KeyCorp (KeyBank) - 10-Q quarterly report FY2014 Q3

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Non-accelerated filer

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Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

September 30, 2014

Commission File Number 1-11302

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 x No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Shares with a par value of $1 each		866,324,529 Shares
Title of class		Outstanding at October 31, 2014

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page Number
	Consolidated Balance Sheets — September 30, 2014 (Unaudited), December 31, 2013, and September 30, 2013 (Unaudited)		1

	Consolidated Statements of Income (Unaudited) — Three and nine months ended September 30, 2014, and September 30, 2013		2

	Consolidated Statements of Comprehensive Income (Unaudited) — Three and nine months ended September 30, 2014, and September 30, 2013		3

	Consolidated Statements of Changes in Equity (Unaudited) — Nine months ended September 30, 2014, and September 30, 2013		4

	Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2014, and September 30, 2013		5

	Notes to Consolidated Financial Statements (Unaudited)		6

	Note 1. Basis of Presentation		6

	Note 2. Earnings Per Common Share		10

	Note 3. Loans and Loans Held for Sale		11

	Note 4. Asset Quality		13

	Note 5. Fair Value Measurements		28

	Note 6. Securities		45

	Note 7. Derivatives and Hedging Activities		49

	Note 8. Mortgage Servicing Assets		57

	Note 9. Variable Interest Entities		58

	Note 10. Income Taxes		60

	Note 11. Acquisitions and Discontinued Operations		61


	Note 12. Securities Financing Activities	70

	Note 13. Employee Benefits	72

	Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	73

	Note 15. Contingent Liabilities and Guarantees	74

	Note 16. Accumulated Other Comprehensive Income	77

	Note 17. Shareholders’ Equity	80

	Note 18. Line of Business Results	81

	Report of Independent Registered Public Accounting Firm	85

Item 2.	Management’s Discussion & Analysis of Financial Condition & Results of Operations	86

	Introduction
	Terminology	86
	Selected financial data	87
	Forward-looking statements	88
	Economic overview	89
	Long-term financial goals	90
	Strategic developments	90
	Demographics	91
	Supervision and regulation	93
	Regulatory reform developments	93
	Regulatory capital rules	93
	Liquidity coverage ratio	94

	Highlights of Our Performance	95
	Financial performance	95

	Results of Operations	100
	Net interest income	100
	Noninterest income	103
	Trust and investment services income	105
	Investment banking and debt placement fees	105
	Service charges on deposit accounts	105
	Operating lease income and other leasing gains	105
	Cards and payments income	105
	Consumer mortgage income	106
	Mortgage servicing fees	106
	Other income	106
	Noninterest expense	106
	Personnel	107
	Operating lease expense	107
	Other expense	107


		Income taxes			107

		Line of Business Results			108
		Key Community Bank summary of operations			108
		Key Corporate Bank summary of operations			109
		Other Segments			110

		Financial Condition			111
		Loans and loans held for sale			111
		Commercial loan portfolio			111
		Commercial, financial and agricultural			111
		Commercial real estate loans			112
		Commercial lease financing			113
		Commercial loan modification and restructuring			113
		Extensions			114
		Guarantors			115
		Consumer loan portfolio			115
		Loans held for sale			116
		Loan sales			116
		Securities			117
		Securities available-for-sale			118
		Held-to-maturity securities			119
		Other investments			120
		Deposits and other sources of funds			120
		Capital			121
		CCAR and capital actions			121
		Dividends			121
		Common shares outstanding			121
		Capital adequacy			122

		Risk Management			125
		Overview			125
		Market risk management			126
		Trading market risk			126
		Management of trading risks			126
		Covered positions			126
		VaR and stressed VaR			127
		Internal capital adequacy assessment			128
		Nontrading market risk			128
		Net interest income simulation analysis			129
		Economic value of equity modeling			130
		Management of interest rate exposure			130
		Liquidity risk management			131
		Governance structure			131
		Factors affecting liquidity			131
		Managing liquidity risk			132
		Final U.S. liquidity coverage ratio			132
		Long-term liquidity strategy			133


	Sources of liquidity	133
	Liquidity programs	133
	Liquidity for KeyCorp	133
	Our liquidity position and recent activity	133
	Credit risk management	134
	Credit policy, approval, and evaluation	134
	Allowance for loan and lease losses	135
	Net loan charge-offs	137
	Nonperforming assets	139
	Operational and compliance risk management	141
	Cybersecurity	142

	Critical Accounting Policies and Estimates	142

	European Sovereign and Non-Sovereign Debt Exposures	143

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	144
Item 4.	Controls and Procedures	144

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	144
Item 1A.	Risk Factors	144
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	145
Item 6.	Exhibits	145
	Signature	146
	Exhibits

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


in millions, except per share data	September 30, 2014			December 31, 2013			September 30, 2013
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	651		$	617		$	748
Short-term investments		2,342			5,590			3,535
Trading account assets		965			738			806
Securities available for sale		12,245			12,346			12,606
Held-to-maturity securities (fair value: $4,911, $4,617, and $4,730)		4,997			4,756			4,835
Other investments		822			969			1,007
Loans, net of unearned income of $685, $805, and $827		56,155			54,457			53,597
Less: Allowance for loan and lease losses		804			848			868

Net loans		55,351			53,609			52,729
Loans held for sale		784			611			699
Premises and equipment		832			885			890
Operating lease assets		304			305			293
Goodwill		1,051			979			979
Other intangible assets		126			127			137
Corporate-owned life insurance		3,456			3,408			3,384
Derivative assets		413			407			475
Accrued income and other assets (including $1 of consolidated LIHTC guaranteed funds VIEs, see Note 9)^(a)		3,024			3,015			2,747
Discontinued assets (including $201 of loans in portfolio at fair value)		2,421			4,572			4,838

Total assets	$	89,784		$	92,934		$	90,708


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	33,941		$	33,952		$	33,132
Savings deposits		2,390			2,472			2,489
Certificates of deposit ($100,000 or more)		2,533			2,631			2,698
Other time deposits		3,338			3,648			3,833

Total interest-bearing deposits		42,202			42,703			42,152
Noninterest-bearing deposits		25,697			26,001			25,778
Deposits in foreign office — interest-bearing		557			558			605

Total deposits		68,456			69,262			68,535
Federal funds purchased and securities sold under repurchase agreements		657			1,534			1,455
Bank notes and other short-term borrowings		996			343			466
Derivative liabilities		384			414			450
Accrued expense and other liabilities		1,613			1,557			1,375
Long-term debt		7,172			7,650			6,154
Discontinued liabilities		3			1,854			2,037

Total liabilities		79,281			82,614			80,472

EQUITY
Preferred stock, $1 par value, authorized 25,000,000 shares:
7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839, and 2,904,839 shares		291			291			291
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905, 1,016,969,905, and 1,016,969,905 shares		1,017			1,017			1,017
Capital surplus		3,984			4,022			4,029
Retained earnings		8,082			7,606			7,431
Treasury stock, at cost (148,492,881, 126,245,538, and 119,148,654 shares)		(2,563	)		(2,281	)		(2,193	)
Accumulated other comprehensive income (loss)		(325	)		(352	)		(369	)

Key shareholders’ equity		10,486			10,303			10,206
Noncontrolling interests		17			17			30

Total equity		10,503			10,320			10,236

Total liabilities and equity	$	89,784		$	92,934		$	90,708

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended September 30,						Nine months ended September 30,
dollars in millions, except per share amounts	2014			2013			2014			2013
INTEREST INCOME
Loans	$	531		$	532		$	1,576		$	1,619
Loans held for sale		4			5			13			14
Securities available for sale		67			76			210			236
Held-to-maturity securities		25			22			70			60
Trading account assets		6			5			19			15
Short-term investments		2			1			4			4
Other investments		4			6			16			23

Total interest income		639			647			1,908			1,971

INTEREST EXPENSE
Deposits		28			37			91			124
Federal funds purchased and securities sold under repurchase agreements		1			1			2			2
Bank notes and other short-term borrowings		2			2			6			5
Long-term debt		33			29			98			98

Total interest expense		64			69			197			229


NET INTEREST INCOME		575			578			1,711			1,742
Provision (credit) for loan and lease losses		21			28			37			111

Net interest income (expense) after provision for loan and lease losses		554			550			1,674			1,631

NONINTEREST INCOME
Trust and investment services income		99			100			291			295
Investment banking and debt placement fees		88			86			271			249
Service charges on deposit accounts		68			73			197			213
Operating lease income and other leasing gains		17			44			81			91
Corporate services income		42			44			125			132
Cards and payments income		42			43			123			122
Corporate-owned life insurance income		26			26			80			87
Consumer mortgage income		3			3			7			16
Mortgage servicing fees		9			15			35			36
Net gains (losses) from principal investing		9			17			60			32
Other income^(a)		14			8			37			40

Total noninterest income		417			459			1,307			1,313

NONINTEREST EXPENSE
Personnel		405			414			1,182			1,211
Net occupancy		66			66			198			202
Computer processing		39			38			118			116
Business services and professional fees		36			37			118			109
Equipment		25			25			73			78
Operating lease expense		11			14			31			37
Marketing		15			16			33			33
FDIC assessment		9			7			21			23
Intangible asset amortization		10			12			29			34
Provision (credit) for losses on lending-related commitments		(2	)		3			(2	)		11
OREO expense, net		1			1			3			5
Other expense		89			83			251			249

Total noninterest expense		704			716			2,055			2,108

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		267			293			926			836
Income taxes		64			59			232			201

INCOME (LOSS) FROM CONTINUING OPERATIONS		203			234			694			635
Income (loss) from discontinued operations, net of taxes of ($10), $21, ($24), and $29 (see Note 11)^(b)		(17	)		37			(41	)		45

NET INCOME (LOSS)^(b)		186			271			653			680
Less: Net income (loss) attributable to noncontrolling interests		—			(1	)		6			—

NET INCOME (LOSS) ATTRIBUTABLE TO KEY^(b)	$	186		$	272		$	647		$	680


Income (loss) from continuing operations attributable to Key common shareholders	$	197		$	229		$	671		$	618
Net income (loss) attributable to Key common shareholders^(b)		180			266			630			663

Per common share:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.25		$	.77		$	.68
Income (loss) from discontinued operations, net of taxes ^(b)		(.02	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders ^(b), (c)		.21			.29			.72			.73

Per common share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.25		$	.76		$	.67
Income (loss) from discontinued operations, net of taxes ^(b)		(.02	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders ^{(b), (c)}		.21			.29			.71			.72

Cash dividends declared per common share	$	.065		$	.055		$	.185		$	.16

Weighted-average common shares outstanding (000)		867,350			901,904			875,728			911,918
Effect of convertible preferred stock		—			—			—			—
Effect of common share options and other stock awards		6,772			6,349			6,723			5,661

Weighted-average common shares and potential common shares outstanding (000)^(d)		874,122			908,253			882,451			917,579

(a)	For each of the three months ended September 30, 2014, and September 30, 2013, net securities gains (losses) totaled less than $1 million. For the three months ended September 30, 2014, and September 30, 2013, we did not have any impairment losses related to securities.

(b)

For the three and nine months ended September 30, 2014, income (loss) from discontinued operations, net of taxes; consolidated net income (loss); earnings per common share from discontinued operations, net of taxes; and consolidated earnings per common share have been revised from our financial results reported on Form 8-K on October 15, 2014. For further information regarding these changes, see KeyCorp’s Form 8-K filed on November 4, 2014.

(c)	EPS may not foot due to rounding.

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

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended September 30,						Nine months ended September 30,
in millions	2014			2013			2014			2013
Net income (loss)^(a)	$	186		$	271		$	653		$	680
Other comprehensive income (loss), net of tax:

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($20), ($48), $14, and ($135)		(33	)		(81	)		24			(228	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($6), $6, ($3), and ($17)		(8	)		10			(4	)		(29	)
Foreign currency translation adjustments, net of income taxes of ($3), $1, ($3), and ($3)		(9	)		2			(12	)		(12	)
Net pension and postretirement benefit costs, net of income taxes of $10, $12, $13, and $16		14			18			19			24

Total other comprehensive income (loss), net of tax		(36	)		(51	)		27			(245	)

Comprehensive income (loss)		150			220			680			435
Less: Comprehensive income attributable to noncontrolling interests		—			(1	)		6			—

Comprehensive income (loss) attributable to Key	$	150		$	221		$	674		$	435

(a)

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Equity (Unaudited)


	Key Shareholders’ Equity
dollars in millions, except per share amounts	Preferred Shares Outstanding (000)		Common Shares Outstanding (000)			Preferred Stock		Common Shares		Capital Surplus			Retained Earnings			Treasury Stock, at Cost			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests
BALANCE AT DECEMBER 31, 2012		2,905		925,769		$	291	$	1,017	$	4,126		$	6,913		$	(1,952	)	$	(124	)	$	38
Net income (loss)														680									—
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($135)																				(228	)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($17)																				(29	)
Foreign currency translation adjustments, net of income taxes of ($3)																				(12	)
Net pension and postretirement benefit costs, net of income taxes of $16																				24
Deferred compensation											3
Cash dividends declared on common shares ($.16 per share)														(145	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share)														(17	)
Common shares repurchased				(33,940	)												(375	)
Common shares reissued (returned) for stock options and other employee benefit plans				5,992							(100	)					134
Net contribution from (distribution to) noncontrolling interests																							(8	)

BALANCE AT SEPTEMBER 30, 2013		2,905		897,821		$	291	$	1,017	$	4,029		$	7,431		$	(2,193	)	$	(369	)	$	30

BALANCE AT DECEMBER 31, 2013		2,905		890,724		$	291	$	1,017	$	4,022		$	7,606		$	(2,281	)	$	(352	)	$	17

Net income (loss)^(a)														647									6
Other comprehensive income (loss):
Net unrealized gains (losses) on securities available for sale, net of income taxes of $14																				24
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($3)																				(4	)
Foreign currency translation adjustments, net of income taxes of ($3)																				(12	)
Net pension and postretirement benefit costs, net of income taxes of $13																				19
Cash dividends declared on common shares ($.185 per share)														(161	)
Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share)														(17	)
Common shares repurchased				(26,499	)												(355	)
Common shares reissued (returned) for stock options and other employee benefit plans				4,252							(38	)					73
LIHTC guaranteed funds put														7
Net contribution from (distribution to) noncontrolling interests																							(6	)

BALANCE AT SEPTEMBER 30, 2014		2,905		868,477		$	291	$	1,017	$	3,984		$	8,082		$	(2,563	)	$	(325	)	$	17

(a)

For the nine months ended September 30, 2014, income (loss) from discontinued operations, net of taxes; consolidated net income (loss); earnings per common share from discontinued operations, net of taxes; and consolidated earnings per common share have been revised from our financial results reported on Form 8-K on October 15, 2014. For further information regarding these changes, see KeyCorp’s Form 8-K filed on November 4, 2014.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended September 30,
in millions	2014			2013
OPERATING ACTIVITIES
Net income (loss)^(a)	$	653		$	680
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for loan and lease losses		37			111
Provision (credit) for losses on lending-related commitments		(2	)		11
Provision (credit) for losses on LIHTC guaranteed funds		(6	)		4
Depreciation, amortization and accretion expense, net		174			168
Increase in cash surrender value of corporate-owned life insurance		(73	)		(74	)
Stock-based compensation expense		31			27
FDIC reimbursement (payments), net of FDIC expense		1			296
Deferred income taxes (benefit)		(29	)		(4	)
Proceeds from sales of loans held for sale		2,832			3,815
Originations of loans held for sale, net of repayments		(2,951	)		(3,779	)
Net losses (gains) on sales of loans held for sale		(59	)		(85	)
Net losses (gains) from principal investing		(60	)		(32	)
Net losses (gains) and writedown on OREO		3			5
Net losses (gains) on leased equipment		(35	)		(36	)
Net losses (gains) on sales of fixed assets		5			9
Gain on sale of Victory		(10	)		(146	)
Loss on sale of residual interests and deconsolidation of securitization trusts		40			—
Net decrease (increase) in trading account assets		(227	)		(201	)
Other operating activities, net		141			99

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		465			868
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired		(113	)		817
Proceeds from sale of residual interests		57			—
Proceeds from sale of Victory		10			131
Net decrease (increase) in short-term investments, excluding acquisitions		3,285			405
Purchases of securities available for sale		(1,993	)		(4,628	)
Proceeds from sales of securities available for sale		—			29
Proceeds from prepayments and maturities of securities available for sale		2,123			3,725
Proceeds from prepayments and maturities of held-to-maturity securities		628			667
Purchases of held-to-maturity securities		(869	)		(1,572	)
Purchases of other investments		(42	)		(30	)
Proceeds from sales of other investments		266			39
Proceeds from prepayments and maturities of other investments		3			82
Net decrease (increase) in loans, excluding acquisitions, sales and transfers		(1,936	)		(1,098	)
Proceeds from sales of portfolio loans		91			150
Proceeds from corporate-owned life insurance		24			23
Purchases of premises, equipment, and software		(53	)		(60	)
Proceeds from sales of premises and equipment		1			8
Proceeds from sales of other real estate owned		13			19

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,495			(1,293	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions		(806	)		1,605
Net increase (decrease) in short-term borrowings		(224	)		26
Net proceeds from issuance of long-term debt		648			1,013
Payments on long-term debt		(1,034	)		(1,540	)
Repurchase of common shares		(355	)		(375	)
Net proceeds from reissuance of common shares		23			22
Cash dividends paid		(178	)		(162	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,926	)		589

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		34			164
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		617			584

CASH AND DUE FROM BANKS AT END OF PERIOD	$	651		$	748

Additional disclosures relative to cash flows:
Interest paid	$	250		$	271
Income taxes paid (refunded)		109			114
Noncash items:
Assets acquired	$	35		$	41
Liabilities assumed		22			—
Reduction of secured borrowing and related collateral		78			—
LIHTC guaranteed funds put		7			—
Loans transferred to portfolio from held for sale		10			2
Loans transferred to held for sale from portfolio		5			53
Loans transferred to other real estate owned		16			16

(a)

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

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

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

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

AICPA: American Institute of Certified Public Accountants.

ALCO: Asset/Liability Management Committee.

ALLL: Allowance for loan and lease losses.

A/LM: Asset/liability management.

AOCI: Accumulated other comprehensive income (loss).

APBO: Accumulated postretirement benefit obligation.

Austin: Austin Capital Management, Ltd.

BHCs: Bank holding companies.

CCAR: Comprehensive Capital Analysis and Review.

CMBS: Commercial mortgage-backed securities.

CMO: Collateralized mortgage obligation.

Common shares: KeyCorp common shares, $1 par value.

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

EPS: Earnings per share.

ERISA: Employee Retirement Income Security Act of 1974.

ERM: Enterprise risk management.

EVE: Economic value of equity.

FASB: Financial Accounting Standards Board.

FDIC: Federal Deposit Insurance Corporation.

Federal Reserve: Board of Governors of the Federal Reserve System.

FHLMC: Federal Home Loan Mortgage Corporation.

FNMA: Federal National Mortgage Association.

FOMC: Federal Open Market Committee of the Federal Reserve Board.

FSOC: Financial Stability Oversight Council.

GAAP: U.S. generally accepted accounting principles.

GNMA: Government National Mortgage Association.

ISDA: International Swaps and Derivatives Association.

KAHC: Key Affordable Housing Corporation.

KEF: Key Equipment Finance.

KREEC: Key Real Estate Equity Capital, Inc.

LIBOR: London Interbank Offered Rate.

LIHTC: Low-income housing tax credit.

Moody’s: Moody’s Investor Services, Inc.

MSRs: Mortgage servicing rights.

N/A: Not applicable.

NASDAQ: The NASDAQ Stock Market LLC.

N/M: Not meaningful.

NOW: Negotiable Order of Withdrawal.

NYSE: New York Stock Exchange.

OCC: Office of the Comptroller of the Currency.

OCI: Other comprehensive income (loss).

OREO: Other real estate owned.

OTTI: Other-than-temporary impairment.

QSPE: Qualifying special purpose entity.

PBO: Projected benefit obligation.

PCI: Purchased credit impaired.

S&P: Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc.

SEC: U.S. Securities & Exchange Commission.

Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A.

SIFIs: Systemically important financial institutions, including

BHCs with total consolidated assets of at least $50 billion and nonbank financial companies designated by FSOC for supervision by the Federal Reserve.

TDR: Troubled debt restructuring.

TE: Taxable-equivalent.

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

VaR: Value at risk.

VEBA: Voluntary Employee Beneficiary Association.

Victory: Victory Capital Management and/or

Victory Capital Advisors.

VIE: Variable interest entity.

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

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

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

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

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

Offsetting Derivative Positions

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

Accounting Guidance Adopted in 2014

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

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

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

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

Accounting Guidance Pending Adoption at September 30, 2014

Going concern. In August 2014, the FASB issued new accounting guidance that requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. Disclosure is required when conditions or events raise substantial doubt about an entity’s ability to continue as a going concern. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Troubled debt restructurings. In August 2014, the FASB issued new accounting guidance that clarifies how to account for certain government-guaranteed mortgage loans upon foreclosure. This accounting guidance will be effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and can be implemented using either a modified retrospective method or a prospective method. Early adoption is permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Consolidation. In August 2014, the FASB issued new accounting guidance that clarifies how to measure the financial assets and the financial liabilities of a consolidated collateralized financing entity. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a retrospective method or a cumulative-effect approach. 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.

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

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

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

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

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

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

2. Earnings Per Common Share

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

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


	Three months ended September 30,						Nine months ended September 30,
dollars in millions, except per share amounts	2014			2013			2014			2013
EARNINGS
Income (loss) from continuing operations	$	203		$	234		$	694		$	635
Less: Net income (loss) attributable to noncontrolling interests		—			(1	)		6			—
Income (loss) from continuing operations attributable to Key		203			235			688			635
Less: Dividends on Series A Preferred Stock		6			6			17			17
Income (loss) from continuing operations attributable to Key common shareholders		197			229			671			618
Income (loss) from discontinued operations, net of taxes^{(a), (b)}		(17	)		37			(41	)		45

Net income (loss) attributable to Key common shareholders^(b)	$	180		$	266		$	630		$	663

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		867,350			901,904			875,728			911,918
Effect of convertible preferred stock		—			—			—			—
Effect of common share options and other stock awards		6,772			6,349			6,723			5,661

Weighted-average common shares and potential common shares outstanding (000)^(c)		874,122			908,253			882,451			917,579

EARNINGS PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.25		$	.77		$	.68
Income (loss) from discontinued operations, net of taxes^{(a), (b)}		(.02	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders^{(b), (d)}		.21			.29			.72			.73

Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.23		$	.25		$	.76		$	.67
Income (loss) from discontinued operations, net of taxes^{(a), (b)}		(.02	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders — assuming dilution^(b), (d)		.21			.29			.71			.72

(a)

In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (“Acquisitions and Discontinued Operations”).

(b)

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

(d)	EPS may not foot due to rounding.

3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:


in millions	September 30, 2014		December 31, 2013		September 30, 2013
Commercial, financial and agricultural^(a)	$	26,683	$	24,963	$	24,317
Commercial real estate:
Commercial mortgage		8,276		7,720		7,544
Construction		1,036		1,093		1,058
Total commercial real estate loans		9,312		8,813		8,602
Commercial lease financing^(b)		4,135		4,551		4,550
Total commercial loans		40,130		38,327		37,469
Residential — prime loans:
Real estate — residential mortgage		2,213		2,187		2,198
Home equity:
Key Community Bank		10,380		10,340		10,285
Other		283		334		353
Total home equity loans		10,663		10,674		10,638
Total residential — prime loans		12,876		12,861		12,836
Consumer other — Key Community Bank		1,546		1,449		1,440
Credit cards		724		722		698
Consumer other:
Marine		828		1,028		1,083
Other		51		70		71
Total consumer other		879		1,098		1,154
Total consumer loans		16,025		16,130		16,128

Total loans^{(c) (d)}	$	56,155	$	54,457	$	53,597

(a)	Loan balances include $90 million, $94 million, and $96 million of commercial credit card balances at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

(b)

Commercial lease financing includes receivables of $367 million and $58 million held as collateral for a secured borrowing at September 30, 2014, and December 31, 2013, respectively. Principal reductions are based on the cash payments received from these related receivables. We expect to record additional commercial lease financing receivables held as collateral for a secured borrowing through the fourth quarter of 2014. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”) beginning on page 200 of our 2013 Form 10-K.

(c)

At September 30, 2014, total loans include purchased loans of $143 million, of which $14 million were PCI loans. At December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. At September 30, 2013, total loans include purchased loans of $176 million, of which $18 million were PCI loans.

(d)	Total loans exclude loans of $2.4 billion at September 30, 2014, $4.5 billion at December 31, 2013, and $4.7 billion at September 30, 2013, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:


in millions	September 30, 2014		December 31, 2013		September 30, 2013

Commercial, financial and agricultural	$	30	$	278	$	68
Real estate — commercial mortgage		725		307		608
Commercial lease financing		10		9		—
Real estate — residential mortgage		19		17		23

Total loans held for sale	$	784	$	611	$	699

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


in millions	September 30, 2014			December 31, 2013			September 30, 2013
Balance at beginning of the period	$	435		$	699		$	402
New originations		1,593			1,669			1,467
Transfers from held to maturity, net		—			1			15
Loan sales		(1,243	)		(1,750	)		(1,181	)
Loan draws (payments), net		(1	)		(8	)		(4	)

Balance at end of period	$	784		$	611		$	699

4. Asset Quality

We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by management.

Our nonperforming assets and past due loans were as follows:


in millions	September 30, 2014		December 31, 2013		September 30, 2013
Total nonperforming loans^(a)	$	401	$	508	$	541
Nonperforming loans held for sale		—		1		13
OREO		16		15		15
Other nonperforming assets		1		7		10

Total nonperforming assets	$	418	$	531	$	579

Nonperforming assets from discontinued operations - education lending^(b)	$	9	$	25	$	23

Restructured loans included in nonperforming loans	$	136	$	214	$	228
Restructured loans with an allocated specific allowance^(c)		115		71		104
Specifically allocated allowance for restructured loans^(d)		30		35		46

Accruing loans past due 90 days or more	$	71	$	71	$	90
Accruing loans past due 30 through 89 days		340		318		288

(a)	Loan balances exclude $14 million, $16 million, and $18 million of PCI loans at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

(b)	Includes restructured loans of approximately $16 million, $13 million, and $11 million at September 30, 2014, December 31, 2013, and September 30, 2013, respectively. See Note 11 (“Acquisitions and Discontinued Operations”) for further discussion.

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

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

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

At September 30, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $21 million and $14 million, respectively. Changes in the accretable yield during 2014 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at September 30, 2014.

At September 30, 2014, the approximate carrying amount of our commercial nonperforming loans outstanding represented 62% of their original contractual amount, total nonperforming loans outstanding represented 74% of their original contractual amount owed, and nonperforming assets in total were carried at 74% of their original contractual amount.

At September 30, 2014, our twenty largest nonperforming loans totaled $72 million, representing 18% of total loans on nonperforming status. At September 30, 2013, the twenty largest nonperforming loans totaled $119 million, representing 22% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $12 million for the nine months ended September 30, 2014, and $23 million for the year ended December 31, 2013.

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


			Unpaid				Average
September 30, 2014	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	11	$	20		—	$	12
Commercial real estate:
Commercial mortgage		22		27		—		23
Construction		9		20		—		7

Total commercial real estate loans		31		47		—		30

Total commercial loans		42		67		—		42

Real estate — residential mortgage		36		36		—		30

Home equity:
Key Community Bank		64		64		—		65
Other		2		2		—		2

Total home equity loans		66		66		—		67
Consumer other:
Marine		2		2		—		2

Total consumer other		2		2		—		2

Total consumer loans		104		104		—		99

Total loans with no related allowance recorded		146		171		—		141

With an allowance recorded:
Commercial, financial and agricultural		20		21	$	7		12
Commercial real estate:
Commercial mortgage		7		7		2		5

Total commercial real estate loans		7		7		2		5

Total commercial loans		27		28		9		17

Real estate — residential mortgage		19		19		4		24

Home equity:
Key Community Bank		41		41		16		39
Other		11		11		2		11

Total home equity loans		52		52		18		50

Consumer other — Key Community Bank		3		3		—		3
Credit cards		3		3		1		3
Consumer other:
Marine		46		46		5		47
Other		2		2		1		2

Total consumer other		48		48		6		49

Total consumer loans		125		125		29		129

Total loans with an allowance recorded		152		153		38		146

Total	$	298	$	324	$	38	$	287

(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.


			Unpaid				Average
December 31, 2013	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	33	$	69		—	$	33
Commercial real estate:
Commercial mortgage		21		25		—		55
Construction		48		131		—		48

Total commercial real estate loans		69		156		—		103

Total commercial loans		102		225		—		136

Real estate — residential mortgage		27		27		—		24

Home equity:
Key Community Bank		67		67		—		66
Other		2		2		—		2

Total home equity loans		69		69		—		68

Consumer other:
Marine		3		3		—		2

Total consumer other		3		3		—		2

Total consumer loans		99		99		—		94

Total loans with no related allowance recorded		201		324		—		230

With an allowance recorded:
Commercial, financial and agricultural		17		20	$	8		25
Commercial real estate:
Commercial mortgage		6		6		2		7
Construction		2		12		—		1

Total commercial real estate loans		8		18		2		8

Total commercial loans		25		38		10		33

Real estate — residential mortgage		29		29		9		23

Home equity:
Key Community Bank		35		35		10		29
Other		10		11		1		9

Total home equity loans		45		46		11		38

Consumer other — Key Community Bank		3		3		1		2
Credit cards		5		5		1		3
Consumer other:
Marine		49		49		10		55
Other		1		1		—		1

Total consumer other		50		50		10		56

Total consumer loans		132		133		32		122

Total loans with an allowance recorded		157		171		42		155

Total	$	358	$	495	$	42	$	385

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

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


			Unpaid				Average
September 30, 2013	Recorded		Principal		Specific		Recorded
in millions	Investment ^(a)		Balance ^(b)		Allowance		Investment
With no related allowance recorded:
Commercial, financial and agricultural	$	58	$	116		—	$	74
Commercial real estate:
Commercial mortgage		43		80		—		66
Construction		41		124		—		45

Total commercial real estate loans		84		204		—		111

Total commercial loans		142		320		—		185

Real estate — residential mortgage		16		16		—		16

Home equity:
Key Community Bank		69		69		—		69
Other		2		2		—		2

Total home equity loans		71		71		—		71

Consumer other:
Marine		3		3		—		3

Total consumer other		3		3		—		3

Total consumer loans		90		90		—		90

Total loans with no related allowance recorded		232		410		—		275

With an allowance recorded:
Commercial, financial and agricultural		50		51	$	17		36
Commercial real estate:
Commercial mortgage		3		3		1		4
Construction		3		13		—		2

Total commercial real estate loans		6		16		1		6

Total commercial loans		56		67		18		42

Real estate — residential mortgage		20		20		6		20

Home equity:
Key Community Bank		33		33		10		32
Other		11		11		2		10

Total home equity loans		44		44		12		42

Consumer other — Key Community Bank		3		3		—		3
Credit cards		6		6		1		5
Consumer other:
Marine		49		49		10		50
Other		1		1		—		1

Total consumer other		50		50		10		51

Total consumer loans		123		123		29		121

Total loans with an allowance recorded		179		190		47		163

Total	$	411	$	600	$	47	$	438

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

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

For each of the nine months ended September 30, 2014, and September 30, 2013, interest income recognized on the outstanding balances of accruing impaired loans totaled $5 million.

At September 30, 2014, aggregate restructured loans (accrual and nonaccrual loans) totaled $264 million, compared to $338 million at December 31, 2013, and $349 million at September 30, 2013. We added $58 million in restructured loans during the first nine months of 2014, which were offset by $132 million in payments and charge-offs.

