		)	(19		)
Loan adjustment on previous fair value measurements	30			7			37
BALANCE AT JUNE 30, 2017	$	2,103		$	361		$	2,464

Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. The fair values of savings and transaction deposit accounts acquired from First Niagara were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.

Direct acquisition costs related to the First Niagara acquisition were expensed as incurred and amounted to less than $1 million for the six months ended June 30, 2017. These direct acquisition costs are part of our total merger-related charges.

The following table presents unaudited pro forma information as if the acquisition of First Niagara had occurred on January 1, 2015. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles, and related income tax effects. Merger-related charges related to the First Niagara merger that we incurred during the six months ended June 30, 2016, are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had KeyCorp merged with First Niagara at the beginning of 2015. Cost savings are also not reflected in the unaudited pro forma amounts for the six months ended June 30, 2016.



	Pro forma
in millions	Six months ended June 30, 2016
Net interest income (TE)	$	1,773
Noninterest income	1,044
Net income (loss) attributable to common shareholders	482

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3. 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 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.

On March 20, 2017, all outstanding Series A Preferred Stock was converted into KeyCorp common shares. Prior to this conversion, for diluted earnings per share, net income available to common shareholders could have been affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would have been dilutive, net income available to common shareholders was adjusted by the amount of preferred dividends associated with our Series A Preferred Stock.

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



	Three months ended June 30,					Six months ended June 30,
dollars in millions, except per share amounts	2017		2016			2017		2016
EARNINGS
Income (loss) from continuing operations	$	407	$	198		$	732	$	385
Less: Net income (loss) attributable to noncontrolling interests	—		(1		)	1		(1		)
Income (loss) from continuing operations attributable to Key	407		199			731		386
Less: Dividends on Preferred Stock	14		6			42		11
Income (loss) from continuing operations attributable to Key common shareholders	393		193			689		375
Income (loss) from discontinued operations, net of taxes ^(a)	5		3			5		4
Net income (loss) attributable to Key common shareholders	$	398	$	196		$	694	$	379
WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)	1,076,203		831,899			1,083,486		829,640
Effect of convertible preferred stock	—		—			—		—
Effect of common share options and other stock awards	16,836		6,597			15,808		7,138
Weighted-average common shares and potential common shares outstanding (000) ^(b)	1,093,039		838,496			1,099,294		836,778
EARNINGS PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.36	$	.23		$	.64	$	.45
Income (loss) from discontinued operations, net of taxes ^(a)	—		—			—		—
Net income (loss) attributable to Key common shareholders ^(c)	.37		.23			.64		.45

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.36	$	.23		$	.63	$	.44
Income (loss) from discontinued operations, net of taxes ^(a)	—		—			—		—
Net income (loss) attributable to Key common shareholders — assuming dilution ^(c)	.36		.23			.63		.45

(a)


(b)	Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.


(c)	EPS may not foot due to rounding.

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4. Loans and Loans Held for Sale



in millions	June 30, 2017		December 31, 2016
Commercial and industrial ^(a)	$	40,914	$	39,768
Commercial real estate:
Commercial mortgage	14,813		15,111
Construction	2,168		2,345
Total commercial real estate loans	16,981		17,456
Commercial lease financing ^(b)	4,737		4,685
Total commercial loans	62,632		61,909
Residential — prime loans:
Real estate — residential mortgage	5,517		5,547
Home equity loans	12,405		12,674
Total residential — prime loans	17,922		18,221
Consumer direct loans	1,755		1,788
Credit cards	1,049		1,111
Consumer indirect loans	3,145		3,009
Total consumer loans	23,871		24,129
Total loans^{(c), (d)}	$	86,503	$	86,038


(a)	Loan balances include $118 million and $116 million of commercial credit card balances at June 30, 2017, and December 31, 2016, respectively.

(b)

Commercial lease financing includes receivables held as collateral for a secured borrowing of $47 million and $68 million at June 30, 2017, and December 31, 2016, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 19 (“Long-Term Debt”) beginning on page 191 of our 2016 Form 10-K.


(c)	At June 30, 2017, total loans include purchased loans of $17.8 billion of which $835 million were PCI loans. At December 31, 2016, total loans include purchased loans of $21 billion, of which $865 million were PCI loans.


(d)	Total loans exclude loans of $1.4 billion at June 30, 2017, and $1.6 billion at December 31, 2016, related to the discontinued operations of the education lending business. Additional information pertaining to these loans is provided in Note 12 (“Acquisition, Divestiture, and Discontinued Operations”).

Our loans held for sale are summarized as follows:



in millions	June 30, 2017		December 31, 2016
Commercial and industrial	$	338	$	19
Real estate — commercial mortgage	1,332		1,022
Real estate — construction	—		1
Commercial lease financing	10		—
Real estate — residential mortgage ^(a)	63		62
Total loans held for sale	$	1,743	$	1,104

(a)

Real estate — residential mortgage loans held for sale are held at fair value at June 30, 2017, and December 31, 2016. The fair value option was elected for real estate — residential mortgage loans held for sale during the third quarter of 2016 with the First Niagara acquisition. The contractual amount due on these loans totaled $63 million at June 30, 2017, and $62 million at December 31, 2016. Changes in fair value are recorded in “Consumer mortgage income” on the income statement. Additional information regarding residential mortgage loans held for sale fair value methodology is provided in Note 6 (“Fair Value Measurements”).

Our quarterly summary of changes in loans held for sale is provided below:



in millions	June 30, 2017			December 31, 2016
Balance at beginning of the period	$	1,384		$	1,137
New originations	2,876			2,846
Transfers from (to) held to maturity, net	(7		)	11
Loan sales	(2,507		)	(2,889		)
Loan draws (payments), net	(3		)	(1		)
Balance at end of period ^(a)	$	1,743		$	1,104


(a)	Total loans held for sale include real estate — residential mortgage loans held for sale at fair value of $63 million at June 30, 2017, and $62 million at December 31, 2016.

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5. Asset Quality

We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets, delinquencies, and credit quality ratings as defined by management. Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming assets include nonperforming loans, nonperforming loans held for sale, OREO, and other nonperforming assets. Nonimpaired acquired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio. PCI loans cannot be classified as nonperforming loans or TDRs.

Our nonperforming assets and past due loans were as follows:



in millions	June 30, 2017		December 31, 2016
Total nonperforming loans ^(a)	$	507	$	625
OREO ^(b)	48		51
Other nonperforming assets	1		—
Total nonperforming assets	$	556	$	676
Nonperforming assets from discontinued operations—education lending ^(c)	$	5	$	5
TDRs included in nonperforming loans	193		141
TDRs with an allocated specific allowance^(d)	72		59
Specifically allocated allowance for restructured loans ^(e)	25		27
Accruing loans past due 90 days or more	$	85	$	87
Accruing loans past due 30 through 89 days	340		404


(a)	Nonperforming loan balances exclude $835 million and $865 million of PCI loans at June 30, 2017, and December 31, 2016, respectively.


(b)	Includes carrying value of foreclosed residential real estate of approximately $29 million and $29 million at June 30, 2017 and December 31, 2016, respectively.


(c)	Restructured loans of approximately $24 million and $22 million are included in discontinued operations at June 30, 2017, and December 31, 2016, respectively. See Note 12 (“Acquisition, Divestiture, 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. Several factors are considered when evaluating whether a loan is considered a PCI loan, including the delinquency status of the loan, updated borrower credit status, and updated LTV ratios. In accordance with ASC 310-30, excluded from the purchased impaired loans are leases, revolving credit arrangements, and loans held for sale.

We estimated the fair value of loans acquired from First Niagara by utilizing the discounted cash flow method within the income approach. See Note 2 (“Business Combination”) for further discussion of the fair value methodology used. There was no carryover of First Niagara’s ALLL associated with the loans we acquired.

The excess of a PCI loan’s contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the nonaccretable difference. The nonaccretable difference, which is not accreted into income, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the PCI loan or pool. The excess of cash flows expected to be collected over the carrying amount of the PCI loans or pools is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the PCI loans or pools using the level yield method.

Over the life of PCI loans or pools, Key evaluates the remaining contractually required payments receivable and estimates cash flows expected to be collected. Contractually required payments receivable may increase or decrease for a variety of reasons, such as, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on PCI loans are estimated by incorporating several primary assumptions similar to the initial estimate of fair value. These primary assumptions include probability of default, loss given default, and prepayment rate. Increases in expected cash flows of PCI loans or pools subsequent to acquisition are recognized prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for credit losses and an increase in the ALLL.

The difference between the fair value of a nonimpaired acquired loan and contractual amounts due at the Acquisition Date is accreted into income over the estimated life of the loan or pool. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments.

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The following table presents the PCI loans receivable balance at the First Niagara Acquisition Date:



August 1, 2016	PCI
in millions	PCI
Contractual required payments receivable	$	1,434
Nonaccretable difference	173
Expected cash flows	1,261
Accretable yield	172
Fair value	$	1,089

At the First Niagara Acquisition Date, the contractual required payments receivable on the purchased non-impaired loans totaled $22.5 billion, with a corresponding estimated fair value of $22.0 billion. The estimated cash flows not expected to be collected at the Acquisition Date were $500 million. These amounts do not include loans held for sale and the loans that were divested as part of the 18 branches that were sold on September 9, 2016.

In addition to the PCI loans acquired with the First Niagara acquisition in the third quarter of 2016, Key has PCI loans from an earlier acquisition in 2012. At the 2012 acquisition date, the estimated gross contractual amount receivable of all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The following tables present the roll-forward of the accretable yield and the beginning and ending outstanding unpaid principal balance and carrying amount of all PCI loans for the three and six months ended June 30, 2017, and the twelve months ended December 31, 2016. The roll-forward of the accretable yield for the three and six months ended June 30, 2017, reflects the impact of prospective purchase accounting adjustments resulting from the finalization of the First Niagara Acquisition Date loan valuation.



	Three Months Ended June 30,							Six Months Ended June 30,
	2017							2017
in millions	Accretable Yield			Carrying Amount		Outstanding Unpaid Principal Balance		Accretable Yield			Carrying Amount		Outstanding Unpaid Principal Balance
Balance at beginning of period	$	192		$	812	$	930	$	197		$	865	$	1,002
Additions	(33		)					(33		)
Accretion	(6		)					(20		)
Net reclassifications from nonaccretable to accretable	(24		)					(11		)
Payments received, net	8							4
Disposals	—							—
Balance at end of period	$	137		$	835	$	912	$	137		$	835	$	912



	Twelve Months Ended December 31,
	2016
in millions	Accretable Yield			Carrying Amount		Outstanding Unpaid Principal Balance
Balance at beginning of period	$	5		$	11	$	17
Additions	205
Accretion	(29		)
Net reclassifications from nonaccretable to accretable	35
Payments received, net	(19		)
Disposals	—
Balance at end of period	$	197		$	865	$	1,002

At June 30, 2017, the approximate carrying amount of our commercial nonperforming loans outstanding represented 81% of their original contractual amount owed, total nonperforming loans outstanding represented 83% of their original contractual amount owed, and nonperforming assets in total were carried at 83% of their original contractual amount owed. At June 30, 2017, our 20 largest nonperforming loans totaled $164 million, representing 32% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $6 million and $12 million for the three and six months ended June 30, 2017, and $6 million and $12 million for the three and six months ended June 30, 2016.

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The following tables set forth a further breakdown of individually impaired loans as of June 30, 2017, and December 31, 2016:



June 30, 2017	Recorded Investment ^(a)		Unpaid Principal Balance^(b)		Specific Allowance
in millions
With no related allowance recorded:
Commercial and industrial	$	124	$	138	—
Commercial real estate:
Commercial mortgage	1		12		—
Total commercial real estate loans	1		12		—
Total commercial loans	125		150		—
Real estate — residential mortgage	19		19		—
Home equity loans	59		59		—
Consumer indirect loans	2		2		—
Total consumer loans	80		80		—
Total loans with no related allowance recorded	205		230		—
With an allowance recorded:
Commercial and industrial	42		54		$	17
Commercial real estate:
Commercial mortgage	14		15		3
Total commercial real estate loans	14		15		3
Total commercial loans	56		69		20
Real estate — residential mortgage	31		31		3
Home equity loans	60		60		13
Consumer direct loans	3		3		—
Credit cards	3		3		—
Consumer indirect loans	31		31		1
Total consumer loans	128		128		17
Total loans with an allowance recorded	184		197		37
Total	$	389	$	427	$	37


(a)	The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our Consolidated Balance Sheet.


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



December 31, 2016	Recorded Investment ^(a)		Unpaid Principal Balance ^(b)		Specific Allowance
in millions
With no related allowance recorded:
Commercial and industrial	$	222	$	301	—
Commercial real estate:
Commercial mortgage	2		3		—
Total commercial real estate loans	2		3		—
Total commercial loans	224		304		—
Real estate — residential mortgage	20		20		—
Home equity loans	61		61		—
Consumer indirect loans	1		1		—
Total consumer loans	82		82		—
Total loans with no related allowance recorded	306		386		—
With an allowance recorded:
Commercial and industrial	62		73		$	17
Commercial real estate:
Commercial mortgage	4		4		—
Total commercial real estate loans	4		4		—
Total commercial loans	66		77		17
Real estate — residential mortgage	31		31		2
Home equity loans	64		64		18
Consumer direct loans	2		3		—
Credit cards	3		3		—
Consumer indirect loans	29		29		1
Total consumer loans	129		130		21
Total loans with an allowance recorded	195		207		38
Total	$	501	$	593	$	38


(a)	The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our Consolidated Balance Sheet.