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


			Pre-modification Outstanding		Post-modification Outstanding
September 30, 2014	Number		Recorded		Recorded
dollars in millions	of loans		Investment		Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		20	$	16	$	9
Commercial real estate:
Real estate — commercial mortgage		12		39		14
Real estate — construction		3		15		1

Total commercial real estate loans		15		54		15

Total commercial loans		35		70		24
Real estate — residential mortgage		464		28		28
Home equity:
Key Community Bank		1,125		70		64
Other		133		4		4

Total home equity loans		1,258		74		68
Consumer other — Key Community Bank		31		1		1
Credit cards		156		1		1
Consumer other:
Marine		211		16		14
Other		40		1		1

Total consumer other		251		17		15

Total consumer loans		2,160		121		113

Total nonperforming TDRs		2,195		191		137

Prior-year accruing^(a)
Commercial, financial and agricultural		25		6		3
Commercial real estate:
Real estate — commercial mortgage		4		18		8

Total commercial real estate loans		4		18		8

Total commercial loans		29		24		11
Real estate — residential mortgage		359		28		28
Home equity:
Key Community Bank		731		45		40
Other		325		10		8

Total home equity loans		1,056		55		48
Consumer other — Key Community Bank		53		2		2
Credit cards		564		4		3
Consumer other:
Marine		402		58		34
Other		72		2		1

Total consumer other		474		60		35

Total consumer loans		2,506		149		116

Total prior-year accruing TDRs		2,535		173		127

Total TDRs		4,730	$	364	$	264

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

A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2013, follows:


December 31, 2013 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		33	$	72	$	34
Commercial real estate:
Real estate — commercial mortgage		11		41		14
Real estate — construction		6		19		4

Total commercial real estate loans		17		60		18

Total commercial loans		50		132		52
Real estate — residential mortgage		676		43		43
Home equity:
Key Community Bank		1,708		91		86
Other		227		6		6

Total home equity loans		1,935		97		92
Consumer other — Key Community Bank		49		2		1
Credit cards		629		5		4
Consumer other:
Marine		360		24		21
Other		50		1		1

Total consumer other		410		25		22

Total consumer loans		3,699		172		162

Total nonperforming TDRs		3,749		304		214

Prior-year accruing^(a)
Commercial, financial and agricultural		50		7		3
Commercial real estate:
Real estate — commercial mortgage		4		18		10
Real estate — construction		1		23		42

Total commercial real estate loans		5		41		52

Total commercial loans		55		48		55
Real estate — residential mortgage		119		12		12
Home equity:
Key Community Bank		161		17		17
Other		212		7		6

Total home equity loans		373		24		23
Consumer other — Key Community Bank		31		1		1
Credit cards		240		2		1
Consumer other:
Marine		272		51		31
Other		54		1		1

Total consumer other		326		52		32

Total consumer loans		1,089		91		69

Total prior-year accruing TDRs		1,144		139		124

Total TDRs		4,893	$	443	$	338

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

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


September 30, 2013 dollars in millions	Number of loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
LOAN TYPE
Nonperforming:
Commercial, financial and agricultural		39	$	96	$	63
Commercial real estate:
Real estate — commercial mortgage		14		51		17
Real estate — construction		6		19		4

Total commercial real estate loans		20		70		21

Total commercial loans		59		166		84
Real estate — residential mortgage		401		24		24
Home equity:
Key Community Bank		1,677		89		85
Other		237		6		6

Total home equity loans		1,914		95		91
Consumer other — Key Community Bank		40		2		1
Credit cards		689		5		5
Consumer other:
Marine		346		42		22
Other		46		1		1

Total consumer other		392		43		23

Total consumer loans		3,436		169		144

Total nonperforming TDRs		3,495		335		228

Prior-year accruing^(a)
Commercial, financial and agricultural		68		9		4
Commercial real estate:
Real estate — commercial mortgage		3		17		12
Real estate — construction		1		23		35

Total commercial real estate loans		4		40		47

Total commercial loans		72		49		51
Real estate — residential mortgage		118		13		13
Home equity:
Key Community Bank		162		18		17
Other		214		6		6

Total home equity loans		376		24		23
Consumer other — Key Community Bank		32		1		1
Credit cards		267		2		2
Consumer other:
Marine		276		32		30
Other		56		1		1

Total consumer other		332		33		31

Total consumer loans		1,125		73		70

Total prior-year accruing TDRs		1,197		122		121

Total TDRs		4,692	$	457	$	349

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

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

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During the three months ended September 30, 2014, there were no significant commercial loan TDRs, and 93 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults from modifications resulting in TDR status during 2013. During the three months ended September 30, 2013, there were no significant commercial loan TDRs, and 138

consumer loan TDRs with a combined recorded investment of $7 million that experienced payment defaults from modifications resulting in TDR status during 2012. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL.

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

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


	September 30,		December 31,		September 30,
in millions	2014		2013		2013
Commercial loans:
Interest rate reduction	$	24	$	95	$	104
Forgiveness of principal		5		5		5
Other		6		7		26

Total	$	35	$	107	$	135

Consumer loans:
Interest rate reduction	$	140	$	130	$	110
Forgiveness of principal		4		5		5
Other		85		96		99

Total	$	229	$	231	$	214

Total commercial and consumer TDRs^(a)	$	264	$	338	$	349
Total loans		56,155		54,457		53,597

(a)	Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $1 million, $15 million, and $26 million at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

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

At September 30, 2014, approximately $55.3 billion, or 98.5%, of our total loans were current. At September 30, 2014, total past due loans and nonperforming loans of $813 million represented approximately 1.5% of total loans.

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


September 30, 2014 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	26,534	$	50	$	34	$	18	$	47	$	149		—	$	26,683
Commercial real estate:
Commercial mortgage		8,201		17		7		9		41		74	$	1		8,276
Construction		1,017		3		2		—		14		19		—		1,036

Total commercial real estate loans		9,218		20		9		9		55		93		1		9,312
Commercial lease financing		4,017		74		24		6		14		118		—		4,135

Total commercial loans	$	39,769	$	144	$	67	$	33	$	116	$	360	$	1	$	40,130

Real estate — residential mortgage	$	2,091	$	17	$	7	$	5	$	81	$	110	$	12	$	2,213
Home equity:
Key Community Bank		10,124		46		19		16		174		255		1		10,380
Other		266		4		2		1		10		17		—		283

Total home equity loans		10,390		50		21		17		184		272		1		10,663
Consumer other — Key Community Bank		1,528		7		3		6		2		18		—		1,546
Credit cards		705		5		4		9		1		19		—		724
Consumer other:
Marine		796		11		4		1		16		32		—		828
Other		49		1		—		—		1		2		—		51

Total consumer other		845		12		4		1		17		34		—		879

Total consumer loans	$	15,559	$	91	$	39	$	38	$	285	$	453	$	13	$	16,025

Total loans	$	55,328	$	235	$	106	$	71	$	401	$	813	$	14	$	56,155


December 31, 2013 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	24,823	$	39	$	8	$	16	$	77	$	140		—	$	24,963
Commercial real estate:
Commercial mortgage		7,638		20		7		17		37		81	$	1		7,720
Construction		1,068		10		—		1		14		25		—		1,093

Total commercial real estate loans		8,706		30		7		18		51		106		1		8,813
Commercial lease financing		4,463		32		33		4		19		88		—		4,551

Total commercial loans	$	37,992	$	101	$	48	$	38	$	147	$	334	$	1	$	38,327

Real estate — residential mortgage	$	2,038	$	19	$	5	$	4	$	107	$	135	$	14	$	2,187
Home equity:
Key Community Bank		10,038		51		31		14		205		301		1		10,340
Other		308		6		4		1		15		26		—		334

Total home equity loans		10,346		57		35		15		220		327		1		10,674
Consumer other — Key Community Bank		1,426		8		5		7		3		23		—		1,449
Credit cards		698		11		5		4		4		24		—		722
Consumer other:
Marine		979		15		6		2		26		49		—		1,028
Other		65		2		1		1		1		5		—		70

Total consumer other		1,044		17		7		3		27		54		—		1,098

Total consumer loans	$	15,552	$	112	$	57	$	33	$	361	$	563	$	15	$	16,130

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


September 30, 2013 in millions	Current		30-59 Days Past Due		60-89 Days Past Due		90 and Greater Days Past Due		Nonperforming Loans		Total Past Due and Nonperforming Loans		Purchased Credit Impaired		Total Loans
LOAN TYPE
Commercial, financial and agricultural	$	24,161	$	33	$	9	$	12	$	102	$	156		—	$	24,317
Commercial real estate:
Commercial mortgage		7,429		22		2		31		58		113	$	2		7,544
Construction		1,038		3		—		—		17		20		—		1,058

Total commercial real estate loans		8,467		25		2		31		75		133		2		8,602
Commercial lease financing		4,472		41		7		8		22		78		—		4,550

Total commercial loans	$	37,100	$	99	$	18	$	51	$	199	$	367	$	2	$	37,469

Real estate — residential mortgage	$	2,045	$	22	$	9	$	10	$	98	$	139	$	14	$	2,198
Home equity:
Key Community Bank		9,994		50		29		12		198		289		2		10,285
Other		327		8		3		2		13		26		—		353

Total home equity loans		10,321		58		32		14		211		315		2		10,638
Consumer other — Key Community Bank		1,419		8		5		6		2		21		—		1,440
Credit cards		675		7		4		8		4		23		—		698
Consumer other:
Marine		1,034		17		6		1		25		49		—		1,083
Other		66		2		1		—		2		5		—		71

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

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

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

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

Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically 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.

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

Credit quality indicators for our commercial and consumer loan portfolios, excluding $14 million and $18 million of PCI loans at September 30, 2014, and September 30, 2013, respectively, based on bond rating, regulatory classification, and payment activity as of September 30, 2014, and September 30, 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category^(a)


September 30, in millions
	Commercial, financial and agricultural				RE — Commercial				RE — Construction				Commercial Lease				Total
RATING^{(b), (c)}	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
AAA — AA	$	342	$	292	$	2		—	$	1	$	1	$	528	$	454	$	873	$	747
A		1,147		774		2	$	73		—		1		596		866		1,745		1,714
BBB — BB		23,822		21,837		7,735		6,867		895		879		2,848		3,021		35,300		32,604
B		594		487		298		294		100		26		75		133		1,067		940
CCC — C		778		927		238		308		40		151		88		76		1,144		1,462

Total	$	26,683	$	24,317	$	8,275	$	7,542	$	1,036	$	1,058	$	4,135	$	4,550	$	40,129	$	37,467

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

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

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

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications^{(a), (b)}


September 30, in millions
	Residential — Prime
GRADE	2014		2013
Pass	$	12,576	$	12,487
Substandard		287		333

Total	$	12,863	$	12,820

Credit Risk Profile Based on Payment Activity^(a)


September 30,	Consumer — Key Community Bank				Credit cards				Consumer — Marine				Consumer — Other				Total
in millions	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
Performing	$	1,544	$	1,438	$	723	$	694	$	812	$	1,058	$	50	$	69	$	3,129	$	3,259
Nonperforming		2		2		1		4		16		25		1		2		20		33

Total	$	1,546	$	1,440	$	724	$	698	$	828	$	1,083	$	51	$	71	$	3,149	$	3,292

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

(b)	Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days; and substandard = 90 days and greater plus nonperforming loans.

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

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

Although quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, we have not changed the accounting policies or methodology that we use to estimate the ALLL.

Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Most consumer loans are charged off when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans, and similar unsecured products, are charged off when payments are 180 days past due.

At September 30, 2014, the ALLL was $804 million, or 1.43% of loans, compared to $868 million, or 1.62% of loans, at September 30, 2013. At September 30, 2014, the ALLL was 200.5% of nonperforming loans, compared to 160.4% at September 30, 2013.

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2014			2013			2014			2013
Balance at beginning of period — continuing operations	$	814		$	876		$	848		$	888
Charge-offs		(49	)		(78	)		(162	)		(242	)
Recoveries		18			41			81			111

Net loans and leases charged off		(31	)		(37	)		(81	)		(131	)
Provision for loan and lease losses from continuing operations		21			28			37			111
Foreign currency translation adjustment		—			1			—			—

Balance at end of period — continuing operations	$	804		$	868		$	804		$	868

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


in millions	December 31, 2013		Provision			Charge-offs			Recoveries		September 30, 2014
Commercial, financial and agricultural	$	362	$	32		$	(35	)	$	27	$	386
Real estate — commercial mortgage		165		(7	)		(3	)		4		159
Real estate — construction		32		(16	)		(4	)		16		28
Commercial lease financing		62		(9	)		(6	)		8		55

Total commercial loans		621		—			(48	)		55		628
Real estate — residential mortgage		37		(10	)		(7	)		2		22
Home equity:
Key Community Bank		84		9			(29	)		7		71
Other		11		(1	)		(8	)		4		6

Total home equity loans		95		8			(37	)		11		77
Consumer other — Key Community Bank		29		14			(23	)		4		24
Credit cards		34		24			(27	)		1		32
Consumer other:
Marine		29		1			(18	)		7		19
Other		3		—			(2	)		1		2

Total consumer other:		32		1			(20	)		8		21

Total consumer loans		227		37			(114	)		26		176

Total ALLL — continuing operations		848		37			(162	)		81		804
Discontinued operations		39		15			(34	)		11		31

Total ALLL — including discontinued operations	$	887	$	52		$	(196	)	$	92	$	835


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

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

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

Total consumer other:		43		1			(25	)		15		34

Total consumer loans		267		75			(153	)		37		226

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

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

Our ALLL from continuing operations decreased by $64 million, or 7.4%, from the third quarter of 2013 primarily because of the improvement in the credit quality of our loan portfolios. The quality of new loan originations as well as decreasing levels of criticized, classified, and nonperforming loans and net loan charge-offs has also resulted in a reduction in our general allowance. Our general allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Our delinquency trends declined during 2013 and into 2014 due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio, reflecting our effort to maintain a moderate enterprise risk tolerance.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $299 million, with a corresponding allowance of $38 million at September 30, 2014. Loans outstanding collectively evaluated for impairment totaled $55.8 billion, with a corresponding allowance of $765 million at September 30, 2014. At September 30, 2014, PCI loans evaluated for impairment totaled $14 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the nine months ended September 30, 2014. At September 30, 2013, the loans outstanding individually evaluated for impairment totaled $411 million, with a corresponding allowance of $47 million. Loans outstanding collectively evaluated for impairment totaled $53.2 billion, with a corresponding allowance of $820 million at September 30, 2013. At September 30, 2013, PCI loans evaluated for impairment totaled $18 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the nine months ended September 30, 2013.

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


	Allowance						Outstanding
September 30, 2014 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	7	$	379		—	$	26,683		$	31	$	26,652			—
Commercial real estate:
Commercial mortgage		2		157		—		8,276			29		8,246		$	1
Construction		—		28		—		1,036			10		1,026			—

Total commercial real estate loans		2		185		—		9,312			39		9,272			1
Commercial lease financing		—		55		—		4,135			—		4,135			—

Total commercial loans		9		619		—		40,130			70		40,059			1
Real estate — residential mortgage		4		17	$	1		2,213			55		2,146			12
Home equity:
Key Community Bank		16		55		—		10,380			105		10,274			1
Other		2		4		—		283			12		271			—

Total home equity loans		18		59		—		10,663			117		10,545			1
Consumer other — Key Community Bank		—		24		—		1,546			4		1,542			—
Credit cards		1		31		—		724			3		721			—
Consumer other:
Marine		5		14		—		828			48		780			—
Other		1		1		—		51			2		49			—

Total consumer other		6		15		—		879			50		829			—

Total consumer loans		29		146		1		16,025			229		15,783			13

Total ALLL — continuing operations		38		765		1		56,155			299		55,842			14
Discontinued operations		1		30		—		2,392	^(a)		16		2,376	^(a)		—

Total ALLL — including discontinued operations	$	39	$	795	$	1	$	58,547		$	315	$	58,218		$	14

(a)	Amount includes $201 million of portfolio 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, 2013, follows:


	Allowance						Outstanding
December 31, 2013 in millions	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit Impaired		Loans			Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Purchased Credit Impaired
Commercial, financial and agricultural	$	8	$	354		—	$	24,963		$	50	$	24,913			—
Commercial real estate:
Commercial mortgage		2		163		—		7,720			27		7,692		$	1
Construction		—		32		—		1,093			50		1,043			—

Total commercial real estate loans		2		195		—		8,813			77		8,735			1
Commercial lease financing		—		62		—		4,551			—		4,551			—

Total commercial loans		10		611		—		38,327			127		38,199			1
Real estate — residential mortgage		9		27	$	1		2,187			56		2,117			14
Home equity:
Key Community Bank		10		74		—		10,340			102		10,237			1
Other		1		10		—		334			12		322			—

Total home equity loans		11		84		—		10,674			114		10,559			1
Consumer other — Key Community Bank		1		28		—		1,449			3		1,446			—
Credit cards		1		33		—		722			5		717			—
Consumer other:
Marine		10		19		—		1,028			52		976			—
Other		—		3		—		70			1		69			—

Total consumer other		10		22		—		1,098			53		1,045			—

Total consumer loans		32		194		1		16,130			231		15,884			15

Total ALLL — continuing operations		42		805		1		54,457			358		54,083			16
Discontinued operations		1		38		—		4,497	^(a)		13		4,484	^(a)		—

Total ALLL — including discontinued operations	$	43	$	843	$	1	$	58,954		$	371	$	58,567		$	16

(a)	Amount includes $2.1 billion of loans carried at fair value that are excluded from ALLL consideration.

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


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

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

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

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

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

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

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

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

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

The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments is $35 million at September 30, 2014. When combined with our ALLL, our total allowance for credit losses represented 1.49% of loans at September 30, 2014, compared to 1.69% at September 30, 2013.

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


	Three months ended September 30,					Nine months ended September 30,
in millions	2014			2013		2014			2013
Balance at beginning of period	$	37		$	37	$	37		$	29
Provision (credit) for losses on lending-related commitments		(2	)		3		(2	)		11

Balance at end of period	$	35		$	40	$	35		$	40

5. 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 unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

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

•

the amount of time since the last relevant valuation;

•

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

•

volatility associated with the primary pricing components.

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

•

an independent review and approval of valuation models and assumptions;

•

recurring detailed reviews of profit and loss; and

•

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

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

Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” beginning on page 119 of our 2013 Form 10-K.

Qualitative Disclosures of Valuation Techniques

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

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

•

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

•

Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate CMOs. Inputs to the pricing models include: standard inputs, such as 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. In such cases, we use internal models based on certain assumptions to determine fair value. We do not have any securities classified as Level 3. Our Level 3 instruments consist of certain CMBS. As of September 30, 2014, the convertible preferred security was valued based on its recent purchase price. Going forward, the security will be valued using a cash flow analysis of the associated private company issuer as determined by a third-party valuation service. The valuation of the security will be negatively impacted by a projected net loss of the associated private company and positively impacted by a projected net gain.

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 the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:

•

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

•

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

•

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

Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods. The portion of our Real Estate Capital line of business involved with private equity and mezzanine investments is accounted for as an investment company in accordance with the applicable accounting guidance, whereby all investments are recorded at fair value.

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

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

Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. The calculation to determine the investment’s fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2014, management has 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 under the heading “Other regulatory developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation” in Item 1 of our 2013 Form 10-K.

Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting.

The following table presents the fair value of our indirect investments and related unfunded commitments at September 30, 2014. We did not provide any financial support to investees related to our direct and indirect investments for the three and nine months ended September 30, 2014, and September 30, 2013.


	September 30, 2014
in millions	Fair Value		Unfunded Commitments
INVESTMENT TYPE
Indirect investments
Passive funds^(a)	$	9	$	1
Co-managed funds^(b)		4		—

Total	$	13	$	1

(a)

We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to four years. The purpose of KREEC’s funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements.

(b)

We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. We can sell or transfer our interest in any of these funds with the written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of one to three years. The purpose of KREEC’s funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements.

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 a former employee of Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.

Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.

Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Team’s knowledge of the current financial status of the subject company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the company’s payment history, adequacy of cash flows from operations, and current operating results, including market multiples and historical and forecast earnings before interest, taxation, depreciation, and amortization (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 are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2014, management has 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. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment, and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.

The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at September 30, 2014, as well as financial support provided for the three and nine months ended September 30, 2014, and September 30, 2013:


					Financial support provided
					Three months ended September 30,								Nine months ended September 30,
	September 30, 2014				2014				2013				2014				2013
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)	$	115		—		—		—		—	$	3		—	$	2		—	$	8
Indirect investments^(b)		353	$	65	$	3		—	$	3		—	$	10		—	$	14		—

Total	$	468	$	65	$	3		—	$	3	$	3	$	10	$	2	$	14	$	8

(a)

Our direct investments consist of equity, mezzanine, 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 nine 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.

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

In addition, we have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as bond spreads and asset values, as well as unobservable internally derived assumptions, such as loss probabilities and internal risk ratings of customers. These derivatives are priced monthly by our Market Risk Management group using a credit valuation adjustment methodology. Swap details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.

Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a 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 Market Risk Management group is responsible for the valuation policies and procedure 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 corporate accounting personnel. On a quarterly basis, Market Risk Management 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 the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings, and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets and bids and offers.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at September 30, 2014, December 31, 2013, and September 30, 2013.


September 30, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	596		—	$	596
States and political subdivisions		—		24		—		24
Collateralized mortgage obligations		—				—		—
Other mortgage-backed securities		—		186		—		186
Other securities	$	13		145		—		158

Total trading account securities		13		951		—		964
Commercial loans		—		1		—		1

Total trading account assets		13		952		—		965
Securities available for sale:
States and political subdivisions		—		27		—		27
Collateralized mortgage obligations		—		10,009		—		10,009
Other mortgage-backed securities		—		2,177		—		2,177
Other securities		22		—	$	10		32

Total securities available for sale		22		12,213		10		12,245
Other investments:
Principal investments:
Direct		—		—		115		115
Indirect		—		—		353		353

Total principal investments		—		—		468		468
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		13		13

Total equity and mezzanine investments		—		—		13		13

Total other investments		—		—		481		481
Derivative assets:
Interest rate		—		827		19		846
Foreign exchange		73		8		—		81
Commodity		—		95		—		95
Credit		—		1		3		4

Derivative assets		73		931		22		1,026
Netting adjustments ^(a)		—		—		—		(613	)

Total derivative assets		73		931		22		413
Accrued income and other assets		—		—		—		—

Total assets on a recurring basis at fair value	$	108	$	14,096	$	513	$	14,104

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	6	$	490		—	$	496
Derivative liabilities:
Interest rate		—		616		—		616
Foreign exchange		55		9		—		64
Commodity		—		89	$	1		90
Credit		—		7		—		7

Derivative liabilities		55		721		1		777
Netting adjustments ^(a)		—		—		—		(393	)

Total derivative liabilities		55		721		1		384
Accrued expense and other liabilities		—		—		—		—

Total liabilities on a recurring basis at fair value	$	61	$	1,211	$	1	$	880

(a)

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


December 31, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations		—	$	471		—	$	471
States and political subdivisions		—		23		—		23
Collateralized mortgage obligations		—		9		—		9
Other mortgage-backed securities		—		120		—		120
Other securities	$	4		108		—		112

Total trading account securities		4		731		—		735
Commercial loans		—		3		—		3

Total trading account assets		4		734		—		738
Securities available for sale:
States and political subdivisions		—		40		—		40
Collateralized mortgage obligations		—		11,000		—		11,000
Other mortgage-backed securities		—		1,286		—		1,286
Other securities		20		—		—		20

Total securities available for sale		20		12,326		—		12,346
Other investments:
Principal investments:
Direct		—		—	$	141		141
Indirect		—		—		413		413

Total principal investments		—		—		554		554
Equity and mezzanine investments:
Direct		—		—		—		—
Indirect		—		—		23		23

Total equity and mezzanine investments		—		—		23		23

Total other investments		—		—		577		577
Derivative assets:
Interest rate		—		1,014		25		1,039
Foreign exchange		56		7		—		63
Commodity		—		112		—		112
Credit		—		1		4		5

Derivative assets		56		1,134		29		1,219
Netting adjustments ^(a)		—		—		—		(812	)

Total derivative assets		56		1,134		29		407
Accrued income and other assets		—		1		—		1

Total assets on a recurring basis at fair value	$	80	$	14,195	$	606	$	14,069

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	2	$	341		—	$	343
Derivative liabilities:
Interest rate		—		739		—		739
Foreign exchange		49		8		—		57
Commodity		—		106		—		106
Credit		—		11	$	1		12

Derivative liabilities		49		864		1		914
Netting adjustments ^(a)		—		—		—		(500	)

Total derivative liabilities		49		864		1		414
Accrued expense and other liabilities		—		1		—		1

Total liabilities on a recurring basis at fair value	$	51	$	1,206	$	1	$	758

(a)


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

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

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

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

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

Total equity and mezzanine investments		—		—		28		28

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

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

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

Total assets on a recurring basis at fair value	$	90	$	14,643	$	636	$	14,500

LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	4	$	458		—	$	462
Derivative liabilities:
Interest rate		—		798		—		798
Foreign exchange		59		10		—		69
Commodity		—		130	$	1		131
Credit		—		10		1		11

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

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

Total liabilities on a recurring basis at fair value	$	63	$	1,539	$	2	$	1,045

(a)

Changes in Level 3 Fair Value Measurements

The following table shows the change in the fair values of our Level 3 financial instruments for the three and nine months ended September 30, 2014, and September 30, 2013. We mitigate the credit risk, interest rate risk, and risk of loss related to many of these Level 3 instruments by using securities and derivative positions classified as Level 1 or Level 2. Level 1 and Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of our risk management activities.


in millions	Beginning of Period Balance		Gains (Losses) Included in Earnings			Purchases		Sales		Settlements		Transfers into Level 3^(e)			Transfers out of Level 3^(e)			End of Period Balance^(g)		Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2014
Securities available for sale
Other securities		—		—		$	10		—		—		—			—		$	10		—

Other investments
Principal investments
Direct	$	141	$	9	^(c)		1	$	(36)		—		—			—			115	$	18	^(c)
Indirect		413		49	^(c)		8		(117)		—		—			—			353		8	^(c)
Equity and mezzanine investments
Direct		—		—			—		—		—		—			—			—		—
Indirect		23		(1)	^(c)		—		—	$	(9)		—			—			13		(1)	^(c)

Derivative instruments^(a)
Interest rate		25		2	^(d)		3		(2)		—	$	7	^(f)	$	(16)	^(f)		19		—
Commodity		—		—			(1)		—		—		1	^(f)		(1)	^(f)		(1)		—
Credit		3		(7)	^(d)		—		—		7		—			—			3		—

Three months ended September 30, 2014
Securities available for sale
Other securities		—		—		$	10		—		—		—			—		$	10		—

Other investments
Principal investments
Direct	$	146	$	(2)	^(c)		—	$	(29)		—		—			—			115	$	(2)	^(c)
Indirect		399		9	^(c)		3		(58)		—		—			—			353		(4)	^(c)
Equity and mezzanine investments
Direct		—		—			—		—		—		—			—			—		—
Indirect		16		—			—		—	$	(3)		—			—			13		—

Derivative instruments^(a)
Interest rate		20		—			—		—		—	$	2	^(f)	$	(3)	^(f)		19		—
Commodity		1		—			(1)		—		—		—			(1)	^(f)		(1)		—
Credit		3		(2)	^(d)		—		—		2		—			—			3		—


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

Trading account assets
Other mortgage-backed securities		—	$	4	^(b)		—	$	(4)		—		—			—			—		—
Other securities		—		4	^(b)		—		—	$	(4)		—			—			—	$	(1)	^(b)
State and political subdivisions	$	3		—			—		(3)		—		—			—			—		—

Other investments
Principal investments
Direct		191		(9)	^(c)	$	7		(21)		—		—			—		$	168		(19)	^(c)
Indirect		436		37	^(c)		14		(70)		—		—			—			417		13	^(c)
Equity and mezzanine investments
Direct		—		—			—		—		—		—			—			—		8	^(c)
Indirect		41		1	^(c)		—		—		(14)		—			—			28		1	^(c)

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

Three months ended September 30, 2013

Trading account assets
Other mortgage-backed securities		—		—			—		—		—		—			—			—		—
Other securities		—	$	1	^(b)		—		—	$	(1)		—			—			—	$	(2)	^(b)
State and political subdivisions		—		—			—		—		—		—			—			—		—

Other investments
Principal investments
Direct	$	186		(4)	^(c)	$	3	$	(17)		—		—			—		$	168		(8)	^(c)
Indirect		426		18	^(c)		3		(30)		—		—			—			417		9	^(c)
Equity and mezzanine investments
Direct		—		—			—		—		—		—			—			—		5	^(c)
Indirect		32		(1)	^(c)		—		—		(3)		—			—			28		(1)	^(c)

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

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

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

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

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

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

(f)	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.

(g)	There were no issuances for the nine-month periods ended September 30, 2014, and September 30, 2013.

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2014, December 31, 2013, and September 30, 2013:


	September 30, 2014
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	6	$	6
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—		—		51		51

Total assets on a nonrecurring basis at fair value		—		—	$	57	$	57


	December 31, 2013
in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans		—		—	$	16	$	16
Loans held for sale ^(a)		—		—		—		—
Accrued income and other assets		—		—		14		14

Total assets on a nonrecurring basis at fair value		—		—	$	30	$	30


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

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

(a)	During the first nine months of 2014, we transferred $10 million of commercial and consumer loans and leases at their current fair value from held-for-sale status to the held-to-maturity portfolio, compared to $9 million during 2013 and $2 million during the first nine months of 2013.

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, 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.

Loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming 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 loans held for sale adjusted to fair value at September 30, 2014, December 31, 2013, or September 30, 2013.

Market inputs, including updated collateral values, and reviews of each borrower’s financial condition influenced 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 or losses realized on the sale of various 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 have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates, and discount rates.

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

Direct financing leases and operating lease assets held for sale. Our 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 is distributed to both groups that lists all equipment finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.

Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. 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 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 is not available, an estimate of the fair value of the leased asset may be used to value the lease, resulting in a Level 3 classification. In an inactive market, the market value of

the assets held for sale is determined as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.

Goodwill and other intangible assets. On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of 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. However, we did not choose to utilize a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2013. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally.

Inputs used include market-available data, such as industry, historical, and expected growth rates, and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified goodwill as Level 3. We use a third-party valuation services provider to perform the annual, and if necessary, any interim, Step 1 valuation process, and to perform a Step 2 analysis, if needed, on our reporting units. Annual and any interim valuations prepared by the third-party valuation services provider are reviewed by the appropriate individuals within Key to ensure that the assumptions used in preparing the analysis are appropriate and properly supported. For additional information on the results of recent goodwill impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”) beginning on page 171 of our 2013 Form 10-K.

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

Our primary assumptions include attrition rates, alternative costs of funds, and rates paid on deposits. For additional information on the results of other intangible assets impairment testing, see Note 10 (“Goodwill and Other Intangible Assets”) beginning on page 171 of our 2013 Form 10-K.

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

•

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

•

Consumer Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures in this area. The current vendor partner provides monthly reporting of all broker price opinion evaluations, appraisals, and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 180 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate.

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

Quantitative Information about Level 3 Fair Value Measurements

The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at September 30, 2014, December 31, 2013, and September 30, 2013, along with the valuation techniques used, are shown in the following table:


September 30, 2014 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	115	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	6.00 - 6.40 (6.30)
Equity instruments of private companies				EBITDA multiple (where applicable)	5.50 - 6.00 (5.70)
				Revenue multiple (where applicable)	4.30 - 4.30 (4.30)

Nonrecurring
Impaired loans		6	Fair value of underlying collateral	Discount	10.00 - 90.00% (24.00%)

Goodwill		1,051	Discounted cash flow and market data	Earnings multiple of peers	10.10 - 14.40 (11.59)
				Equity multiple of peers	1.17 - 1.29 (1.24)
				Control premium	N/A (35.00%)
				Weighted-average cost of capital	N/A (13.00%)

December 31, 2013 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	141	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	6.00 - 7.00 (6.10)
Equity instruments of private companies				EBITDA multiple (where applicable)	4.80 - 10.40 (6.20)
				Revenue multiple (where applicable)	1.10 - 4.70 (4.00)
Nonrecurring
Impaired loans		16	Fair value of underlying collateral	Discount	10.00 - 100.00% (36.00%)

Goodwill		979	Discounted cash flow and market data	Earnings multiple of peers	10.10 - 14.40 (11.59)
				Equity multiple of peers	1.17 - 1.29 (1.24)
				Control premium	N/A (35.00%)
				Weighted-average cost of capital	N/A (13.00%)



September 30, 2013 dollars in millions	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Recurring
Other investments — principal investments — direct:	$	168	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	5.80 - 7.20 (6.00)
Equity instruments of private companies				EBITDA multiple (where applicable)	4.70 - 9.60 (6.30)
				Revenue multiple (where applicable)	1.00 - 4.80 (4.10)

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

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

Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at September 30, 2014, December 31, 2013, and September 30, 2013, are shown in the following table.


	September 30, 2014
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	2,993	$	2,993		—		—		—		$	2,993
Trading account assets ^(b)		965		13	$	952		—		—			965
Securities available for sale ^(b)		12,245		22		12,213	$	10		—			12,245
Held-to-maturity securities ^(c)		4,997		—		4,911		—		—			4,911
Other investments ^(b)		822		—		341		481		—			822
Loans, net of allowance ^(d)		55,351		—		—		53,996		—			53,996
Loans held for sale ^(b)		784		—		—		784		—			784
Mortgage servicing assets ^(e)		308		—		—		370		—			370
Derivative assets ^(b)		413		73		931		22	$	(613	)^(f)		413

LIABILITIES
Deposits with no stated maturity ^(a)	$	62,028		—	$	62,028		—		—		$	62,028
Time deposits ^(e)		6,428	$	556		5,937		—		—			6,493
Short-term borrowings ^(a)		1,653		6		1,647		—		—			1,653
Long-term debt ^(e)		7,172		6,854		1,202		—		—			8,056
Derivative liabilities^(b)		384		55		721	$	1	$	(393	)^(f)		384

	December 31, 2013
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	6,207	$	6,207		—		—		—		$	6,207
Trading account assets ^(b)		738		4	$	734		—		—			738
Securities available for sale ^(b)		12,346		20		12,326		—		—			12,346
Held-to-maturity securities ^(c)		4,756		—		4,617		—		—			4,617
Other investments ^(b)		969		—		392	$	577		—			969
Loans, net of allowance ^(d)		53,609		—		—		52,102		—			52,102
Loans held for sale ^(b)		611		—		—		611		—			611
Mortgage servicing assets ^(e)		332		—		—		386		—			386
Derivative assets ^(b)		407		56		1,134		29	$	(812	)^(f)		407

LIABILITIES
Deposits with no stated maturity ^(a)	$	62,425		—	$	62,425		—		—		$	62,425
Time deposits ^(e)		6,837	$	558		6,368		—		—			6,926
Short-term borrowings ^(a)		1,877		2		1,875		—		—			1,877
Long-term debt ^(e)		7,650		7,611		397		—		—			8,008
Derivative liabilities^(b)		414		49		864	$	1	$	(500	)^(f)		414

	September 30, 2013
			Fair Value
in millions	Carrying Amount		Level 1		Level 2		Level 3		Netting Adjustment			Total
ASSETS
Cash and short-term investments ^(a)	$	4,283	$	3,767	$	516		—		—		$	4,283
Trading account assets ^(b)		806		6		800		—		—			806
Securities available for sale ^(b)		12,606		24		12,582		—		—			12,606
Held-to-maturity securities ^(c)		4,835		—		4,730		—		—			4,730
Other investments ^(b)		1,007		—		394	$	613		—			1,007
Loans, net of allowance ^(d)		52,729		—		—		51,301		—			51,301
Loans held for sale ^(b)		699		—		—		699		—			699
Mortgage servicing assets ^(e)		331		—		—		388		—			388
Derivative assets ^(b)		475		60		1,261		23	$	(869	)^(f)		475

LIABILITIES
Deposits with no stated maturity ^(a)	$	61,399		—	$	61,399		—		—		$	61,399
Time deposits ^(e)		7,136	$	605		6,632		—		—			7,237
Short-term borrowings ^(a)		1,921		4		1,917		—		—			1,921
Long-term debt ^(e)		6,154		6,192		265		—		—			6,457
Derivative liabilities^(b)		450		59		948	$	2	$	(559	)^(f)		450

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 Measured at Fair Value on a Nonrecurring Basis” in this note.

(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 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 mortgage servicing assets, 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 2013 and the first nine months of 2014, the fair values of our loan portfolios have generally remained stable, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.

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

•

Loans at carrying value, net of allowance, of $2.1 billion ($1.9 billion at fair value) at September 30, 2014, $2.4 billion ($2.0 billion at fair value) at December 31, 2013, and $2.4 billion ($2.0 billion at fair value) at September 30, 2013;

•

Portfolio loans at fair value of $201 million at September 30, 2014, $147 million at December 31, 2013, and $148 million at September 30, 2013; and

•

Loans in the trusts at fair value of $2.0 billion at December 31, 2013, and $2.1 billion at September 30, 2013.

Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $1.8 billion in fair value at December 31, 2013, and $2.0 billion in fair value at September 30, 2013, are also excluded from the above table.

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

On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts to a third party. With that transaction, we deconsolidated the securitization trusts and removed the trust assets and liabilities from our balance sheet at September 30, 2014. Additional information regarding the sale of the residual interests and deconsolidation of the securitization trusts is provided in Note 11 (“Acquisitions and Discontinued Operations”).

Residential real estate mortgage loans. Residential real estate mortgage loans with carrying amounts of $2.2 billion at September 30, 2014, December 31, 2013, and September 30, 2013, 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.

6. Securities

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

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

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

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

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

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


	September 30, 2014
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
States and political subdivisions	$	26	$	1		—	$	27
Collateralized mortgage obligations		10,096		109	$	196		10,009
Other mortgage-backed securities		2,156		24		3		2,177
Other securities		28		4		—		32

Total securities available for sale	$	12,306	$	138	$	199	$	12,245

HELD-TO-MATURITY SECURITIES
Collateralized mortgage obligations	$	4,977	$	10	$	96	$	4,891
Other securities		20		—		—		20

Total held-to-maturity securities	$	4,997	$	10	$	96	$	4,911


	December 31, 2013
in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
States and political subdivisions	$	39	$	1		—	$	40
Collateralized mortgage obligations		11,120		152	$	272		11,000
Other mortgage-backed securities		1,270		27		11		1,286
Other securities		17		3		—		20

Total securities available for sale	$	12,446	$	183	$	283	$	12,346

HELD-TO-MATURITY SECURITIES
Collateralized mortgage obligations	$	4,736	$	6	$	145	$	4,597
Other securities		20		—		—		20

Total held-to-maturity securities	$	4,756	$	6	$	145	$	4,617


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

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

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

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

The following table summarizes our securities that were in an unrealized loss position as of September 30, 2014, December 31, 2013, and September 30, 2013.


	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^(a)		Fair Value		Gross Unrealized Losses
September 30, 2014
Securities available for sale:
Collateralized mortgage obligations	$	605	$	7	$	4,379	$	189	$	4,984	$	196
Other mortgage-backed securities		811		1		81		2		892		3
Other securities		1		—		2		—		3		—
Held-to-maturity:
Collateralized mortgage obligations		1,288		13		2,342		83		3,630		96
Other securities		—		—		—		—		—		—

Total temporarily impaired securities	$	2,705	$	21	$	6,804	$	274	$	9,509	$	295

December 31, 2013
Securities available for sale:
Collateralized mortgage obligations	$	5,122	$	261	$	157	$	11	$	5,279	$	272
Other mortgage-backed securities		856		11		—		—		856		11
Other securities		2		—		—		—		2		—
Held-to-maturity:
Collateralized mortgage obligations		3,969		145		—		—		3,969		145
Other securities		2		—		—		—		2		—

Total temporarily impaired securities	$	9,951	$	417	$	157	$	11	$	10,108	$	428


September 30, 2013
Securities available for sale:
Collateralized mortgage obligations	$	5,380	$	225		—		—	$	5,380	$	225
Other mortgage-backed securities		94		2		—		—		94		2
Other securities		2		—		—		—		2		—
Held-to-maturity:
Collateralized mortgage obligations		3,659		115		—		—		3,659		115
Other securities		5		—		—		—		5		—

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

(a)	There were less than $1 million of gross unrealized losses for the period ended September 30, 2013.

At September 30, 2014, we had $196 million of gross unrealized losses related to 63 fixed-rate CMOs that we invested in as part of our overall A/LM strategy. These securities had a weighted-average maturity of 4.5 years at September 30, 2014. Since these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. We also had $3 million of gross unrealized losses related to 25 other mortgage-backed securities positions, which had a weighted-average maturity of 4.2 years at September 30, 2014. 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 earnings.

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

The debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, we did not have any impairment losses recognized in earnings for the three months ended September 30, 2014.


Three months ended September 30, 2014
in millions
Balance at June 30, 2014	$	4
Impairment recognized in earnings		—

Balance at September 30, 2014	$	4

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


Nine months ended September 30, 2014
in millions
Realized gains			—
Realized losses			—

Net securities gains (losses)			—

At September 30, 2014, securities available for sale and held-to-maturity securities totaling $9.6 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.

The following table shows securities by remaining maturity. CMOs and other mortgage-backed securities (both of which are included in the securities available-for-sale portfolio) as well 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				Held-to-Maturity
	Available for Sale				Securities
September 30, 2014	Amortized		Fair		Amortized		Fair
in millions	Cost		Value		Cost		Value
Due in one year or less	$	272	$	277	$	9	$	9
Due after one through five years		11,406		11,351		4,855		4,774
Due after five through ten years		625		614		133		128
Due after ten years		3		3		—		—

Total	$	12,306	$	12,245	$	4,997	$	4,911

7. Derivatives and Hedging Activities

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

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

•

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

•

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

•

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

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

At September 30, 2014, after taking into account the effects of bilateral collateral and master netting agreements, we had $66 million of derivative assets and $11 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 $347 million and derivative liabilities of $373 million that were not designated as hedging instruments.

The Dodd-Frank Act, which is currently being implemented, may limit the types of derivative activities that KeyBank and other insured depository institutions may conduct. As a result, we may not continue the use of some of the types of derivatives noted above in the future. For further information, please see the section entitled “Supervision and Regulation” in Item 1. Business of our 2013 Form 10-K.

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 122 of our 2013 Form 10-K.

Derivatives Designated in Hedge Relationships

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

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

Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.

We also designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.

Interest rate swaps are also used to hedge the floating-rate debt that funds fixed-rate leases entered into by our equipment finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt. These hedge relationships were terminated during the quarter ended March 31, 2014.

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 September 30, 2014, 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 forecasted 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 entered into generally to accommodate the needs of commercial loan clients;

•

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

•

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

•

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

These contracts are not designated as part of hedge relationships.

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

The following table summarizes the fair values of our derivative instruments on a gross and net basis as of September 30, 2014, December 31, 2013, and September 30, 2013. The change in the notional amounts of these derivatives by type from December 31, 2013, to September 30, 2014, indicates the volume of our derivative transaction activity during the first nine months of 2014. 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:


	September 30, 2014								December 31, 2013								September 30, 2013
			Fair Value								Fair Value								Fair Value
in millions	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate	$	13,946	$	237		$	44		$	14,487	$	306		$	37		$	13,762	$	332		$	36
Foreign exchange		413		13			—			190		4			1			190		—			1

Total		14,359		250			44			14,677		310			38			13,952		332			37
Derivatives not designated as hedging instruments:
Interest rate		42,088		608			572			46,173		733			702			47,315		799			762
Foreign exchange		4,433		69			64			4,701		59			56			4,479		70			68
Commodity		1,780		95			90			1,616		112			106			1,890		137			131
Credit		618		4			7			910		5			12			971		6			11

Total		48,919		776			733			53,400		909			876			54,655		1,012			972
Netting adjustments ^(a)		—		(613	)		(393	)		—		(812	)		(500	)		—		(869	)		(559	)

Net derivatives in the balance sheet		63,278		413			384			68,077		407			414			68,607		475			450
Other collateral^(b)		—		(71	)		(268	)		—		(72	)		(287	)		—		(81	)		(356	)

Net derivative amounts	$	63,278	$	342		$	116		$	68,077	$	335		$	127		$	68,607	$	394		$	94

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

(b)

Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, 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 nine-month period ended September 30, 2014, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our fair value hedges remained “highly effective” as of September 30, 2014.

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the nine-month periods ended September 30, 2014, and September 30, 2013, and where they are recorded on the income statement.


	Nine months ended September 30, 2014
in millions	Income Statement Location of Net Gains (Losses) on Derivative		Net Gains (Losses) on Derivative			Hedged Item		Income Statement Location of Net Gains (Losses) on Hedged Item		Net Gains (Losses) on Hedged Item
Interest rate		Other income	$	(21	)		Long-term debt		Other income	$	21	^(a)
Interest rate		Interest expense – Long-term debt		91

Total			$	70						$	21


	Nine months ended September 30, 2013
in millions	Income Statement Location of Net Gains (Losses) on Derivative		Net Gains (Losses) on Derivative			Hedged Item		Income Statement Location of Net Gains (Losses) on Hedged Item		Net Gains (Losses) on Hedged Item
Interest rate		Other income	$	(167	)		Long-term debt		Other income	$	167	^(a)
Interest rate		Interest expense – Long-term debt		97

Total			$	(70	)					$	167

(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 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 nine-month period ended September 30, 2014, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our cash flow hedges remained “highly effective” as of September 30, 2014.

Considering the interest rates, yield curves, and notional amounts as of September 30, 2014, we would expect to reclassify an estimated $20 million of net losses on derivative instruments from AOCI to income during the next twelve months for our cash flow hedges. In addition, we expect to reclassify approximately $5 million of net gains related to terminated cash flow hedges from AOCI to income during the next twelve months. As of September 30, 2014, the maximum length of time over which we hedge forecasted transactions is 14 years.

Net investment hedges. We enter into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments as a result of changes in the related foreign exchange rates. Instruments designated as net investment hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. Initially, the effective portion of a gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we dispose of or liquidate a foreign subsidiary). At September 30, 2014, AOCI reflected unrecognized after-tax gains totaling $11 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 September 30, 2014. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the three-month period ended September 30, 2014.

The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the nine-month periods ended September 30, 2014, and September 30, 2013, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in OCI during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period, and the portion of net gains (losses) recognized directly in income, representing the amount of hedge ineffectiveness.


	Nine months ended September 30, 2014
in millions	Net Gains (Losses) Recognized in OCI (Effective Portion)			Income Statement Location of Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)	Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion)			Income Statement Location of Net Gains (Losses) Recognized in Income (Ineffective Portion)		Net Gains (Losses) Recognized in Income (Ineffective Portion)
Cash Flow Hedges
Interest rate	$	27		Interest income – Loans	$	49			Other income		—
Interest rate		(5	)	Interest expense – Long-term debt		(3	)		Other income		—
Interest rate		(1	)	Investment banking and debt placement fees		—			Other income		—

Net Investment Hedges
Foreign exchange contracts		17		Other Income		—			Other income		—

Total	$	38			$	46					—


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

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

Total	$	(3	)		$	42					—

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


						Reclassification
	December 31,			2014		of Gains to			September 30,
in millions	2013			Hedging Activity		Net Income			2014
AOCI resulting from cash flow and net investment hedges	$	(11	)	$	25	$	(29	)	$	(15	)

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

The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the nine-month periods ended September 30, 2014, and September 30, 2013, and where they are recorded on the income statement.


	Nine months ended September 30, 2014								Nine months ended September 30, 2013
in millions	Corporate Services Income		Other Income			Total			Corporate Services Income		Other Income			Total
NET GAINS (LOSSES)
Interest rate	$	11		—		$	11		$	13		—		$	13
Foreign exchange		25		—			25			29		—			29
Commodity		3		—			3			4		—			4
Credit		—	$	(16	)		(16	)		1	$	(11	)		(10	)

Total net gains (losses)	$	39	$	(16	)	$	23		$	47	$	(11	)	$	36

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with 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. The cash collateral netted against derivative assets on the balance sheet totaled $230 million at September 30, 2014, $308 million at December 31, 2013, and $327 million at September 30, 2013. The cash collateral netted against derivative liabilities totaled $10 million at September 30, 2014, $4 million at December 31, 2013, and $17 million at September 30, 2013. The relevant agreements that allow us to access the central clearing organizations to clear derivative transactions are not considered to be qualified master netting agreements. Therefore, we cannot net derivative contracts or offset those contracts with related cash collateral with these counterparties. At September 30, 2014, we posted $51 million of cash collateral with clearing organizations. This additional cash collateral is included in “accrued income and other assets” and “accrued expense and other liabilities” on the balance sheet.

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


	September 30,		December 31,		September 30,
in millions	2014		2013		2013
Largest gross exposure (derivative asset) to an individual counterparty	$	106	$	121	$	129
Collateral posted by this counterparty		44		42		44
Derivative liability with this counterparty		103		106		123
Collateral pledged to this counterparty		47		33		45
Net exposure after netting adjustments and collateral		6		6		7

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	September 30, 2014		December 31, 2013		September 30, 2013
Interest rate	$	556	$	633	$	708
Foreign exchange		39		23		28
Commodity		47		58		65
Credit		1		1		1

Derivative assets before collateral		643		715		802
Less: Related collateral		230		308		327

Total derivative assets	$	413	$	407	$	475

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

We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. 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 quarter ended March 31, 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 September 30, 2014, we had gross exposure of $456 million to broker-dealers and banks. We had net exposure of $115 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $15 million after considering $100 million of additional collateral held in the form of securities.

We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by buying and selling U.S. Treasuries and Eurodollar futures, and entering into offsetting positions and other derivative contracts. Due to the smaller size and magnitude of the individual contracts with clients, 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 $11 million at September 30, 2014, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At December 31, 2013, the credit valuation adjustment was $14 million. At September 30, 2014, we had gross exposure of $330 million to client counterparties for derivatives that have associated master netting agreements. We had net exposure of $298 million on our derivatives with clients after the application of master netting agreements, collateral, and the related reserve.

Credit Derivatives

We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations 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 position prior to maturity.

The following table summarizes the fair value of our credit derivatives purchased and sold by type as of September 30, 2014, December 31, 2013, and September 30, 2013. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.


	September 30, 2014								December 31, 2013									September 30, 2013
in millions	Purchased			Sold		Net			Purchased			Sold			Net			Purchased			Sold		Net
Single-name credit default swaps	$	(1	)		—	$	(1	)	$	(7	)	$	1		$	(6	)	$	(4	)		—	$	(4	)
Traded credit default swap indices		(2	)		—		(2	)		—			—			—			(1	)		—		(1	)
Other		—			—		—			—			(1	)		(1	)		—			—		—

Total credit derivatives	$	(3	)		—	$	(3	)	$	(7	)		—		$	(7	)	$	(5	)		—	$	(5	)

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 September 30, 2014, December 31, 2013, and September 30, 2013. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using a Moody’s credit ratings matrix known as Moody’s “Idealized” Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.


	September 30, 2014							December 31, 2013							September 30, 2013
dollars in millions	Notional Amount		Average Term (Years)		Payment / Performance Risk			Notional Amount		Average Term (Years)		Payment / Performance Risk			Notional Amount		Average Term (Years)		Payment / Performance Risk
Single-name credit default swaps	$	5		.97		.87	%	$	55		.77		22.28	%	$	67		.91		21.26	%
Other		6		2.92		5.59			13		5.03		8.82			16		5.11		8.72

Total credit derivatives sold	$	11		—		—		$	68		—		—		$	83		—		—

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 September 30, 2014, KeyBank’s ratings were “A3” with Moody’s and “A-” with S&P, and KeyCorp’s ratings were “Baa1” with Moody’s and “BBB+” with S&P. As of September 30, 2014, 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 $278 million, which includes $220 million in derivative assets and $498 million in derivative liabilities. We had $276 million in cash and securities collateral posted to cover those positions as of September 30, 2014. The aggregate fair value of all derivative contracts with credit risk contingent features held by KeyCorp as of September 30, 2014, that were in a net liability position totaled $4 million, which consists solely of derivative liabilities. We had $2 million in collateral posted to cover those positions as of September 30, 2014.

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 September 30, 2014, December 31, 2013, and September 30, 2013. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of September 30, 2014, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and additional collateral of $3 million would have been required as of September 30, 2014, less than $1 million as of December 31, 2013, and $2 million as of September 30, 2013.


	September 30, 2014				December 31, 2013				September 30, 2013
in millions	Moody’s		S&P		Moody’s		S&P		Moody’s		S&P
KeyBank’s long-term senior unsecured credit ratings		A3		A-		A3		A-		A3		A-

One rating downgrade	$	1	$	1	$	6	$	6	$	6	$	6
Two rating downgrades		4		4		11		11		11		11
Three rating downgrades		6		6		11		11		11		11

KeyBank’s long-term senior unsecured credit rating is currently four ratings above noninvestment grade at Moody’s and S&P. If KeyBank’s ratings had been downgraded below investment grade as of September 30, 2014, payments of up to $8 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorp’s ratings had been downgraded below investment grade as of September 30, 2014, payments of $3 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.

8. Mortgage Servicing Assets

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


	Nine months ended September 30,
in millions	2014			2013
Balance at beginning of period	$	332		$	204
Servicing retained from loan sales		19			31
Purchases		33			144	^(a)
Amortization		(76	)		(48	)

Balance at end of period	$	308		$	331

Fair value at end of period	$	370		$	388

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

The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our mortgage servicing assets at September 30, 2014, and September 30, 2013, along with the valuation techniques, are shown in the following table:


September 30, 2014 dollars in millions	Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Mortgage servicing assets	Discounted cash flow	Prepayment speed	1.90 - 12.30%(5.90%)
		Expected defaults	1.00 - 3.00%(1.90%)
		Residual cash flows discount rate	7.00 - 14.10%(7.80%)
		Escrow earn rate	0.50 - 3.10%(1.70%)
		Servicing cost	$150 - $2,700($1,053)
		Loan assumption rate	0.20 - 3.00%(1.52%)
		Percentage late	0.00 - 2.00%(0.32%)


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

If these economic assumptions change or prove incorrect, the fair value of mortgage servicing assets may also change. The volume of loans serviced, expected credit losses, and the value assigned to escrow deposits are critical to the valuation of servicing assets. At September 30, 2014, a 1.00% decrease in the value assigned to the escrow deposits would cause a $56 million decrease in the fair value of our mortgage servicing assets. An increase in the assumed default rate of commercial mortgage loans of 1.00% would cause a $6 million decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $35 million for the nine-month period ended September 30, 2014, and $37 million for the nine-month period ended September 30, 2013. We have elected to account for servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in “mortgage servicing fees” on the income statement.

Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 123 of our 2013 Form 10-K and Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Mortgage Servicing Rights” in this report.

9. Variable Interest Entities

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

•

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

•

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

•

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

•

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

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

On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts and therefore no longer have a significant interest in those trusts. We deconsolidated the securitization trusts as of September 30, 2014, and removed the trust assets and liabilities from our balance sheet. Further information regarding these education securitization trusts is provided in Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Education lending.”


	Consolidated VIEs				Unconsolidated VIEs
in millions	Total Assets		Total Liabilities		Total Assets		Total Liabilities		Maximum Exposure to Loss
September 30, 2014
LIHTC funds	$	1	$	2	$	55		—		—
LIHTC investments		N/A		N/A		775		—	$	508

Our involvement with VIEs is described below.

Consolidated VIEs

LIHTC guaranteed funds.KAHC formed limited partnership funds that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the guaranteed funds and continue to earn asset management fees. The guaranteed funds’ assets, primarily investments in LIHTC operating partnerships, totaled $6 million at September 30, 2014. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the guaranteed funds’ limited obligations.

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

In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the guaranteed funds’ profits and losses. At September 30, 2014, we estimated the settlement value of these third-party interests to be between zero and $5 million, while the recorded value, including reserves, totaled $6 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.

Unconsolidated VIEs

LIHTC nonguaranteed funds. Although we hold interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. At September 30, 2014, assets of these unconsolidated nonguaranteed funds totaled $55 million. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.

LIHTC investments. Through Key Community Bank, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits. At September 30, 2014, assets of these unconsolidated LIHTC operating partnerships totaled approximately $775 million. At September 30, 2014, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $402 million plus $106 million of tax credits claimed but subject to recapture. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. We have not obtained any significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships since September 2003.

We have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $470 million at September 30, 2014. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance, and the obligation to absorb expected losses and right to receive residual returns. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 15 under the heading “Return guarantee agreement with LIHTC investors.”

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

10. Income Taxes

Income Tax Provision

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

The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 24.1% for the third quarter of 2014 and 20.1% for the third quarter of 2013. The effective tax rates are below our combined federal and state statutory tax rate of 37.2% primarily due to income from investments in tax-advantaged assets such as corporate-owned life insurance and credits associated with investments in low-income housing projects. During the third quarter and the first nine months of 2014, our effective tax rate was lower due to a settlement with the IRS on tax refund claims for prior years, partially offset by the write-off of a foreign deferred tax asset due to the sale of certain foreign leasing assets. Our effective tax rate was also lower in the first nine months of 2014 due to the early termination of certain leveraged leases that resulted in non-taxable gains pursuant to a prior settlement with the IRS.

Deferred Tax Asset

At September 30, 2014, from continuing operations, we had a net federal deferred tax asset of $153 million and a net state deferred tax asset of $19 million compared to a net federal deferred tax asset of $201 million and a net state deferred tax asset of $9 million at December 31, 2013, and a net federal deferred tax asset of $219 million and a net state deferred tax asset of $9 million at September 30, 2013, included in “accrued income and other assets” on the balance sheet. To determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded, we conduct a quarterly assessment of all available evidence. This evidence includes, but is not limited to, taxable income in prior periods, projected future taxable income, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo change. Based on these criteria, we have a valuation allowance of $1 million at September 30, 2014, $1 million at December 31, 2013, and $2 million at September 30, 2013, associated with certain state net operating loss carryforwards and state credit 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.

The FASB issued new accounting guidance, effective January 1, 2014, for us, that requires unrecognized tax benefits to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if certain criteria are met. As a result, at September 30, 2014, our federal tax credit carryforward included in our federal deferred tax asset was reduced by $1 million.

11. Acquisitions and Discontinued Operations

Acquisitions

Pacific Crest Securities. On September 3, 2014, we acquired Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm based in Portland, Oregon. This acquisition, which is being accounted for as a business combination, expands our corporate and investment banking business unit and adds technology to our other industry verticals. We recorded estimated identifiable intangible assets of $28 million and estimated goodwill of $72 million in Key Corporate Bank for this acquisition during the third quarter of 2014. The identifiable intangible assets and the goodwill related to this acquisition are non-deductible for tax purposes. The fair value estimates relating to this acquisition represent our best estimate of fair value and are expected to be finalized during the fourth quarter of 2014.

Mortgage Servicing Rights. On June 24, 2013, in the first of multiple closings, we acquired substantially all third-party commercial loan servicing rights consisting of CMBS Master, Primary, and Special Servicing as well as other servicing from Bank of America’s Global Mortgages & Securitized Products business. Simultaneously, we entered into a subservicing agreement with Berkadia Commercial Mortgage LLC related to all CMBS primary servicing. This acquisition was accounted for as a business combination and aligned with our strategy to drive growth. At the time, the acquisition resulted in KeyBank becoming the third largest servicer of commercial/multifamily loans in the U.S. and the fifth largest special servicer of CMBS. The acquisition date fair value of the MSRs acquired on June 24, 2013, which were included on our balance sheet at June 30, 2013, was approximately $117 million. Three additional and related closings occurred on July 22, 2013, August 26, 2013, and October 7, 2013. The acquisition date fair value of the MSRs acquired in these transactions was $3 million. As a result of this acquisition, the total fair value of the MSRs acquired during 2013 and included in our December 31, 2013, financial results was $120 million. In addition to the MSRs acquired, Key, as a master servicer, acquired $216 million of principal and interest advances. These principal and interest advances recorded at fair value were primarily associated with the June 24, 2013, acquisition of MSRs. No goodwill was recognized as a result of this acquisition. Additional information regarding our mortgage servicing assets is provided in Note 8 (“Mortgage Servicing Assets”).

Discontinued operations

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

As of January 1, 2010, we consolidated our ten outstanding education lending securitization trusts since 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 or the right to receive benefits related to the securitization trusts. Therefore, we have 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. As part of the sale and deconsolidation, we recognized an after-tax loss of $25 million, which is recorded in “income (loss) from discontinued operations, net of tax” on our income statement. 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 remain a counterparty to derivative contracts with three of the securitization trusts. We have 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 assets and liabilities of the education loan securitization trusts and the loans at fair value in portfolio (discussed later in this note), and (ii) the interest income and expense from the loans and the securities of the trusts and the loans in portfolio at both amortized cost and fair value. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of “noninterest income” or “noninterest expense.” Interest income and expense related to the loans and securities are shown as a component of “net interest income.”

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2014			2013			2014			2013
Net interest income	$	21		$	26		$	67		$	80
Provision (credit) for loan and lease losses		5			6			15			10

Net interest income (expense) after provision for loan and lease losses		16			20			52			70
Noninterest income		(41	)		(94	)		(111	)		(128	)
Noninterest expense		7			6			19			20

Income (loss) before income taxes		(32	)		(80	)		(78	)		(78	)
Income taxes		(12	)		(30	)		(29	)		(29	)

Income (loss) from discontinued operations, net of taxes ^{(a), (b)}	$	(20	)	$	(50	)	$	(49	)	$	(49	)

(a)

Includes after-tax charges of $9 million for each of the three-month periods ended September 30, 2014, and September 30, 2013, and $26 million and $30 million for the nine-month periods ended September 30, 2014, and September 30, 2013, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

(b)

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


in millions	September 30, 2014		December 31, 2013		September 30, 2013
Held-to-maturity securities	$	1		—		—

Trust loans at fair value		—	$	1,960	$	2,135
Portfolio loans at fair value		201		147		148
Loans, net of unearned income of ($2), ($6), and ($6)		2,174		2,390		2,455
Less: Allowance for loan and lease losses		31		39		38

Net loans		2,344		4,458		4,700

Trust accrued income and other assets at fair value		—		20		23
Accrued income and other assets		40		45		64

Total assets	$	2,385	$	4,523	$	4,787

Trust accrued expense and other liabilities at fair value		—	$	20	$	21
Trust securities at fair value		—		1,834		2,016

Total liabilities		—	$	1,854	$	2,037

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

At September 30, 2014, education loans include 1,434 TDRs with a recorded investment of approximately $16 million (pre-modification and post-modification). A specifically allocated allowance of $1 million was assigned to these loans as of September 30, 2014. There have been no significant payment defaults. There are no significant commitments outstanding to lend additional funds to these borrowers. Additional information regarding TDR classification and ALLL methodology is provided in Note 4 (“Asset Quality”).

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

The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or transfer the liabilities. The loans in the consolidated trusts consist of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to Key. We no longer have economic interest or risk of loss associated with these education loan securitization trusts as of September 30, 2014. During the second quarter of 2014 and the third quarter of 2013, additional market information became available. Based on this information and our related internal analysis, we adjusted certain assumptions related to valuing the loans in the securitization trusts. As a result, we recognized a net after-tax loss of $22 million during the second quarter of 2014 and a net after-tax loss of $48 million during the third quarter of 2013 related to the fair value of the loans and securities in the securitization trusts. These losses resulted in a reduction in the value of our economic interest in these trusts. We record all income and expense (including fair value adjustments) through the “income (loss) from discontinued operations, net of tax” line item in our income statement.

On October 27, 2013, we purchased the government-guaranteed education loans from one of the education loan securitization trusts pursuant to the legal terms of the particular trust. The trust used the cash proceeds from the sale of these loans to retire the outstanding securities related to the government-guaranteed education loans. This particular trust remains in existence and continues to maintain the private education loan portfolio and has securities related to these loans outstanding. On December 20, 2013, we sold substantially all of the loans we purchased for $147 million and recognized a gain on the sale of $3 million.

On June 27, 2014, we purchased the private loans from one of the education loan securitization trusts through the execution of a clean-up call option. The trust used the cash proceeds from the sale of these loans to retire the outstanding securities related to these private loans, and there are no future commitments or obligations to the holders of the securities. The trust no longer has any loans or securities and will remain in existence for one more year. The portfolio loans were valued using internal discounted cash flow method, which was affected by assumptions for defaults, expected credit losses, discount rates, and prepayments. The portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining fair value.

At September 30, 2014, there were $199 million of loans that were previously purchased from three of the outstanding securitizations trusts pursuant to the legal terms of these particular trusts. These loans are held as portfolio loans and continue to be accounted for at fair value. These portfolio loans were valued using an internal discounted cash flow model, which was affected by assumptions for defaults, loss severity, discount rates, and prepayments. These portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining fair value. Our valuation process for these loans as well as the trust loans and securities is discussed in more detail below. Portfolio loans accounted for at fair value had a value of $201 million at September 30, 2014, $147 million at December 31, 2013, and $148 million at September 30, 2013.

When we first consolidated the education loan securitization trusts, we made an election to record them at fair value. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest. The fair value of the assets and liabilities of the trusts was determined by calculating the present value of the future expected cash flows. We relied on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts because observable market data was not available. Our valuation process is described in more detail below.

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

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

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

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

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

A quarterly variance analysis reconciles valuation changes in the model used to calculate the fair value of the trust loans and securities and the portfolio loans at fair value. This quarterly analysis considers loan and securities run-off, yields, future default and recovery changes, and the timing of cash releases to us from the trusts. We also perform back-testing to compare expected defaults to actual experience; the impact of future defaults can significantly affect the fair value of these loans and securities over time. In addition, our internal model validation group periodically performs a review to ensure the accuracy and validity of the model for determining the fair value of these loans and securities.