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

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The following table sets forth a further breakdown of the average recorded investment for individually impaired loans reported by Key:



Average Recorded Investment ^(a)	Three Months Ended June 30,				Six Months Ended June 30,
in millions	2017		2016		2017		2016
Commercial and industrial	$	201	$	342	$	225	$	195
Commercial real estate:
Commercial mortgage	15		6		10		8
Construction	—		14		—		13
Total commercial real estate loans	15		20		10		21
Total commercial loans	216		362		235		216
Real estate — residential mortgage	50		54		50		54
Home equity loans	122		132		122		128
Consumer direct loans	3		3		3		2
Credit cards	3		3		3		3
Consumer indirect loans	34		35		32		37
Total consumer loans	212		227		210		224
Total	$	428	$	589	$	445	$	440


(a)	The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our Consolidated Balance Sheet.

Interest income recognized on the outstanding balances of accruing impaired loans totaled $3 million and $6 million for the three and six months ended June 30, 2017, and $1 million and $6 million for the three and six months ended June 30, 2016.

At June 30, 2017, aggregate restructured loans (accrual and nonaccrual loans) totaled $333 million, compared to $280 million at December 31, 2016. During the three months ended June 30, 2017, we added $67 million in restructured loans, which were partially offset by $36 million in payments and charge-offs. During the first six months ended June 30, 2017, we added $114 million in restructured loans, which were partially offset by $61 million in payments and charge-offs. During 2016, we added $107 million in restructured loans, which were offset by $107 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of June 30, 2017, follows:



June 30, 2017	Number of Loans	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial	20	$	126	$	91
Commercial real estate:
Commercial mortgage	7	16		15
Total commercial real estate loans	7	16		15
Total commercial loans	27	142		106
Real estate — residential mortgage	282	16		16
Home equity loans	1,097	67		59
Consumer direct loans	38	1		1
Credit cards	320	2		2
Consumer indirect loans	592	11		9
Total consumer loans	2,329	97		87
Total nonperforming TDRs	2,356	239		193
Prior-year accruing:^(a)
Commercial and industrial	5	30		18
Total commercial loans	5	30		18
Real estate — residential mortgage	513	33		33
Home equity loans	1,272	75		61
Consumer direct loans	29	2		2
Credit cards	405	3		1
Consumer indirect loans	334	53		25
Total consumer loans	2,553	166		122
Total prior-year accruing TDRs	2,558	196		140
Total TDRs	4,914	$	435	$	333


(a)	Represents TDRs that were restructured prior to January 1, 2017, and are fully accruing.

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A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2016, follows:



December 31, 2016	Number of Loans	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial	18	$	91	$	50
Commercial real estate:
Commercial mortgage	7	2		1
Total commercial real estate loans	7	2		1
Total commercial loans	25	93		51
Real estate — residential mortgage	264	16		16
Home equity loans	1,199	77		69
Consumer direct loans	32	1		—
Credit cards	336	2		2
Consumer indirect loans	124	4		3
Total consumer loans	1,955	100		90
Total nonperforming TDRs	1,980	193		141
Prior-year accruing: ^(a)
Commercial and Industrial	5	30		16
Total commercial loans	5	30		16
Real estate — residential mortgage	477	35		35
Home equity loans	1,231	70		57
Consumer direct loans	35	2		2
Credit cards	410	3		1
Consumer indirect loans	377	56		28
Total consumer loans	2,530	166		123
Total prior-year accruing TDRs	2,535	196		139
Total TDRs	4,515	$	389	$	280


(a)	Represents TDRs that were restructured prior to January 1, 2016, and are fully accruing.

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. Acquired loans that were previously modified in a TDR are no longer classified as TDRs at the Acquisition Date. An acquired loan may only be classified as a TDR if a modification meeting the above TDR criteria is performed after the Acquisition Date. PCI loans cannot be classified as TDRs. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan loss allowance. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e., individually evaluated) and may impact the ALLL through a charge-off or increased loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 12 (“Acquisition, Divestiture, and Discontinued Operations”).

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During the three months ended June 30, 2017, there were no commercial loan TDRs and 52 consumer loan TDRs with a combined recorded investment of $2 million that experienced payment defaults after modifications resulting in TDR status during 2016. During the three months ended June 30, 2016, there were no commercial loan TDRs and 41 consumer loan TDRs with a combined recorded investment of $2 million that experienced payment defaults after modifications resulting in TDR status during 2015.

During the six months ended June 30, 2017, there were no commercial loan TDRs and 55 consumer loan TDRs with a combined recorded investment of $2 million that experienced payment defaults after modifications resulting in TDR status during 2016. During the six months ended June 30, 2016, there were no commercial loan TDRs and 91 consumer TDRs with a combined recorded investment of $4 million that experienced payment defaults after modifications resulting in TDR status during 2015.

As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL. Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $26 million and $14 million at June 30, 2017 and December 31, 2016, respectively.

Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Our concession types are primarily interest rate

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reductions, forgiveness of principal, and other modifications. The commercial TDR other concession category includes modification of loan terms, covenants, or conditions. The consumer TDR other concession category primarily includes those borrowers’ debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed. At June 30, 2017, and December 31, 2016, the recorded investment of consumer residential mortgage loans in the process of foreclosure was approximately $142 million and $141 million, respectively.

The following table shows the post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs that occurred during the three and six months ended June 30, 2017, and June 30, 2016.



	Three Months Ended June 30,				Six Months Ended June 30,
in millions	2017		2016		2017		2016
Commercial loans:
Interest rate reduction	$	43	$	16	$	69	19
Forgiveness of principal	—		—		—		—
Other	12		—		12		$	—
Total	$	55	$	16	$	81	$	19
Consumer loans:
Interest rate reduction	$	4	$	3	$	7	$	6
Forgiveness of principal	—		—		—		—
Other	4		3		16		17
Total	$	8	$	6	$	23	$	23
Total commercial and consumer TDRs	$	63	$	22	$	104	$	42
Total loans	86,503		62,098		86,503		62,098

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” beginning on page 108 of our 2016 Form 10-K.

The following aging analysis of past due and current loans as of June 30, 2017, and December 31, 2016, provides further information regarding Key’s credit exposure.

Aging Analysis of Loan Portfolio ^(a)



June 30, 2017	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
in millions	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
LOAN TYPE
Commercial and industrial	$	40,484	$	76	$	41	$	33	$	178	$	328	$	102	$	40,914
Commercial real estate:
Commercial mortgage	14,433		26		12		13		34		85		295		14,813
Construction	2,132		1		—		2		4		7		29		2,168
Total commercial real estate loans	16,565		27		12		15		38		92		324		16,981
Commercial lease financing	4,675		43		2		6		11		62		—		4,737
Total commercial loans	$	61,724	$	146	$	55	$	54	$	227	$	482	$	426	$	62,632
Real estate — residential mortgage	$	5,054	$	17	$	8	$	1	$	58	$	84	$	379	$	5,517
Home equity loans	12,106		36		18		12		208		274		25		12,405
Consumer direct loans	1,731		9		3		5		2		19		5		1,755
Credit cards	1,026		7		4		10		2		23		—		1,049
Consumer indirect loans	3,095		29		8		3		10		50		—		3,145
Total consumer loans	$	23,012	$	98	$	41	$	31	$	280	$	450	$	409	$	23,871
Total loans	$	84,736	$	244	$	96	$	85	$	507	$	932	$	835	$	86,503


(a)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs.


(b)	Past due loan amounts exclude PCI, even if contractually past due (or if we do not expect to collect principal or interest in full based on the original contractual terms), as we are currently accreting income over the remaining term of the loans.


(c)	Net of unearned income, net deferred loan fees and costs, and unamortized discounts and premiums.


(d)	Future accretable yield related to PCI loans is not included in the analysis of the loan portfolio.

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December 31, 2016	Current		30-59 Days Past Due ^(b)		60-89 Days Past Due ^(b)		90 and Greater Days Past Due ^(b)		Non-performing Loans		Total Past Due and Non-performing Loans		Purchased Credit Impaired		Total Loans ^{(c), (d)}
in millions
LOAN TYPE
Commercial and industrial	$	39,242	$	58	$	28	$	31	$	297	$	414	112		$	39,768
Commercial real estate:
Commercial mortgage	14,655		93		9		6		26		134		322		15,111
Construction	2,314		—		—		2		3		5		26		2,345
Total commercial real estate loans	16,969		93		9		8		29		139		348		17,456
Commercial lease financing	4,641		28		3		5		8		44		—		4,685
Total commercial loans	$	60,852	$	179	$	40	$	44	$	334	$	597	460		$	61,909
Real estate — residential mortgage	$	5,098	$	17	$	5	$	3	$	56	$	81	$	368	$	5,547
Home equity loans	12,327		49		29		16		223		317		30		12,674
Consumer direct loans	1,705		44		15		11		6		76		7		1,788
Credit cards	1,082		9		6		12		2		29		—		1,111
Consumer indirect loans	2,993		7		4		1		4		16		—		3,009
Total consumer loans	$	23,205	$	126	$	59	$	43	$	291	$	519	$	405	$	24,129
Total loans	$	84,057	$	305	$	99	$	87	$	625	$	1,116	$	865	$	86,038


(a)	Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs.


(b)	Past due loan amounts exclude purchased impaired loans, even if contractually past due (or if we do not expect to collect principal or interest in full based on the original contractual terms), as we are currently accreting income over the remaining term of the loans.


(c)	Net of unearned income, net deferred loan fees and costs, and unamortized discounts and premiums.


(d)	Future accretable yield related to purchased credit impaired loans is not included in the analysis of the loan portfolio.

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

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

Commercial Credit Exposure — Excluding PCI

Credit Risk Profile by Creditworthiness Category ^{(a), (b)}



in millions	Commercial and industrial				RE — Commercial				RE — Construction				Commercial lease				Total
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
RATING	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
Pass	$	38,977	$	37,845	$	14,084	$	14,308	$	2,105	$	2,287	$	4,654	$	4,632	$	59,820	$	59,072
Criticized (Accruing)	1,657		1,514		400		455		30		30		72		45		2,159		2,044
Criticized (Nonaccruing)	178		297		34		26		4		2		11		8		227		333
Total	$	40,812	$	39,656	$	14,518	$	14,789	$	2,139	$	2,319	$	4,737	$	4,685	$	62,206	$	61,449


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


(b)	The term criticized refers to those loans that are internally classified by Key as special mention or worse, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not classified as criticized.

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Consumer Credit Exposure — Excluding PCI

Non-PCI Loans by Refreshed FICO Score ^(a)



in millions	Residential — Prime				Consumer direct loans				Credit cards				Consumer indirect loans				Total
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
750 and above	$	9,991	$	9,818	$	494	$	498	$	431	$	453	$	1,456	$	1,266	$	12,372	$	12,035
660 to 749	5,601		5,266		647		661		496		525		1,172		1,195		7,916		7,647
Less than 660	1,605		1,617		191		194		122		132		517		543		2,435		2,486
No Score	321		1,122		418		428		—		1		—		5		739		1,556
Total	$	17,518	$	17,823	$	1,750	$	1,781	$	1,049	$	1,111	$	3,145	$	3,009	$	23,462	$	23,724


(a)	Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay its debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the above table at the dates indicated.

Commercial Credit Exposure — PCI

Credit Risk Profile by Creditworthiness Category ^{(a), (b)}



in millions	Commercial and Industrial				RE — Commercial				RE — Construction				Commercial Lease		Total
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,	December 31,	June 30,		December 31,
RATING	2017		2016		2017		2016		2017		2016		2017	2016	2017		2016
Pass	$	41	$	12	$	140	$	139	$	23	$	21	—	—	$	204	$	172
Criticized	61		100		155		183		6		5		—	—	222		288
Total	$	102	$	112	$	295	$	322	$	29	$	26	—	—	$	426	$	460


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


(b)	The term “criticized” refers to those loans that are internally classified by Key as special mention or worse, which are asset quality categories defined by regulatory authorities. These assets have an elevated level of risk and may have a high probability of default or total loss. Pass rated refers to all loans not classified as criticized.

Consumer Credit Exposure — PCI

PCI Loans by Refreshed FICO Score ^(a)



in millions	Residential — Prime				Consumer direct loans				Credit cards		Consumer indirect loans		Total
	June 30,		December 31,		June 30,		December 31,		June 30,	December 31,	June 30,	December 31,	June 30,		December 31,
	2017		2016		2017		2016		2017	2016	2017	2016	2017		2016
750 and above	$	133	$	133	—		—		—	—	—	—	$	133	$	133
660 to 749	131		127		$	2	$	2	—	—	—	—	133		129
Less than 660	123		133		3		4		—	—	—	—	126		137
No Score	17		5		—		1		—	—	—	—	17		6
Total	$	404	$	398	$	5	$	7	—	—	—	—	$	409	$	405


(a)	Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay its debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the above table at the dates indicated.

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology for this determination is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 109 of our 2016 Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics and exercise judgment to assess the impact of qualitative 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 for impaired commercial loans with an outstanding balance of $2.5 million or greater, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Non-Chapter 7 consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the loan’s effective interest rate. A specific allowance also may be assigned, even when sources of repayment appear sufficient, if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses.

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Commercial loans are generally 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. Consumer loans are generally charged off when payments are 120 days past due. Home equity and residential mortgage loans are generally charged down to net realizable value when payment is 180 days past due. Credit card loans and similar unsecured products are charged off when payments are 180 days past due.