The following table shows the significant unobservable inputs used to measure the fair value of the education loan securitization trust loans and securities and the portfolio loans accounted for at fair value as of September 30, 2014, December 31, 2013, and September 30, 2013:


September 30, 2014 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	$	201	Discounted cash flow	Prepayment speed		5.00 - 5.80% (5.25%	)
				Loss severity		2.00 - 77.00% (25.71%	)
				Discount rate		3.60 - 3.90% (3.69%	)
				Default rate		.93 - 1.91% (1.24%	)

December 31, 2013 dollars in millions	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Trust loans and portfolio loans accounted for at fair value	$	2,107	Discounted cash flow	Prepayment speed		4.00 - 13.50% (6.47%	)
				Loss severity		2.00 - 79.50% (54.21%	)
				Discount rate		2.40 -10.50% (3.50%	)
				Default rate		8.01 - 23.71% (18.43%	)
Trust securities		1,834	Discounted cash flow	Discount rate		1.60 - 3.50% (2.55%	)

September 30, 2013 dollars in millions	Fair Value of Level 3 Assets and Liabilities		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
Trust loans and portfolio loans accounted for at fair value	$	2,283	Discounted cash flow	Prepayment speed		4.00 - 13.50% (6.04%	)
				Loss severity		2.00 - 79.50% (37.67%	)
				Discount rate		2.00 - 10.50% (7.09%	)
				Default rate		8.02 - 23.78% (15.97%	)
Trust securities		2,016	Discounted cash flow	Discount rate		1.10 - 3.80% (2.64%	)

The following table shows the principal and fair value amounts for our trust loans at fair value, portfolio loans at fair value, and portfolio loans at carrying value at September 30, 2014, December 31, 2013, and September 30, 2013. 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 117 of our 2013 Form 10-K.


	September 30, 2014				December 31, 2013				September 30, 2013
dollars in millions	Principal		Fair Value		Principal		Fair Value		Principal		Fair Value
Trust loans at fair value
Accruing loans past due 90 days or more		—		—	$	25	$	25	$	29	$	28
Loans placed on nonaccrual status		—		—		12		12		12		12

Portfolio loans at fair value
Accruing loans past due 90 days or more	$	5	$	5	$	8	$	8	$	5	$	5
Loans placed on nonaccrual status		—		—		—		—		—		—

Portfolio loans at carrying value
Accruing loans past due 90 days or more	$	31		N/A	$	35		N/A	$	38		N/A
Loans placed on nonaccrual status		9		N/A		10		N/A		9		N/A

The following table shows the consolidated trusts’ assets and liabilities at fair value and the portfolio loans at fair value and their related contractual values as of September 30, 2014, December 31, 2013, and September 30, 2013.


	September 30, 2014				December 31, 2013				September 30, 2013
dollars in millions	Contractual Amount		Fair Value		Contractual Amount		Fair Value		Contractual Amount		Fair Value
ASSETS
Portfolio loans	$	199	$	201	$	140	$	147	$	142	$	148
Trust loans		—		—		1,964		1,960		2,190		2,135
Trust other assets		—		—		20		20		23		23

LIABILITIES
Trust securities		—		—	$	1,958	$	1,834	$	2,200	$	2,016
Trust other liabilities		—		—		20		20		21		21

The following tables present the assets and liabilities of the consolidated education loan securitization trusts measured at fair value as well as the portfolio loans that are measured at fair value on a recurring basis at September 30, 2014, December 31, 2013, and September 30, 2013.


September 30, 2014 in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans		—		—	$	201	$	201

Total assets on a recurring basis at fair value		—		—	$	201	$	201


December 31, 2013 in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans		—		—	$	147	$	147
Trust loans		—		—		1,960		1,960
Trust other assets		—		—		20		20

Total assets on a recurring basis at fair value		—		—	$	2,127	$	2,127

LIABILITIES MEASURED ON A RECURRING BASIS
Trust securities		—		—	$	1,834	$	1,834
Trust other liabilities		—		—		20		20

Total liabilities on a recurring basis at fair value		—		—	$	1,854	$	1,854


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

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

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

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

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts and portfolio loans for the three- and nine-month periods ended September 30, 2014, and September 30, 2013.


in millions	Portfolio Student Loans			Trust Student Loans			Trust Other Assets			Trust Securities			Trust Other Liabilities
Balance at December 31, 2013	$	147		$	1,960		$	20		$	1,834		$	20
Gains (losses) recognized in earnings ^(a)		(4	)		(34	)		—			33			—
Purchases		74			—			—			—			—
Sales		—			(74	)		—			—			—
Settlements		(16	)		(202	)		(1	)		(278	)		(3	)
Transfers out due to deconsolidation		—			(1,650	)		(19	)		(1,589	)		(17	)

Balance at September 30, 2014^(b)	$	201			—			—			—			—

Balance at June 30, 2014	$	209		$	1,711		$	19		$	1,660		$	17
Gains (losses) recognized in earnings ^(a)		—			—			—			—			—
Purchases		—			—			—			—			—
Sales		—			—			—			—			—
Settlements		(8	)		(61	)		—			(71	)		—
Transfers out due to deconsolidation		—			(1,650	)		(19	)		(1,589	)		(17	)

Balance at September 30, 2014^(b)	$	201			—			—			—			—

Balance at December 31, 2012	$	157		$	2,369		$	26		$	2,159		$	22
Gains (losses) recognized in earnings ^(a)		—			6			—			130			—
Purchases		—			—			—			—			—
Sales		—			—			—			—			—
Settlements		(9	)		(240	)		(3	)		(273	)		(1	)

Balance at September 30, 2013^(b)	$	148		$	2,135		$	23		$	2,016		$	21

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

Balance at September 30, 2013^(b)	$	148		$	2,135		$	23		$	2,016		$	21

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

(b)	There were no issuances or transfers into Level 3 for the three- and nine-month periods ended September 30, 2014. There were no issuances, transfers into Level 3, or transfers out of Level 3 for the three- and nine-month periods ended September 30, 2013.

Victory Capital Management and Victory Capital Advisors. On July 31, 2013, we completed the sale of Victory to a private equity fund. As a result of this sale, we recorded an after-tax gain of $92 million as of September 30, 2013. The cash portion of the gain was $72 million as of September 30, 2013. During March 2014, client consents were secured and assets under management were finalized and, as a result, we recorded an additional after-tax cash gain of $6 million as of March 31, 2014. Since February 21, 2013, when we agreed to sell Victory, we have accounted for this business as a discontinued operation.

The results of this discontinued business are included in “income (loss) from discontinued operations, net of taxes” on the income statement. The components of “income (loss) from discontinued operations, net of taxes” for Victory, which includes the additional gain recorded as of March 31, 2014, on the sale of this business, are as follows:


	Three months ended September 30,				Nine months ended September 30,
in millions	2014		2013		2014		2013
Net interest income	$	5		—	$	7		—
Noninterest income		—	$	155		10	$	212
Noninterest expense		—		16		—		59

Income (loss) before income taxes		5		139		17		153
Income taxes		2		52		7		57

Income (loss) from discontinued operations, net of taxes	$	3	$	87	$	10	$	96

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


	September 30,		December 31,		September 30,
in millions	2014		2013		2013
Seller note	$	17	$	29	$	31

Total assets	$	17	$	29	$	31

Accrued expense and other liabilities		—		—		—

Total liabilities		—		—		—

The only remaining asset of Victory is a $17 million Seller note. The Seller note was accounted for at fair value and classified as a Level 3 asset through December 31, 2013. Since the contingency involving certain fund outflows was resolved, the Seller note was no longer accounted for at fair value subsequent to December 31, 2013.

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


	Three months ended September 30,					Nine months ended September 30,
in millions	2014		2013			2014			2013
Noninterest expense		—	$	1		$	4		$	1

Income (loss) before income taxes		—		(1	)		(4	)		(1	)
Income taxes		—		(1	)		(2	)		1

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

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



	September 30,		December 31,		September 30,
in millions	2014		2013		2013
Cash and due from banks	$	19	$	20	$	20

Total assets	$	19	$	20	$	20

Accrued expense and other liabilities	$	3		—		—

Total liabilities	$	3		—		—

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


	Three months ended September 30,					Nine months ended September 30,
in millions	2014			2013		2014			2013

Net interest income	$	26		$	26	$	74		$	80
Provision (credit) for loan and lease losses		5			6		15			10

Net interest income (expense) after provision for loan and lease losses		21			20		59			70
Noninterest income		(41	)		61		(101	)		84
Noninterest expense		7			23		23			80

Income (loss) before income taxes		(27	)		58		(65	)		74
Income taxes		(10	)		21		(24	)		29

Income (loss) from discontinued operations, net of taxes ^{(a), (b)}	$	(17	)	$	37	$	(41	)	$	45

(a)

(b)

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


	September 30,		December 31,		September 30,
in millions	2014		2013		2013

Cash and due from banks	$	19	$	20	$	20
Held-to-maturity securities		1		—		—
Seller note		17		29		31
Trust loans at fair value		—		1,960		2,135
Portfolio loans at fair value		201		147		148
Loans, net of unearned income of ($2), ($6), and ($6)		2,174		2,390		2,455
Less: Allowance for loan and lease losses		31		39		38

Net loans		2,344		4,458		4,700

Trust accrued income and other assets at fair value		—		20		23
Accrued income and other assets		40		45		64

Total assets	$	2,421	$	4,572	$	4,838

Trust accrued expense and other liabilities at fair value		—	$	20	$	21
Accrued expense and other liabilities	$	3		—		—
Trust securities at fair value		—		1,834		2,016

Total liabilities	$	3	$	1,854	$	2,037

12. Securities Financing Activities

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

During the third quarter of 2014, our broker-dealer subsidiary, KeyBanc Capital Markets, Inc. (“KBCM”), moved from a self-clearing organization to using a third-party organization for clearing purposes. In connection with this change, KBCM became an introducing broker-dealer, whereby it no longer needs to fund its business operations by entering into repurchase, reverse repurchase, or securities borrowed agreements. KBCM had no securities financing agreements outstanding at September 30, 2014.

The following table summarizes our securities financing agreements at September 30, 2014, December 31, 2013, and September 30, 2013:


	September 30, 2014
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments^(a)			Collateral^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	6	$	(4	)	$	(2	)		—
Securities borrowed		—		—			—			—

Total	$	6	$	(4	)	$	(2	)		—

Offsetting of financial liabilities:
Repurchase agreements	$	4	$	(4	)		—			—

Total	$	4	$	(4	)		—			—


	December 31, 2013
in millions	Gross Amount Presented in Balance Sheet		Netting Adjustments^(a)			Collateral^(b)			Net Amounts
Offsetting of financial assets:
Reverse repurchase agreements	$	347	$	(278	)	$	(66	)	$	3
Securities borrowed		12		—			(12	)		—

Total	$	359	$	(278	)	$	(78	)	$	3

Offsetting of financial liabilities:
Repurchase agreements	$	517	$	(278	)	$	(239	)		—

Total	$	517	$	(278	)	$	(239	)		—


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

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

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

Total	$	464	$	(176	)	$	(288	)		—

(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.

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

13. Employee Benefits

Pension Plans

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

During the third quarters of 2014 and 2013, lump sum payments made under certain pension plans triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement losses reflected in the following table. We will also recognize a settlement loss in the fourth quarter of 2014 related to additional lump sum payments made during the fourth quarter.

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2014			2013			2014			2013
Interest cost on PBO	$	12		$	10		$	36		$	30
Expected return on plan assets		(17	)		(17	)		(51	)		(51	)
Amortization of losses		4			5			12			15
Settlement loss		20			25			20			25

Net pension cost (benefit)	$	19		$	23		$	17		$	19

Other Postretirement Benefit Plans

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

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2014			2013			2014			2013
Interest cost on APBO	$	1		$	1		$	3		$	3
Expected return on plan assets		(1	)		(1	)		(3	)		(3	)

Net postretirement benefit cost		—			—			—			—

14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

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

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

•

required distributions on the trust preferred securities;

•

the redemption price when a capital security is redeemed; and

•

the amounts due if a trust is liquidated or terminated.

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

As of September 30, 2014, the trust preferred securities issued by the KeyCorp capital trusts represent $340 million, or 3.4%, of our total qualifying Tier 1 capital, net of goodwill.

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


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
September 30, 2014
KeyCorp Capital I	$	156	$	6	$	162		.975	%		2028
KeyCorp Capital II		105		4		109		6.875			2029
KeyCorp Capital III		136		4		140		7.750			2029

Total	$	397	$	14	$	411		4.856	%		—

December 31, 2013	$	384	$	14	$	398		4.777	%		—

September 30, 2013	$	391	$	14	$	405		4.834	%		—

(a)

The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include basis adjustments related to fair value hedges totaling $57 million at September 30, 2014,
$44 million at December 31, 2013, and $51 million at September 30, 2013. See Note 7 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.

(b)

We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (i) the principal amount, plus any accrued but unpaid interest, or (ii) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points for KeyCorp Capital II or 25 basis points for KeyCorp Capital III or 50 basis points in the case of redemption upon either a tax or a capital treatment event for either KeyCorp Capital II or KeyCorp Capital III, plus any accrued but unpaid interest. The principal amount of certain debentures includes basis adjustments related to fair value hedges totaling $57 million at September 30, 2014, $44 million at December 31, 2013, and $51 million at September 30, 2013. See Note 7 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in “long-term debt” on the balance sheet.

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

15. Contingent Liabilities and Guarantees

Legal Proceedings

The following discussion provides information on material developments in our legal proceedings during the third quarter of 2014. Additional information on our legal proceedings is available on pages 203-204 of our 2013 Form 10-K, Note 20 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings,” and in our Forms 10-Q for the quarters ended March 31, 2014, and June 30, 2014, in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings” on pages 77 and 76, respectively.

Austin Madoff-Related Claims. On October 2, 2014, the United States District Court for the Southern District of New York entered a final judgment and order of dismissal with prejudice in In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Security Act (ERISA) Litigation, approving the previously reported settlement agreement and ending the litigation. The settlement is covered under our insurance policies and will not have a material impact on our financial condition. The settlement did not affect the status of other previously disclosed Austin Madoff-related matters that were outside the scope of the litigation. Based on information presently known to us, we do not expect those matters, either individually or in the aggregate, to have a material adverse effect on our financial condition.

Metyk Litigation. As previously reported, on January 29, 2013, the United States District Court for the Northern District of Ohio (“Northern District”) entered an order granting KeyCorp’s motion to dismiss in a consolidated class action lawsuit styled
Thomas Metyk, et al. v. KeyCorp, et al. (“Metyk”). Plaintiffs appealed both the Northern District’s dismissal and its denial of plaintiffs’ motion to set aside the judgment to the United States Court of Appeals for the Sixth Circuit (“Sixth Circuit”). The Sixth Circuit affirmed the Northern District’s decision on both issues, and denied Plaintiffs’ petition for rehearing or rehearing en banc. On August 27, 2014, Plaintiffs filed a Petition for Writ of Certiorari with the Supreme Court of the United States.

Checking Account Overdraft Litigation. As previously reported, KeyBank was named a defendant in a putative class action seeking to represent a national class of KeyBank customers allegedly harmed by KeyBank’s overdraft practices. The case was transferred and consolidated for purposes of pretrial discovery and motion proceedings to a multidistrict proceeding styled In Re: Checking Account Overdraft Litigation pending in the United States District Court for the Southern District of Florida (the “District Court”). KeyBank filed a notice of appeal in regard to the denial by the District Court of a motion to compel arbitration. On August 21, 2012, the
United States Court of Appeals for the Eleventh Circuit (the “Eleventh Circuit”) vacated the District Court’s order denying KeyBank’s motion to compel arbitration and remanded the case for further consideration. On June 21, 2013, KeyBank filed with the
District Court its renewed motion to compel arbitration and stay or dismiss litigation. On August 27, 2013, the District Court granted KeyBank’s renewed motion to compel arbitration and dismissed the case. The plaintiff appealed. On June 18, 2014, the Eleventh Circuit vacated the District Court’s order granting KeyBank’s renewed motion to compel arbitration and remanded the case to the District Court to address the issue of the enforceability of KeyBank’s arbitration provision. On August 22, 2014, KeyBank filed its Second Renewed Motion to Compel Arbitration and Dismiss the Complaint.

Other litigation. From time to time, in the ordinary course of business, we and our subsidiaries are subject to various other litigation, investigations, and administrative proceedings. Private, civil litigations may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These other matters may involve claims for substantial monetary relief. At times, these matters may present novel claims or legal theories. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any other matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We continually monitor and reassess the potential materiality of these other litigation matters. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

Guarantees

We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at September 30, 2014. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” beginning on page 125 of our 2013 Form 10-K.


September 30, 2014 in millions	Maximum Potential Undiscounted Future Payments		Liability Recorded
Financial guarantees:
Standby letters of credit	$	11,384	$	70
Recourse agreement with FNMA		1,377		4
Return guarantee agreement with LIHTC investors		5		5
Written put options^(a)		2,269		30

Total	$	15,035	$	109

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

We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0-30% probability of payment), moderate (31-70% probability of payment), or high (71-100% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at September 30, 2014, is low.

Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At September 30, 2014, our standby letters of credit had a remaining weighted-average life of 3.1 years, with remaining actual lives ranging from less than one year to as many as 30 years.

Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability. At September 30, 2014, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.1 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $4.3 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at September 30, 2014. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan; any loss we incur could be offset by the amount of any recovery from the collateral.

Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low-income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the property’s confirmed LIHTC status throughout a 15-year compliance period. Typically, KAHC fulfills these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.

As shown in the previous table, KAHC maintained a reserve in the amount of $5 million at September 30, 2014, which is sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future payments due to investors for the return on and of their investments.

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

Written put options. In the ordinary course of business, we “write” put options for clients that wish to mitigate their exposure to changes in interest rates and commodity prices. At September 30, 2014, our written put options had an average life of 2 years. These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark interest rate or commodity price is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, as further discussed in Note 7 (“Derivatives and Hedging Activities”). We mitigate our potential future payment obligations by entering into offsetting positions with third parties.

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

Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: (i) either the risk profile of the debtor should provide an investment return, or (ii) we are supporting our underlying investment in the debtor. We do not hold collateral for the default guarantees. If we were required to make a payment under a guarantee, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor. At September 30, 2014, we did not have any default guarantees.

Other Off-Balance Sheet Risk

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

Liquidity facilities that support asset-backed commercial paper conduits.Since June 30, 2012, we have not had any liquidity facilities remaining outstanding with any unconsolidated third-party commercial paper conduits.

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

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

16. Accumulated Other Comprehensive Income

Our changes in AOCI for the three and nine months ended September 30, 2014, and September 30, 2013, are as follows:


in millions	Unrealized gains (losses) on available for sale securities			Unrealized gains (losses) on derivative financial instruments			Foreign currency translation adjustment			Net pension and postretirement benefit costs			Total
Balance at December 31, 2013	$	(63	)	$	(11	)	$	42		$	(320	)	$	(352	)

Other comprehensive income before reclassification, net of income taxes		24			25			(9	)		—			40

Amounts reclassified from accumulated other comprehensive income, net of income taxes^(a)		—			(29	)		(3	)		19			(13	)

Net current-period other comprehensive income, net of income taxes		24			(4	)		(12	)		19			27

Balance at September 30, 2014	$	(39	)	$	(15	)	$	30		$	(301	)	$	(325	)

Balance at June 30, 2014	$	(6	)	$	(7	)	$	39		$	(315	)	$	(289	)

Other comprehensive income before reclassification, net of income taxes		(33	)		3			(9	)		—			(39	)

Amounts reclassified from accumulated other comprehensive income, net of income taxes^(a)		—			(11	)		—			14			3

Net current-period other comprehensive income, net of income taxes		(33	)		(8	)		(9	)		14			(36	)

Balance at September 30, 2014	$	(39	)	$	(15	)	$	30		$	(301	)	$	(325	)

Balance at December 31, 2012	$	229		$	18		$	55		$	(426	)	$	(124	)

Other comprehensive income before reclassification, net of income taxes		(228	)		(2	)		(8	)		—			(238	)

Amounts reclassified from accumulated other comprehensive income, net of income taxes^(a)		—			(27	)		(4	)		24			(7	)

Net current-period other comprehensive income, net of income taxes		(228	)		(29	)		(12	)		24			(245	)

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

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

Other comprehensive income before reclassification, net of income taxes		(81	)		20			2			—			(59	)

Amounts reclassified from accumulated other comprehensive income, net of income taxes^(a)		—			(10	)		—			18			8

Net current-period other comprehensive income, net of income taxes		(81	)		10			2			18			(51	)

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

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

Our reclassifications out of AOCI for the three and nine months ended September 30, 2014, and September 30, 2013, are as follows:


Nine months ended September 30, 2014 in millions	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	49		Interest income — Loans
Interest rate		(3	)	Interest expense — Long term debt

		46		Income (loss) from continuing operations before income taxes
		17		Income taxes

	$	29		Income (loss) from continuing operations

Foreign currency translation adjustment
	$	3		Corporate services income

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

	$	3		Income (loss) from continuing operations

Net pension and postretirement benefit costs
Amortization of losses	$	(12	)	Personnel expense
Settlement loss		(20	)	Personnel expense

		(32	)	Income (loss) from continuing operations before income taxes
		(13	)	Income taxes

	$	(19	)	Income (loss) from continuing operations


Three months ended September 30, 2014 in millions	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains (losses) on derivative financial instruments
Interest rate	$	18		Interest income — Loans
Interest rate		(1	)	Interest expense — Long term debt
Foreign exchange contracts		1		Other income

		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	$	(4	)	Personnel expense
Settlement loss		(20	)	Personnel expense

		(24	)	Income (loss) from continuing operations before income taxes
		(10	)	Income taxes

	$	(14	)	Income (loss) from continuing operations


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

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

	$	27		Income (loss) from continuing operations

Foreign currency translation adjustment
	$	7		Corporate services income

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

	$	4		Income (loss) from continuing operations

Net pension and postretirement benefit costs
Amortization of losses	$	(15	)	Personnel expense
Settlement loss		(25	)	Personnel expense

		(40	)	Income (loss) from continuing operations before income taxes
		(16	)	Income taxes

	$	(24	)	Income (loss) from continuing operations


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

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

	$	10		Income (loss) from continuing operations

Net pension and postretirement benefit costs
Amortization of losses	$	(5	)	Personnel expense
Settlement loss		(25	)	Personnel expense

		(30	)	Income (loss) from continuing operations before income taxes
		(12	)	Income taxes

	$	(18	)	Income (loss) from continuing operations

17. Shareholders’ Equity

Comprehensive Capital Plan

As previously reported and as authorized by our Board of Directors and pursuant to our 2014 capital plan submitted to and not objected to by the Federal Reserve, we have authority to repurchase up to $542 million of our common shares, which include repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under our 2014 capital plan are expected to be executed through the first quarter of 2015. During the third quarter of 2014, we completed
$119 million of common share repurchases under our 2014 capital plan authorization.

Consistent with our 2014 capital plan, the Board declared a quarterly dividend of $.065 per common share for the third quarter of 2014.

18. Line of Business Results

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

Key Community Bank

Key Community Bank serves individuals and small to mid-sized businesses through its 12-state branch network.

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

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

On April 8, 2014, we announced a new leadership structure for Key Community Bank: Community Bank Co-President, Commercial & Private Banking and Community Bank Co-President, Consumer & Small Business. In this structure, the Community Bank Co-Presidents work as a team to lead the Key Community Bank, which continues to operate as one business segment.

Key Corporate Bank

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

Other Segments

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

Reconciling Items

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

The table on the following pages shows selected financial data for our two major business segments for the three- and nine-month periods ended September 30, 2014, and September 30, 2013.

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

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

•

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

•

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

•

The consolidated provision for loan and lease losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated ALLL. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 118 of our 2013 Form 10-K.

•

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%.

•

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

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


Three months ended September 30,	Key Community Bank						Key Corporate Bank
dollars in millions	2014			2013			2014			2013
SUMMARY OF OPERATIONS
Net interest income (TE)	$	360		$	385		$	212		$	196
Noninterest income		199			199			183			183

Total revenue (TE)^(a)		559			584			395			379
Provision (credit) for loan and lease losses		31			24			(5	)		12
Depreciation and amortization expense		16			19			8			7
Other noninterest expense		421			434			204			196

Income (loss) from continuing operations before income taxes (TE)		91			107			188			164
Allocated income taxes and TE adjustments		34			40			69			58

Income (loss) from continuing operations		57			67			119			106
Income (loss) from discontinued operations, net of taxes^(b)		—			—			—			—

Net income (loss) ^(b)		57			67			119			106
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			—

Net income (loss) attributable to Key^(b)	$	57		$	67		$	119		$	106

AVERAGE BALANCES^(c)
Loans and leases	$	30,103		$	29,498		$	22,700		$	19,946
Total assets^(a)		32,209			31,685			26,460			23,739
Deposits		50,302			49,732			17,310			16,044
OTHER FINANCIAL DATA
Net loan charge-offs^(c)	$	28		$	27			—		$	6
Return on average allocated equity^(c)		8.45	%		9.02	%		29.71	%		26.89	%
Return on average allocated equity		8.45			9.02			29.71			26.89
Average full-time equivalent employees^(d)		7,573			8,029			1,945			1,891

Nine months ended September 30,	Key Community Bank						Key Corporate Bank
dollars in millions	2014			2013			2014			2013
SUMMARY OF OPERATIONS
Net interest income (TE)	$	1,085		$	1,155		$	613		$	586
Noninterest income		574			595			559			544

Total revenue (TE) ^(a)		1,659			1,750			1,172			1,130
Provision (credit) for loan and lease losses		63			123			(6	)		7
Depreciation and amortization expense		49			58			22			21
Other noninterest expense		1,272			1,310			587			567

Income (loss) from continuing operations before income taxes (TE)		275			259			569			535
Allocated income taxes and TE adjustments		103			96			207			193

Income (loss) from continuing operations		172			163			362			342
Income (loss) from discontinued operations, net of taxes^(b)		—			—			—			—

Net income (loss) ^(b)		172			163			362			342
Less: Net income (loss) attributable to noncontrolling interests		—			—			2			—

Net income (loss) attributable to Key^(b)	$	172		$	163		$	360		$	342

AVERAGE BALANCES ^(c)
Loans and leases	$	29,979		$	29,215		$	22,169		$	19,650
Total assets ^(a)		32,107			31,582			26,003			23,388
Deposits		50,149			49,572			16,361			15,160
OTHER FINANCIAL DATA
Net loan charge-offs ^(c)	$	89		$	116		$	(17	)	$	1
Return on average allocated equity ^(c)		8.42	%		7.37	%		32.32	%		29.35	%
Return on average allocated equity		8.42			7.37			32.32			29.35
Average full-time equivalent employees ^(d)		7,613			8,377			1,900			1,837

(a)

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

(b)

(c)	From continuing operations.

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


Other Segments					Total Segments						Reconciling Items						Key
2014		2013			2014			2013			2014			2013			2014			2013
$	8	$	5		$	580		$	586		$	1		$	(2	)	$	581		$	584
	39		75			421			457			(4	)		2			417			459

	47		80			1,001			1,043			(3	)		—			998			1,043
	(6)		(7	)		20			29			1			(1	)		21			28
	3		4			27			30			38			34			65			64
	17		20			642			650			(3	)		2			639			652

	33		63			312			334			(39	)		(35	)		273			299
	(15)		(1	)		88			97			(18	)		(32	)		70			65

	48		64			224			237			(21	)		(3	)		203			234
	—		—			—			—			(17	)		37			(17	)		37

	48		64			224			237			(38	)		34			186			271
	—		(1	)		—			(1	)		—			—			—			(1	)

$	48	$	65		$	224		$	238		$	(38	)	$	34		$	186		$	272

$	2,911	$	3,760		$	55,714		$	53,204		$	82		$	67		$	55,796		$	53,271
	27,787		27,641			86,456			83,065			667			444			87,123			83,509
	854		755			68,466			66,531			(130	)		(548	)		68,336			65,983
$	3	$	3		$	31		$	36			—		$	1		$	31		$	37
	32.33 %		37.70	%		18.31	%		18.18	%		(1.48	)%		(.24	)%		7.69	%		9.11	%
	32.33		37.70			18.31			18.18			(.99	)		2.68			7.96			10.54
	88		122			9,606			10,042			4,299			4,513			13,905			14,555


Other Segments					Total Segments						Reconciling Items						Key
2014		2013			2014			2013			2014			2013			2014			2013
$	28	$	18		$	1,726		$	1,759		$	3			—		$	1,729		$	1,759
	180		172			1,313			1,311			(6	)	$	2			1,307			1,313

	208		190			3,039			3,070			(3	)		2			3,036			3,072
	(21)		(20	)		36			110			1			1			37			111
	9		12			80			91			115			104			195			195
	56		64			1,915			1,941			(55	)		(28	)		1,860			1,913

	164		134			1,008			928			(64	)		(75	)		944			853
	(14)		(24	)		296			265			(46	)		(47	)		250			218

	178		158			712			663			(18	)		(28	)		694			635
	—		—			—			—			(41	)		45			(41	)		45

	178		158			712			663			(59	)		17			653			680
	4		—			6			—			—			—			6			—

$	174	$	158		$	706		$	663		$	(59	)	$	17		$	647		$	680

$	3,172	$	3,947		$	55,320		$	52,812		$	68		$	55		$	55,388		$	52,867
	27,725		27,923			85,835			82,893			677			534			86,512			83,427
	886		714			67,396			65,446			(137	)		(417	)		67,259			65,029
$	9	$	13		$	81		$	130			—		$	1		$	81		$	131
	39.10 %		29.88	%		19.60	%		16.98	%		(.43	)%		(.74	)%		6.59	%		6.18	%
	39.10		29.88			19.60			16.98			(.83	)		.45			6.43			6.62
	103		121			9,616			10,335			4,326			4,645			13,942			14,980

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of KeyCorp

We have reviewed the consolidated balance sheets of KeyCorp (“Key”) as of September 30, 2014 and 2013, and the related consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 2014 and 2013, and the consolidated statements of changes in equity and cash flows for the nine-month periods ended September 30, 2014 and 2013. These financial statements are the responsibility of Key’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified opinion on those consolidated financial statements in our report dated February 26, 2014. In our opinion, the accompanying consolidated balance sheet of Key as of December 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



Cleveland, Ohio
November 4, 2014				/s/ Ernst & Young LLP

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations

Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended September 30, 2014, and September 30, 2013. 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 “2013 Form 10-K” refer to our Form 10-K for the year ended December 31, 2013, 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.

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

•

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

•

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

•

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

•

For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHC’s total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described under the heading “Regulatory capital and liquidity – Capital planning and stress testing” in the section entitled “Supervision and Regulation” that begins on page 7 of our 2013 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 Tier 1 common equity. The section entitled “Capital adequacy” provides more information on total capital, Tier 1 capital, and Tier 1 common equity and describes how the three measures are calculated.

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

Selected financial data

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

Figure 1. Selected Financial Data


	2014									2013						Nine months ended September 30,
dollars in millions, except per share amounts	Third			Second			First			Fourth			Third			2014			2013
FOR THE PERIOD
Interest income	$	639		$	639		$	630		$	649		$	647		$	1,908		$	1,971
Interest expense		64			66			67			66			69			197			229
Net interest income		575			573			563			583			578			1,711			1,742
Provision (credit) for loan and lease losses		21			10			6			19			28			37			111
Noninterest income		417			455			435			453			459			1,307			1,313
Noninterest expense		704			689			662			712			716			2,055			2,108
Income (loss) from continuing operations before income taxes		267			329			330			305			293			926			836
Income (loss) from continuing operations attributable to Key		203			247			238			235			235			688			635
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(17	)		(28	)		4			(5	)		37			(41	)		45
Net income (loss) attributable to Key ^(b)		186			219			242			230			272			647			680
Income (loss) from continuing operations attributable to Key common shareholders		197			242			232			229			229			671			618
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(17	)		(28	)		4			(5	)		37			(41	)		45
Net income (loss) attributable to Key common shareholders^(b)		180			214			236			224			266			630			663

PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.28		$	.26		$	.26		$	.25		$	.77		$	.68
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(.02	)		(.03	)		—			(.01	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders ^{(b), (c)}		.21			.24			.27			.25			.29			.72			.73
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	$	.23		$	.27		$	.26		$	.26		$	.25		$	.76		$	.67
Income (loss) from discontinued operations, net of taxes — assuming dilution ^(a), (b)		(.02	)		(.03	)		—			(.01	)		.04			(.05	)		.05
Net income (loss) attributable to Key common shareholders — assuming dilution ^(b), (c)		.21			.24			.26			.25			.29			.71			.72
Cash dividends paid		.065			.065			.055			.055			.055			.185			.16
Book value at period end		11.74			11.65			11.43			11.25			11.05			11.74			11.05
Tangible book value at period end		10.47			10.50			10.28			10.11			9.92			10.47			9.92
Market price:
High		14.62			14.59			14.70			13.55			12.63			14.70			12.63
Low		12.97			12.90			12.25			11.24			11.05			12.25			8.29
Close		13.33			14.33			14.24			13.42			11.40			13.33			11.40
Weighted-average common shares outstanding (000)		867,350			875,298			884,727			890,516			901,904			875,728			911,918
Weighted-average common shares and potential common shares outstanding (000)^(d)		874,122			902,137			891,890			897,712			908,253			882,451			917,579

AT PERIOD END
Loans	$	56,155		$	55,600		$	55,445		$	54,457		$	53,597		$	56,155		$	53,597
Earning assets		78,310			78,457			77,692			79,467			77,085			78,310			77,085
Total assets		89,784			91,798			90,802			92,934			90,708			89,784			90,708
Deposits		68,456			67,799			67,266			69,262			68,535			68,456			68,535
Long-term debt		7,172			8,213			7,712			7,650			6,154			7,172			6,154
Key common shareholders’ equity		10,195			10,213			10,112			10,012			9,915			10,195			9,915
Key shareholders’ equity		10,486			10,504			10,403			10,303			10,206			10,486			10,206

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets		.92	%		1.14	%		1.13	%		1.08	%		1.12	%		1.06	%		1.02	%
Return on average common equity		7.68			9.55			9.33			9.10			9.13			8.84			8.27
Return on average tangible common equity ^(e)		8.55			10.60			10.38			10.13			10.18			9.83			9.22
Net interest margin (TE)		2.96			2.98			3.00			3.01			3.11			2.98			3.16
Cash efficiency ratio ^(e)		69.5			65.8			64.9			67.4			67.5			66.7			67.5

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets		.81	%		.96	%		1.09	%		1.00	%		1.22	%		.95	%		1.03	%
Return on average common equity		7.01			8.44			9.50			8.90			10.61			8.30			8.88
Return on average tangible common equity ^(e)		7.81			9.37			10.56			9.91			11.82			9.23			9.89
Net interest margin (TE)		2.94			2.94			2.95			2.91			3.06			2.94			3.10
Loan-to-deposit ^(f)		87.4			87.1			87.5			83.8			83.8			87.4			83.8

CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets		11.68	%		11.44	%		11.46	%		11.09	%		11.25	%		11.68	%		11.25	%
Key common shareholders’ equity to assets		11.36			11.13			11.14			10.78			10.94			11.36			10.94
Tangible common equity to tangible assets ^(e)		10.26			10.15			10.14			9.80			9.93			10.26			9.93
Tier 1 common equity ^(e)		11.26			11.25			11.27			11.22			11.17			11.26			11.17
Tier 1 risk-based capital		12.01			11.99			12.01			11.96			11.92			12.01			11.92
Total risk-based capital		14.10			14.14			14.23			14.33			14.37			14.10			14.37
Leverage		11.15			11.24			11.30			11.11			11.33			11.15			11.33

TRUST AND BROKERAGE ASSETS
Assets under management	$	39,283		$	39,669		$	38,893		$	36,905		$	36,110		$	39,283		$	36,110
Nonmanaged and brokerage assets		48,273			48,728			47,396			47,418			38,525			48,273			38,525

OTHER DATA
Average full-time-equivalent employees		13,905			13,867			14,055			14,197			14,555			13,942			14,980
Branches		997			1,009			1,027			1,028			1,044			997			1,044

(a)

(b)

(c)	EPS may not foot due to rounding.

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

(e)

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

(f)	Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitizations trusts for periods prior to September 30, 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).

Forward-looking statements

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

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

•

deterioration of commercial real estate market fundamentals;

•

defaults by our loan counterparties or clients;

•

adverse changes in credit quality trends;

•

declining asset prices;

•

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

•

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

•

changes in accounting policies, rules and interpretations;

•

increasing capital and liquidity standards under applicable regulatory rules;

•

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

•

our ability to receive dividends from our subsidiary, KeyBank;

•

downgrades in our credit ratings or those of KeyBank;

•

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

•

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

•

adverse judicial proceedings;

•

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

•

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;

•

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;

•

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

•

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

•

other risks and uncertainties discussed in the section “Supervision and regulation” in Item 2 of this report, and Part I, Item 1. Business under the heading “Supervision and Regulation” and Item 1A. Risk Factors in our 2013 Form 10-K.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including our reports on Forms 8-K, 10-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.

Economic overview

The economy continued its momentum in the third quarter of 2014, as real GDP grew by an annualized rate of 3.5% after a strong second quarter of 4.6%. Consumer spending remains a modest driver, but the housing market remains mixed, with slow growth in residential construction and sales of both new and existing homes falling below year-ago levels. A disconnect between high consumer confidence and low wage growth continues to result in only modest consumer spending growth. Geopolitical tensions, prospective Federal Reserve actions, and mixed economic data tempered equity and bond markets throughout the third quarter.

In the third quarter, weak income growth remained an important constraint on consumption; however, fundamentals appear to be strengthening. Real spending climbed in August 2014 after remaining flat in July, led by increases in durable goods and services spending. Vehicle sales grew to a seasonally adjusted annual average rate of 16.7 million units in the third quarter of 2014, up from the 16.5 million units recorded in the second quarter of 2014. Retail sales were modest for the quarter, although research analysts are forecasting pickup in the fourth quarter as lower gasoline prices should give consumers more purchasing power. Consumer confidence slightly decreased, with the Conference Board measure ending the second quarter at 86%, down .4 points quarter-over-quarter but remaining at levels not seen in six years. Price gains remained flat, with the consumer price index holding at 1.7% for September 2014, as the cost of fuel remains a restraint on prices. The core personal consumption expenditure index was up 1.5% year-over-year as of August 2014.

In the labor market, average monthly job gains declined to 224,000 during the third quarter of 2014, compared to average gains of 272,000 in the second quarter of 2014. Gains were across all job sectors and reflect normalization in the labor market after a strong rebound in the second quarter from the rough first quarter. The unemployment rate declined sharply, finishing the quarter at 5.9%, driven by an increase in employment and a decrease in the labor force participation. Despite the improved health of the labor market, the participation rate remains historically low at 62.7% as of September 30, 2014.

The housing market continues to be volatile on a month-to-month basis. Lower mortgage rates led to an uptick in demand across each segment. Existing home sales climbed modestly to 5.17 million units annualized in September 2014, up from 5.03 million units annualized in June 2014, but remain below year-ago levels. New home sales showed steady improvement in September 2014, with a 17% year-over-year increase. Housing starts began to accelerate, totaling a seasonally adjusted annual rate of 1.017 million in September 2014, up 18% year-over-year. Permits rebounded by 2.8% month-over-month in September 2014, in line with expectations. Home price appreciation continues to slow, with the CoreLogic Home Price Index up only 6.4% year-over-year in August 2014, which should increase affordability.

The Federal Reserve continued tapering in the third quarter, reducing asset purchases at a steady pace of $10 billion per month to a current purchasing level of $15 billion per month. The yield on the 10-year U.S. Treasury was relatively unchanged in the third quarter, opening at 2.56% and finishing slightly lower at 2.49%. The latest quantitative easing program ended in October 2014, with the federal funds rate not expected to increase until mid-to-late 2015.

Long-term financial goals

Our long-term financial goals are as follows:

•

Improve balance sheet efficiency by targeting a loan-to-deposit ratio range of 90% to 100%;

•

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

•

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

•

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

•

Strengthen returns by executing our strategy and target a return on average assets in the range of 1.00% to 1.25%.

Figure 2 shows the evaluation of our long-term financial goals for the third quarter and first nine months of 2014.

Figure 2. Evaluation of Our Long-Term Financial Goals


KEY Business Model	Key Metrics^(a)	3Q14			YTD 2014			Targets

Balance sheet efficiency	Loan-to-deposit ratio ^(b)		87	%		87	%		90 -100	%

Moderate risk profile	NCOs to average loans		.22	%		.20	%		.40 - .60	%
Moderate risk profile	Provision to average loans		.15	%		.09	%		.40 - .60	%

High quality, diverse revenue streams	Net interest margin		2.96	%		2.98	%		> 3.50	%
High quality, diverse revenue streams	Noninterest income to total revenue		42	%		43	%		> 40	%

Positive operating leverage	Cash efficiency ratio^(c)		69.5	%		66.7	%		< 60	%

Execution of strategy	Return on average assets		.92	%		1.06	%		1.00 -1.25	%

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

(b)	Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitization trusts for periods prior to third quarter of 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).

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

Strategic developments

We initiated the following actions during the first nine months of 2014 to support our corporate strategy described in the “Introduction” section under the “Corporate Strategy” heading on page 38 of our 2013 Form 10-K.

•

Our strong risk management practices and a more favorable credit environment resulted in another quarter of positive credit quality trends. For the nine months ended September 30, 2014, net loan charge-offs were ..20% of average loans, well below our targeted range, and nonperforming assets decreased 27.8% from the year-ago period.

•

Capital management remains a priority in 2014. Common share repurchases under the 2014 capital plan are expected to be executed through the first quarter of 2015. During the second and third quarters of 2014, we completed $227 million of common share repurchases under our 2014 capital plan authorization.

•

Our 2014 capital plan also proposed an 18% increase in our quarterly common share dividend to $.065 per share, which was approved by our Board in May 2014. Consistent with the 2014 capital plan, we made a dividend payment of $.065 per share on our common shares during each of the second and third quarters of 2014.

•

We continue to take actions to drive growth and efficiency. These actions include leadership changes to leverage our alignment, accelerate momentum, and drive growth. We are also focused on growing our commercial payments business and maximizing the return from our recent investments, which included the launch of purchase and prepaid cards in the first quarter of 2014. In addition to these new payment products, we continue to invest in, and build out, our online and mobile capabilities. During the first quarter of 2014, we expanded our online account-opening tools to include more products and services. During the second quarter of 2014, we introduced the new KeyBank Hassle-Free Account for banking customers who want straightforward ways to make deposits, track money, obtain cash, and make payments without worrying about potential overdraft fees or other unexpected fees. In addition, as part of our actions to drive efficiency, we closed 31 branches and reduced headcount in our fixed income trading business by approximately 20% during the first nine months of 2014.

•

We also made progress on other strategic initiatives, including improving sales productivity and strengthening our business mix through targeted investments and exiting businesses that are not a strategic fit. Key Community Bank is strengthening its sales management process and saw a lift in sales productivity. Key Corporate Bank continues to see growth in new and expanded client relationships. In the first quarter of 2014, we announced that we would be exiting our international leasing operation, which had limited scale and connectivity to our other businesses. This decision is consistent with our commitment to allocate our capital to businesses that fit our strategy and generate appropriate risk-adjusted returns. Late in the third quarter of 2014, we closed the acquisition of Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm. This acquisition underscores our commitment to creating the leading corporate and investment bank serving middle market companies. The transaction brings together two firms with a shared vision of enhancing their differentiation in the market by capitalizing on the convergence of technology across traditional industry verticals.

Demographics

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

Key Community Bank serves individuals and small to mid-sized businesses by offering a variety of deposit, investment, lending, credit card, and personalized wealth management products and business advisory services. These products and services are provided through our relationship managers and specialists working in our 12-state branch network, which is organized into eight internally defined geographic regions: Pacific, Rocky Mountains, Indiana, Western Ohio and Michigan, Eastern Ohio, Western New York, Eastern New York, and New England.

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

Figure 3. Key Community Bank Geographic Diversity


	Geographic Region
Three months ended September 30, 2014 dollars in millions	Pacific			Rocky Mountains			Indiana			West Ohio/ Michigan			East Ohio			Western New York			Eastern New York			New England			Non Region ^(a)			Total
Average deposits	$	11,416		$	4,954		$	2,313		$	4,299		$	9,028		$	4,897		$	7,767		$	2,935		$	2,693		$	50,302
Percent of total		22.7	%		9.9	%		4.6	%		8.5	%		18.0	%		9.7	%		15.4	%		5.8	%		5.4	%		100.0	%

Average commercial loans	$	3,510		$	1,694		$	737		$	1,123		$	2,265		$	571		$	1,889		$	734		$	2,841		$	15,364
Percent of total		22.9	%		11.0	%		4.8	%		7.3	%		14.7	%		3.7	%		12.3	%		4.8	%		18.5	%		100.0	%

Average home equity loans	$	3,299		$	1,581		$	490		$	851		$	1,274		$	821		$	1,297		$	654		$	101		$	10,368
Percent of total		31.8	%		15.3	%		4.7	%		8.2	%		12.3	%		7.9	%		12.5	%		6.3	%		1.0	%		100.0	%

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

Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance. Key Corporate Bank 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 18 (“Line of Business Results”).

Supervision and regulation

Regulatory reform developments

On July 21, 2010, the Dodd-Frank Act became law. It was intended to address perceived deficiencies and gaps in the regulatory framework for financial services in the U.S., reduce the risks of bank failures, better equip the nation’s regulators to guard against or mitigate any future financial crises, and manage systemic risk through increased supervision of bank and nonbank SIFIs, such as KeyCorp and KeyBank. Further discussion concerning the Dodd-Frank Act, related regulatory developments, and the risks that they present to Key is available under the heading “Supervision and Regulation” in Item 1. Business and under the heading “II. Compliance Risks” in Item 1A. Risk Factors of our 2013 Form 10-K. Many proposed rules referenced in our prior reports remain pending. The following discussion provides a summary of relevant regulatory developments relating to the Dodd-Frank Act or that relate to our results this quarter.

Regulatory capital rules

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the “Regulatory Capital Rules”). The Regulatory Capital Rules generally implement in the U.S. the Basel III capital framework published by the Basel Committee in December 2010 and revised in June 2011 (the “Basel III capital framework”). 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 2013 Form 10-K under the heading “Supervision and Regulation—Basel III capital and liquidity frameworks.”

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

New minimum capital requirements

Under the Regulatory Capital Rules, “standardized approach” banking organizations, like Key, will be required to meet the minimum capital and leverage ratios set forth in Figure 4 below. At September 30, 2014, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.8% under the Regulatory Capital Rules. Also at September 30, 2014, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios, after adjustment for market risk, would be as set forth in Figure 4.

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


Ratios (including Capital conservation buffer)	Key September 30, 2014 Estimated			Minimum January 1, 2015			Phase-in Period	Minimum January 1, 2019
Common Equity Tier 1 ^(a)		10.8	%		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		11.1			6.0		None		6.0
Tier 1 Capital + Capital conservation buffer		—			6.0		1/1/16 - 1/1/19		8.5
Total Capital		13.3			8.0		None		8.0
Total Capital + Capital conservation buffer		—			8.0		1/1/16 - 1/1/19		10.5
Leverage^(c)		10.4			4.0		None		4.0

(a)	See Figure 7 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. Key is not subject to the countercyclical capital buffer of up to 2.5% imposed under the “advanced approaches” portion of the Regulatory Capital Rules.

(c)

Because Key is not an “advanced approaches” banking organization under the Regulatory Capital Rules, it is not subject to the 3% supplemental leverage ratio or to the supplemental leverage buffer of more than 2% under a final rule adopted by the federal banking agencies in April 2014 or to the revision to the denominator of the supplementary leverage ratio adopted by these agencies under a final rule issued in September 2014 (the “Supplemental Leverage Requirements”).

Revised prompt corrective action standards

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

Figure 5. “Well Capitalized” and “Adequately Capitalized” Capital Category Ratios under Current and Revised

Prompt Corrective Action Rules


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

(a)	As a “standardized approach” banking organization, KeyBank is not subject to the Supplemental Leverage Requirements.

We believe that, as of September 30, 2014, KeyBank would meet all “well capitalized” capital adequacy requirements under the Regulatory Capital Rules if such requirements were currently effective.

Liquidity coverage ratio

In October 2014, federal banking agencies published the final Basel III liquidity framework for U.S. banking organizations (the “Liquidity Coverage Rules”) that create a minimum liquidity coverage ratio (“LCR”) for certain internationally active bank and nonbank financial companies (not including Key) and a modified version of the LCR (“Modified LCR”) for bank holding companies and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including Key). The LCR and Modified LCR created by the Liquidity Coverage Rules are an enhanced prudential liquidity standard consistent with the Dodd-Frank Act.

As a Modified LCR bank holding company under the Liquidity Coverage Rules, Key will be required to maintain high-quality liquid assets of at least 100% of its total net cash outflow amount determined by prescribed assumptions in a standardized hypothetical stress scenario over a 30-calendar day period. Implementation for Modified LCR banking organizations, like Key, will begin on January 1, 2016, with a minimum requirement of 90% coverage, reaching 100% coverage by January 1, 2017. During the third quarter of 2014, our estimated Modified LCR was 80%. Key will be required to calculate its LCR on the last business day of each month upon implementation of the Liquidity Coverage Rules for Modified LCR banking organizations.

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 its asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system.

Highlights of Our Performance

Financial performance

For the third quarter of 2014, we announced net income from continuing operations attributable to Key common shareholders of $197 million, or $.23 per common share. Our third quarter of 2014 results compare to net income from continuing operations attributable to Key common shareholders of $229 million, or $.25 per common share, for the third quarter of 2013.

Our taxable-equivalent net interest income was $581 million for the third quarter of 2014, and the net interest margin was 2.96%. These results compare to taxable-equivalent net interest income of $584 million and a net interest margin of 3.11% for the third quarter of 2013. The decreases in net interest income and net interest margin were largely attributable to lower earning asset yields. The net interest margin was additionally impacted by higher levels of excess liquidity driven by commercial deposit growth. The decrease in net interest income was partially offset by higher loan levels, a more favorable mix of lower-cost deposits, and higher loan fees as the prior year had an early termination of a leveraged lease. For the full year of 2014, we expect net interest income to be relatively stable compared to 2013, with slight downward pressure due to the competitive environment.

Our noninterest income was $417 million for the third quarter of 2014, compared to $459 million for the year-ago quarter. Operating lease income and other leasing gains decreased $27 million as the prior year included the benefit of an early termination of a leveraged lease. Net gains from principal investing declined $8 million. Mortgage servicing fees decreased $6 million due to lower special servicing fees. These decreases were partially offset by an increase of $6 million in fee income related to the recently-acquired Pacific Crest Securities. For the full year of 2014, we expect low single-digit growth in noninterest income compared to the prior year.

Our noninterest expense was $704 million for the third quarter of 2014, compared to $716 million for the same period last year. This decline reflects lower efficiency- and pension-related charges of $6 million. This decrease was slightly offset by $6 million of expenses associated with the recently-acquired Pacific Crest Securities. For the full year of 2014, we expect a low-to-mid single-digit percentage decline in noninterest expense from 2013.

Average loans were $55.8 billion for the third quarter of 2014, an increase of $2.5 billion compared to the third quarter of 2013. The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $2.6 billion and was broad-based across our commercial lines of business. Consumer loans remained relatively stable, as modest increases across our core consumer loan portfolio, primarily home equity loans and direct term loans, were more than offset by run-off in our designated consumer exit portfolio. For the full year of 2014, we expect mid single-digit loan growth compared to 2013, driven by commercial, financial and agricultural loans.

Average deposits, excluding deposits in foreign office, totaled $67.7 billion for the third quarter of 2014, an increase of $2.4 billion compared to the year-ago quarter. Demand deposits increased by $1.9 billion, and NOW and money market deposit accounts increased $1.2 billion, mostly due to growth related to commercial client inflows as well as increases related to the commercial mortgage servicing business. These increases were partially offset by run-off in certificates of deposit.

Our provision for loan and lease losses was $21 million for the third quarter of 2014, compared to $28 million for the year-ago quarter. Our ALLL was $804 million, or 1.43%, of total period-end loans at September 30, 2014, compared to 1.62% at September 30, 2013. We expect our provision for loan and lease losses to approximate the level of net loan charge-offs for the remainder of the year.

Net loan charge-offs for the third quarter of 2014 totaled $31 million, or .22% of average total loans, compared to .28% for the same period last year. We expect net loan charge-offs to average total loans to continue to be below our targeted range of .40% to .60% for the remainder of the year.

At September 30, 2014, our nonperforming loans totaled $401 million and represented .71% of period-end portfolio loans, compared to 1.01% at September 30, 2013. Nonperforming assets at September 30, 2014, totaled $418 million and represented .74% of period-end portfolio loans and OREO and other nonperforming assets, compared to 1.08% at September 30, 2013.

Our capital ratios remain strong. Our tangible common equity, Tier 1 common equity and Tier 1 risk-based capital ratios at September 30, 2014, are 10.26%, 11.26%, and 12.01%, respectively, compared to 9.93%, 11.17%, and 11.92%, respectively, at September 30, 2013. We continue to return capital to our shareholders by repurchasing common shares and through our quarterly common share dividend. In the third quarter of 2014, we repurchased $119 million of common shares and paid a cash dividend of $.065 per common share under our 2014 capital plan authorization.

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

Figure 6. Results of Operations


	Three months ended								Nine months ended
in millions, except per share amounts	9-30-14			6-30-14			9-30-13		9-30-14			9-30-13
Summary of operations
Income (loss) from continuing operations attributable to Key	$	203		$	247		$	235	$	688		$	635
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(17	)		(28	)		37		(41	)		45

Net income (loss) attributable to Key^(b)	$	186		$	219		$	272	$	647		$	680

Income (loss) from continuing operations attributable to Key	$	203		$	247		$	235	$	688		$	635
Less: Dividends on Series A Preferred Stock		6			5			6		17			17

Income (loss) from continuing operations attributable to Key common shareholders		197			242			229		671			618
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(17	)		(28	)		37		(41	)		45

Net income (loss) attributable to Key common shareholders ^(b)	$	180		$	214		$	266	$	630		$	663

Per common share — assuming dilution
Income (loss) from continuing operations attributable to Key common shareholders	$	.23		$	.27		$	.25	$	.76		$	.67
Income (loss) from discontinued operations, net of taxes ^{(a), (b)}		(.02	)		(.03	)		.04		(.05	)		.05

Net income (loss) attributable to Key common shareholders ^{(b), (c)}	$	.21		$	.24		$	.29	$	.71		$	.72

(a)

(b)

(c)	EPS may not foot due to rounding.

Figure 7 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible common equity,” “Tier 1 common equity,” “pre-provision net revenue,” “cash efficiency ratio,” and “Common Equity Tier 1 under the Regulatory Capital Rules (estimates).”

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key’s capital position without regard to the effects of intangible assets and preferred stock. Tier 1 common equity, a non-GAAP financial measure, is a component of Tier 1 risk-based capital. Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations applicable to us before January 1, 2015. However, since analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1 common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 7 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

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

Figure 7 also shows the computation for pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for loan and lease losses makes it easier to analyze our results by presenting them on a more comparable basis.

The cash efficiency ratio 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 believe this ratio provides greater consistency and comparability between our results and those of our peer banks. Additionally, this ratio is used by analysts and investors as they develop earnings forecasts and peer bank analysis.

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

Figure 7. GAAP to Non-GAAP Reconciliations


	Three months ended
dollars in millions	9-30-14			6-30-14			3-31-14			12-31-13			9-30-13
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP)	$	10,486		$	10,504		$	10,403		$	10,303		$	10,206
Less: Intangible assets ^(a)		1,105			1,008			1,012			1,014			1,017
Series A Preferred Stock ^(b)		282			282			282			282			282

Tangible common equity (non-GAAP)	$	9,099		$	9,214		$	9,109		$	9,007		$	8,907

Total assets (GAAP)	$	89,784		$	91,798		$	90,802		$	92,934		$	90,708
Less: Intangible assets ^(a)		1,105			1,008			1,012			1,014			1,017

Tangible assets (non-GAAP)	$	88,679		$	90,790		$	89,790		$	91,920		$	89,691

Tangible common equity to tangible assets ratio (non-GAAP)		10.26	%		10.15	%		10.14	%		9.80	%		9.93	%

Tier 1 common equity at period end
Key shareholders’ equity (GAAP)	$	10,486		$	10,504		$	10,403		$	10,303		$	10,206
Qualifying capital securities		340			339			339			339			340
Less: Goodwill		1,051			979			979			979			979
Accumulated other comprehensive income (loss) ^(c)		(366	)		(328	)		(367	)		(394	)		(409	)
Other assets ^(d)		110			86			84			89			96

Total Tier 1 capital (regulatory)		10,031			10,106			10,046			9,968			9,880
Less: Qualifying capital securities		340			339			339			339			340
Series A Preferred Stock ^(b)		282			282			282			282			282

Total Tier 1 common equity (non-GAAP)	$	9,409		$	9,485		$	9,425		$	9,347		$	9,258

Net risk-weighted assets (regulatory)	$	83,547		$	84,287		$	83,637		$	83,328		$	82,913

Tier 1 common equity ratio (non-GAAP)		11.26	%		11.25	%		11.27	%		11.22	%		11.17	%

Pre-provision net revenue
Net interest income (GAAP)	$	575		$	573		$	563		$	583		$	578
Plus: Taxable-equivalent adjustment		6			6			6			6			6
Noninterest income (GAAP)		417			455			435			453			459
Less: Noninterest expense (GAAP)		704			689			662			712			716

Pre-provision net revenue from continuing operations (non-GAAP)	$	294		$	345		$	342		$	330		$	327

Average tangible common equity
Average Key shareholders’ equity (GAAP)	$	10,473		$	10,459		$	10,371		$	10,272		$	10,237
Less: Intangible assets (average) ^(e)		1,037			1,010			1,013			1,016			1,019
Series A Preferred Stock (average)		291			291			291			291			291

Average tangible common equity (non-GAAP)	$	9,145		$	9,158		$	9,067		$	8,965		$	8,927

Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)	$	197		$	242		$	232		$	229		$	229
Average tangible common equity (non-GAAP)		9,145			9,158			9,067			8,965			8,927

Return on average tangible common equity from continuing operations (non-GAAP)		8.55	%		10.60	%		10.38	%		10.13	%		10.18	%

Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)	$	180		$	214		$	236		$	224		$	266
Average tangible common equity (non-GAAP)		9,145			9,158			9,067			8,965			8,927

Return on average tangible common equity consolidated (non-GAAP)		7.81	%		9.37	%		10.56	%		9.91	%		11.82	%

Cash efficiency ratio
Noninterest expense (GAAP)	$	704		$	689		$	662		$	712		$	716
Less: Intangible asset amortization (GAAP)		10			9			10			10			12

Adjusted noninterest expense (non-GAAP)	$	694		$	680		$	652		$	702		$	704

Net interest income (GAAP)	$	575		$	573		$	563		$	583		$	578
Plus: Taxable-equivalent adjustment		6			6			6			6			6
Noninterest income (GAAP)		417			455			435			453			459

Total taxable-equivalent revenue (non-GAAP)	$	998		$	1,034		$	1,004		$	1,042		$	1,043

Cash efficiency ratio (non-GAAP)		69.5	%		65.8	%		64.9	%		67.4	%		67.5	%

(a)	For the three months ended September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, intangible assets exclude $72 million, $79 million, $84 million, $92 million, and $99 million, respectively, of period-end purchased credit card receivables.

(b)	Net of capital surplus.

(c)

Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

(d)

Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at September 30, 2014, June 30, 2014, March 31, 2014, and at any quarter-end during 2013.

(e)	For the three months ended September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, average intangible assets exclude $76 million, $82 million, $89 million, $96 million, and $103 million, respectively, of average purchased credit card receivables.

Figure 7. GAAP to Non-GAAP Reconciliations, continued


	Three months ended
dollars in millions	9-30-14			6-30-14
Common Equity Tier 1 under the Regulatory Capital Rules (estimates)
Tier 1 common equity under current regulatory rules	$	9,409		$	9,485
Adjustments from current regulatory rules to the Regulatory Capital Rules:
Deferred tax assets and other^(f)		(93	)		(108	)

Common Equity Tier 1 anticipated under the Regulatory Capital Rules^(g)	$	9,316		$	9,377

Net risk-weighted assets under current regulatory rules	$	83,547		$	84,287
Adjustments from current regulatory rules to the Regulatory Capital Rules:
Loan commitments less than one year		1,039			1,004
Past due loans		114			128
Mortgage servicing assets^(h)		462			484
Deferred tax assets^(h)		201			177
Other		1,172			1,519

Total risk-weighted assets anticipated under the Regulatory Capital Rules^(g)	$	86,535		$	87,599

Common Equity Tier 1 ratio under the Regulatory Capital Rules		10.77	%		10.70	%

	Nine months ended
dollars in millions	9-30-14			9-30-13
Pre-provision net revenue
Net interest income (GAAP)	$	1,711		$	1,742
Plus: Taxable-equivalent adjustment		18			17
Noninterest income (GAAP)		1,307			1,313
Less: Noninterest expense (GAAP)		2,055			2,108

Pre-provision net revenue from continuing operations (non-GAAP)	$	981		$	964

Average tangible common equity
Average Key shareholders’ equity (GAAP)	$	10,435		$	10,277
Less: Intangible assets (average)⁽ⁱ⁾		1,020			1,023
Preferred Stock, Series A (average)		291			291

Average tangible common equity (non-GAAP)	$	9,124		$	8,963

Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)	$	671		$	618
Average tangible common equity (non-GAAP)		9,124			8,963

Return on average tangible common equity from continuing operations (non-GAAP)		9.83	%		9.22	%

Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)	$	630		$	663
Average tangible common equity (non-GAAP)		9,124			8,963

Return on average tangible common equity consolidated (non-GAAP)		9.23	%		9.89	%

Cash efficiency ratio
Noninterest expense (GAAP)	$	2,055		$	2,108
Less: Intangible asset amortization (GAAP)		29			34

Adjusted noninterest expense (non-GAAP)	$	2,026		$	2,074

Net interest income (GAAP)	$	1,711		$	1,742
Plus: Taxable-equivalent adjustment		18			17
Noninterest income (GAAP)		1,307			1,313

Total taxable-equivalent revenue (non-GAAP)	$	3,036		$	3,072

Cash efficiency ratio (non-GAAP)		66.7	%		67.5	%

(f)	Includes the deferred tax asset subject to future taxable income for realization, primarily tax credit carryforwards, as well as the deductible portion of purchased credit card receivables.

(g)	The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies’ Regulatory Capital Rules (as fully phased-in on January 1, 2019); Key is subject to the Regulatory Capital Rules under the “standardized approach.”

(h)	Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%.

(i)	For the nine months ended September 30, 2014, and September 30, 2013, average intangible assets exclude $82 million and $110 million, respectively, of average purchased credit card receivables.

Results of Operations

Net interest income

One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

•

the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities;

•

the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;

•

the use of derivative instruments to manage interest rate risk;

•

interest rate fluctuations and competitive conditions within the marketplace; and

•

asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “taxable-equivalent basis” (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that — if taxed at the statutory federal income tax rate of 35% — would yield $100.

Figure 8 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of taxable-equivalent net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing annualized taxable-equivalent net interest income by average earning assets.

Taxable-equivalent net interest income was $581 million for the third quarter of 2014, and the net interest margin was 2.96%. These results compare to taxable-equivalent net interest income of $584 million and a net interest margin of 3.11% for the third quarter of 2013. The decreases in net interest income and net interest margin were largely attributable to lower earning asset yields. The net interest margin was additionally impacted by higher levels of excess liquidity driven by commercial deposit growth. The decrease in net interest income was partially offset by higher loan levels, a more favorable mix of lower-cost deposits, and higher loan fees as the prior year had an early termination of a leveraged lease.

For the nine months ended September 30, 2014, taxable-equivalent net interest income decreased $30 million and the net interest margin declined by 18 basis points compared to the same period one year ago. The decreases in net interest income and net interest margin were attributable to lower earning asset yields. These decreases were partially offset by loan growth, the maturity of higher-rate certificates of deposit, and a more favorable mix of lower-cost deposits.

Average earning assets totaled $78.1 billion for the third quarter of 2014, compared to $74.8 billion for the third quarter of 2013. Commercial, financial and agricultural loans grew by $2.6 billion over the year-ago quarter; this growth was broad-based across our commercial lines of business. Consumer loans remained relatively stable, as modest increases across our core consumer loan portfolio, primarily home equity loans and direct term loans, were more than offset by run-off in our designated consumer exit portfolio.

As shown in Figure 8, the average earning asset yield for the third quarter of 2014 was impacted by lower spreads on both commercial and consumer loans when compared to the average earning asset yield for the same period one year ago.