The ALLL on the acquired non-impaired loan portfolio is estimated using the same methodology as is used for the originated portfolio, however, the estimated ALLL is compared to the remaining accretable yield to determine if any incremental ALLL must be recorded. For PCI loans, Key estimates cash flows expected to be collected quarterly. Decreases in expected cash flows are recognized as impairment through a provision for credit losses and an increase in the ALLL. The ALLL at June 30, 2017, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

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



	Three months ended June 30,						Six months ended June 30,
in millions	2017			2016			2017			2016
Balance at beginning of period — continuing operations	$	870		$	826		$	858		$	796

Charge-offs	(82		)	(64		)	(159		)	(124		)
Recoveries	16			21			35			35
Net loans and leases charged off	(66		)	(43		)	(124		)	(89		)

Provision for loan and lease losses from continuing operations	66			71			136			147
Balance at end of period — continuing operations	$	870		$	854		$	870		$	854

The changes in the ALLL by loan category for the three and six months ended June 30, 2017, and June 30, 2016, are as follows:

Three months ended June 30, 2017:



in millions	March 31, 2017		Provision			Charge-offs			Recoveries		June 30, 2017
Commercial and Industrial	$	512	$	54		$	(40	)	$	2	$	528
Commercial real estate:
Real estate — commercial mortgage	146		1			(3		)	—		144
Real estate — construction	29		(1		)	—			—		28
Total commercial real estate loans	175		—			(3		)	—		172
Commercial lease financing	40		1			(1		)	—		40
Total commercial loans	727		55			(44		)	2		740
Real estate — residential mortgage	18		(6		)	(4		)	1		9
Home equity loans	53		(7		)	(9		)	5		42
Consumer direct loans	24		7			(8		)	2		25
Credit cards	38		16			(12		)	2		44
Consumer indirect loans	10		1			(5		)	4		10
Total consumer loans	143		11			(38		)	14		130
Total ALLL — continuing operations	870		66			(82		)	16		870
Discontinued operations	23		—			(4		)	2		21
Total ALLL — including discontinued operations	$	893	$	66		$	(86	)	$	18	$	891

Three months ended June 30, 2016:



in millions	March 31, 2016		Provision				Charge-offs			Recoveries		June 30, 2016
Commercial and Industrial	$	477	$	68			$	(35	)	$	3	$	513
Commercial real estate:
Real estate — commercial mortgage	135		(4		)		(2		)	6		135
Real estate — construction	23		(6		)		—			—		$	17
Total commercial real estate loans	158		(10		)		(2		)	6		152
Commercial lease financing	43		3				(3		)	2		45
Total commercial loans	678		61				(40		)	11		710
Real estate — residential mortgage	20		(1		)		(1		)	—		18
Home equity loans	64		4				(7		)	4		65
Consumer direct loans	20		3				(6		)	2		19
Credit cards	31		6				(8		)	1		30
Consumer indirect loans	13		(2		)		(2		)	3		12
Total consumer loans	148		10				(24		)	10		144
Total ALLL — continuing operations	826		71			^(a)	(64		)	21		854
Discontinued operations	24		—				(6		)	2		20
Total ALLL — including discontinued operations	$	850	$	71			$	(70	)	$	23	$	874

(a) Excludes a credit for losses on lending-related commitments of $19 million.

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Six months ended June 30, 2017:



in millions	December 31, 2016		Provision				Charge-offs			Recoveries		June 30, 2017
Commercial and Industrial	$	508	$	85			$	(72	)	$	7	$	528
Commercial real estate:
Real estate — commercial mortgage	144		3				(3		)	—		144
Real estate — construction	22		5				—			1		$	28
Total commercial real estate loans	166		8				(3		)	1		172
Commercial lease financing	42		4				(8		)	2		40
Total commercial loans	716		97				(83		)	10		740
Real estate — residential mortgage	17		(9		)		(2		)	3		9
Home equity loans	54		(3		)		(17		)	8		42
Consumer direct loans	24		16				(18		)	3		25
Credit cards	38		26				(23		)	3		44
Consumer indirect loans	9		9				(16		)	8		10
Total consumer loans	142		39				(76		)	25		130
Total ALLL — continuing operations	858		136			^(a)	(159		)	35		870
Discontinued operations	24		3				(10		)	4		21
Total ALLL — including discontinued operations	$	882	$	139			$	(169	)	$	39	$	891

(a) Excludes a credit for losses on lending-related commitments of $7 million.

Six months ended June 30, 2016:



in millions	December 31, 2015		Provision				Charge-offs			Recoveries		June 30, 2016
Commercial and Industrial	$	450	$	118			$	(61	)	$	6	$	513
Commercial real estate:
Real estate — commercial mortgage	134		(4		)		(3		)	8		135
Real estate — construction	25		(9		)		—			1		$	17
Total commercial real estate loans	159		(13		)		(3		)	9		152
Commercial lease financing	47		2				(6		)	2		45
Total commercial loans	656		107				(70		)	17		710
Real estate — residential mortgage	18		1				(3		)	2		18
Home equity loans	57		18				(17		)	7		65
Consumer direct loans	20		8				(12		)	3		19
Credit cards	32		12				(16		)	2		30
Consumer indirect loans	13		1				(6		)	4		12
Total consumer loans	140		40				(54		)	18		144
Total ALLL — continuing operations	796		147			^(a)	(124		)	35		854
Discontinued operations	28		2				(15		)	5		20
Total ALLL — including discontinued operations	$	824	$	149			$	(139	)	$	40	$	874

(a) Excludes a credit for losses on lending-related commitments of $6 million.

Our allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors, such as changes in economic conditions, underwriting standards, and concentrations of credit.

There was $4 million of provision for loan and lease losses on PCI loans during the six months ended June 30, 2017, and less than $1 million of provision for loan and lease losses on PCI loans during the three months ended June 30, 2017. There was $11 million of provision for loan and lease losses on PCI loans during the twelve months ended December 31, 2016. The provision for loan and lease losses on PCI loans was less than $1 million for the three and six months ended June 30, 2016.

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A breakdown of the individual and collective ALLL and the corresponding loan balances as of June 30, 2017, follows:



	Allowance					Outstanding
June 30, 2017	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired	Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
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 and industrial	$	17	$	508	3	$	40,914		$	166	$	40,646		$	102
Commercial real estate:
Commercial mortgage	3		138		3	14,813			15		14,503			295
Construction	—		28		—	2,168			—		2,139			29
Total commercial real estate loans	3		166		3	16,981			15		16,642			324
Commercial lease financing	—		40		—	4,737			—		4,737			—
Total commercial loans	20		714		6	62,632			181		62,025			426
Real estate — residential mortgage	3		6		—	5,517			50		5,088			379
Home equity loans	13		28		1	12,405			120		12,260			25
Consumer direct loans	—		25		—	1,755			4		1,746			5
Credit cards	—		44		—	1,049			3		1,046			—
Consumer indirect loans	—		10		—	3,145			33		3,112			—
Total consumer loans	16		113		1	23,871			210		23,252			409
Total ALLL — continuing operations	36		827		7	86,503			391		85,277			835
Discontinued operations	2		19		—	1,436		^(a)	24		1,412		^(a)	—
Total ALLL — including discontinued operations	$	38	$	846	7	$	87,939		$	415	$	86,689		$	835


(a)	Amount includes $2 million 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, 2016, follows:



	Allowance						Outstanding
December 31, 2016	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
in millions
Commercial and Industrial	$	17	$	486	5		$	39,768		$	284	$	39,372		$	112
Commercial real estate:
Commercial mortgage	—		144		—		15,111			5		14,784			322
Construction	—		22		—		2,345			—		2,319			26
Total commercial real estate loans	—		166		—		17,456			5		17,103			348
Commercial lease financing	—		42		—		4,685			—		4,685			—
Total commercial loans	17		694		5		61,909			289		61,160			460
Real estate — residential mortgage	2		15		—		5,547			51		5,128			368
Home equity loans	17		37		—		12,674			125		12,519			30
Consumer direct loans	—		24		—		1,788			3		1,778			7
Credit cards	—		38		—		1,111			3		1,108			—
Consumer indirect loans	1		8		—		3,009			30		2,979			—
Total consumer loans	20		122		—		24,129			212		23,512			405
Total ALLL — continuing operations	37		816		5		86,038			501		84,672			865
Discontinued operations	2		22		—		1,565		^(a)	22		1,543		^(a)	—
Total ALLL — including discontinued operations	$	39	$	838	$	5	$	87,603		$	523	$	86,215		$	865


(a)	Amount includes $3 million of loans carried at fair value that are excluded from ALLL consideration.

The liability for credit losses inherent in unfunded lending-related 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.

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



	Three months ended June 30,					Six months ended June 30,
in millions	2017		2016			2017			2016
Balance at beginning of period	$	48	$	69		$	55		$	56
Provision (credit) for losses on lending-related commitments	—		(19		)	(7		)	(6		)
Balance at end of period	$	48	$	50		$	48		$	50

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6. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to 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 on 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. Various working groups that report to the Fair Value Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The working groups are discussed in more detail in the qualitative disclosures within this note. 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” beginning on page 110 of our 2016 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.

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•

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, agency residential and CMBS, securities issued by the U.S. Treasury, money markets, and certain agency and corporate CMOs. Inputs to the pricing models include standard inputs (i.e. yields, benchmark securities, bids, and offers), actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets, spread tables, matrices, high-grade scales, and option-adjusted spreads.

•

Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. To determine fair value in such cases, depending on the complexity of the valuations required, we use internal models based on certain assumptions or a third-party valuation service. At June 30, 2017, our Level 3 instruments consist of two convertible preferred securities. Our Corporate Strategy group is responsible for reviewing the valuation model and determining the fair value of these investments on a quarterly basis. The securities are valued using a cash flow analysis of the associated private company issuers. The valuations of the securities are negatively affected by projected net losses of the associated private companies and positively affected by projected net gains.

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 securities issued by state and political subdivisions, 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 that 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.

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) and indirect investments (investments made through funds that include other investors). Our principal investing entities are accounted for as investment companies in accordance with the applicable accounting guidance, whereby 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 (individuals from one of the independent investment managers who oversee these instruments), accounting staff, and the Investment Committee (individual employees 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. 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

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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 EBITDA. 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. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and 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 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 allowing 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). On January 13, 2017, Key filed for an additional extension for illiquid funds, to retain certain indirect investments until the earlier of the date on which the investment is conformed or is expected to mature, or July 21, 2022. The application for an extension was approved on February 14, 2017. As of June 30, 2017, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

For indirect investments, management may make adjustments it deems appropriate to the net asset value 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. 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 following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at June 30, 2017, as well as financial support provided for the six months ended June 30, 2017, and June 30, 2016.



					Financial support provided
					Three months ended June 30,					Six months ended June 30,
	June 30, 2017				2017		2016			2017			2016
in millions	Fair Value		Unfunded Commitments		Funded Commitments	Funded Other	Funded Commitments		Funded Other	Funded Commitments		Funded Other	Funded Commitments		Funded Other
INVESTMENT TYPE
Direct investments ^(a)	$	15	—		—	—	—		—	—		—	—		$	13
Indirect investments^(b) (measured at NAV)	148		$	36	—	—	$	2	—	$	1	—	$	3	—
Total	$	163	$	36	—	—	$	2	—	$	1	—	$	3	$	13

(a)

Our direct investments consist of equity and debt investments directly in independent business enterprises. Operations of the business enterprises are handled by management of the portfolio company. The purpose of funding these enterprises is to provide financial support for business development and acquisition strategies. We infuse equity capital based on an initial contractual cash contribution and later from additional requests on behalf of the companies’ management.

(b)

Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically 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 eight years. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.

Loans Held for Sale. As of August 1, 2016, we account for our residential mortgage loans held for sale at fair value on a recurring basis. The election of the fair value option aligns the accounting for the residential mortgages held for sale with the related forward mortgage loan sale commitments.

Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans and to take into consideration the specific

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characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, the majority of residential mortgage loans held for sale are classified as Level 2. Our residential mortgage activity also includes temporarily unsalable residential mortgage loans that are included in “Loans, net of unearned income” and loans with salability issues included in “Loans held for sale” on the balance sheet. These loans have an origination defect that makes them temporarily unable to be sold into the performing loan sales market. Because transaction details regarding sales of this type of loan are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3.

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, LIBOR and Overnight Index Swap 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), as well as current prices for mortgage securities and investor supplied prices. These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross-currency swaps, credit default swaps, and forward mortgage loan sale commitments.

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 MRM 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.

As a result of the First Niagara acquisition, we acquired First Niagara’s residential mortgage business, which included interest rate lock commitments. These instruments are accounted for as a derivative and valued using models containing unobservable significant inputs. For valuation purposes, the loan amount associated with each interest rate lock commitment is adjusted by its modeled pull-through (an unobservable input) defined as the percentage of loans that will close prior to the expiration of the rate lock commitment, as adjusted for approved changes to the terms. Based on the significance of unobservable inputs, these instruments are classified as Level 3.

Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes that 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 credit valuation adjustment. The credit component is determined by individual counterparty based on the probability of default and considers master netting and collateral agreements. The credit valuation adjustment is classified as Level 3. Our MRM group is responsible for the valuation policies and procedures related to this credit valuation adjustment. 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 accounting personnel. On a quarterly basis, MRM prepares the credit valuation adjustment calculation, which includes a detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast to ensure that the credit valuation adjustment recorded at period end is sufficient.