100

Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations


	Third Quarter 2014								Second Quarter 2014
	Average					Yield/			Average					Yield/
dollars in millions	Balance			Interest ^(a)		Rate ^(a)			Balance			Interest ^(a)		Rate ^(a)
ASSETS
Loans^{(b), (c)}
Commercial, financial and agricultural^(d)	$	26,456		$	218		3.28	%	$	26,444		$	219		3.31	%
Real estate — commercial mortgage		8,142			78		3.79			7,880			74		3.79
Real estate — construction		1,030			10		3.78			1,049			11		4.03
Commercial lease financing		4,145			38		3.66			4,257			38		3.54

Total commercial loans		39,773			344		3.44			39,630			342		3.45
Real estate — residential mortgage		2,204			24		4.35			2,189			24		4.41
Home equity:
Key Community Bank		10,368			102		3.91			10,321			100		3.92
Other		290			6		7.80			306			6		7.80

Total home equity loans		10,658			108		4.01			10,627			106		4.03
Consumer other — Key Community Bank		1,534			26		6.87			1,479			26		6.97
Credit cards		716			20		11.12			702			18		10.39
Consumer other:
Marine		856			13		6.23			926			15		6.18
Other		55			2		7.63			58			1		8.09

Total consumer other		911			15		6.32			984			16		6.29

Total consumer loans		16,023			193		4.78			15,981			190		4.77

Total loans		55,796			537		3.82			55,611			532		3.83
Loans held for sale		502			4		3.87			458			5		4.14
Securities available for sale^{(b), (e)}		11,939			67		2.25			12,408			71		2.30
Held-to-maturity securities^(b)		5,108			25		1.90			4,973			23		1.87
Trading account assets		893			6		2.68			985			7		2.80
Short-term investments		3,048			2		.19			2,475			1		.17
Other investments^(e)		847			4		2.12			888			6		2.64

Total earning assets		78,133			645		3.30			77,798			645		3.31
Allowance for loan and lease losses		(809	)							(824	)
Accrued income and other assets		9,799								9,767
Discontinued assets		4,138								4,341

Total assets	$	91,261							$	91,082

LIABILITIES
NOW and money market deposit accounts	$	33,969			12		.14		$	34,283			11		.14
Savings deposits		2,428			1		.02			2,493			—		.03
Certificates of deposit ($100,000 or more)^(f)		2,629			8		1.23			2,808			10		1.39
Other time deposits		3,413			7		.83			3,587			9		.98
Deposits in foreign office		595			—		.23			662			1		.23

Total interest-bearing deposits		43,034			28		.26			43,833			31		.28
Federal funds purchased and securities sold under repurchase agreements		1,176			1		.19			1,470			—		.19
Bank notes and other short-term borrowings		484			2		1.79			545			2		1.54
Long-term debt^{(f), (g)}		4,868			33		2.88			5,476			33		2.51

Total interest-bearing liabilities		49,562			64		.52			51,324			66		.52
Noninterest-bearing deposits		25,302								23,290
Accrued expense and other liabilities		1,768								1,654
Discontinued liabilities^(g)		4,138								4,341

Total liabilities		80,770								80,609
EQUITY
Key shareholders’ equity		10,473								10,459
Noncontrolling interests		18								14

Total equity		10,491								10,473

Total liabilities and equity	$	91,261							$	91,082

Interest rate spread (TE)							2.78	%							2.79	%

Net interest income (TE) and net interest margin (TE)					581		2.96	%					579		2.98	%

TE adjustment^(b)					6								6

Net interest income, GAAP basis				$	575							$	573

(a)	Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology.

(b)	Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(c)	For purposes of these computations, nonaccrual loans are included in average loan balances.

(d)

Commercial, financial and agricultural average balances include $92 million, $95 million, $94 million, $97 million, and $96 million of assets from commercial credit cards for the three months ended September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, respectively.

101

Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations


First Quarter 2014							Fourth Quarter 2013								Third Quarter 2013
Average Balance		Interest ^(a)		Yield/ Rate ^(a)			Average Balance			Interest ^(a)		Yield/ Rate ^(a)			Average Balance			Interest ^(a)		Yield/ Rate ^(a)
$	25,390	$	206		3.29	%	$	24,218		$	212		3.47	%	$	23,864		$	213		3.54	%
	7,807		74		3.84			7,678			78		4.01			7,575			77		4.06
	1,091		12		4.55			1,075			11		4.21			1,073			12		4.24
	4,439		42		3.78			4,513			41		3.62			4,633			36		3.14

	38,727		334		3.49			37,484			342		3.62			37,145			338		3.61
	2,187		24		4.44			2,199			24		4.43			2,193			25		4.43
	10,305		100		3.92			10,310			102		3.92			10,247			101		3.92
	325		6		7.77			343			7		7.72			364			7		7.72

	10,630		106		4.04			10,653			109		4.04			10,611			108		4.05
	1,438		25		7.06			1,446			26		7.18			1,435			26		7.24
	701		20		11.28			701			20		11.17			700			21		11.77
	996		15		6.18			1,056			17		6.24			1,120			17		6.26
	67		1		7.55			69			1		8.03			67			2		8.72

	1,063		16		6.26			1,125			18		6.35			1,187			19		6.40

	16,019		191		4.83			16,124			197		4.88			16,126			199		4.93

	54,746		525		3.88			53,608			539		3.98			53,271			537		4.00
	446		4		3.34			688			6		3.65			456			5		4.06
	12,346		72		2.33			12,464			74		2.40			12,926			77		2.37
	4,767		22		1.84			4,775			22		1.85			4,796			22		1.84
	981		6		2.51			819			6		2.90			747			5		2.52
	2,486		1		.17			4,455			2		.18			1,615			1		.20
	936		6		2.57			983			6		2.47			1,022			6		2.67

	76,708		636		3.32			77,792			655		3.37			74,833			653		3.49
	(842)							(859	)							(873	)
	9,791							9,467								9,549
	4,493							4,777								5,061
$	90,150						$	91,177							$	88,570

	$34,064		12		.14		$	33,834			12		.15		$	32,736			13		.15
	2,475		—		.03			2,483			—		.03			2,520			—		.04
	2,758		10		1.50			2,649			11		1.57			2,785			12		1.67
	3,679		10		1.07			3,736			11		1.16			3,957			12		1.24
	660		—		.22			615			—		.21			621			—		.20

	43,636		32		.30			43,317			34		.32			42,619			37		.35
	1,469		1		.17			1,618			—		.15			1,837			1		.08
	587		2		1.63			438			3		1.96			383			2		1.98
	5,169		32		2.57			4,174			29		2.94			3,504			29		3.41

	50,861		67		.54			49,547			66		.53			48,343			69		.56
	22,658							25,077								23,364
	1,750							1,548								1,626
	4,493							4,717								4,968

	79,762							80,889								78,301
	10,371							10,272								10,237
	17							16								32

	10,388							10,288								10,269

$	90,150						$	91,177							$	88,570

					2.78	%							2.84	%							2.93	%

			569		3.00	%					589		3.01	%					584		3.11	%

			6								6								6

		$	563							$	583							$	578

(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.

102

Figure 9 shows how the changes in yields or rates and average balances from the prior year period affected net interest income. The section entitled “Financial Condition” contains additional discussion about changes in earning assets and funding sources.

Figure 9. Components of Net Interest Income Changes from Continuing Operations


	From three months ended September 30, 2013 to three months ended September 30, 2014									From nine months ended September 30, 2013 to nine months ended September 30, 2014
in millions	Average Volume			Yield/ Rate			Net Change^(a)			Average Volume			Yield/ Rate			Net Change^(a)
INTEREST INCOME
Loans	$	25		$	(25	)		—		$	76		$	(117	)	$	(41	)
Loans held for sale		—			(1	)	$	(1	)		—			(1	)		(1	)
Securities available for sale		(6	)		(4	)		(10	)		(10	)		(17	)		(27	)
Held-to-maturity securities		1			2			3			10			—			10
Trading account assets		1			—			1			4			—			4
Short-term investments		1			—			1			—			—			—
Other investments		(1	)		(1	)		(2	)		(3	)		(4	)		(7	)

Total interest income (TE)		21			(29	)		(8	)		77			(139	)		(62	)

INTEREST EXPENSE
NOW and money market deposit accounts		—			(1	)		(1	)		2			(8	)		(6	)
Savings deposits		—			1			1			—			—			—
Certificates of deposit ($100,000 or more)		(1	)		(3	)		(4	)		(2	)		(9	)		(11	)
Other time deposits		(1	)		(4	)		(5	)		(6	)		(10	)		(16	)

Total interest-bearing deposits		(2	)		(7	)		(9	)		(6	)		(27	)		(33	)
Federal funds purchased and securities sold under repurchase agreements		—			—			—			(1	)		1			—
Bank notes and other short-term borrowings		—			—			—			2			(1	)		1
Long-term debt		10			(6	)		4			21			(21	)		—

Total interest expense		8			(13	)		(5	)		16			(48	)		(32	)

Net interest income (TE)	$	13		$	(16	)	$	(3	)	$	61		$	(91	)	$	(30	)

(a)	The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

Noninterest income

As shown in Figure 10, noninterest income was $417 million for the third quarter of 2014, compared to $459 million for the year-ago quarter, a decrease of $42 million, or 9.2%. Operating lease income and other leasing gains decreased $27 million as the prior year included the benefit of an early termination of a leveraged lease. Net gains from principal investing declined $8 million. Mortgage servicing fees decreased $6 million due to lower special servicing fees. These decreases were partially offset by an increase of $6 million in fee income related to the recently-acquired Pacific Crest Securities.

For the nine months ended September 30, 2014, noninterest income declined $6 million, or .5%, from the same period one year ago. Service charges on deposit accounts decreased $16 million due to lower non-sufficient funds and overdraft charges. Operating lease income and other leasing gains declined $10 million as the prior year included greater benefits from early terminations of leveraged leases. Consumer mortgage income was down $9 million due to lower mortgage originations, and corporate services income and corporate-owned life insurance were each down $7 million. Trust and investment services income and other income were slightly lower as well. These decreases in noninterest income were mostly offset by increases of $28 million in net gains from principal investing and $22 million in investment banking and debt placement fees.

103

Figure 10. Noninterest Income


	Three months ended September 30,				Change						Nine months ended September 30,				Change
dollars in millions	2014		2013		Amount			Percent			2014		2013		Amount			Percent

Trust and investment services income	$	99	$	100	$	(1	)		(1.0	)%	$	291	$	295	$	(4	)		(1.4	)%
Investment banking and debt placement fees		88		86		2			2.3			271		249		22			8.8
Service charges on deposit accounts		68		73		(5	)		(6.8	)		197		213		(16	)		(7.5	)
Operating lease income and other leasing gains		17		44		(27	)		(61.4	)		81		91		(10	)		(11.0	)
Corporate services income		42		44		(2	)		(4.5	)		125		132		(7	)		(5.3	)
Cards and payments income		42		43		(1	)		(2.3	)		123		122		1			.8
Corporate-owned life insurance income		26		26		—			—			80		87		(7	)		(8.0	)
Consumer mortgage income		3		3		—			—			7		16		(9	)		(56.3	)
Mortgage servicing fees		9		15		(6	)		(40.0	)		35		36		(1	)		(2.8	)
Net gains (losses) from principal investing		9		17		(8	)		(47.1	)		60		32		28			87.5
Other income^(a)		14		8		6			75.0			37		40		(3	)		(7.5	)

Total noninterest income	$	417	$	459	$	(42	)		(9.2	)%	$	1,307	$	1,313	$	(6	)		(.5	)%

(a)	Included in this line item is our “Dealer trading and derivatives income (loss).” Additional detail is provided in Figure 11.

Figure 11. Dealer Trading and Derivatives Income (Loss)


	Three months ended September 30,						Change					Nine months ended September 30,						Change
dollars in millions	2014			2013			Amount			Percent		2014			2013			Amount			Percent
Dealer trading and derivatives income (loss), proprietary^{(a), (b)}	$	(5	)	$	(7	)	$	2			N/M	$	(13	)	$	(12	)	$	(1	)		N/M
Dealer trading and derivatives income (loss), nonproprietary^(b)		(3	)		10			(13	)		N/M		3			27			(24	)		(88.9	)%

Total dealer trading and derivatives income (loss)	$	(8	)	$	3		$	(11	)		N/M	$	(10	)	$	15		$	(25	)		N/M

(a)

For the quarter ended September 30, 2014, income of $1 million related to foreign exchange, interest rate, and commodity derivative trading was offset by losses related to equity securities trading, fixed income, and credit portfolio management activities. For the quarter ended September 30, 2013, income of $2 million related to foreign exchange and interest rate derivative trading was offset by losses related to fixed income, equity securities trading, energy derivative trading, and credit portfolio management activities.

(b)

The allocation between proprietary and nonproprietary is made based upon whether the trade is conducted for the benefit of Key or Key’s clients rather than based upon rulemaking under the Volcker Rule. The prohibitions and restrictions on proprietary trading activities contemplated by the Volcker Rule were detailed in a final rule approved by federal banking regulators in December 2013, which became effective April 1, 2014. For more information, see the discussion under the heading “Other regulatory developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation” in Item 1 of our 2013 Form 10-K.

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

104

Trust and investment services income

Trust and investment services income is our largest source of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 12. For the three and nine months ended September 30, 2014, trust and investment services income decreased
$1 million, or 1%, and $4 million, or 1.4%, respectively, compared to the same periods one year ago. Pacific Crest Securities added
$3 million to trust and investment services income in the third quarter of 2014.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At September 30, 2014, our bank, trust, and registered investment advisory subsidiaries had assets under management of $39.3 billion, compared to $36.1 billion at September 30, 2013. As shown in Figure 12, increases in the equity and securities lending portfolios were primarily attributable to market appreciation. Although total assets under management increased from one year ago, trust and investment services income slightly declined due to a change in the mix of investment type, with the lower-fee portfolios increasing faster than the higher-fee portfolios.

Figure 12. Assets Under Management


	2014						2013
in millions	Third		Second		First		Fourth		Third
Assets under management by investment type:
Equity	$	21,035	$	21,576	$	20,788	$	20,971	$	19,761
Securities lending		5,514		5,397		5,333		3,422		3,740
Fixed income		9,975		9,961		10,011		9,767		9,997
Money market		2,759		2,735		2,761		2,745		2,612

Total	$	39,283	$	39,669	$	38,893	$	36,905	$	36,110

Investment banking and debt placement fees

Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees increased $2 million, or 2.3%, for the third quarter of 2014 and $22 million, or 8.8%, for the nine months ended September 30, 2014, as compared to the same periods one year ago. These increases reflect the benefits of our business model – focusing on targeted industries. The recently-acquired Pacific Crest Securities added $3 million to investment banking and debt placement fees in the third quarter of 2014.

Service charges on deposit accounts

Service charges on deposit accounts declined $5 million, or 6.8%, and $16 million, or 7.5%, for the three and nine months ended September 30, 2014, compared to the same periods one year ago due to lower non-sufficient funds and overdraft charges.

Operating lease income and other leasing gains

Operating lease income and other leasing gains decreased $27 million, or 61.4%, for the third quarter of 2014 and $10 million, or 11%, for the nine months ended September 30, 2014, compared to the same periods one year ago. The decline was due to a
$23 million gain on the early termination of leveraged leases in the third quarter of 2013 and product run-off. Expense related to the rental of leased equipment is presented in Figure 13 as “operating lease expense.”

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, decreased $1 million, or 2.3%, from the year-ago quarter, and increased $1 million, or .8%, for the nine months ended September 30, 2014, as compared to the same period one year ago. The year-to-date increase is due to higher credit card and merchant fees, partially offset by lower ATM debit card and surcharge income.

105

Consumer mortgage income

Consumer mortgage income was unchanged from the year-ago quarter, and declined $9 million, or 56.3%, for the nine months ended September 30, 2014, as compared to the same period one year ago, primarily due to lower mortgage originations.

Mortgage servicing fees

Mortgage servicing fees decreased $6 million, or 40%, from the year-ago quarter and $1 million, or 2.8%, for the nine months ended September 30, 2014, as compared to the same period one year ago due to lower special servicing fees.

Other income

Other income, which consists primarily of gain on sale of certain loans, other service charges, and certain dealer trading income, increased $6 million, or 75%, from the year-ago quarter and decreased $3 million, or 7.5%, for the nine months ended September 30, 2014.

Noninterest expense

As shown in Figure 13, noninterest expense was $704 million for the third quarter of 2014, compared to $716 million for the year-ago quarter, representing a decrease of $12 million, or 1.7%. This decline reflects lower efficiency- and pension-related charges of
$6 million, which were offset by $6 million of expenses associated with the recently-acquired Pacific Crest Securities. Technology contract labor, net decreased $7 million and the provision (credit) for losses on lending-related commitments was $5 million lower in the current quarter.

For the nine months ended September 30, 2014, noninterest expense decreased $53 million, or 2.5%, compared to the same period one year ago. Personnel expense declined $29 million, and nonpersonnel expense decreased $24 million from one year ago. This decline in noninterest expense reflects lower efficiency- and pension-charges of $24 million. Excluding the impact of efficiency- and pension-related charges, the $29 million decrease in expenses was mostly due to declines in technology contract labor, net, and the provision (credit) for losses on lending-related commitments.

Figure 13. Noninterest Expense


	Three months ended September 30,					Change						Nine months ended September 30,					Change
dollars in millions	2014			2013		Amount			Percent			2014			2013		Amount			Percent
Personnel	$	405		$	414	$	(9	)		(2.2	)%	$	1,182		$	1,211	$	(29	)		(2.4	)%
Net occupancy		66			66		—			—			198			202		(4	)		(2.0	)
Computer processing		39			38		1			2.6			118			116		2			1.7
Business services and professional fees		36			37		(1	)		(2.7	)		118			109		9			8.3
Equipment		25			25		—			—			73			78		(5	)		(6.4	)
Operating lease expense		11			14		(3	)		(21.4	)		31			37		(6	)		(16.2	)
Marketing		15			16		(1	)		(6.3	)		33			33		—			—
FDIC assessment		9			7		2			28.6			21			23		(2	)		(8.7	)
Intangible asset amortization		10			12		(2	)		(16.7	)		29			34		(5	)		(14.7	)
Provision (credit) for losses on lending-related commitments		(2	)		3		(5	)		N/M			(2	)		11		(13	)		N/M
OREO expense, net		1			1		—			—			3			5		(2	)		(40.0	)
Other expense		89			83		6			7.2			251			249		2			.8

Total noninterest expense	$	704		$	716	$	(12	)		(1.7	)%	$	2,055		$	2,108	$	(53	)		(2.5	)%

Average full-time equivalent employees^(a)		13,905			14,555		(650	)		(4.5	)%		13,942			14,980		(1,038	)		(6.9	)%

(a)	The number of average full-time-equivalent employees was not adjusted for discontinued operations.

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

106

Personnel

As shown in Figure 14, personnel expense, the largest category of our noninterest expense, decreased by $9 million, or 2.2%, in the third quarter of 2014 when compared to the year-ago quarter. Employee benefits was $7 million lower primarily due to a lower pension settlement charge compared to the prior year. Technology contract labor, net also declined $7 million. These decreases were partially offset by a $4 million increase in salaries. For the nine months ended September 30, 2014, personnel expense declined $29 million, or 2.4%, from the same period one year ago. Technology contract labor, net, decreased $13 million, and severance was $11 million lower. Employee benefits also declined $9 million, partially due to the lower pension settlement charge. These decreases were partially offset by an increase of $4 million in stock-based compensation.

Figure 14. Personnel Expense


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2014		2013		Amount			Percent			2014		2013		Amount			Percent
Salaries	$	226	$	222	$	4			1.8	%	$	670	$	671	$	(1	)		(.1	)%
Technology contract labor, net		12		19		(7	)		(36.8	)		43		56		(13	)		(23.2	)
Incentive compensation		79		81		(2	)		(2.5	)		232		231		1			.4
Employee benefits		71		78		(7	)		(9.0	)		184		193		(9	)		(4.7	)
Stock-based compensation		10		8		2			25.0			31		27		4			14.8
Severance		7		6		1			16.7			22		33		(11	)		(33.3	)

Total personnel expense	$	405	$	414	$	(9	)		(2.2	)%	$	1,182	$	1,211	$	(29	)		(2.4	)%

Operating lease expense

Operating lease expense decreased $3 million, or 21.4%, from the year-ago quarter and $6 million, or 16.2%, from the nine-month period ended one year ago due to product run-off. Income related to the rental of leased equipment is presented in Figure 10 as “operating lease income and other leasing gains.”

Other expense

Other expense is comprised of various miscellaneous expense items. The $6 million, or 7.2%, increase in the current quarter compared to the year-ago quarter and the $2 million, or .8%, decrease in the first nine months of 2014 as compared to the same period one year ago reflects fluctuations in several of those line items.

Income taxes

We recorded tax expense from continuing operations of $64 million for the third quarter of 2014 and $59 million for the third quarter of 2013. For the first nine months of 2014, we recorded tax expense from continuing operations of $232 million, compared to $201 million for the same period last year.

Our federal tax expense (benefit) differs from the amount that would be calculated using the federal statutory tax rate, primarily because we generate income from investments in tax-advantaged assets, such as corporate-owned life insurance, earn credits associated with investments in low-income housing projects, and make periodic adjustments to our tax reserves. During the third quarter and the first nine months of 2014, our effective tax rate was lower due to a settlement with the IRS on tax refund claims for prior years, partially offset by the write-off of a foreign deferred tax asset due to the sale of certain foreign leasing assets. Our effective tax rate was also lower in the first nine months of 2014 due to the early termination of certain leveraged leases that resulted in non-taxable gains pursuant to a prior settlement with the IRS.

Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived are included in Note 12 (“Income Taxes”) beginning on page 175 of our 2013 Form 10-K.

107

Line of Business Results

This section summarizes the financial performance and related strategic developments of our two major business segments (operating segments): Key Community Bank and Key Corporate Bank. Note 18 (“Line of Business Results”) describes the products and services offered by each of these business segments, provides more detailed financial information pertaining to the segments, and explains “Other Segments” and “Reconciling Items.”

Figure 15 summarizes the contribution made by each major business segment to our “taxable-equivalent revenue from continuing operations” and “income (loss) from continuing operations attributable to Key” for the three- and nine-month periods ended September 30, 2014, and September 30, 2013.

Figure 15. Major Business Segments - Taxable-Equivalent (TE) Revenue from Continuing Operations and Income (Loss) from Continuing Operations Attributable to Key


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2014			2013			Amount			Percent			2014			2013			Amount			Percent
REVENUE FROM CONTINUING OPERATIONS (TE)
Key Community Bank	$	559		$	584		$	(25	)		(4.3	)%	$	1,659		$	1,750		$	(91	)		(5.2	)%
Key Corporate Bank		395			379			16			4.2			1,172			1,130			42			3.7
Other Segments		47			80			(33	)		(41.3	)		208			190			18			9.5

Total Segments		1,001			1,043			(42	)		(4.0	)		3,039			3,070			(31	)		(1.0	)
Reconciling Items		(3	)		—			(3	)		N/M			(3	)		2			(5	)		N/M

Total	$	998		$	1,043		$	(45	)		(4.3	)%	$	3,036		$	3,072		$	(36	)		(1.2	)%

INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY
Key Community Bank	$	57		$	67		$	(10	)		(14.9	)%	$	172		$	163		$	9			5.5	%
Key Corporate Bank		119			106			13			12.3			360			342			18			5.3
Other Segments		48			65			(17	)		(26.2	)		174			158			16			10.1

Total Segments		224			238			(14	)		(5.9	)		706			663			43			6.5
Reconciling Items		(21	)		(3	)		(18	)		N/M			(18	)		(28	)		10			N/M

Total	$	203		$	235		$	(32	)		(13.6	)%	$	688		$	635		$	53			8.3	%

Key Community Bank summary of operations

•

Average loan and lease balances up 2.1% from prior year

•

Average core deposits up 1.5% from prior year

•

Net income attributable to Key Community Bank down 14.9% from the prior year

As shown in Figure 16, Key Community Bank recorded net income attributable to Key of $57 million for the third quarter of 2014, compared to net income attributable to Key of $67 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $25 million, or 6.5%, from the third quarter of 2013. Average loans and leases grew 2.1% while average core deposits increased 1.5% from one year ago. However, these volume-related increases were offset by declines in the deposit spread as a result of the continued low-rate environment.

Noninterest income was flat at $199 million from the year-ago quarter. Service charges on deposit accounts declined $5 million due to lower maintenance fees and overdraft charges. This decrease was offset by increases of $2 million in cards and payments income and $3 million in other noninterest income.

The provision for loan and lease losses increased by $7 million, or 29.2%, from the third quarter of 2013. Net loan charge-offs increased $1 million from the same period one year ago.

Noninterest expense declined by $16 million, or 3.5%, from the year-ago quarter as a result of Key’s efficiency initiative. Personnel expense remained flat compared to the third quarter of 2013. Nonpersonnel expense decreased $16 million primarily due to a credit to the provision for unfunded commitments and declines in outside loan servicing and internally-allocated costs.

108

Figure 16. Key Community Bank


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2014		2013		Amount			Percent			2014		2013		Amount			Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	360	$	385	$	(25	)		(6.5	)%	$	1,085	$	1,155	$	(70	)		(6.1	)%
Noninterest income		199		199		—			—			574		595		(21	)		(3.5	)

Total revenue (TE)		559		584		(25	)		(4.3	)		1,659		1,750		(91	)		(5.2	)
Provision (credit) for loan and lease losses		31		24		7			29.2			63		123		(60	)		(48.8	)
Noninterest expense		437		453		(16	)		(3.5	)		1,321		1,368		(47	)		(3.4	)

Income (loss) before income taxes (TE)		91		107		(16	)		(15.0	)		275		259		16			6.2
Allocated income taxes (benefit) and TE adjustments		34		40		(6	)		(15.0	)		103		96		7			7.3

Net income (loss) attributable to Key	$	57	$	67	$	(10	)		(14.9	)%	$	172	$	163	$	9			5.5	%

AVERAGE BALANCES
Loans and leases	$	30,103	$	29,498	$	605			2.1	%	$	29,979	$	29,215	$	764			2.6	%
Total assets		32,209		31,685		524			1.7			32,107		31,582		525			1.7
Deposits		50,302		49,732		570			1.1			50,149		49,572		577			1.2

Assets under management at period end	$	39,249	$	35,982	$	3,267			9.1	%	$	39,249	$	35,982	$	3,267			9.1	%

ADDITIONAL KEY COMMUNITY BANK DATA


	Three months ended												Nine months ended
	September 30,						Change						September 30,				Change
dollars in millions	2014			2013			Amount			Percent			2014		2013		Amount			Percent
NONINTEREST INCOME
Trust and investment services income	$	74		$	74			—			—		$	216	$	220	$	(4	)		(1.8	)%
Services charges on deposit accounts		57			62		$	(5	)		(8.1	)%		164		179		(15	)		(8.4	)
Cards and payments income		38			36			2			5.6			113		107		6			5.6
Other noninterest income		30			27			3			11.1			81		89		(8	)		(9.0	)

Total noninterest income	$	199		$	199			—			—		$	574	$	595	$	(21	)		(3.5	)%

AVERAGE DEPOSITS OUTSTANDING
NOW and money market deposit accounts	$	27,403		$	26,568		$	835			3.1	%	$	27,470	$	26,344	$	1,126			4.3	%
Savings deposits		2,418			2,509			(91	)		(3.6	)		2,456		2,503		(47	)		(1.9	)
Certificates of deposits ($100,000 or more)		2,072			2,264			(192	)		(8.5	)		2,134		2,401		(267	)		(11.1	)
Other time deposits		3,406			3,950			(544	)		(13.8	)		3,552		4,194		(642	)		(15.3	)
Deposits in foreign office		320			278			42			15.1			308		277		31			11.2
Noninterest-bearing deposits		14,683			14,163			520			3.7			14,229		13,853		376			2.7

Total deposits	$	50,302		$	49,732		$	570			1.1	%	$	50,149	$	49,572	$	577			1.2	%

HOME EQUITY LOANS
Average balance	$	10,368		$	10,247
Weighted-average loan-to-value ratio (at date of origination)		71	%		71	%
Percent first lien positions		59			58

OTHER DATA
Branches		997			1,044
Automated teller machines		1,290			1,350

Key Corporate Bank summary of operations

•

Completed the acquisition of Pacific Crest Securities, adding an important new industry vertical

•

Average loan and lease balances up 13.8% from the prior year

•

Average deposits up 7.9% from the prior year

As shown in Figure 17, Key Corporate Bank recorded net income attributable to Key of $119 million for the third quarter of 2014, compared to $106 million for the same period one year ago.

Taxable-equivalent net interest income increased by $16 million, or 8.2%, compared to the third quarter of 2013. Average earning assets increased $3.0 billion, or 13.8%, from the year-ago quarter, primarily driven by loan growth in commercial, financial and agricultural and real estate commercial mortgage. This growth in earning assets drove an increase of $9 million in earning asset spread. Average deposit balances increased $1.3 billion, or 7.9%, from the year-ago quarter, driven by the commercial mortgage servicing acquisition and other commercial client inflows. This growth in deposit balances drove an increase of $3 million in deposit and borrowing spread.

109

Noninterest income was flat from the prior year. The recently-acquired Pacific Crest Securities added $6 million in noninterest income. Other noninterest income increased $10 million due to higher trading income and miscellaneous gains on sale. Offsetting these increases were declines in mortgage servicing fees due to lower special servicing fees, and decreases in cards and payments income, corporate services income, and other noninterest income items.

The provision for loan and lease losses decreased $17 million compared to the third quarter of 2013. Net loan recoveries were less than $1 million for the third quarter of 2014 compared to net loan charge-offs of $6 million for the same period one year ago.

Noninterest expense increased by $9 million, or 4.4%, from the third quarter of 2013. There were $6 million in expenses related to the recently-acquired Pacific Crest Securities, and higher expenses related to low-income housing tax credit investments.

Figure 17. Key Corporate Bank


	Three months ended											Nine months ended
	September 30,					Change						September 30,					Change
dollars in millions	2014			2013		Amount			Percent			2014			2013		Amount			Percent
SUMMARY OF OPERATIONS
Net interest income (TE)	$	212		$	196	$	16			8.2	%	$	613		$	586	$	27			4.6	%
Noninterest income		183			183		—			—			559			544		15			2.8

Total revenue (TE)		395			379		16			4.2			1,172			1,130		42			3.7
Provision (credit) for loan and lease losses		(5	)		12		(17	)		N/M			(6	)		7		(13	)		N/M
Noninterest expense		212			203		9			4.4			609			588		21			3.6

Income (loss) before income taxes (TE)		188			164		24			14.6			569			535		34			6.4
Allocated income taxes and TE adjustments		69			58		11			19.0			207			193		14			7.3

Net income (loss)		119			106		13			12.3			362			342		20			5.8
Less: Net income (loss) attributable to
noncontrolling interests		—			—		—			N/M			2			—		2			N/M

Net income (loss) attributable to Key	$	119		$	106	$	13			12.3	%	$	360		$	342	$	18			5.3	%

AVERAGE BALANCES
Loans and leases	$	22,700		$	19,946	$	2,754			13.8	%	$	22,169		$	19,650	$	2,519			12.8	%
Loans held for sale		481			422		59			14.0			446			433		13			3.0
Total assets		26,460			23,739		2,721			11.5			26,003			23,388		2,615			11.2
Deposits		17,310			16,044		1,266			7.9			16,361			15,160		1,201			7.9
Assets under management at period end	$	34		$	128	$	(94	)		(73.4	)%	$	34		$	128	$	(94	)		(73.4	)%

ADDITIONAL KEY CORPORATE BANK DATA


	Three months ended											Nine months ended
	September 30,					Change						September 30,				Change
dollars in millions	2014		2013			Amount			Percent			2014		2013		Amount			Percent
NONINTEREST INCOME
Trust and investment services income	$	25	$	26		$	(1	)		(3.8	)%	$	75	$	76	$	(1	)		(1.3	)%
Investment banking and debt placement fees		86		85			1			1.2			267		245		22			9.0
Operating lease income and other leasing gains		14		13			1			7.7			47		41		6			14.6
Corporate services income		30		32			(2	)		(6.3	)		88		91		(3	)		(3.3	)
Service charges on deposit accounts		11		11			—			—			32		33		(1	)		(3.0	)
Cards and payments income		4		7			(3	)		(42.9	)		11		15		(4	)		(26.7	)

Payments and services income		45		50			(5	)		(10.0	)		131		139		(8	)		(5.8	)
Mortgage servicing fees		9		15			(6	)		(40.0	)		35		37		(2	)		(5.4	)
Other noninterest income		4		(6	)		10			N/M			4		6		(2	)		(33.3	)

Total noninterest income	$	183	$	183			—			—		$	559	$	544	$	15			2.8	%

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Key’s Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $48 million for the third quarter of 2014, compared to net income attributable to Key of $65 million for the same period last year. These results were primarily attributable to a decrease of $27 million in operating lease income and other leasing gains due to the early termination of a leveraged lease in the prior year. Net gains (losses) from principal investing also decreased $8 million from the prior year.

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Financial Condition

Loans and loans held for sale

At September 30, 2014, total loans outstanding from continuing operations were $56.2 billion, compared to $54.5 billion at December 31, 2013, and $53.6 billion at September 30, 2013. Loans related to the discontinued operations of the education lending business, which are excluded from total loans at September 30, 2014, December 31, 2013, and September 30, 2013, totaled $2.4 billion, $4.5 billion, and $4.7 billion, respectively. The decrease in education loans from prior periods is due to the sale, and resulting deconsolidation, of the residual interests in all of our outstanding education loan securitization trusts on September 30, 2014. The increase in our outstanding loans from continuing operations over the past twelve months results primarily from increased lending activity in our commercial, financial and agricultural portfolio. For more information on balance sheet carrying value, see Note 1 (“Summary of Significant Accounting Policies”) under the headings “Loans” and “Loans Held for Sale” on pages 117-118 of our 2013 Form 10-K.