Other assets and liabilities. The value of our short positions is driven by the valuation of the underlying securities. 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 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 credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets and bids and offers.

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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 June 30, 2017, and December 31, 2016.



June 30, 2017	Level 1		Level 2		Level 3		Total
in millions
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations	—		$	797	—		$	797
States and political subdivisions	—		31		—		31
Collateralized mortgage obligations	—		—		—		—
Other mortgage-backed securities	—		195		—		195
Other securities	$	3	40		—		43
Total trading account securities	3		1,063		—		1,066
Commercial loans	—		15		—		15
Total trading account assets	3		1,078		—		1,081
Securities available for sale:
U.S. Treasury, agencies and corporations	—		168		—		168
States and political subdivisions	—		11		—		11
Agency residential collateralized mortgage obligations ^(a)	—		14,291		—		14,291
Agency residential mortgage-backed securities ^(a)	—		1,637		1		1,638
Agency commercial mortgage-backed securities	—		1,897		—		1,897
Other securities	—		—		$	19	19
Total securities available for sale	—		18,004		20		18,024
Other investments:
Principal investments:
Direct	—		—		15		15
Indirect (measured at NAV) ^(b)	—		—		—		148
Total other investments	—		—		15		163
Loans, net of unearned income	—		—		—		—
Loans held for sale	—		63		—		63
Derivative assets:
Interest rate	—		767		16		783
Foreign exchange	86		13		—		99
Commodity	—		167		—		167
Credit	—		2		1		3
Other	—		1		4		5
Derivative assets	86		950		21		1,057
Netting adjustments ^(c)	—		—		—		(421		)
Total derivative assets	86		950		21		636
Accrued income and other assets	—		—		—		—
Total assets on a recurring basis at fair value	$	89	$	20,095	$	56	$	19,967
LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	195	$	729	—		$	924
Derivative liabilities:
Interest rate	—		516		—		516
Foreign exchange	85		11		—		96
Commodity	—		157		—		157
Credit	—		4		—		4
Other	—		18		—		18
Derivative liabilities	85		706		—		791
Netting adjustments ^(c)	—		—		—		(483		)
Total derivative liabilities	85		706		—		308
Accrued expense and other liabilities	—		—		—		—
Total liabilities on a recurring basis at fair value	$	280	$	1,435	—		$	1,232


(a)	“Collateralized mortgage obligations” and “Other mortgage-back securities” were renamed to “Agency residential collateralized mortgage obligations” and “Agency residential mortgage-backed securities”, respectively, in September 2016. There was no reclassification of previously reported balances.


(b)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.

(c)

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. 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.

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December 31, 2016	Level 1		Level 2		Level 3		Total
in millions
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations	—		$	655	—		$	655
States and political subdivisions	—		8		—		8
Collateralized mortgage obligations	—		—		—		—
Other mortgage-backed securities	—		113		—		113
Other securities	—		73		—		73
Total trading account securities	—		849		—		849
Commercial loans	—		18		—		18
Total trading account assets	—		867		—		867
Securities available for sale:
U.S. Treasury, agencies and corporations	—		184		—		184
States and political subdivisions	—		11		—		11
Agency residential collateralized mortgage obligations ^(a)	—		16,408		—		16,408
Agency residential mortgage-backed securities ^(a)	—		1,846		—		1,846
Agency commercial mortgage-backed securities	—		1,743		—		1,743
Other securities	$	3	—		$	17	20
Total securities available for sale	3		20,192		17		20,212
Other investments:
Principal investments:
Direct	—		—		27		27
Indirect (measured at NAV) ^(b)	—		—		—		158
Total principal investments	—		—		27		185
Equity and mezzanine investments:
Indirect (measured at NAV) ^(b)	—		—		—		6
Total equity and mezzanine investments	—		—		—		6
Total other investments	—		—		27		191
Loans, net of unearned income	—		—		—		—
Loans held for sale	—		62		—		62
Derivative assets:
Interest rate	—		923		7		930
Foreign exchange	114		9		—		123
Commodity	—		176		—		176
Credit	—		—		1		1
Other	—		2		2		4
Derivative assets	114		1,110		10		1,234
Netting adjustments ^(c)	—		—		—		(431		)
Total derivative assets	114		1,110		10		803
Accrued income and other assets	—		8		—		8
Total assets on a recurring basis at fair value	$	117	$	22,239	$	54	$	22,143
LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	192	$	616	—		$	808
Derivative liabilities:
Interest rate	—		737		—		737
Foreign exchange	102		11		—		113
Commodity	—		165		—		165
Credit	—		4		—		4
Other	—		1		—		1
Derivative liabilities	102		918		—		1,020
Netting adjustments ^(c)	—		—		—		(384		)
Total derivative liabilities	102		918		—		636
Accrued expense and other liabilities	—		14		—		14
Total liabilities on a recurring basis at fair value	$	294	$	1,548	—		$	1,458


(a)	“Collateralized mortgage obligations” and “Other mortgage-back securities” were renamed to “Agency residential collateralized mortgage obligations” and “Agency residential mortgage-backed securities”, respectively, in September 2016. There was no reclassification of previously reported balances.


(b)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.

(c)

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Changes in Level 3 Fair Value Measurements

The following table shows the components of the change in the fair values of our Level 3 financial instruments for the three and six months ended June 30, 2017, and June 30, 2016. 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 Other Comprehensive Income		Gains (Losses) Included in Earnings				Purchases	Sales			Settlements		Transfers Other		Transfers into Level 3 ^(a)			Transfers out of Level 3^(a)				End of Period Balance ^(f)		Unrealized Gains (Losses) Included in Earnings
Six months ended June 30, 2017
Securities available for sale
Other securities	$	17	$	3	—				—	—			—		—		—			—				$	20	—
Other investments
Principal investments
Direct	27		—		$	(5	)	^(b)	—	$	(7	)	—		—		—			—				15		$	(3	)	^(b)
Derivative instruments ^(c)
Interest rate	7		—		—				—	—			—		—		$	12	^(e)	$	(3	)	^(e)	16		—
Credit	1		—		(7		)	^(d)	—	—			$	7	—		—			—				1		—
Other ^(g)	2		—		—				—	—			—		$	2	—			—				4		—
Three months ended June 30, 2017
Securities available for sale
Other securities	17		3		—				—	—			—		—		—			—				20		—
Other investments
Principal investments
Direct	21		—		(3		)	^(b)	—	(3		)	—		—		—			—				15		3			^(b)
Derivative instruments ^(c)
Interest rate	5		—		—				—	—			—		—		11		^(e)	$	—		^(e)	16		—
Credit	1		—		(4		)	^(d)	—	—			4		—		—			—				1		—
Other ^(g)	4		—		—				—	—			—		—		—			—				4		—



in millions	Beginning of Period Balance		Gains (Losses) Included in Earnings				Purchases	Sales			Settlements		Transfers into Level 3 ^(a)			Transfers out of Level 3 ^(a)				End of Period Balance ^(f)		Unrealized Gains (Losses) Included in Earnings
Six months ended June 30, 2016
Securities available for sale
Other securities	$	17	—				—	—			—		—			—				$	17	—
Other investments
Principal investments
Direct	50		$	3		^(b)	—	$	(29	)	—		—			—				24		$	(1	)	^(b)
Other indirect	20		—			^(b)	—	(20		)	—		—			—				—		(1		)	^(b)
Derivative instruments ^(c)
Interest rate	16		6			^(d)	—	—			—		$	3	^(e)	$	(10	)	^(e)	15		—
Credit	1		(6		)	^(d)	—	—			$	7	—			—				2		—
Three months ended June 30, 2016
Securities available for sale
Other securities	$	17	—				—	—			—		—			—				$	17	—
Other investments
Principal investments
Direct	47		$	6		^(b)	—	$	(29	)	—		—			—				24		$	2		^(b)
Indirect	18		1			^(b)	—	(19		)	—		—			—				—		—
Derivative instruments ^(c)
Interest rate	16		2			^(d)	—	—			—		—			$	(3	)	^(e)	15		—
Credit	2		(4		)	^(d)	—	—			$	4	—			—				2		—


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


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


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


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


(e)	Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant.


(f)	There were no issuances for the six-month periods ended June 30, 2017, and June 30, 2016.


(g)	Amounts represent Level 3 interest rate lock commitments.

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Assets and Liabilities 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. There were no liabilities measured at fair value on a nonrecurring basis at June 30, 2017, and December 31, 2016. The following table presents our assets measured at fair value on a nonrecurring basis at June 30, 2017, and December 31, 2016:



	June 30, 2017						December 31, 2016
in millions	Level 1	Level 2	Level 3		Total		Level 1	Level 2	Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans	—	9	$	2	$	11	—	—	$	11	$	11
Loans held for sale ^(a)	—	—	—		—		—	—	—		—
Accrued income and other assets	—	—	10		10		—	—	11		11
Total assets on a nonrecurring basis at fair value	—	9	$	12	$	21	—	—	$	22	$	22


(a)	During the first six months of 2017, we transferred $17 million of commercial loans and leases at their current fair value from held-to-maturity portfolio to held-for-sale status, compared to $35 million during 2016.

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. Impaired loans 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 assets.

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 Credit Officer. These evaluations are performed in conjunction with the quarterly ALLL process.

Loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarter’s review are re-evaluated, and if their values have changed materially, the underlying information (loan balance and in most cases, collateral value) is compared. Material differences are evaluated for reasonableness, and the relationship managers and their senior managers consider these differences 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, if 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 loan charge-offs on closed deals compared to the specific allocations on such deals is considered in determining each quarter’s specific allocations.

Commercial loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no commercial loans held for sale adjusted to fair value at June 30, 2017, and December 31, 2016.

Market inputs, including updated collateral values, and reviews of each borrower’s financial condition influence the inputs used in our internal models and other valuation methodologies. 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

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or losses realized on the sale of various commercial loans held for sale provide a back-testing mechanism for determining whether our valuations of these loans held for sale that are adjusted to fair value are appropriate.

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. These internal models also rely on our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we classify 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 are classified as Level 3 assets.

Direct financing leases and operating lease assets held for sale. Our 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 the KEF line of business. A weekly report that lists all equipment finance deals booked in the warehouse portfolio is distributed to both groups. 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 whether 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 on 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. KEF has master sale and assignment agreements with numerous institutional investors. Historically, multiple quotes are obtained, with the most reasonable formal quotes retained. These nonbinding quotes generally lead to a sale to one of the parties who provided the quote. Leases for which we receive a current nonbinding bid, and for which the sale is considered probable, may be classified as Level 2. The validity of these quotes is supported by historical and continued dealings with these institutions that have fulfilled the nonbinding quote in the past. In a distressed market where market data were 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 goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. We chose to utilize a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2016. For additional information on the results of recent goodwill impairment testing, see Note 11 (“Goodwill and Other Intangible Assets”) beginning on page 166 of our 2016 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 that 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 11 (“Goodwill and Other Intangible Assets”) beginning on page 166 of our 2016 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

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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, 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.

•

Residential Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures of these loans. 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 180 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate.

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 June 30, 2017, and December 31, 2016, along with the valuation techniques used, are shown in the following table:



June 30, 2017	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
Recurring
Other investments — principal investments — direct:	$	15	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	5.70 - 6.30 (6.20)
Nonrecurring
Impaired loans	2		Fair value of underlying collateral	Discount	00.00 - 55.00% (16.00%)



December 31, 2016	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	27	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	6.30 - 7.00 (6.50)
Equity instruments of private companies				EBITDA multiple (where applicable)	N/A (6.3)
Nonrecurring
Impaired loans	11		Fair value of underlying collateral	Discount	00.00 - 70.00% (46.00%)

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Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at June 30, 2017, and December 31, 2016, are shown in the following tables:



	June 30, 2017
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Measured at NAV	Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	3,123	$	3,123	—		—		—	—			$	3,123
Trading account assets ^(b)	1,081		3		$	1,078	—		—	—			1,081
Securities available for sale ^(b)	18,024		—		18,004		$	20	—	—			18,024
Held-to-maturity securities ^(c)	10,638		—		10,463		—		—	—			10,463
Other investments ^(b)	732		—		—		580		148	—			728
Loans, net of allowance ^(d)	85,633		—		—		84,072		—	—			84,072
Loans held for sale ^(b)	1,743		—		63		1,680		—	—			1,743
Derivative assets ^(b)	636		86		950		21		—	(421	)	^(f)	636
LIABILITIES
Deposits with no stated maturity ^(a)	$	91,930	—		$	91,930	—		—	—			$	91,930
Time deposits ^(e)	10,891		—		10,979		—		—	—			10,979
Short-term borrowings ^(a)	2,704		$	195	2,509		—		—	—			2,704
Long-term debt ^(e)	13,261		13,023		613		—		—	—			13,636
Derivative liabilities ^(b)	308		85		706		—		—	(483	)	^(f)	308



	December 31, 2016
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Measured at NAV		Netting Adjustment				Total
ASSETS
Cash and short-term investments ^(a)	$	3,452	$	3,452	—		—		—		—				$	3,452
Trading account assets ^(b)	867		—		$	867	—		—		—				867
Securities available for sale ^(b)	20,212		3		20,192		$	17	—		—				20,212
Held-to-maturity securities ^(c)	10,232		—		10,007		—		—		—				10,007
Other investments ^(b)	738		—		—		569		$	164	—				733
Loans, net of allowance ^(d)	85,180		—		—		83,285		—		—				83,285
Loans held for sale ^(b)	1,104		—		62		1,042		—		—				1,104
Derivative assets ^(b)	803		114		1,110		10		—		$	(431	)	^(f)	803
LIABILITIES
Deposits with no stated maturity ^(a)	$	93,906	—		$	93,906	—		—		—				$	93,906
Time deposits ^(e)	10,181		—		10,267		—		—		—				10,267
Short-term borrowings ^(a)	2,310		$	192	2,118		—		—		—				2,310
Long-term debt ^(e)	12,384		12,386		304		—		—		—				12,690
Derivative liabilities ^(b)	636		102		918		—		—		$	(384	)	^(f)	636

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)

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 and Liabilities Measured at Fair Value on a Nonrecurring Basis” in this Note. Investments accounted for under the equity method are not included in this table. Investments accounted for under the cost method are classified as Level 3 assets. These investments are not actively traded in an open market as sales for these types of investments are rare. The carrying amount of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary. These adjustments are included in “other income” on the income statement.

(c)

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 that they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.

(d)

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.


(e)	Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.

(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 that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2016 and the first six months of 2017, the fair values of our

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loan portfolios 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 loans in portfolio recorded at carrying value with appropriate valuation reserves, and loans in portfolio recorded at fair value. All of these loans were excluded from the table above as follows:


•	Loans at carrying value, net of allowance, of $1.4 billion ($1.2 billion at fair value) at June 30, 2017, and $1.5 billion ($1.3 billion at fair value) at December 31, 2016;


•	Portfolio loans at fair value of $2 million at June 30, 2017, and $3 million at December 31, 2016.

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 $5.5 billion at June 30, 2017, and $5.5 billion at December 31, 2016, are included in “Loans, net of allowance” in the previous 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.

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7. 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. “Other securities” held in the available-for-sale portfolio consist primarily of convertible preferred stock issued by privately held companies.

Unrealized losses on debt securities deemed to be “other-than-temporary” are included in “other income” on the income statement or in AOCI on the balance sheet in accordance with the applicable accounting guidance related to the recognition of OTTI of debt securities.

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 consists primarily of foreign bonds.

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 in AOCI on the balance sheet 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.

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	June 30, 2017
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies, and corporations	$	170	—		$	2	$	168
States and political subdivisions	10		$	1	—		11
Agency residential collateralized mortgage obligations	14,469		28		206		14,291
Agency residential mortgage-backed securities	1,646		4		12		1,638
Agency commercial mortgage-backed securities	1,941		—		44		1,897
Other securities	17		2		—		19
Total securities available for sale	$	18,253	$	35	$	264	$	18,024
HELD TO MATURITY SECURITIES
Agency residential collateralized mortgage obligations	$	8,216	$	4	$	149	$	8,071
Agency residential mortgage-backed securities	630		1		4		627
Agency commercial mortgage-backed securities	1,777		6		33		1,750
Other securities	15		—		—		15
Total held-to-maturity securities	$	10,638	$	11	$	186	$	10,463



	December 31, 2016
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies, and corporations	$	188	—		$	4	$	184
States and political subdivisions	11		—		—		11
Agency residential collateralized mortgage obligations	16,652		$	31	275		16,408
Agency residential mortgage-backed securities	1,857		6		17		1,846
Agency commercial mortgage-backed securities	1,778		—		35		1,743
Other securities	21		—		1		20
Total securities available for sale	$	20,507	$	37	$	332	$	20,212
HELD TO MATURITY SECURITIES
Agency residential collateralized mortgage obligations	$	8,404	$	1	$	173	$	8,232
Agency residential mortgage-backed securities	629		—		5		624
Agency commercial mortgage-backed securities	1,184		1		49		1,136
Other securities	15		—		—		15
Total held-to-maturity securities	$	10,232	$	2	$	227	$	10,007

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The following table summarizes our securities that were in an unrealized loss position as of June 30, 2017, and December 31, 2016.



	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
in millions	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2017
Securities available for sale:
U.S Treasury, agencies, and corporations	$	168	$	2	—		—		$	168	$	2
Agency residential collateralized mortgage obligations	8,997		149		$	1,922	$	57	10,919		206
Agency residential mortgage-backed securities	1,441		12		—		—		1,441		12
Agency commercial mortgage-backed securities	1,807		40		90		4		1,897		44
Held-to-maturity:
Agency residential collateralized mortgage obligations	$	6,632	$	129	$	608	$	20	$	7,240	$	149
Agency residential mortgage-backed securities	505		4		—		—		505		4
Agency commercial mortgage-backed securities	907		33		—		—		907		33
Other securities ^(a)	4		—		—		—		4		—
Total temporarily impaired securities	$	20,461	$	369	$	2,620	$	81	$	23,081	$	450
December 31, 2016
Securities available for sale:
U.S. Treasury, agencies, and corporations	$	182	$	4	—		—		$	182	$	4
Agency residential collateralized mortgage obligations	12,345		231		$	1,410	$	44	13,755		275
Agency residential mortgage-backed securities	1,452		17		—		—		1,452		17
Agency commercial mortgage-backed securities	1,482		35		—		—		1,482		35
Other securities ^(b)	2		—		3		1		5		1
Held-to-maturity:
Agency residential collateralized mortgage obligations	7,028		156		518		17		7,546		173
Agency residential mortgage-backed securities	547		5		—		—		547		5
Agency commercial mortgage-backed securities	996		49		—		—		996		49
Other securities ^(a)	4		—		—		—		4		—
Total temporarily impaired securities	$	24,038	$	497	$	1,931	$	62	$	25,969	$	559

(a) Gross unrealized losses totaled less than $1 million for other securities held to maturity at June 30, 2017, and December 31, 2016.

(b) Gross unrealized losses totaled less than $1 million for other securities available for sale at December 31, 2016.

At June 30, 2017, we had $206 million of gross unrealized losses related to 355 fixed-rate agency residential CMOs that we invested in as part of our overall A/LM strategy. These securities had a weighted-average maturity of 4.05 years at June 30, 2017. We also had $12 million of gross unrealized losses related to 236 agency residential mortgage-backed securities positions, which had a weighted-average maturity of 4.06 years at June 30, 2017. Because these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. These unrealized losses are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments were reduced to their fair value through OCI, not through 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 as 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 and six months ended June 30, 2017, and June 30, 2016.



Six months ended June 30, 2017
in millions
Balance at December 31, 2016	$	4
Impairment recognized in earnings	—
Balance at June 30, 2017	$	4

For the six months ended June 30, 2017, net realized securities gains totaled less than $1 million.

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At June 30, 2017, securities available for sale and held-to-maturity securities totaling $7.7 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 our securities by remaining maturity. CMOs and other mortgage-backed securities (both of which are included in the securities available-for-sale portfolio) as well as 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
June 30, 2017	Amortized Cost		Fair Value		Amortized Cost		Fair Value
in millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	157	$	159	$	64	$	64
Due after one through five years	16,402		16,200		7,637		7,517
Due after five through ten years	1,673		1,644		2,329		2,291
Due after ten years	21		21		608		591
Total	$	18,253	$	18,024	$	10,638	$	10,463

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8. 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; commodity derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in our 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 is the risk 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 may 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 June 30, 2017, after taking into account the effects of bilateral collateral and master netting agreements, we had $28 million of derivative assets and $8 million of derivative liabilities that relate to contracts entered into for hedging purposes. 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 $608 million and derivative liabilities of $300 million that were not designated as hedging instruments.

Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives” beginning on page 112 of our 2016 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 and the associated interest rates tied to each instrument. In addition, differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities cause net interest income and the EVE to fluctuate. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to manage net interest income and EVE to within our stated risk tolerances. 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.

100

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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 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.

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 June 30, 2017, 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, including situations where there is a forecast sale of loans. Beginning in the first quarter of 2014, we began purchasing credit default swaps to reduce the credit risk associated with the debt securities held in our trading portfolio. 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 generally entered into to accommodate the needs of commercial loan clients;


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


•	foreign exchange forward and option contracts entered into primarily to accommodate the needs of clients; and


•	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.

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 June 30, 2017, and December 31, 2016. The change in the notional amounts of these derivatives by type from December 31, 2016, to June 30, 2017, indicates the volume of our derivative transaction activity during the first six months of 2017. The notional amounts are not affected by bilateral collateral and master netting agreements. The derivative asset and liability 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 are not in effect or are not enforceable under bankruptcy laws, we do not adjust those derivative assets and liabilities with counterparties. Securities collateral related to legally enforceable master netting agreements is 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:

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	June 30, 2017								December 31, 2016
			Fair Value								Fair Value
in millions	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate	$	25,230	$	104		$	24		$	24,237	$	189		$	94
Foreign exchange	286		—			7			282		6			4
Total	25,516		104			31			24,519		195			98
Derivatives not designated as hedging instruments:
Interest rate	60,393		679			492			55,315		741			643
Foreign exchange	6,750		99			89			6,230		117			109
Commodity	1,567		167			157			1,474		176			165
Credit	415		3			4			360		1			4
Other ^(a)	2,704		5			18			390		4			1
Total	71,829		953			760			63,769		1,039			922
Netting adjustments ^(b)	—		(421		)	(483		)	—		(431		)	(384		)
Net derivatives in the balance sheet	97,345		636			308			88,288		803			636
Other collateral ^(c)	—		(10		)	(163		)	—		(21		)	(97		)
Net derivative amounts	$	97,345	$	626		$	145		$	88,288	$	782		$	539


(a)	Other derivatives include interest rate lock commitments and forward sale commitments related to our residential mortgage banking activities, forward purchase and sales contracts consisting of contractual commitments associated with “to be announced” securities and when issued securities, and when-issued security transactions in connection with an “at-the-market” equity offering program.


(b)	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.

(c)

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, excess other collateral, if any, 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 six-month period ended June 30, 2017, 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 June 30, 2017.

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the three-month and six-month periods ended June 30, 2017, and June 30, 2016, and where they are recorded on the income statement.



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
Three months ended June 30, 2017
Interest rate	Other income	$	5		Long-term debt	Other income	$	(5	)	^(a)
Interest rate	Interest expense — Long-term debt	14
Total		$	19				$	(5	)
Six months ended June 30, 2017
Interest rate	Other income	$	(30	)	Long-term debt	Other income	$	30		^(a)
Interest rate	Interest expense — Long-term debt	32
Total		$	2				$	30



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
Three months ended June 30, 2016
Interest rate	Other income	$	49	Long-term debt	Other income	$	(50	)	^(a)
Interest rate	Interest expense — Long-term debt	23
Total		$	72			$	(50	)
Six months ended June 30, 2016
Interest rate	Other income	$	164	Long-term debt	Other income	$	(165	)	^(a)
Interest rate	Interest expense — Long-term debt	50
Total		$	214			$	(165	)


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

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component of AOCI on the balance sheet. This amount 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 six-month period ended June 30, 2017, 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 June 30, 2017.

Considering the interest rates, yield curves, and notional amounts as of June 30, 2017, we would expect to reclassify an estimated $14 million of after-tax net gains on derivative instruments designated as cash flow hedges from AOCI to income during the next 12 months. In addition, we expect to reclassify approximately $3 million of net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of June 30, 2017, the maximum length of time over which we hedge forecast transactions is 11 years.

Net investment hedges. We enter into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments in foreign subsidiaries 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 or liquidate a foreign subsidiary). At June 30, 2017, AOCI reflected unrecognized, after-tax gains totaling $34 million related to cumulative changes in the fair value of our net investment hedges, which offset the unrecognized, after-tax foreign currency losses on net investment balances. The ineffective portion of net investment hedging transactions is included in “other income” on the income statement, but there was no net investment hedge ineffectiveness as of June 30, 2017. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the six-month period ended June 30, 2017.

The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the three-month and six-month periods ended June 30, 2017, and June 30, 2016, 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.



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)
Three months ended June 30, 2017
Cash Flow Hedges
Interest rate	$	22		Interest income — Loans	$	5		Other income	—
Interest rate	—			Interest expense — Long-term debt	(1		)	Other income	—
Interest rate	—			Investment banking and debt placement fees	—			Other income	—
Net Investment Hedges
Foreign exchange contracts	(7		)	Other Income	—			Other income	—
Total	$	15			$	4			—
Six months ended June 30, 2017
Cash Flow Hedges
Interest rate	$	—		Interest income — Loans	$	20		Other income	—
Interest rate	—			Interest expense — Long-term debt	(2		)	Other income	—
Interest rate	—			Investment banking and debt placement fees	—			Other income	—
Net Investment Hedges
Foreign exchange contracts	(10		)	Other Income	—			Other income	—
Total	$	(10	)		$	18			—

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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)
Three months ended June 30, 2016
Cash Flow Hedges
Interest rate	$	71		Interest income — Loans	$	22		Other income	—
Interest rate	(2		)	Interest expense — Long-term debt	(1		)	Other income	—
Interest rate	—			Investment banking and debt placement fees	—			Other income	—
Net Investment Hedges
Foreign exchange contracts	9			Other Income	—			Other income	—
Total	$	78			$	21			—
Six months ended June 30, 2016
Cash Flow Hedges
Interest rate	$	204		Interest income — Loans	$	45		Other income	—
Interest rate	(6		)	Interest expense — Long-term debt	(2		)	Other income	—
Interest rate	(1		)	Investment banking and debt placement fees	—			Other income	—
Net Investment Hedges
Foreign exchange contracts	(5		)	Other Income	—			Other income	—
Total	$	192			$	43			—

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



in millions	December 31, 2016			2017 Hedging Activity			Reclassification of Gains to Net Income			June 30, 2017
AOCI resulting from cash flow and net investment hedges	$	(14	)	$	(6	)	$	(11	)	$	(31	)

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,” “consumer mortgage 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 three- and six-month periods ended June 30, 2017, and June 30, 2016, and where they are recorded on the income statement.



	Three months ended June 30, 2017										Three months ended June 30, 2016
in millions	Corporate Services Income		Consumer Mortgage Income ^(a)		Other Income			Total			Corporate Services Income		Other Income			Total
NET GAINS (LOSSES)
Interest rate	$	10	—		$	(1	)	$	9		$	7	$	(1	)	$	6
Foreign exchange	10		—		—			10			9		—			9
Commodity	1		—		—			1			1		—			1
Credit	—		—		(5		)	(5		)	—		(4		)	(4		)
Other	—		$	2	(10		)	(8		)	—		—			—
Total net gains (losses)	$	21	$	2	$	(16	)	$	7		$	17	$	(5	)	$	12



	Six months ended June 30, 2017										Six months ended June 30, 2016
in millions	Corporate Services Income		Consumer Mortgage Income ^(a)		Other Income			Total			Corporate Services Income		Other Income			Total
NET GAINS (LOSSES)
Interest rate	$	16	—		$	(2	)	$	14		$	13	$	(2	)	$	11
Foreign exchange	21		—		—			21			19		—			19
Commodity	3		—		—			3			2		—			2
Credit	1		—		(10		)	(9		)	1		(6		)	(5		)
Other	—		$	1	(11		)	(10		)	—		—			—
Total net gains (losses)	$	41	$	1	$	(23	)	$	19		$	35	$	(8	)	$	27


(a)	As a result of the First Niagara acquisition, we began recognizing net gains (losses) on other derivatives related to our residential mortgage banking activities in “consumer mortgage income” in December 2016.

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

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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 standard ISDA documentation, central clearing rules, 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. Cash collateral of $37 million was included in derivative assets on the balance sheet at June 30, 2017, compared to $155 million of cash collateral netted against derivative assets at December 31, 2016. The cash collateral netted against derivative liabilities totaled $25 million at June 30, 2017, and $108 million at December 31, 2016.

Beginning in the first quarter of 2017, the relevant agreements that allow us to access the central clearing organizations to clear derivative transactions became qualified master netting agreements resulting in a change in how cash collateral is reflected on our balance sheet and in related disclosures as of March 31, 2017. All cash collateral exchanged with central clearing organizations is now netted against the related derivative contracts on our balance sheet and related disclosures. Cash collateral exchanged with central clearing organizations was included in “short-term investments” and “NOW and money market deposit accounts” on the balance sheet in all periods prior to March 31, 2017. At December 31, 2016, we posted $448 million of cash collateral with clearing organizations and held $59 million of cash collateral from clearing organizations.

Additionally, the CME amended its rulebook effective January 3, 2017, to legally characterize variation margin payments made to and received from the CME as settlement of derivatives, not collateral against derivative exposure. As a result, variation margin payments with the CME are presented on the balance sheet and in related disclosures as part of the gross fair value of CME-cleared derivative assets and liabilities. At June 30, 2017, we had paid $185 million and received $81 million in variation margin to settle CME-cleared derivatives. In addition, under the CME’s settlement rulebook, CME-cleared derivative assets and liabilities are offset against one another to determine the gross asset or liability exposure of CME-cleared derivatives.

Netting cash collateral exchanged with all central clearing organizations and applying variation margin payments as settlement to CME-cleared derivative transactions resulted in a reduction of net derivative assets on our balance sheet of $23 million and a reduction of net derivative liabilities on our balance sheet of $211 million as of June 30, 2017, as compared to December 31, 2016.

The following table summarizes the fair value of our derivative assets by type at the dates indicated. 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	June 30, 2017			December 31, 2016
Interest rate	$	472		$	782
Foreign exchange	43			62
Commodity	77			110
Credit	2			—
Other	5			4
Derivative assets before collateral	599			958
Less: Related collateral	(37		)	155
Total derivative assets	$	636		$	803

We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Given that 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 are generally high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. We began clearing certain types of derivative transactions with these counterparties in June 2013, whereby the central clearing organizations become our counterparties subsequent to novation of the original derivative contracts. In addition, we began entering into derivative contracts through swap execution facilities during the first quarter of 2014. The swap clearing and swap trade execution requirements were mandated by the Dodd-Frank Act for the purpose of reducing counterparty credit risk and increasing transparency in the derivative market. At June 30, 2017, we had gross exposure of $514 million to broker-dealers and banks. We had net exposure of $270 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $247 million after considering $23 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 are generally low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall

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portfolio exposure and market risk by buying and selling U.S. Treasuries and Eurodollar futures and entering into offsetting positions and other derivative contracts, sometimes with entities other than broker-dealers and banks. Due to the smaller size and magnitude of the individual contracts with clients, we generally do not exchange collateral in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a credit valuation adjustment (included in “derivative assets”) in the amount of $6 million at June 30, 2017, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At June 30, 2017, we had gross exposure of $399 million to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $366 million on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve.

Credit Derivatives

We are a buyer and, under limited circumstances, may be a 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 as well as exposures to debt securities. We may also sell credit derivatives, mainly single-name credit default swaps, to offset our purchased credit default swap positions prior to maturity.

The following table summarizes the fair value of our credit derivatives purchased and sold by type as of June 30, 2017, and December 31, 2016. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.



	June 30, 2017							December 31, 2016
in millions	Purchased			Sold	Net			Purchased			Sold	Net
Single-name credit default swaps	$	(1	)	—	$	(1	)	$	(2	)	—	$	(2	)
Traded credit default swap indices	—			—	—			(1		)	—	(1		)
Other ^(a)	—			—	—			—			—	—
Total credit derivatives	$	(1	)	—	$	(1	)	$	(3	)	—	$	(3	)


(a)	As of both June 30, 2017, and December 31, 2016, the fair value of other credit derivatives sold totaled less than $1 million.

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 may settle in

one of two ways if the underlying reference entity experiences a predefined credit event. We may 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 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. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.

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 June 30, 2017, and December 31, 2016. 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

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respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.



	June 30, 2017					December 31, 2016
dollars in millions	Notional Amount		Average Term (Years)	Payment / Performance Risk		Notional Amount		Average Term (Years)	Payment / Performance Risk
Other	$	12	4.55	9.40	%	$	4	6.49	17.93	%
Total credit derivatives sold	$	12	—	—		$	4	—	—

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 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 June 30, 2017, KeyBank’s rating was “A3” with Moody’s and “A-” with S&P, and KeyCorp’s rating was “Baa1” with Moody’s and “BBB+” with S&P. As of June 30, 2017, 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 $113 million, which comprised of $112 million in derivative assets and $225 million in derivative liabilities. We had $118 million in cash and securities collateral posted to cover those positions as of June 30, 2017. There were no derivative contracts with credit risk contingent features held by KeyCorp at June 30, 2017.

The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of June 30, 2017, and December 31, 2016. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of June 30, 2017, and December 31, 2016, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required as of December 31, 2016. For more information about the credit ratings for KeyBank and KeyCorp, see the discussion under the heading “Factors affecting liquidity” in the section entitled “Liquidity risk management” in Item 2 of this report.



	June 30, 2017				December 31, 2016
in millions	Moody’s		S&P		Moody’s		S&P
KeyBank’s long-term senior unsecured credit ratings	A3		A-		A3		A-
One rating downgrade	$	2	$	2	$	2	$	2
Two rating downgrades	2		2		2		2
Three rating downgrades	2		2		4		4

KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of June 30, 2017, and December 31, 2016. If KeyBank’s ratings had been downgraded below investment grade as of June 30, 2017, or December 31, 2016, payments of up to $3 million and $4 million, respectively, 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 December 31, 2016, payments of less than $1 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.

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9. Mortgage Servicing Assets

We originate and periodically sell commercial and residential 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. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Commercial and residential mortgage servicing assets are recorded as a component of “accrued income and other assets” on the balance sheet.

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” in our 2016 Form 10-K.

Commercial Mortgage Servicing

Changes in the carrying amount of commercial mortgage servicing assets are summarized as follows:



	Three months ended June 30,						Six months ended June 30,
in millions	2017			2016			2017			2016
Balance at beginning of period	$	369		$	318		$	356		$	321
Servicing retained from loan sales	19			15			47			22
Purchases	7			—			14			12
Amortization	(22		)	(10		)	(44		)	(32		)
Balance at end of period	$	373		$	323		$	373		$	323
Fair value at end of period	$	495		$	404		$	495		$	404

The fair value of commercial 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 determine the fair value of our commercial mortgage servicing assets at June 30, 2017, and December 31, 2016, along with the valuation techniques, are shown in the following table:



June 30, 2017	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
Commercial mortgage servicing assets	Discounted cash flow	Expected defaults	1.00 - 3.00% (1.30%)
		Residual cash flows discount rate	7.00 - 15.00% (8.80%)
		Escrow earn rate	1.50 - 3.10% (2.50%)
		Servicing cost	$150 - $38,500 ($1,457)
		Loan assumption rate	0.00 - 3.00% (1.24%)
		Percentage late	0.00 - 2.00% (.29%)



December 31, 2016	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
Commercial mortgage servicing assets	Discounted cash flow	Expected defaults	1.00 - 3.00% (1.40%)
		Residual cash flows discount rate	7.00 - 12.00% (8.00%)
		Escrow earn rate	1.10 - 3.00% (2.40%)
		Servicing cost	$150 - $2,700 ($1,124)
		Loan assumption rate	0.00 - 3.00% (1.13%)
		Percentage late	0.00 - 2.00% (.34%)

If these economic assumptions change or prove incorrect, the fair value of commercial mortgage servicing assets may also change. Expected credit losses, escrow earning rates, and discount rates are critical to the valuation of commercial mortgage servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates, and reflect historical data associated with the commercial mortgage loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earning rates would cause a decrease in the fair value of our commercial mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our commercial mortgage servicing assets. Prepayment activity on commercial serviced loans does not significantly affect the valuation of our commercial mortgage servicing assets. Unlike residential mortgages, commercial mortgages experience significantly lower prepayments due to certain contractual restrictions affecting the borrower’s ability to prepay the mortgage.

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We have elected to account for commercial servicing assets using the amortization method. The amortization of commercial servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of commercial servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to contractual fee income. The contractual fee income from servicing commercial mortgage loans totaled $72 million for the six-month period ended June 30, 2017, and $66 million for the six-month period ended June 30, 2016. This fee income was offset by $44 million of amortization for the six-month period ended June 30, 2017, and $44 million for the six-month period ended June 30, 2016. Both the contractual fee income and the amortization are recorded, net, in “mortgage servicing fees” on the income statement.

Additional information pertaining to the accounting for commercial mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 113 of our 2016 Form 10-K.

Residential Mortgage Servicing

With the First Niagara acquisition, we acquired residential mortgage servicing assets with a fair value of $28 million as of the Acquisition Date.

Changes in the carrying amount of residential mortgage servicing assets are summarized as follows:



	Three months ended June 30, 2017			Six months ended June 30, 2017
in millions	Three months ended June 30, 2017			Six months ended June 30, 2017
Balance at beginning of period	$	29		28
Servicing retained from loan sales	1			$	3
Amortization	(1		)	(2		)
Balance at end of period	$	29		$	29
Fair value at end of period	$	35		$	35

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 at June 30, 2017, along with the valuation techniques, are shown in the following table:



June 30, 2017	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
Residential mortgage servicing assets	Discounted cash flow	Prepayment speed	7.85 - 21.72% (9.42%)
		Discount rate	8.50 - 11.00% (8.55%)
		Servicing cost	$76 - $3,335 ($82.18)

If these economic assumptions change or prove incorrect, the fair value of residential mortgage servicing assets may also change. Prepayment speed, discount rates, and servicing cost are critical to the valuation of servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates, and reflect historical data associated with the loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. An increase in the prepayment speed, assigned discount rates, and servicing cost assumptions would also cause a negative impact on the fair value of our residential mortgage servicing assets.

We have elected to account for residential servicing assets using the amortization method. The amortization of residential servicing assets is determined in proportion to, and over the period of, the estimated net residential servicing income. The amortization of servicing assets for June 30, 2017, as shown in the table above, is recorded as a reduction to contractual fee income. The contractual fee income from servicing residential mortgage loans totaled $7 million for the six-month period ended June 30, 2017. This fee income was offset by $2 million of amortization for the six-month period ended June 30, 2017. Both the contractual fee income and the amortization are recorded, net, in “mortgage servicing fees” on the income statement.

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10. 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 affect 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 significant VIEs are summarized below. We define a “significant interest” in an unconsolidated 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 affect the entity’s economic performance.

LIHTC investments. Through KCDC, we have made investments directly and indirectly 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 residual returns. As we are not the primary beneficiary of these investments, we do not consolidate their assets and liabilities in our consolidated financial statements.

Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. We had $1.2 billion of investments in LIHTC operating partnerships at both June 30, 2017, and December 31, 2016. These investments are recorded in “accrued income and other assets” on our balance sheet. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss to be remote. For all legally binding, unfunded equity commitments, we increase our recognized investment and recognize a liability. As of June 30, 2017, and December 31, 2016, we had liabilities of $446 million and $462 million, respectively, related to investments in qualified affordable housing projects, which are recorded in “accrued expenses and other liabilities” on our balance sheet. We continue to invest in these LIHTC operating partnerships.

The assets and liabilities presented in the table below convey the size of KCDC’s direct and indirect investments at June 30, 2017, and December 31, 2016. As these investments represent unconsolidated VIEs, the assets and liabilities of the investments themselves are not recorded on our balance sheet.



	Unconsolidated VIEs
in millions	Total Assets		Total Liabilities		Maximum Exposure to Loss
June 30, 2017
LIHTC investments	$	5,428	$	2,460	$	1,485
December 31, 2016
LIHTC investments	$	4,814	$	2,003	$	1,465

We amortize our LIHTC investments over the period that we expect to receive the tax benefits. During the first six months of 2017, we recognized $81 million of amortization and $78 million of tax credits associated with these investments within “income taxes” on our income statement. During the first six months of 2016, we recognized $64 million of amortization and $67 million of tax credits associated with these investments within “income taxes” on our income statement.

Principal investments. Through our principal investing entity, KCC, we have made investments in private equity funds engaged in venture- and growth-oriented investing. As a limited partner to these funds, KCC records these investments at fair value and receives distributions from the funds in accordance with the funds’ partnership agreements. We are not the primary beneficiary of these investments as we do not hold the power to direct the activities that most significantly affect the funds’ economic performance. Such power rests with the funds’ general partners. In addition, we have neither the obligation to absorb the funds’ expected losses nor the right to receive their residual returns. Our voting rights are also disproportionate to our economic interests, and substantially all of the funds’ activities are conducted on behalf of investors with disproportionately

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few voting rights. Because we are not the primary beneficiary of these investments, we do not consolidate their assets and liabilities in our consolidated financial statements.

Our maximum exposure to loss associated with indirect principal investments consists of the investments’ fair value plus any unfunded equity commitments. The fair value of our indirect principal investments totaled $148 million and $158 million at June 30, 2017, and December 31, 2016, respectively. These investments are recorded in “other investments” on our balance sheet. Additional information on indirect principal investments is provided in Note 6 (“Fair Value Measurements”). The table below reflects the size of the private equity funds in which KCC was invested as well as our maximum exposure to loss in connection with these investments at June 30, 2017.



	Unconsolidated VIEs
in millions	Total Assets		Total Liabilities		Maximum Exposure to Loss
June 30, 2017
KCC indirect investments	$	24,925	$	158	$	184
December 31, 2016
KCC indirect investments	$	32,755	$	201	$	195

Other unconsolidated VIEs. We are involved with other various entities that we have determined to be VIEs in the normal course of business. 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. Our assets associated with these unconsolidated VIEs totaled $155 million at June 30, 2017, and $178 million at December 31, 2016, and primarily consisted of our investments in these entities. These assets are recorded in “accrued income and other assets,” “other investments,” and “securities available for sale” on our balance sheet. We had liabilities totaling $4 million associated with these unconsolidated VIEs at both June 30, 2017, and December 31, 2016. These liabilities are recorded in “accrued expenses and other liabilities” on our balance sheet.

Consolidated VIEs. Through our principal investing entity, KPP, we have formed and funded operating entities that provide management and other related services to our investment company funds, which directly invest in portfolio companies. In return for providing services to our direct investment funds, these entities’ receive a minority equity interest in the funds. This minority equity ownership is recorded at fair value on the entities’ financial statements. Additional information on our direct principal investments is provided in Note 6 (“Fair Value Measurements”). While other equity investors manage the daily operations of these entities, we retain the power, through voting rights, to direct the activities of the entities that most significantly affect their economic performance. In addition, we have the obligation to absorb losses and the right to receive residual returns that could potentially be significant to these entities. As a result, we have determined that we are the primary beneficiary of these funds and have consolidated them since formation. The assets of these KPP entities that can only be used to settle the entities’ obligations totaled $3 million at June 30, 2017, and $1 million at December 31, 2016. These assets are recorded in “cash and due from banks” and “accrued income and other assets” on our balance sheet. The entities had no liabilities at June 30, 2017, nor at December 31, 2016, and other equity investors have no recourse to our general credit.

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11. 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 28.0% for the second quarter of 2017 and 25.6% for the second quarter of 2016. 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 renewable energy and low-income housing investments. The effective tax rates for the three months ended June 30, 2017, and June 30, 2016, were affected by net discrete income tax benefits of .5% and detriments of 2.2%, respectively.

The tax rate for the second quarter of 2017 was also impacted due to notable items of $1 million. Excluding those notable items, the tax rate for the second quarter of 2017 was 27.9%.

Deferred Tax Asset

At June 30, 2017, from continuing operations we had a net deferred tax asset of $385 million, compared to a net deferred tax asset of $607 million at December 31, 2016, included in “accrued income and other assets” on the balance sheet. At June 30, 2017, deferred tax assets were affected by the First Niagara acquisition including certain purchase accounting adjustments and changes in market conditions that affect the mark-to-market deferred tax adjustment on securities.

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 had a valuation allowance of $26 million at June 30, 2017, and $26 million at December 31, 2016. The valuation allowance is associated with certain state net operating loss carryforwards, state credit carryforwards, and federal and state capital loss carryforwards.

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.” At June 30, 2017, Key’s unrecognized tax benefits were $55 million.

Pre-1988 Bank Reserves Acquired in a Business Combination

As a result of the First Niagara acquisition, at June 30, 2017, the retained earnings of KeyBank included approximately $92 million of allocated bad debt deductions for which no income taxes have been recorded. Under current federal law, these

reserves are subject to recapture into taxable income if KeyBank, or any successor, fails to maintain its bank status under the

Internal Revenue Code or makes non-dividend distributions or distributions greater than its accumulated earnings and profits.

No deferred tax liability has been established as these events are not expected to occur in the foreseeable future.

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12. Acquisition, Divestiture, and Discontinued Operations

Acquisitions

HelloWallet Holdings, Inc. On May 31, 2017, KeyBank entered into a definitive agreement to acquire all of the outstanding capital stock of HelloWallet, a digital financial wellness company. Key’s retail banking franchise will leverage HelloWallet’s technology to provide data-driven insights to clients, allowing clients to better understand and improve their personal finances. The acquisition, which will be accounted for as a business combination, is effective July 1, 2017. Accordingly, we will begin consolidating HelloWallet’s financial results in our consolidated financial statements in the third quarter of 2017.

Key Merchant Services, LLC. On June 30, 2017, KeyBank (consolidated) acquired an additional 51% interest in Key Merchant Services, LLC (“KMS”), increasing our ownership interest from 49% to 100%. This acquisition enables us to grow our merchant services business and enhance our merchant product offerings. This transaction is accounted for as a business combination achieved in stages. Prior to the acquisition, KMS was operated as a merchant services joint venture and accounted for as an equity method investment in our consolidated financial statements.

Immediately before the acquisition, the provisional estimated fair value of our equity interest in KMS was $74 million. The fair value of our previously held equity interest was measured using discounted cash flow modeling that incorporates an appropriate risk premium and forecast earnings information. On June 30, 2017, we recognized a provisional non-cash holding gain of $64 million for the difference between the fair value and the book value of our previously held equity interest. The gain is included in “other income” on the income statement for the three and six months ended June 30, 2017. Upon acquisition, we recorded estimated identifiable intangible assets of $95 million and goodwill of less than $1 million. The fair value estimates related to this acquisition represent our best estimate of fair value and are expected to be finalized over a period of up to one year from the acquisition date.

First Niagara Financial Group, Inc. As previously disclosed, on October 30, 2015, KeyCorp entered into a definitive agreement and plan of merger (“Agreement”) to acquire all of the outstanding capital stock of First Niagara, headquartered in Buffalo, New York. On August 1, 2016, First Niagara merged with and into KeyCorp, with KeyCorp as the surviving entity. The total consideration for the transaction was approximately $4.0 billion. Under the terms of the Agreement, at the effective time of the merger, each share of First Niagara common stock was converted into the right to receive (i) 0.680 of a share of KeyCorp common stock and (ii) $2.30 in cash. The exchange ratio of KeyCorp stock for First Niagara stock was fixed per the Agreement and did not adjust based on changes in KeyCorp’s share trading price. First Niagara equity awards outstanding immediately prior to the effective time of the merger were converted into equity awards for KeyCorp common stock as provided in the Agreement. Each share of First Niagara’s Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Stock, Series B, was converted into a share of a newly created series of preferred stock of KeyCorp having substantially the same terms as First Niagara’s preferred stock. For more information on the acquisition, see Note 2 (“Business Combination”).

Divestiture

On September 9, 2016, KeyCorp sold to Northwest Bank, a wholly-owned subsidiary of Northwest Bancshares, Inc., 18 First Niagara Bank branches in the Buffalo, New York market. The branches were divested in connection with the merger between First Niagara and KeyCorp and pursuant to an agreement with the United States Department of Justice and commitments to the Federal Reserve following a customary antitrust review in connection with the merger. The divestiture included $439 million of loans and $1.6 billion of deposits associated with the 18 branches.

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. As of January 1, 2010, we consolidated our ten outstanding education lending securitization trusts, as we held 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.

On September 30, 2014, we sold the residual interests in all of our outstanding education lending securitization trusts to a third party for $57 million. In selling the residual interests, we no longer have the obligation to absorb losses nor the right to receive benefits related to the securitization trusts. Therefore, in accordance with the applicable accounting guidance, we

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deconsolidated the securitization trusts and removed trust assets of $1.7 billion and trust liabilities of $1.6 billion from our balance sheet at September 30, 2014. We continue to service the securitized loans in eight of the securitization trusts and receive servicing fees, whereby we are adequately compensated, as well as remaining a counterparty to derivative contracts with three of the securitization trusts. We retained interests in the securitization trusts through our ownership of an insignificant percentage of certificates in two of the securitization trusts and two interest-only strips in one of the securitization trusts. These retained interests were remeasured at fair value on September 30, 2014, and their fair value of $1 million was recorded in “discontinued assets” on our balance sheet. These assets were valued using a similar approach and inputs that have been used to value the education loan securitization trust loans and securities, which are further discussed later in this note.

“Income (loss) from discontinued operations, net of taxes” on the income statement includes (i) the changes in fair value of the portfolio loans at fair value (discussed later in this note), and (ii) the interest income and expense from 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 “noninterest expense.” Interest income and interest expense related to the loans and securities are included as components 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 June 30,					Six months ended June 30,
in millions	2017			2016		2017		2016
Net interest income	$	6		$	7	$	11	$	14
Provision for credit losses	—			—		3		2
Net interest income after provision for credit losses	6			7		8		12
Noninterest income	1			2		3		3
Noninterest expense	(1		)	4		3		9
Income (loss) before income taxes	8			5		8		6
Income taxes	3			2		3		2
Income (loss) from discontinued operations, net of taxes ^(a)	5			$	3	$	5	$	4


(a)	Includes after-tax charges of $7 million and $6 million for the three-month periods ended June 30, 2017, and June 30, 2016, respectively, and $13 million and $12 million for the six-month periods ended June 30, 2017, and June 30, 2016, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

The discontinued assets of our education lending business included on the balance sheet are as follows. There were no discontinued liabilities for the periods presented below.



in millions	June 30, 2017		December 31, 2016
Held-to-maturity securities	$	1	$	1
Portfolio loans at fair value	2		3
Loans, net of unearned income ^(a)	1,434		1,562
Less: Allowance for loan and lease losses	21		24
Net loans	1,415		1,541
Accrued income and other assets	27		28
Total assets	$	1,443	$	1,570


(a)	At June 30, 2017, and December 31, 2016, unearned income was less than $1 million.

The discontinued education lending business consisted of loans in portfolio recorded at fair value and loans in portfolio recorded at carrying value with appropriate valuation reserves. As of June 30, 2015, we decided to sell the portfolio loans that are recorded at fair value, which were subsequently sold during the fourth quarter of 2015.

At June 30, 2017, education loans included 2,490 TDRs with a recorded investment of approximately $24 million (pre-modification and post-modification). A specifically allocated allowance of $2 million was assigned to these loans as of June 30, 2017. At December 31, 2016, education loans included 2,163 TDRs with a recorded investment of approximately $22 million (pre-modification and post-modification). A specifically allocated allowance of $2 million was assigned to these loans as of December 31, 2016. There have been no significant payment defaults. There are no significant commitments to lend additional funds to these borrowers outstanding. Additional information regarding TDR classification and ALLL methodology is provided in Note 5 (“Asset Quality”).

In June 2015, we transferred $179 million of loans that were previously purchased from three of the outstanding securitization trusts pursuant to the legal terms of those particular trusts to held for sale and accounted for them at fair value. These portfolio loans held for sale were valued based on indicative bids to sell the loans. These loans were considered Level 3 assets since we

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relied on unobservable inputs when determining their fair value. Portfolio loans accounted for at fair value were $2 million at June 30, 2017.

The following table shows the significant unobservable inputs used to measure the fair value of the portfolio loans accounted for at fair value as of June 30, 2017, and December 31, 2016:



June 30, 2017	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Portfolio loans accounted for at fair value	$	2	Market approach	Indicative bids	84.50-104.00%



December 31, 2016	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Portfolio loans accounted for at fair value	$	3	Market approach	Indicative bids	84.50-104.00%

The following table shows the principal and fair value amounts for our portfolio loans at carrying value at June 30, 2017, and December 31, 2016. 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” beginning on page 108 of our 2016 Form 10-K.



	June 30, 2017			December 31, 2016
in millions	Principal		Fair Value	Principal		Fair Value
Portfolio loans at carrying value
Accruing loans past due 90 days or more	$	17	N/A	$	22	N/A
Loans placed on nonaccrual status	6		N/A	5		N/A

The following table shows the portfolio loans at fair value and their related contractual amounts as of June 30, 2017, and December 31, 2016.



	June 30, 2017				December 31, 2016
in millions	Contractual Amount		Fair Value		Contractual Amount		Fair Value
ASSETS
Portfolio loans	$	3	$	2	$	3	$	3

The following tables present the assets of the portfolio loans measured at fair value on a recurring basis at June 30, 2017, and December 31, 2016.



June 30, 2017
in millions	Level 1	Level 2	Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans	—	—	$	2	$	2
Total assets on a recurring basis at fair value	—	—	$	2	$	2



December 31, 2016
in millions	Level 1	Level 2	Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans	—	—	$	3	$	3
Total assets on a recurring basis at fair value	—	—	$	3	$	3

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The following table shows the change in the fair values of the Level 3 portfolio loans held for sale, portfolio loans, and consolidated education loan securitization trusts for the six-month periods ended June 30, 2017, and June 30, 2016.



in millions		Portfolio Student Loans
Balance at December 31, 2016		$	3
Settlements		(1		)
Balance at June 30, 2017	^(a)	$	2

Balance at March 31, 2017		$	3
Settlements		(1		)
Balance at June 30, 2017	^(a)	$	2

Balance at December 31, 2015		$	4
Settlements		(1		)
Balance at June 30, 2016	^(a)	$	3

Balance at March 31, 2016		$	3
Settlements		—
Balance at June 30, 2016	^(a)	$	3


(a)	There were no purchases, sales, issuances, gains (losses) recognized in earnings, transfers into Level 3, or transfers out of Level 3 for the six-month period ended June 30, 2017. There were no purchases, sales, issuances, gains (losses) recognized in earnings, transfers into Level 3, or transfers out of Level 3 for the three- and six-month periods ended June 30, 2016.

Austin Capital Management, Ltd. In April 2009, we decided to discontinue 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. There was no income related to Austin for the six-month periods ended June 30, 2017, and June 30, 2016. The discontinued assets of Austin included on the balance sheet are as follows. There were no discontinued liabilities for the periods presented below.

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



	Three months ended June 30,					Six months ended June 30,
in millions	2017			2016		2017		2016
Net interest income	$	6		$	7	$	11	$	14
Provision for credit losses	—			—		3		2
Net interest income after provision for credit losses	6			7		8		12
Noninterest income	1			2		3		3
Noninterest expense	(1		)	4		3		9
Income (loss) before income taxes	8			5		8		6
Income taxes	3			2		3		2
Income (loss) from discontinued operations, net of taxes ^(a)	5			$	3	$	5	$	4


(a)	Includes after-tax charges of $7 million and $6 million for the three-month periods ended June 30, 2017, and June 30, 2016, respectively, and $13 million and $12 million for the six-month periods ended June 30, 2017, and June 30, 2016, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

The combined assets of the discontinued operations are as follows. There were no discontinued liabilities for the periods presented below.



in millions	June 30, 2017		December 31, 2016
Cash and due from banks	$	15	$	15
Held-to-maturity securities	1		1
Portfolio loans at fair value	2		3
Loans, net of unearned income^(a)	1,434		1,562
Less: Allowance for loan and lease losses	21		24
Net loans	1,415		1,541
Accrued income and other assets	27		28
Total assets	$	1,458	$	1,585


(a)	At June 30, 2017, and December 31, 2016, unearned income was less than $1 million.

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13. Securities Financing Activities

We enter into repurchase agreements to finance overnight customer sweep deposits. We also enter into repurchase and reverse repurchase agreements 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 for 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 our securities financing agreements incorporate a right of set off, the assets and liabilities are reported on a gross basis. Reverse repurchase agreements and securities borrowed transactions are included in “short-term investments” on the balance sheet; repurchase agreements are included in “federal funds purchased and securities sold under repurchase agreements.”

The following table summarizes our securities financing agreements at June 30, 2017, and December 31, 2016:



	June 30, 2017
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments ^(a)			Collateral ^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	11	$	(9	)	$	(2	)	—
Total	$	11	$	(9	)	$	(2	)	—

Offsetting of financial liabilities:
Repurchase agreements ^(c)	$	346	$	(8	)	$	(338	)	—
Total	$	346	$	(8	)	$	(338	)	—



	December 31, 2016
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments^(a)			Collateral ^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	3	$	(3	)	—			—
Total	$	3	$	(3	)	—			—

Offsetting of financial liabilities:
Repurchase agreements ^(c)	$	497	$	(3	)	$	(494	)	—
Total	$	497	$	(3	)	$	(494	)	—


(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, excess collateral, if any, is not reflected above.


(c)	Repurchase agreements are collateralized by federal agency CMOs and U.S. Treasury securities and contracted on an overnight basis. These securities are reported in “securities available for sale” on our balance sheet.

As of June 30, 2017, the carrying amount of assets pledged as collateral against repurchase agreements totaled $425 million. Assets pledged as collateral are reported in “securities available for sale” and “held-to-maturity securities” on our balance sheet. At June 30, 2017, the liabilities associated with collateral pledged were solely comprised of customer sweep financing activity and had a carrying value of $338 million. The collateral pledged under customer sweep repurchase agreements is posted to a third-party custodian and cannot be sold or repledged by the secured party. The risk related to a decline in the market value of collateral pledged is minimal given the collateral's high credit quality and the overnight duration of the repurchase agreements.

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 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. With the exception of collateral pledged against customer sweep repurchase agreements, the collateral we pledge and receive can generally be sold or repledged by the secured parties.

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Table of Contents

14. 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. As part of the acquisition of First Niagara, Key also obtained two frozen defined benefit plans sponsored by First Niagara, both of which provide benefits based upon length of service and compensation levels. Effective September 30, 2016, the two First Niagara plans merged into another defined benefit plan maintained by Key to form the KeyCorp Consolidated Cash Balance Plan. Effective December 31, 2016, our original cash balance pension plan merged into the KeyCorp Consolidated Cash Balance Plan.

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



	Three months ended June 30,						Six months ended June 30,
in millions	2017			2016			2017			2016
Interest cost on PBO	$	12		$	11		$	24		$	21
Expected return on plan assets	(17		)	(13		)	(34		)	(26		)
Amortization of losses	4			4			8			8
Net pension cost	$	(1	)	$	2		$	(2	)	$	3

in millions

June 30, 2017

December 31, 2016

Cash and due from banks

Total assets


•	required distributions on the trust preferred securities;


•	the redemption price when a capital security is redeemed; and



dollars in millions	Trust Preferred Securities, Net of Discount ^(a)		Common Stock		Principal Amount of Debentures, Net of Discount ^(b)		Interest Rate of Trust Preferred Securities and Debentures ^(c)		Maturity of Trust Preferred Securities and Debentures
June 30, 2017
KeyCorp Capital I	$	155	$	6	$	161	1.888	%	2028
KeyCorp Capital II	106		4		110		6.875		2029
KeyCorp Capital III	139		4		143		7.750		2029
HNC Statutory Trust III	18		1		19		2.586		2035
Willow Grove Statutory Trust I	18		1		19		2.556		2036
HNC Statutory Trust IV	16		1		17		2.450		2037
Westbank Capital Trust II	7		—		7		3.464		2034
Westbank Capital Trust III	7		—		7		3.464		2034
Total	$	466	$	17	$	483	4.890	%	—

December 31, 2016	$	475	$	17	$	492	4.845	%	—



June 30, 2017	Maximum Potential Undiscounted Future Payments		Liability Recorded
in millions	Maximum Potential Undiscounted Future Payments		Liability Recorded
Financial guarantees:
Standby letters of credit	$	11,839	$	66
Recourse agreement with FNMA	2,848		5
Residential mortgage reserve	1,291		5
Return guarantee agreement with LIHTC investors	3		3
Written put options ^(a)	2,243		50
Total	$	18,224	$	129


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



in millions	Unrealized gains (losses) on securities available for sale			Unrealized gains (losses) on derivative financial instruments			Foreign currency translation adjustment			Net pension and postretirement benefit costs			Total
Balance at December 31, 2016	$	(185	)	$	(14	)	$	(3	)	$	(339	)	$	(541	)
Other comprehensive income before reclassification, net of income taxes	40			(6		)	7			—			41
Amounts reclassified from accumulated other comprehensive income, net of income taxes ^(a)	—			(11		)	—			5			(6		)
Net current-period other comprehensive income, net of income taxes	40			(17		)	7			5			35
Balance at June 30, 2017	$	(145	)	$	(31	)	$	4		$	(334	)	$	(506	)

Balance at March 31, 2017	$	(179	)	$	(38	)	$	(2	)	$	(335	)	$	(554	)
Other comprehensive income before reclassification, net of income taxes	34			9			6			(1		)	48
Amounts reclassified from accumulated other comprehensive income, net of income taxes ^(a)	—			(2		)	—			2			—
Net current-period other comprehensive income, net of income taxes	34			7			6			1			48
Balance at June 30, 2017	$	(145	)	$	(31	)	$	4		$	(334	)	$	(506	)

Balance at December 31, 2015	$	(58	)	$	20		$	(2	)	$	(365	)	$	(405	)
Other comprehensive income before reclassification, net of income taxes	187			121			7			(2		)	313
Amounts reclassified from accumulated other comprehensive income, net of income taxes ^(a)	—			(27		)	—			5			(22		)
Net current-period other comprehensive income, net of income taxes	187			94			7			3			291
Balance at June 30, 2016	$	129		$	114		$	5		$	(362	)	$	(114	)

Balance at March 31, 2016	70			$	78		$	3		$	(364	)	$	(213	)
Other comprehensive income before reclassification, net of income taxes	59			49			2			—			110
Amounts reclassified from accumulated other comprehensive income, net of income taxes ^(a)	—			(13		)	—			2			(11		)
Net current-period other comprehensive income, net of income taxes	59			36			2			2			99
Balance at June 30, 2016	$	129		$	114		$	5		$	(362	)	$	(114	)


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



Six months ended June 30, 2017	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
in millions
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	20		Interest income — Loans
Interest rate	(2		)	Interest expense — Long-term debt
	18			Income (loss) from continuing operations before income taxes
	7			Income taxes
	$	11		Income (loss) from continuing operations
Net pension and postretirement benefit costs
Amortization of losses	$	(8	)	Personnel expense
	(8		)	Income (loss) from continuing operations before income taxes
	(3		)	Income taxes
	$	(5	)	Income (loss) from continuing operations




Three months ended June 30, 2016	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
in millions
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	22		Interest income — Loans
Interest rate	(1		)	Interest expense — Long term debt
	21			Income (loss) from continuing operations before income taxes
	8			Income taxes
	$	13		Income (loss) from continuing operations
Net pension and postretirement benefit costs
Amortization of losses	$	(4	)	Personnel expense
	(4		)	Income (loss) from continuing operations before income taxes
	(2		)	Income taxes
	$	(2	)	Income (loss) from continuing operations


•	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 that each line of business actually uses the services;


•	The consolidated provision for credit 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


•	Income taxes are allocated based on the statutory federal income tax rate of 35% and a blended state income tax rate (net of the federal income tax benefit) of 2.2%; and


•	Capital is assigned to each line of business based on economic equity.


(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.



Other Segments						Total Segments						Reconciling Items						Key
2017			2016			2017			2016			2017			2016			2017			2016

$	(5	)	$	(11	)	$	983		$	602		$	4		$	3		$	987		$	605
40			42			660			478			(7		)	(5		)	653			473
35			31			1,643			1,080			(3		)	(2		)	1,640			1,078
—			(3		)	66			52			—			—			66			52
1			1			51			26			42			36			93			62
10			9			911			688			(9		)	1			902			689
24			24			615			314			(36		)	(39		)	579			275
(4		)	(2		)	168			75			4			2			172			77
28			26			447			239			(40		)	(41		)	407			198
—			—			—			—			5			3			5			3
28			26			447			239			(35		)	(38		)	412			201
—			1			—			(1		)	—			—			—			(1		)
$	28		$	25		$	447		$	240		$	(35	)	$	(38	)	$	412		$	202


$	1,288		$	1,519		$	86,469		$	61,062		$	33		$	86		$	86,502		$	61,148
36,104			30,121			131,700			96,992			791			421			132,491			97,413
2,050			972			102,912			73,895			(133		)	9			102,779			73,904

$	—		$	—		$	66		$	44		—			—			$	66		$	44
74.38		%	59.85		%	23.13		%	19.41		%	(2.15		)%	(2.67		)%	10.74		%	7.18		%
74.38			59.85			23.13			19.41			(1.88		)	(2.48		)	10.87			7.29
2			4			13,265			9,473			5,079			3,946			18,344			13,419



Calendar month	Total number of shares purchased ^(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)
April 1-30	1,363,746	18.55	1,209,170	8,063,302
May 1-31	2,580,217	18.57	2,422,186	5,675,390
June 1-30	1,127,984	18.65	1,125,955	4,168,178
Total	5,071,947	18.58	4,757,311


(a)	Includes common shares deemed surrendered by employees in connection with our 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 as follows: on April 30, 2017, at $18.24; on May 31, 2017, at $17.47; and on June 30, 2017, at $18.74.



12	Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

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 June 30, 2017, 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.



	KEYCORP
	(Registrant)

Date: August 4, 2017	/s/ Douglas M. Schosser
	By: Douglas M. Schosser
	Chief Accounting Officer (Principal Accounting Officer)