Commercial loan portfolio

Commercial loans outstanding were $40.1 billion at September 30, 2014, an increase of $2.7 billion, or 7.1%, compared to September 30, 2013.

Commercial, financial and agricultural. Our commercial, financial and agricultural loans, also referred to as “commercial and industrial,” represented 48% of our total loan portfolio at September 30, 2014, 46% at December 31, 2013, and 45% at September 30, 2013, 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.

Figure 18 provides our commercial, financial and agricultural loans by industry classification at September 30, 2014, December 31, 2013, and September 30, 2013.

Figure 18. Commercial, Financial and Agricultural Loans


	September 30, 2014					December 31, 2013					September 30, 2013
dollars in millions	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Industry classification:
Services	$	6,011		22.5	%	$	6,036		24.2	%	$	5,769		23.7	%
Manufacturing		4,538		17.0			4,238		17.0			4,140		17.0
Public utilities		1,694		6.4			1,838		7.4			1,789		7.4
Financial services		2,752		10.3			2,155		8.6			2,163		8.9
Wholesale trade		2,172		8.1			1,838		7.4			1,951		8.0
Retail trade		981		3.7			993		4.0			1,024		4.2
Mining		733		2.7			634		2.5			617		2.5
Dealer floor plan		1,188		4.5			1,345		5.4			1,027		4.2
Property management		911		3.4			877		3.5			784		3.2
Transportation		1,183		4.4			953		3.8			959		4.0
Building contractors		590		2.2			526		2.1			521		2.1
Agriculture/forestry/fishing		550		2.1			542		2.2			513		2.1
Insurance		210		.8			169		.7			164		.7
Public administration		556		2.1			432		1.7			335		1.4
Communications		168		.6			204		.8			231		1.0
Other		2,446		9.2			2,183		8.7			2,330		9.6

Total	$	26,683		100.0	%	$	24,963		100.0	%	$	24,317		100.0	%

Commercial, financial and agricultural loans increased $2.4 billion, or 9.7%, from the same period last year, with Key Corporate Bank increasing $2.1 billion and Key Community Bank up $382 million. We have experienced growth in new high credit quality loan commitments, and utilization with clients in our middle market segment and Institutional and Capital Markets business. Our two largest industry classifications—services and manufacturing—increased by 4.2% and 9.6%, respectively, when compared to one year ago. The services and manufacturing industries represented 23% and 17%, respectively, of the total commercial, financial and agricultural loan portfolio at September 30, 2014, and 24% and 17%, respectively, at September 30, 2013. At the end of each period provided in Figure 18 above, loans in the services and manufacturing industry classifications accounted for approximately 40% of our total commercial, financial and agricultural loan portfolio.

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Services, manufacturing, and public utilities are focus areas where we maintain dedicated industry verticals that are staffed by relationship managers who possess deep industry experience and knowledge. Our loans in the services classification grew by $242 million, or 4.2%, compared to last year. The growth in the services loan portfolio was in large part due to increases in lending to large corporate, middle market, and business banking clients, and was partially offset by decreases in loans to clients in private bank and real estate. Loans in the manufacturing classification grew by $398 million, or 9.6%, compared to the same period one year ago. Increases in lending to large corporate, middle market, and business banking clients accounted for the majority of the growth in this classification.

Commercial real estate loans. Our commercial real estate (“CRE”) lending business is conducted through two primary sources: our 12-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of CRE located both within and beyond the branch system. This line of business deals primarily with nonowner-occupied properties (generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties) and accounted for approximately 59% of our average year-to-date CRE loans, compared to 55% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of CRE.

CRE loans totaled $9.3 billion and $8.6 billion and represented 17% and 16% of our total loan portfolio at September 30, 2014, and September 30, 2013, respectively. These loans, which include both owner- and nonowner-occupied properties, represented 23% of our commercial loan portfolio at September 30, 2014, and September 30, 2013. We have been de-risking the portfolio by changing our focus from developers to owners of completed and stabilized CRE.

Figure 19 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 19, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.

As presented in Figure 19, at September 30, 2014, our CRE portfolio included mortgage loans of $8.3 billion and construction loans of $1 billion, representing 15% and 2%, respectively, of our total loans. At September 30, 2014, nonowner-occupied loans represented 12% of our total loans and owner-occupied loans represented 5% of our total loans. The average size of mortgage loans originated during the third quarter of 2014 was $5.4 million, and our largest mortgage loan at September 30, 2014, had a balance of $105 million. At September 30, 2014, our average construction loan commitment was $5.8 million. Our largest construction loan commitment was $49.8 million, and our largest construction loan amount outstanding was $41.8 million.

Also shown in Figure 19, 71% of our CRE loans at September 30, 2014, were for nonowner-occupied properties compared to 66% at September 30, 2013. Approximately 14% of these loans were construction loans at September 30, 2014, compared to 16% at September 30, 2013. Typically, these properties are not fully leased at the origination of the loan. The borrower relies upon additional leasing through the life of the loan to provide the cash flow necessary to support debt service payments. A significant decline in economic growth, and in turn, rental rates and occupancy would adversely affect our portfolio of construction loans.

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Figure 19. Commercial Real Estate Loans


September 30, 2014	Geographic Region																Percent of					Commercial
dollars in millions	West		Southwest		Central		Midwest		Southeast		Northeast		National		Total		Total			Construction		Mortgage
Nonowner-occupied:
Retail properties	$	148	$	133	$	127	$	127	$	183	$	58	$	179	$	955		10.2	%	$	81	$	874
Multifamily properties		456		190		437		529		801		120		203		2,736		29.4			582		2,154
Health facilities		182		—		246		147		91		226		187		1,079		11.6			75		1,004
Office buildings		246		13		91		107		75		97		—		629		6.7			76		553
Warehouses		176		10		22		118		81		75		103		585		6.3			10		575
Manufacturing facilities		4		—		5		5		59		1		37		111		1.2			1		110
Hotels/Motels		13		5		7		17		19		6		—		67		.7			—		67
Residential properties		1		—		24		4		5		14		—		48		.5			14		34
Land and development		8		—		8		6		15		16		—		53		.6			42		11
Other		62		—		8		17		74		75		115		351		3.8			14		337

Total nonowner-occupied		1,296		351		975		1,077		1,403		688		824		6,614		71.0			895		5,719
Owner-occupied		1,130		9		318		618		50		573		—		2,698		29.0			141		2,557

Total	$	2,426	$	360	$	1,293	$	1,695	$	1,453	$	1,261	$	824	$	9,312		100.0	%	$	1,036	$	8,276

Nonowner-occupied:
Nonperforming loans	$	1		—	$	1	$	9		—	$	14		—	$	25		N/M		$	12	$	13
Accruing loans past due 90 days or more		1		—		—		—		—		—		—		1		N/M			—		1
Accruing loans past due 30 through 89 days		—		—		—		—		—		3		—		3		N/M			—		3


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

During the first nine months of 2014, nonperforming loans related to nonowner-occupied properties increased by $2 million from December 31, 2013, to $25 million at September 30, 2014, and decreased by $18 million when compared to September 30, 2013. Our nonowner-occupied CRE portfolio has increased by 16.5%, or approximately $938 million, since September 30, 2013.

If the economic recovery stalls, it may weaken the CRE market fundamentals (i.e., vacancy rates, the stability of rental income, and asset values), leading to reduced cash flow to support debt service payments. Reduced client cash flow would adversely affect our ability to collect such payments. Accordingly, the value of our CRE loan portfolio could be adversely affected.

Commercial lease financing. We conduct commercial lease financing arrangements through our KEF line of business and have both the scale and array of products to compete in the equipment lease financing business. Commercial lease financing receivables represented 10% of commercial loans at September 30, 2014, and 12% at September 30, 2013.

Commercial loan modification and restructuring

We modify and extend certain commercial loans in the normal course of business for our clients. Loan modifications vary and are handled on a case by case basis with strategies responsive to the specific circumstances of each loan and borrower. In many cases, borrowers have other resources and can reinforce the credit with additional capital, collateral, guarantees, or income sources.

Modifications are negotiated to achieve mutually agreeable terms that maximize loan credit quality while at the same time meeting our clients’ financing needs. Modifications made to loans of creditworthy borrowers not experiencing financial difficulties and under circumstances where ultimate collection of all principal and interest is not in doubt are not classified as TDRs. In accordance with applicable accounting guidance, a loan is classified as a TDR only when the borrower is experiencing financial difficulties and a creditor concession has been granted.

Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. Loan extensions are sometimes coupled with these primary concession types. Because economic conditions have improved modestly and we have restructured loans to provide the optimal opportunity for successful repayment by the borrower, certain of our restructured loans have returned to accrual status and consistently performed under the restructured loan terms over the past year.

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If loan terms are extended at less than normal market rates for similar lending arrangements, our Asset Recovery Group is consulted to help determine if any concession granted would result in designation as a TDR. Transfer to our Asset Recovery Group is considered for any commercial loan determined to be a TDR. During the first nine months of 2014, there were $3 million of new restructured commercial loans.

For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 4 (“Asset Quality”).

Figure 20. Commercial TDRs by Note Type and Accrual Status


	September 30,		June 30,		March 31,		December 31,		September 30,
in millions	2014		2014		2014		2013		2013
Commercial TDRs by Note Type
Tranche A	$	35	$	38	$	61	$	107	$	135

Total Commercial TDRs	$	35	$	38	$	61	$	107	$	135

Commercial TDRs by Accrual Status
Nonaccruing	$	24	$	26	$	49	$	52	$	84
Accruing		11		12		12		55		51

Total Commercial TDRs	$	35	$	38	$	61	$	107	$	135

We often use an A-B note structure for our TDRs, breaking the existing loan into two tranches. First, we create an A note. Since the objective of this TDR note structure is to achieve a fully performing and well-rated A note, we focus on sizing that note to a level that is supported by cash flow available to service debt at current market terms and consistent with our customary underwriting standards. This note structure typically will include a debt coverage ratio of 1.2 or better of cash flow to monthly payments of market interest, and principal amortization of generally not more than 25 years. (These metrics are adjusted from time to time based upon changes in long-term markets and “take-out underwriting standards” of our various lines of business.) Appropriately sized A notes are more likely to return to accrual status, allowing us to resume recognizing interest income. As the borrower’s payment performance improves, these restructured notes typically also allow for an upgraded internal quality risk rating classification. Moreover, the borrower retains ownership and control of the underlying collateral (typically, CRE), the borrower’s capital structure is strengthened (often to the point that fresh capital is attracted to the transaction), and local markets are spared distressed/fire sales.

The B note typically is an interest-only note with no required amortization until the property stabilizes and generates excess cash flow. This excess cash flow customarily is applied directly to the principal of the A note. We evaluate the B note when we consider returning the A note to accrual status. In many cases, the B note is charged off at the same time the A note is returned to accrual status. Alternatively, both A and B notes may be simultaneously returned to accrual if credit metrics are supportive.

Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented evaluation of the credit, which would include analysis of the borrower’s financial condition, prospects for repayment under the modified terms, and alternate sources of repayment such as the value of loan collateral. We wait a reasonable period (generally a minimum of six months) to establish the borrower’s ability to sustain historical repayment performance before returning the loan to accrual status. Sustained historical repayment performance prior to the restructuring also may be taken into account. The primary consideration for returning a restructured loan to accrual status is the reasonable assurance that the full contractual principal balance of the loan and the ongoing contractually required interest payments will be fully repaid. Although our policy is a guideline, considerable judgment is required to review each borrower’s circumstances.

All loans processed as TDRs, including A notes and any non-charged-off B notes, are reported as TDRs during the calendar year in which the restructure took place.

Additional information regarding TDRs is provided in Note 4 (“Asset Quality”).

Extensions. Project loans typically are refinanced into the permanent commercial loan market at maturity, but sometimes they are modified and extended. Extension terms take into account the specific circumstances of the client relationship, the status of the project, and near-term prospects for both the client and the collateral. In all cases, pricing and loan structure are

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reviewed and, where necessary, modified to ensure the loan has been priced to achieve a market rate of return and loan terms that are appropriate for the risk. Typical enhancements include one or more of the following: principal pay down, increased amortization, additional collateral, increased guarantees, and a cash flow sweep. Some maturing construction loans have automatic extension options built in; in those cases, pricing and loan terms cannot be altered.

Loan pricing is determined based on the strength of the borrowing entity and the strength of the guarantor, if any. Therefore, pricing for an extended loan may remain the same because the loan is already priced at or above current market.

We do not consider loan extensions in the normal course of business (under existing loan terms or at market rates) as TDRs, particularly when ultimate collection of all principal and interest is not in doubt and no concession has been made. In the case of loan extensions where either collection of all principal and interest is uncertain or a concession has been made, we would analyze such credit under the applicable accounting guidance to determine whether it qualifies as a TDR. Extensions that qualify as TDRs are measured for impairment under the applicable accounting guidance.

Guarantors. We conduct a detailed guarantor analysis (1) for all new extensions of credit, (2) at the time of any material modification/extension, and (3) typically annually, as part of our on-going portfolio and loan monitoring procedures. This analysis requires the guarantor entity to submit all appropriate financial statements, including balance sheets, income statements, tax returns, and real estate schedules.

While the specific steps of each guarantor analysis may vary, the high-level objectives include determining the overall financial conditions of the guarantor entities, including size, quality, and nature of asset base; net worth (adjusted to reflect our opinion of market value); leverage; standing liquidity; recurring cash flow; contingent and direct debt obligations; and near-term debt maturities.

Borrower and guarantor financial statements are required at least annually within 90-120 days of the calendar/fiscal year end. Income statements and rent rolls for project collateral are required quarterly. We may require certain information, such as liquidity, certifications, status of asset sales or debt resolutions, and real estate schedules, to be provided more frequently.

We routinely seek performance from guarantors of impaired debt if the guarantor is solvent. We may not seek to enforce the guaranty if we are precluded by bankruptcy or we determine the cost to pursue a guarantor exceeds the value to be returned given the guarantor’s verified financial condition. We often are successful in obtaining either monetary payment or the cooperation of our solvent guarantors to help mitigate loss, cost, and the expense of collections.

As of September 30, 2014, we had $3.4 million of mortgage and construction loans that had a loan-to-value ratio greater than 1.0, and were accounted for as performing loans. These loans were not considered impaired due to one or more of the following factors: (i) underlying cash flow adequate to service the debt at a market rate of return with adequate amortization; (ii) a satisfactory borrower payment history; and (iii) acceptable guarantor support.

Consumer loan portfolio

Consumer loans outstanding decreased by $103 million, or .6%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 97% of this portfolio at September 30, 2014, was originated from our Key Community Bank within our 12-state footprint. The remainder of the portfolio, which has been in an exit mode since the fourth quarter of 2007, was originated from the Consumer Finance line of business and is now included in Other Segments. Home equity loans in Key Community Bank increased by $95 million, or .9%, over the past twelve months as a result of stabilized home values, improved employment, and favorable borrowing conditions.

As shown in Figure 16, we held the first lien position for approximately 59% of the Key Community Bank home equity portfolio at September 30, 2014, and 58% at September 30, 2013. For consumer loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent Fair Isaac Corporation scores as well as original and updated loan-to-value 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 118 of our 2013 Form 10-K.

Regulatory guidance issued in January 2012 addressed specific risks and required actions within home equity portfolios associated with second lien loans. At September 30, 2014, 41% of our home equity portfolio was secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.

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Figure 21 summarizes our home equity loan portfolio by source at the end of each of the last five quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.

Figure 21. Home Equity Loans


	2014									2013
dollars in millions	Third			Second			First			Fourth			Third
SOURCES OF PERIOD-END LOANS
Key Community Bank	$	10,380		$	10,379		$	10,281		$	10,340		$	10,285
Other		283			300			315			334			353

Total	$	10,663		$	10,679		$	10,596		$	10,674		$	10,638

Nonperforming loans at period end	$	184		$	189		$	199		$	220		$	211
Net loan charge-offs for the period		7			10			9			13			14
Yield for the period		4.01	%		4.03	%		4.04	%		4.04	%		4.05	%

Loans held for sale

As shown in Note 3 (“Loans and Loans Held for Sale”), our loans held for sale increased to $784 million at September 30, 2014, from $611 million at December 31, 2013, and totaled $699 million at September 30, 2013.

At September 30, 2014, loans held for sale included $30 million of commercial, financial and agricultural loans, which decreased by $38 million from September 30, 2013, $725 million of commercial mortgage loans, which increased $117 million from September 30, 2013, and $19 million of residential mortgage loans, which decreased $4 million from September 30, 2013.

Loan sales

As shown in Figure 22, during the first nine months of 2014, we sold $2.1 billion of CRE loans, $304 million of residential real estate loans, $347 million of commercial loans, and $132 million of commercial lease financing loans. Most of these sales came from the held-for-sale portfolio; however, $91 million of these loan sales related to the held-to-maturity portfolio.

Loan sales classified as held for sale generated net gains of $59 million in the first nine months of 2014 and are included in “investment banking and debt placement fees” and “other income” on the income statement.

Among the factors that we consider in determining which loans to sell are:

•

our business strategy for particular lending areas;

•

whether particular lending businesses meet established performance standards or fit with our relationship banking strategy;

•

our A/LM needs;

•

the cost of alternative funding sources;

•

the level of credit risk;

•

capital requirements; and

•

market conditions and pricing.

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Figure 22 summarizes our loan sales for the first nine months of 2014 and all of 2013.

Figure 22. Loans Sold (Including Loans Held for Sale)


in millions	Commercial		Commercial Real Estate		Commercial Lease Financing		Residential Real Estate		Total
2014
Third quarter	$	179	$	913	$	48	$	127	$	1,267
Second quarter		152		679		45		104		980
First quarter		16		489		39		73		617

Total	$	347	$	2,081	$	132	$	304	$	2,864

2013
Fourth quarter	$	39	$	1,504	$	141	$	102	$	1,786
Third quarter		17		923		129		184		1,253
Second quarter		181		815		90		226		1,312
First quarter		38		880		69		328		1,315

Total	$	275	$	4,122	$	429	$	840	$	5,666	^(a)

(a)	Excludes education loans of $147 million sold during 2013 that relate to the discontinued operations of the education lending business.

Figure 23 shows loans that are either administered or serviced by us, but not recorded on the balance sheet, and includes loans that were sold.

Figure 23. Loans Administered or Serviced


	September 30,		June 30,		March 31,		December 31,		September 30,
in millions	2014		2014		2014		2013		2013
Commercial real estate loans	$	179,293	$	179,194	$	174,601	$	177,731	$	199,464
Education loans^(a)		1,655		—		—		—		—
Commercial lease financing		709		708		717		717		623
Commercial loans		340		327		325		327		345

Total	$	181,997	$	180,229	$	175,643	$	178,775	$	200,432

(a)

During the third quarter of 2014, we sold the residual interests in all of our outstanding education loan securitization trusts to a third party. At September 30, 2014, we deconsolidated the securitization trusts and removed the trust assets from our balance sheet. We retained the servicing for the loans associated with these securitization trusts. See Note 11 (“Acquisitions and Discontinued Operations”) for more information about this transaction.

In the event of default by a borrower, we are subject to recourse with respect to approximately $1.4 billion of the $182 billion of loans administered or serviced at September 30, 2014. Additional information about this recourse arrangement is included in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with FNMA.”

We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as “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 $17.2 billion at September 30, 2014, compared to $17.1 billion at December 31, 2013, and $17.4 billion at September 30, 2013. Available-for-sale securities were $12.2 billion at September 30, 2014, compared to $12.3 billion at December 31, 2013, and $12.6 billion at September 30, 2013. Held-to-maturity securities were $5.0 billion at September 30, 2014, compared to $4.8 billion at December 31, 2013, and $4.8 billion at September 30, 2013. Essentially all of our held-to-maturity securities portfolio was invested in CMOs at September 30, 2014.

As shown in Figure 24, all of our mortgage-backed securities, which include both securities available for sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 5 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques,” and Note 6 (“Securities”).

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Figure 24. Mortgage-Backed Securities by Issuer


	September 30,		December 31,		September 30,
in millions	2014		2013		2013
FHLMC	$	5,988	$	7,047	$	7,467
FNMA		5,253		5,978		6,129
GNMA		5,922		3,997		3,760

Total^(a)	$	17,163	$	17,022	$	17,356

(a)	Includes securities held in the available-for-sale and held-to-maturity portfolios.

Securities available for sale

The majority of our securities available-for-sale portfolio consists of CMOs, which are debt securities secured by a pool of mortgages or mortgage-backed securities. CMOs generate interest income and serve as collateral to support certain pledging agreements. At September 30, 2014, we had $12.2 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $12.3 billion at December 31, 2013, and $12.5 billion at September 30, 2013.

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.

Throughout 2013 and the first nine months of 2014, our investing activities continued to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times during this time period served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities. 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 GNMA-related securities is also related to liquidity management strategies as we continue to make progress in preparing for expected future regulatory requirements.

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Figure 25 shows the composition, yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 6 (“Securities”).

Figure 25. Securities Available for Sale


dollars in millions	States and Political Subdivisions			Collateralized Mortgage Obligations^(a)			Other Mortgage- Backed Securities^(a)			Other Securities ^(b)			Total			Weighted- Average Yield^(c)
September 30, 2014
Remaining maturity:
One year or less	$	2		$	275			—			—		$	277			3.33	%
After one through five years		15			9,418		$	1,886		$	32			11,351			2.28
After five through ten years		10			316			288			—			614			1.96
After ten years		—			—			3			—			3			5.50

Fair value	$	27		$	10,009		$	2,177		$	32		$	12,245			—
Amortized cost		26			10,096			2,156			28			12,306			2.28	%
Weighted-average yield ^(c)		6.21	%		2.23	%		2.45	%		9.50	%		2.28	%^(d)		—
Weighted-average maturity		4.2 years			3.5 years			4.1 years			3.9 years			3.6 years			—

December 31, 2013
Fair value	$	40		$	11,000		$	1,286		$	20		$	12,346			—
Amortized cost		39			11,120			1,270			17			12,446			2.33	%

September 30, 2013
Fair value	$	41		$	11,779		$	762		$	24		$	12,606			—
Amortized cost		40			11,810			733			20			12,603			2.38	%

(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 taxable-equivalent basis using the statutory federal income tax rate of 35%.

(d)	Excludes $22 million of securities at September 30, 2014, that have no stated yield.

Held-to-maturity securities

Federal Agency CMOs constitute essentially all of our held-to-maturity securities. The remaining balance comprises foreign bonds and capital securities. Figure 26 shows the composition, yields and remaining maturities of these securities.

Figure 26. Held-to-Maturity Securities


dollars in millions	Collateralized Mortgage Obligations			Other Securities			Total			Weighted- Average Yield^(a)
September 30, 2014
Remaining maturity:
One year or less		—		$	9		$	9			2.42	%
After one through five years	$	4,844			11			4,855			1.92
After five through ten years		133			—			133			1.83

Amortized cost	$	4,977		$	20		$	4,997			1.92	%
Fair value		4,891			20			4,911			—
Weighted-average yield		1.92	%		2.47	%^(b)		1.92	%^(b)		—
Weighted-average maturity		3.7 years			1.7 years			3.7 years			—

December 31, 2013
Amortized cost	$	4,736		$	20		$	4,756			1.83	%
Fair value		4,597			20			4,617			—

September 30, 2013
Amortized cost	$	4,815		$	20		$	4,835			1.84	%
Fair value		4,710			20			4,730			—

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

(b)	Excludes $5 million of securities at September 30, 2014, that have no stated yield.

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Other investments

Principal investments — investments in equity and mezzanine instruments made by our Principal Investing unit — represented 57% of other investments at September 30, 2014. 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 $115 million at September 30, 2014, $141 million at December 31, 2013, and $168 million at September 30, 2013, while the fair value of the indirect investments was $353 million at September 30, 2014, $413 million at December 31, 2013, and $417 million at September 30, 2013. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. The implementation date of the Volcker Rule is July 21, 2015. Key is permitted to file for two one-year extensions, and an additional extension of up to five years for illiquid funds, to retain the indirect investments for a longer period of time. We plan to apply for the extensions and hold the investments. As of September 30, 2014, we have not committed to a plan to sell these investments. For more information about the Volcker Rule, see the discussion under the heading “Other regulatory developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation” in Item 1 of our 2013 Form 10-K.

In addition to principal investments, “other investments” include other equity and mezzanine instruments, such as certain real-estate-related investments that are carried at fair value, as well as other types of investments that generally are carried at cost. There are indirect real-estate-related investments valued at $13 million at September 30, 2014, $23 million at December 31, 2013, and $28 million at September 30, 2013, that may be subject to the disposal requirements under the Volcker Rule, as described in the previous paragraph.

Most of our other investments are not traded on an active market. We determine the fair value at which these investments should be recorded based on the nature of the specific investment and all available relevant information. This review may encompass such factors as the issuer’s past financial performance and future potential, the values of public companies in comparable businesses, the risks associated with the particular business or investment type, current market conditions, the nature and duration of resale restrictions, the issuer’s payment history, our knowledge of the industry, third-party data, and other relevant factors. During the first nine months of 2014, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $60 million, which includes $25 million of net unrealized gains. These net gains are recorded as “net gains (losses) from principal investing” on the income statement. Additional information regarding these investments is provided in Note 5 (“Fair Value Measurements”).

Deposits and other sources of funds

Domestic deposits are our primary source of funding. During the third quarter of 2014, average domestic deposits were $67.7 billion and represented 87% of the funds we used to support loans and other earning assets, compared to $65.4 billion and 87% during the third quarter of 2013. The composition of our average deposits is shown in Figure 8 in the section entitled “Net interest income.”

The increase in average domestic deposits from the third quarter of 2013 to the third quarter of 2014 was due to increases in demand deposits of $1.9 billion and NOW and money market deposit accounts of $1.2 billion. These increases were mostly due to growth related to commercial client inflows as well as increases related to the commercial mortgage servicing business. This growth was partially offset by run-off in certificates of deposit.

Wholesale funds, consisting of deposits in our foreign office and short-term borrowings, averaged $2.3 billion during the third quarter of 2014, compared to $2.8 billion during the third quarter of 2013. The change from the third quarter of 2013 was caused by a $661 million decrease in federal funds purchased and securities sold under agreements to repurchase and a $26 million decrease in foreign office deposits, partially offset by a $101 million increase in bank notes and other short-term borrowings.

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Capital

At September 30, 2014, our shareholders’ equity was $10.5 billion, up $183 million from December 31, 2013. 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 (Unaudited).

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. In January 2014, we submitted to the Federal Reserve and provided to the OCC our 2014 capital plan under the annual CCAR process. On March 26, 2014, the Federal Reserve announced that it did not object to our 2014 capital plan. The 2014 capital plan includes a common share repurchase program of up to $542 million. Share repurchases under the capital plan have been authorized by our Board and include repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2014 capital plan are expected to be executed through the first quarter of 2015.

During the third quarter of 2014, we repurchased $119 million of common shares under our 2014 capital plan authorization.

Dividends

As previously reported, our 2014 capital plan also proposed an increase in our quarterly common share dividend from $.055 to $.065 per share, which was approved by our Board of Directors in May 2014. 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 in the “Supervision and Regulation” section of our 2013 Form 10-K in Item 1. Business under the heading “Regulatory capital and liquidity.”

Consistent with the 2014 capital plan, we made a dividend payment of $.065 per share, or $55 million, on our common shares during the third quarter of 2014.

We also made a quarterly dividend payment of $1.9375 per share, or $6 million, on our Series A Preferred Stock during the third quarter of 2014.

Common shares outstanding

Our common shares are traded on the NYSE under the symbol KEY with 29,039 holders of record at September 30, 2014. Our book value per common share was $11.74 based on 868.5 million shares outstanding at September 30, 2014, compared to $11.25 per common share based on 890.7 million shares outstanding at December 31, 2013, and $11.05 per common share based on 897.8 million shares outstanding at September 30, 2013. At September 30, 2014, our tangible book value per common share was $10.47, compared to $10.11 per common share at December 31, 2013, and $9.92 per common share at September 30, 2013.

Figure 27 shows activities that caused the change in outstanding common shares over the past five quarters.

Figure 27. Changes in Common Shares Outstanding


	2014									2013
in thousands	Third			Second			First			Fourth			Third
Shares outstanding at beginning of period		876,823			884,869			890,724			897,821			912,883
Common shares repurchased		(8,830	)		(7,824	)		(9,845	)		(7,659	)		(16,364	)
Shares reissued (returned) under employee benefit plans		484			(222	)		3,990			562			1,302

Shares outstanding at end of period		868,477			876,823			884,869			890,724			897,821

As shown above, common shares outstanding decreased by 8.3 million shares during the third quarter of 2014 from share repurchases under our 2014 capital plan and the net activity in our employee benefit plans.

At September 30, 2014, we had 148.5 million treasury shares, compared to 126.2 million treasury shares at December 31, 2013, and 119.1 million treasury shares at September 30, 2013. Going forward we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.

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Information on repurchases of common shares by KeyCorp is included in Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this report.

Capital adequacy

Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remain in excess of regulatory requirements at September 30, 2014. 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 11.68% at September 30, 2014, compared to 11.09% at December 31, 2013, and 11.25% at September 30, 2013. Our tangible common equity to tangible assets ratio was 10.26% at September 30, 2014, compared to 9.80% at December 31, 2013, and 9.93% at September 30, 2013.

Banking industry regulators prescribe minimum capital ratios for BHCs like KeyCorp and their banking subsidiaries. Risk-based capital guidelines require a minimum level of capital as a percent of “risk-weighted assets.” Risk-weighted assets consist of total assets plus certain off-balance sheet and market risk items, subject to adjustment for predefined credit risk factors. Currently, banks and BHCs must maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00% and total capital as a percent of risk-weighted assets of 8.00%. As of September 30, 2014, our Tier 1 risk-based capital ratio and our total risk-based capital ratio were 12.01% and 14.10%, respectively, compared to 11.96% and 14.33%, respectively, at December 31, 2013, and 11.92% and 14.37%, respectively, at September 30, 2013.

Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. BHCs that either have the highest supervisory rating or have implemented the Federal Reserve’s risk-adjusted measure for market risk — as we have — must maintain a minimum leverage ratio of 3.00%. All other BHCs must maintain a minimum ratio of 4.00%. As of September 30, 2014, our leverage ratio was 11.15%, compared to 11.11% at December 31, 2013, and 11.33% at September 30, 2013.

The adoption of the Regulatory Capital Rules changes the regulatory capital standards that apply to BHCs by phasing out the treatment of capital securities and cumulative preferred securities as eligible Tier 1 capital. The phase-out period, beginning January 1, 2015, for standardized approach banking organizations such as Key, will result in our trust preferred securities issued by the KeyCorp capital trusts being treated only as Tier 2 capital by 2016. These changes apply the same leverage and risk-based capital requirements that apply to depository institutions to BHCs, savings and loan holding companies, and nonbank financial companies identified as systemically important. Given our strong capital position, we expect to be able to satisfy the capital framework established under the Regulatory Capital Rules by our compliance date of January 1, 2015. The section titled “Supervision and Regulation” under Item 1. Business of our 2013 Form 10-K contains more detailed information regarding the Regulatory Capital Rules.

As of September 30, 2014, our Tier 1 risk-based capital ratio, leverage ratio, and total risk-based capital ratio were 12.01%, 11.15%, and 14.10%, respectively. The trust preferred securities issued by the KeyCorp capital trusts contribute $340 million, or 41, 37, and 40 basis points, to our Tier 1 risk-based capital ratio, Tier 1 leverage ratio, and total risk-based capital ratio, respectively, as of September 30, 2014. The new minimum capital ratios under the Regulatory Capital Rules together with the estimated capital ratios of Key at September 30, 2014, calculated on a fully phased-in basis are set forth in Figure 4 of this report.

Federal banking regulations group FDIC-insured depository institutions into one of five prompt corrective action capital categories, ranging from “well capitalized” to “critically undercapitalized.” A “well capitalized” institution must meet or exceed the prescribed threshold ratios of 6.00% for Tier 1 risk-based capital, 5.00% for Tier 1 leverage capital, and 10.00% for total risk-based capital and must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. If these provisions applied to BHCs, we believe we would qualify as “well capitalized” at September 30, 2014, and we believe there has not been any change in condition or event since that date that would cause a change in capital category. Analysis on an estimated basis, accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and therefore as Tier 2 instead) as of September 30, 2014, also determines that we would qualify as “well capitalized” under current regulatory guidelines (Basel I), with the estimated Tier 1 risk-based capital ratio, estimated leverage ratio, and estimated total risk-based capital ratio being 11.60%, 10.78%, and 14.10%, respectively. Figure 5 in the “Supervision and regulation” section above, describes the new threshold capital ratios for a “well capitalized” and an “adequately capitalized” institution under the Regulatory Capital Rules. The regulatory defined capital categories serve a limited supervisory function. Investors should not use our estimated ratios as a representation of our overall financial

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condition or prospects of KeyCorp. A discussion of the regulatory capital standards and other related capital adequacy regulatory standards is included in the section “Supervision and Regulation” under Item 1. Business of our 2013 Form 10-K under the heading “Regulatory capital and liquidity.”

Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations. As a result of the financial crisis, the Federal Reserve has intensified its assessment of capital adequacy on a component of Tier 1 risk-based capital, known as Tier 1 common equity, and its review of the consolidated capitalization of systemically important financial companies, including KeyCorp. The capital modifications mandated by the Regulatory Capital Rules are consistent with the renewed focus on Tier 1 common equity and the consolidated capitalization of banks, BHCs, and covered nonbank financial companies, which resulted from the financial crisis. Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations; this measure is considered to be a non-GAAP financial measure. Figure 7 in the “Highlights of Our Performance” section reconciles Key shareholders’ equity, the GAAP performance measure, to Tier 1 common equity, the corresponding non-GAAP measure. Our Tier 1 common equity ratio was 11.26% at September 30, 2014, compared to 11.22% at December 31, 2013, and 11.17% at September 30, 2013.

Generally, for risk-based capital purposes, deferred tax assets that are dependent upon future taxable income are limited to the lesser of: (i) the amount of deferred tax assets that a financial institution expects to realize within one year of the calendar quarter-end date, based on its projected future taxable income for the year, or (ii) 10% of the amount of an institution’s Tier 1 capital. At September 30, 2014, and September 30, 2013, we had no net deferred tax assets deducted from Tier 1 capital and risk-weighted assets. At September 30, 2014, for Key’s consolidated operations, we had a federal net deferred tax asset of $176 million and a state deferred tax asset of $21 million, compared to a federal net deferred tax asset of $184 million and a state deferred tax asset of $7 million at December 31, 2013, and a federal net deferred tax asset of $197 million and a state deferred tax asset of $7 million at September 30, 2013. We have recorded a valuation allowance of $1 million against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.

Figure 28 represents the details of our regulatory capital position at September 30, 2014, December 31, 2013, and September 30, 2013, under the existing regulatory capital standards.

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Figure 28. Capital Components and Risk-Weighted Assets


	September 30,			December 31,			September 30,
dollars in millions	2014			2013			2013
TIER 1 CAPITAL
Key shareholders’ equity	$	10,486		$	10,303		$	10,206
Qualifying capital securities		340			339			340
Less: Goodwill		1,051			979			979
Accumulated other comprehensive income^(a)		(366	)		(394	)		(409	)
Other assets^(b)		110			89			96

Total Tier 1 capital		10,031			9,968			9,880

TIER 2 CAPITAL
Allowance for losses on loans and liability for losses on lending-related commitments^(c)		870			924			946
Net unrealized gains on equity securities available for sale		2			1			1
Qualifying long-term debt		880			1,048			1,087

Total Tier 2 capital		1,752			1,973			2,034

Total risk-based capital	$	11,783		$	11,941		$	11,914

TIER 1 COMMON EQUITY
Tier 1 capital	$	10,031		$	9,968		$	9,880
Less: Qualifying capital securities		340			339			340
Series A Preferred Stock^(d)		282			282			282

Total Tier 1 common equity	$	9,409		$	9,347		$	9,258

RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet	$	65,245		$	65,505		$	65,080
Risk-weighted off-balance sheet exposure		18,721			17,778			17,528
Less: Goodwill		1,051			979			979
Other assets^(b)		295			458			355
Plus: Market risk-equivalent assets		927			1,482			1,639

Gross risk-weighted assets		83,547			83,328			82,913
Less: Excess allowance for loan and lease losses		—			—			—

Net risk-weighted assets	$	83,547		$	83,328		$	82,913

AVERAGE QUARTERLY TOTAL ASSETS	$	91,283		$	91,141		$	88,498

CAPITAL RATIOS
Tier 1 risk-based capital		12.01	%		11.96	%		11.92	%
Total risk-based capital		14.10			14.33			14.37
Leverage^(e)		11.15			11.11			11.33
Tier 1 common equity		11.26			11.22			11.17

(a)

(b)	Other assets deducted from Tier 1 capital and risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at September 30, 2014, December 31, 2013, and September 30, 2013.

(c)

The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the sum of gross risk-weighted assets plus low level exposures and residual interests calculated under the direct reduction method, as defined by the Federal Reserve. The ALLL includes $31 million, $39 million, and $38 million of allowance classified as “discontinued assets” on the balance sheet at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

(d)	Net of capital surplus.

(e)

This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible assets described in footnote (b), and (iii) deductible portions of nonfinancial equity investments; plus assets derecognized as an offset to AOCI resulting from the adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans.

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Risk Management

Overview

Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, compliance, liquidity, operational, market, reputation, strategic, and model risks. Our risk management activities are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. Certain of these risks are defined and discussed in greater detail in the remainder of this section.

The KeyCorp Board of Directors (the “Board”) serves in an oversight capacity ensuring that Key’s risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board understands Key’s risk philosophy, approves the risk appetite, inquires about risk practices, reviews the portfolio of risks, compares the actual risks to the risk appetite and is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately. The Board challenges management and ensures accountability.

The Board’s Audit Committee assists the Board in oversight of financial statement integrity, regulatory and legal compliance, independent auditors’ qualifications and independence, and all risk review functions, including internal audit. The Audit Committee meets with management and approves significant policies related to risk assessment and risk management and the processes related to risk review, operational risk, and compliance. The Audit Committee has responsibility over internal audit, financial reporting, compliance risk, and legal matters; the implementation, management, and evaluation of operational risk controls and information; security and fraud risk; and associated reputation and strategic risks.

The Board’s Risk Committee assists the Board in oversight of strategies, policies, procedures and practices relating to the assessment and management of enterprise-wide risk, including credit risk, market risk, liquidity risk, and model risk, as well as reputational and strategic risks. The Risk Committee also assists the Board in overseeing capital adequacy, capital planning, capital actions and other material financial matters. The Risk Committee reviews and provides oversight of management’s activities and approves significant policies related to enterprise-wide risks, which includes reviewing management and Enterprise Risk Management (ERM) reports, the ERM Policy, including the Risk Appetite Statement, as well as approving any material changes to the charter of the ERM Committee.

The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.

Our ERM Committee, chaired by the Chief Executive Officer and comprised of other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework and governance structure for the management of risks across the entire company. The ERM Committee reports to the Board’s Risk Committee. Annually, the Board reviews and approves the ERM 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. Membership of the Risk Governance Committees includes representatives from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing and reporting risk information. Risk Review provides the Third Line of Defense in their role to provide independent assessment and testing of the effectiveness, appropriateness and adherence to KeyCorp’s risk management policies, practices and controls.

The Chief Risk Officer ensures that relevant risk information is properly integrated into strategic and business decisions, ensures appropriate ownership of risks, provides input into performance and compensation decisions, assesses aggregate enterprise risk, monitors capabilities to manage critical risks, and executes appropriate Board and stakeholder reporting.

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Federal banking regulators continue to emphasize with financial institutions the importance of relating capital management strategy to the level of risk at each institution. We believe our internal risk management processes help us achieve and maintain capital levels that are commensurate with our business activities and risks, and conform to regulatory expectations.

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 impact the fair value of the financial instruments in the trading category. Our traditional banking loan and deposit products as well as long-term debt and certain short-term borrowings are nontrading positions. These positions are generally carried at the principal amount outstanding for assets and the amount owed for liabilities. The nontrading positions are subject to changes in economic value due to varying market conditions, primarily changes in interest rates.

Trading market risk

Key incurs market risk as a result of trading, investing, and client facilitation activities, principally within our investment banking and capital markets business. Key has exposures to a wide range of interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed income markets and maintaining positions in these instruments. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks. The majority of our positions are traded in active markets.

Management of trading market risks. Market risk management is an integral part of Key’s risk culture. Oversight of trading market risks is governed by the Risk Committee of our Board, the ERM Committee, and the Market Risk Committee. These committees regularly review and discuss market risk reports prepared by our Market Risk Management group (“MRM”) that contain our market risk exposures and results of monitoring activities. 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.

MRM is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. 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. MRM conducts stress tests for each covered position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.

Covered positions. We monitor the market risk of our covered positions, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. The trading account includes on- and off-balance sheet positions in financial instruments acquired with the intent to profit from price variations. All positions in the trading account are recorded at fair value, and changes in fair value are reflected in our consolidated statements of income. Information regarding our fair value policies, procedures and methodologies is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” beginning on page 119 of our 2013 Form 10-K and Note 5 (“Fair Value Measurements”) in this report. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.

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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.

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Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments include positions in municipal bonds, bonds backed by the U.S. government, agency 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 include credit default swaps, which are used to mitigate loan portfolio credit risk, and credit default swap indexes, which are used to manage the credit risk exposure associated with anticipated sales of certain commercial real estate loans. The transactions within the credit derivatives portfolio result in exposure to 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 the extreme conditions on market risk within our trading portfolios. MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.

We use a historical 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. Historical scenarios are customized for specific covered positions, and numerous risk factors are incorporated in the calculation. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level. We also utilize factors to estimate the exposures that contain optionality features, such as options and cancellable provisions.

The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s Risk Management Group on an annual basis. The Model Risk Management Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee.

MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to observed daily profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. Actual losses did not exceed daily trading VaR on any day during the quarters ended September 30, 2014, and September 30, 2013.

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 $1.1 million at September 30, 2014, and $1.7 million at September 30, 2013. The decrease in aggregate VaR was primarily due to reduced exposures in credit and interest rate derivatives. Figure 29 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended September 30, 2014, and September 30, 2013.

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Figure 29. VaR for Significant Portfolios of Covered Positions


	2014								2013
	Three months ended September 30,								Three months ended September 30,
in millions	High		Low		Mean		September 30,		High		Low		Mean		September 30,
Trading account assets:
Fixed income	$	.7	$	.3	$	.5	$	.4	$	1.0	$	.3	$	.6	$	.8
Derivatives:
Interest rate	$	.2	$	.1	$	.1	$	.1	$	.4	$	.2	$	.3	$	.4
Credit		.3		.1		.2		.3		.5		.2		.4		.4

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 $3.4 million at September 30, 2014, and $5.0 million at September 30, 2013. Figure 30 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended September 30, 2014, and September 30, 2013, as used for market risk capital charge calculation purposes.

Figure 30. Stressed VaR for Significant Portfolios of Covered Positions


	2014								2013
	Three months ended September 30,								Three months ended September 30,
in millions	High		Low		Mean		September 30,		High		Low		Mean		September 30,
Trading account assets:
Fixed income	$	2.1	$	1.0	$	1.5	$	1.2	$	3.1	$	.8	$	1.8	$	2.5
Derivatives:
Interest rate	$	.7	$	.2	$	.4	$	.2	$	1.2	$	.7	$	1.0	$	1.1
Credit		1.0		.4		.6		1.0		1.6		.6		1.1		1.2

Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset position, which consists of a VaR component, stressed VaR component, 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 risk factors and is measured through a standardized approach. Specific risk calculations are run quarterly by 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 consumer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, and changes in market interest rates that affect client activity and our hedging, investing, funding and capital positions. The primary components of interest rate risk exposure consist of gap risk, basis risk, yield curve risk and option risk.

The management of nontrading market risk is centralized within Corporate Treasury. Oversight and governance is provided by the Risk Committee of our Board, the ERM Committee and the ALCO. These committees 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 Asset Liability Management 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 Market Risk Management Group, as the second line of defense, provides additional oversight.

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“Gap risk” is the exposure to changes in interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (for example, deposits used to fund loans) do not mature or reprice at the same time.

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“Basis risk” is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes.

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“Yield curve risk” is the exposure to non-parallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve.

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“Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or early prepayments are not mitigated with an offsetting position or appropriate compensation.

Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments, including a most likely macro-economic scenario. Simulation modeling assumes that residual risk exposures will be managed to within the risk appetite.

We measure the amount of net interest income at risk by simulating the change in net interest income that would occur if the federal funds target rate were to gradually increase or decrease over the next twelve months, and term rates were to move in a similar fashion. Our standard rate scenarios encompass a gradual increase or decrease of 200 basis points, but due to the low interest rate environment, we have modified the standard to a gradual decrease of 25 basis points over two months with no change over the following ten months. After calculating the amount of net interest income at risk to interest rate changes, we compare that amount with the base case of an unchanged interest rate environment. We also perform regular stress tests and sensitivities on the model inputs that could materially change the resulting risk assessments. One set of stress tests and sensitivities assesses the effect of interest rate inputs on simulated exposures. Assessments are performed using different shapes of the yield curve, including a sustained flat yield curve, an inverted slope yield curve, changes in credit spreads, an immediate parallel change in market interest rates, and changes in the relationship of money market interest rates. Another set of stress tests and sensitivities assesses the effect of loan and deposit assumptions and assumed discretionary strategies on simulated exposures. Assessments are performed on changes to the following assumptions: the pricing of deposits without contractual maturities; changes in lending spreads; prepayments on loans and securities; other loan and deposit balance shifts; investment, funding and hedging activities; and liquidity and capital management strategies.

Simulation analysis produces only a sophisticated estimate of interest rate exposure based on judgments related to assumption inputs into the simulation model. We tailor assumptions to the specific interest rate environment and yield curve shape being modeled, and validate those assumptions on a regular basis. Our simulations are performed with the assumption that interest rate risk positions will be actively managed through the use of on- and off-balance sheet financial instruments to achieve the desired residual risk profile. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.

Figure 31 presents the results of the simulation analysis at September 30, 2014, and September 30, 2013. At September 30, 2014, our simulated exposure to changes in interest rates was moderately asset sensitive, and net interest income would benefit over time from either an increase in short-term or intermediate-term interest rates. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual increase or decrease in short-term interest rates over the next twelve months would adversely affect net interest income over the same period by more than 4%. As shown in Figure 31, we are operating within these levels as of September 30, 2014.

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Figure 31. Simulated Change in Net Interest Income


September 30, 2014
Basis point change assumption (short-term rates)	-25		+200
Tolerance level	-4.00	%	-4.00	%

Interest rate risk assessment	-1.04	%	3.34	%

September 30, 2013
Basis point change assumption (short-term rates)	-25		+200
Tolerance level	-4.00	%	-4.00	%

Interest rate risk assessment	-1.21	%	2.13	%

The results of additional sensitivity analysis of alternate interest rate paths and loan and deposit behavior assumptions indicates that net interest income could increase or decrease from the base simulation results presented in Figure 31. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. The unprecedented 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. The sensitivity testing of these assumptions supports our confidence that actual results are likely to be within a 75 basis point range of modeled results.

To support continued progress toward maximum employment and price stability, the FOMC expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens, and in particular expects to keep the federal funds rate at exceptionally low levels. Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase prior to any increase in the federal funds rate. Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.

We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a twelve-month horizon. To capture longer-term exposures, we calculate exposures to changes to the EVE as discussed in the following section.

Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond twelve, twenty-four, and thirty-six month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the base case of an unchanged interest rate environment. Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in certain yield curve term points, we have modified the standard declining rate scenario to an immediate 100 basis point decrease. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines as of September 30, 2014.

Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing securities, issuing term debt with floating or fixed interest rates, and using derivatives — predominantly in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities.

Figure 32 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a “receive fixed/pay variable” interest rate swap. The volume, maturity and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 7 (“Derivatives and Hedging Activities”).

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Figure 32. Portfolio Swaps by Interest Rate Risk Management Strategy


	September 30, 2014
						Weighted-Average								September 30, 2013
dollars in millions	Notional Amount		Fair Value			Maturity (Years)		Receive Rate			Pay Rate			Notional Amount		Fair Value
Receive fixed/pay variable — conventional A/LM ^(a)	$	9,300	$	(10	)		1.8		.8	%		.2	%	$	9,300	$	12
Receive fixed/pay variable — conventional debt		4,434		180			3.9		2.5			.2			4,160		259
Pay fixed/receive variable — conventional debt		50		(4	)		13.8		.2			3.6			208		(6	)

Total portfolio swaps	$	13,784	$	166	^(b)		2.5		1.3	%		.2	%	$	13,668	$	265	^(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 $28 million and $32 million for September 30, 2014, and September 30, 2013, respectively.

Liquidity risk management

We define “liquidity” as the ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions.

Governance structure

We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entity’s capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding.

The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Risk Committee of our Board, the ERM Committee, and the ALCO. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The Market Risk Management group, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are largely consistent with the Federal Reserve Board’s Enhanced Prudential Standards, and further enhancements are underway that will put us in compliance with these standards.

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 September 30, 2014, are shown in Figure 33. We believe these credit ratings, under normal conditions in the capital markets, will enable the parent company or KeyBank to issue fixed income securities to investors.

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Figure 33. Credit Ratings

September 30, 2014

Short-Term
Borrowings

Senior
Long-Term
Debt

Subordinated
Long-Term
Debt

Capital
Securities

Series A
Preferred
Stock

KEYCORP (THE PARENT COMPANY)

Standard & Poor’s

A-2

BBB+

BBB

BB+

Moody’s

P-2

Baa1

Baa2

Baa3

Ba1

Fitch

A-

BBB+

BB+

DBRS

R-2(high)

BBB(high)

BBB

N/A

KEYBANK

Standard & Poor’s

A-2

A-

BBB+

N/A

Moody’s

P-2

Baa1

N/A

Fitch

A-

BBB+

N/A

DBRS

R-1(low)

A(low)

BBB(high)

N/A

Managing liquidity risk

Most of our liquidity risk is derived from our lending activities, which inherently places 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. Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities, deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner, and without adverse consequences. These assessments 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 a liquidity reserve through balances in our liquid asset portfolio. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at September 30, 2014, totaled $10.1 billion, consisting of $7.5 billion of unpledged securities, $855 million of securities available for secured funding at the Federal Home Loan Bank of Cincinnati (“FHLB”), and $1.8 billion of net balances of federal funds sold and balances in our Federal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as of September 30, 2014, our unused borrowing capacity secured by loan collateral was $18.7 billion at the Federal Reserve Bank of Cleveland and $2.7 billion at the FHLB. During the third quarter of 2014, Key’s outstanding FHLB advances increased by $244 million due to additional advances of $501 million and repayments of $257 million.

Final U.S. liquidity coverage ratio

Under the Liquidity Coverage Rules, we will be required to calculate the Modified LCR. Implementation for Modified LCR banking organizations, like Key, will begin on January 1, 2016, with a minimum requirement of 90% coverage, reaching 100% coverage by January 1, 2017. During the third quarter, our estimated Modified LCR was approximately 80%. To reach the minimum of 90% by January 1, 2016, and to operate with a cushion above the minimum required level, we may change the mix of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings.

Additional information about the Liquidity Coverage Rules is included in the “Supervision and regulation” section under the heading “Liquidity coverage ratio.”

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Long-term liquidity strategy

Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Key’s client-based relationship strategy provides for a strong core deposit base which, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan-to-deposit ratio as a metric to monitor these strategies. Our target loan-to-deposit ratio is 90-100% (at September 30, 2014, 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 liquid assets. Conversely, excess cash generated by operating, investing and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.

Liquidity programs

We have several liquidity programs, which are described in Note 18 (“Long-Term Debt”) beginning on page 200 of our 2013 Form 10-K, that are designed to enable the parent company and KeyBank to raise funds in the public and private 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 of Directors and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs. During the three-month period ended September 30, 2014, KeyCorp and KeyBank did not issue any debt, and $750 million subordinated bank debt matured on July 1, 2014.

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 cash coverage metric as the primary measure to assess parent company liquidity. The cash coverage metric measures the months into the future where projected obligations can be met with the current amount of liquidity to meet all projected obligations. We generally issue term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. At September 30, 2014, KeyCorp held $2.0 billion in short-term investments, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.

Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year, up to the date of dividend declaration. During the third quarter of 2014, KeyCorp’s nonbank subsidiaries made a small dividend payment to the parent, and KeyCorp did not make any capital infusions to KeyBank. As of September 30, 2014, KeyBank had $113 million of capacity to pay dividends to KeyCorp.

Our liquidity position and recent activity

Over the past three months our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has decreased as a result of net customer loan and deposit flows and 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

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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 of our 2013 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 $207 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of September 30, 2014. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $8 million in taxes to be paid. If we were to cease operations in all international tax jurisdictions, the total amount of taxes to be paid would increase to approximately $17 million. Accordingly, we have included the total amount as a deferred tax liability at September 30, 2014.

The Consolidated Statements of Cash Flows (Unaudited) summarize our sources and uses of cash by type of activity for the nine-month periods ended September 30, 2014, and September 30, 2013.

Credit risk management

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk.

Credit policy, approval, and evaluation

We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves both retail and commercial credit policies. These policies are communicated throughout the organization to foster a consistent approach to granting credit.

Our credit risk management team is responsible for credit approval, is independent of our lines of business, and consists of senior officers who have extensive experience in structuring and approving loans. Only credit risk management members are authorized to grant significant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, but most major lending units have been assigned specific thresholds to keep exceptions at an acceptable level based upon portfolio and economic considerations.

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

Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan grading and scoring processes.

We maintain an active concentration management program to encourage diversification in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the strength of the borrower. Our legal lending limit is approximately $1.6 billion for any individual borrower. However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of September 30, 2014, we had five client relationships with loan commitments net of credit default swaps of more than $200 million. The average amount outstanding on these five individual net obligor commitments was $39 million at September 30, 2014. In general, our philosophy is to maintain a diverse portfolio with regard to credit exposures.

We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate credit risk. We utilize credit default swaps on a limited basis to transfer a portion of the credit risk

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associated with a particular extension of credit to a third party. At September 30, 2014, we used credit default swaps with a notional amount of $371 million to manage the credit risk associated with specific commercial lending obligations. We may also sell credit derivatives — primarily single name credit default swaps — to offset our purchased credit default swap position prior to maturity. At September 30, 2014, we had sold credit default swaps outstanding with a total notional amount of $5 million.

Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the “corporate services income” and “other income” components of noninterest income.

We may also manage the loan portfolio using portfolio swaps and bulk purchases and sales. Our overarching goal is to manage the loan portfolio within a specified range of asset quality.

Allowance for loan and lease losses

At September 30, 2014, the ALLL was $804 million, or 1.43% of period-end loans, compared to $848 million, or 1.56%, at December 31, 2013, and $868 million, or 1.62%, at September 30, 2013. The allowance includes $38 million that was specifically allocated for impaired loans of $299 million at September 30, 2014, compared to $42 million that was allocated for impaired loans of $358 million at December 31, 2013, and $47 million that was allocated for impaired loans of $411 million at September 30, 2013. For more information about impaired loans, see Note 4 (“Asset Quality”). At September 30, 2014, the ALLL was 200.5% of nonperforming loans, compared to 166.9% at December 31, 2013, and 160.4% at September 30, 2013.

Selected asset quality statistics for each of the past five quarters are presented in Figure 34. The factors that drive these statistics are discussed in the remainder of this section.

Figure 34. Selected Asset Quality Statistics from Continuing Operations


	2014									2013
dollars in millions	Third			Second			First			Fourth			Third
Net loan charge-offs	$	31		$	30		$	20		$	37		$	37
Net loan charge-offs to average loans		.22	%		.22	%		.15	%		.27	%		.28	%
Allowance for loan and lease losses	$	804		$	814		$	834		$	848		$	868
Allowance for credit losses ^(a)		839			851			869			885			908
Allowance for loan and lease losses to period-end loans		1.43	%		1.46	%		1.50	%		1.56	%		1.62	%
Allowance for credit losses to period-end loans		1.49			1.53			1.57			1.63			1.69
Allowance for loan and lease losses to nonperforming loans		200.5			205.6			185.7			166.9			160.4
Allowance for credit losses to nonperforming loans		209.2			214.9			193.5			174.2			167.8
Nonperforming loans at period end ^(b)	$	401		$	396		$	449		$	508		$	541
Nonperforming assets at period end		418			410			469			531			579
Nonperforming loans to period-end portfolio loans		.71	%		.71	%		.81	%		.93	%		1.01	%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets		.74			.74			.85			.97			1.08

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

(b)	Loan balances exclude $14 million, $15 million, $16 million, $16 million, and $18 million of PCI loans at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, respectively.

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 118 of our 2013 Form 10-K. Briefly, our general 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.

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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 September 30, 2014, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

As shown in Figure 35, our ALLL decreased by $64 million, or 7.4%, during the past twelve months. This contraction is directly associated with the improvement in credit quality of the loan portfolio. The quality of new loan originations and decreasing levels of criticized, classified, and nonperforming loans and net loan charge-offs has resulted in a reduction in our general allowance. Our delinquency trends have declined during the past twelve months due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio reflecting our effort to maintain a moderate enterprise risk tolerance. Our liability for credit losses on lending-related commitments was $35 million at September 30, 2014. When combined with our ALLL, our total allowance for credit losses represented 1.49% of period-end loans at September 30, 2014, compared to 1.63% at December 31, 2013, and 1.69% at September 30, 2013.

Figure 35. Allocation of the Allowance for Loan and Lease Losses


	September 30, 2014								December 31, 2013								September 30, 2013
dollars in millions	Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans
Commercial, financial and agricultural	$	386		48.0	%		47.5	%	$	362		42.7	%		45.8	%	$	370		42.6	%		45.4	%
Commercial real estate:
Commercial mortgage		159		19.8			14.7			165		19.4			14.2			172		19.8			14.1
Construction		28		3.5			1.9			32		3.8			2.0			36		4.2			1.9

Total commercial real estate loans		187		23.3			16.6			197		23.2			16.2			208		24.0			16.0
Commercial lease financing		55		6.8			7.4			62		7.3			8.4			64		7.4			8.5

Total commercial loans		628		78.1			71.5			621		73.2			70.4			642		74.0			69.9
Real estate — residential mortgage		22		2.7			3.9			37		4.4			4.0			35		4.0			4.1
Home equity:
Community Banking		71		8.8			18.5			84		9.9			19.0			82		9.5			19.2
Other		6		.8			.5			11		1.3			.6			14		1.6			.6

Total home equity loans		77		9.6			19.0			95		11.2			19.6			96		11.1			19.8
Consumer other — Community Banking		24		3.0			2.7			29		3.4			2.7			27		3.1			2.7
Credit cards		32		4.0			1.3			34		4.0			1.3			34		3.9			1.3
Consumer other:
Marine		19		2.4			1.5			29		3.4			1.9			31		3.6			2.0
Other		2		.2			.1			3		.4			.1			3		.3			.2

Total consumer other		21		2.6			1.6			32		3.8			2.0			34		3.9			2.2

Total consumer loans		176		21.9			28.5			227		26.8			29.6			226		26.0			30.1

Total loans ^(a)	$	804		100.0	%		100.0	%	$	848		100.0	%		100.0	%	$	868		100.0	%		100.0	%

(a)	Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amounts of $31 million, $39 million, and $38 million at September 30, 2014, December 31, 2013, and September 30, 2013, respectively.

Our provision (credit) for loan and lease losses was $21 million for the third quarter of 2014, compared to $28 million for the third quarter of 2013. Our net loan charge-offs were $31 million for the third quarter of 2014, compared to $37 million for the third quarter of 2013. The decrease in our provision is due to continued improvement in credit quality experienced in most of our loan portfolios. Additionally, 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.

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Net loan charge-offs

Net loan charge-offs for the third quarter of 2014 totaled $31 million, or .22% of average loans, compared to net loan charge-offs of $37 million, or .28%, for the same period last year. Figure 36 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 37.

Over the past twelve months, net loan charge-offs decreased $6 million. This decrease is attributable to continued improvement in asset quality as reflected in the asset quality statistics shown in Figure 38. As shown in Figure 39, our exit loan portfolio contributed a total of $4 million in net loan charge-offs for the third quarter of 2014. Net loan charge-offs for the second quarter of 2014 in our exit loan portfolio were less than $1 million. The increase in net loan charge-offs in our exit loan portfolio was primarily driven by lower levels of net loan recoveries in the consumer exit loan portfolios during the third quarter of 2014.

Figure 36. Net Loan Charge-offs from Continuing Operations^(a)


	2014									2013
dollars in millions	Third			Second			First			Fourth			Third
Commercial, financial and agricultural	$	6			—		$	2		$	9		$	4
Real estate — Commercial mortgage		(2	)		—			1			(5	)		(8	)
Real estate — Construction		1		$	(1	)		(12	)		1			(6	)
Commercial lease financing		(1	)		(2	)		1			(3	)		15

Total commercial loans		4			(3	)		(8	)		2			5
Home equity — Key Community Bank		6			9			7			10			12
Home equity — Other		1			1			2			3			2
Credit cards		9			11			6			5			8
Marine		2			5			4			5			1
Other		9			7			9			12			9

Total consumer loans		27			33			28			35			32

Total net loan charge-offs	$	31		$	30		$	20		$	37		$	37


Net loan charge-offs to average loans		.22	%		.22	%		.15	%		.27	%		.28	%
Net loan charge-offs from discontinued operations — education lending business	$	7		$	7		$	9		$	9		$	9

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

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Figure 37. Summary of Loan and Lease Loss Experience from Continuing Operations


	Three months ended September 30,						Nine months ended September 30,
dollars in millions	2014			2013			2014			2013
Average loans outstanding	$	55,796		$	53,271		$	55,388		$	52,867

Allowance for loan and lease losses at beginning of period	$	814		$	876		$	848		$	888
Charge-offs:
Commercial, financial and agricultural^(a)		12			15			35			44
Real estate — commercial mortgage		—			2			3			18
Real estate — construction		2			—			4			2

Total commercial real estate loans^(b)		2			2			7			20
Commercial lease financing		1			17			6			25

Total commercial loans		15			34			48			89
Real estate — residential mortgage		2			3			7			13
Home equity:
Key Community Bank		9			14			29			50
Other		2			4			8			16

Total home equity loans		11			18			37			66
Consumer other — Key Community Bank		7			8			23			24
Credit cards		9			9			27			25
Consumer other:
Marine		4			5			18			22
Other		1			1			2			3

Total consumer other		5			6			20			25

Total consumer loans		34			44			114			153

Total loans charged off		49			78			162			242
Recoveries:
Commercial, financial and agricultural^(a)		6			11			27			30
Real estate — commercial mortgage		2			10			4			20
Real estate — construction		1			6			16			14

Total commercial real estate loans^(b)		3			16			20			34
Commercial lease financing		2			2			8			10

Total commercial loans		11			29			55			74
Real estate — residential mortgage		—			1			2			1
Home equity:
Key Community Bank		3			2			7			8
Other		1			2			4			5

Total home equity loans		4			4			11			13
Consumer other — Key Community Bank		1			1			4			5
Credit cards		—			1			1			3
Consumer other:
Marine		2			4			7			13
Other		—			1			1			2

Total consumer other		2			5			8			15

Total consumer loans		7			12			26			37

Total recoveries		18			41			81			111

Net loans and leases charged off		(31	)		(37	)		(81	)		(131	)
Provision (credit) for loan and lease losses		21			28			37			111
Foreign currency translation adjustment		—			1			—			—

Allowance for loan and lease losses at end of period	$	804		$	868		$	804		$	868

Liability for credit losses on lending-related commitments at beginning of period	$	37		$	37		$	37		$	29
Provision (credit) for losses on lending-related commitments		(2	)		3			(2	)		11

Liability for credit losses on lending-related commitments at end of period^(c)	$	35		$	40		$	35		$	40

Total allowance for credit losses at end of period	$	839		$	908		$	839		$	908

Net loan charge-offs to average loans		.22	%		.28	%		.20	%		.33	%
Allowance for loan and lease losses to period-end loans		1.43			1.62			1.43			1.62
Allowance for credit losses to period-end loans		1.49			1.69			1.49			1.69
Allowance for loan and lease losses to nonperforming loans		200.5			160.4			200.5			160.4
Allowance for credit losses to nonperforming loans		209.2			167.8			209.2			167.8
Discontinued operations — education lending business:
Charge-offs	$	10		$	14		$	34		$	42
Recoveries		3			5			11			14

Net loan and lease charge-offs	$	(7	)	$	(9	)	$	(23	)	$	(28	)

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

(b)	See Figure 19 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.

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

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Nonperforming assets

Figure 38 shows the composition of our nonperforming assets. These assets totaled $418 million at September 30, 2014, and represented .74% of period-end portfolio loans, OREO and other nonperforming assets, compared to $531 million, or .97%, at December 31, 2013, and $579 million, or 1.08%, at September 30, 2013. 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 117 of our 2013 Form 10-K for a summary of our nonaccrual and charge-off policies.

Figure 38. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations


dollars in millions	September 30, 2014			June 30, 2014			March 31, 2014			December 31, 2013			September 30, 2013
Commercial, financial and agricultural^(a)	$	47		$	37		$	60		$	77		$	102

Real estate — commercial mortgage		41			38			37			37			58
Real estate — construction		14			9			11			14			17

Total commercial real estate loans ^(b)		55			47			48			51			75
Commercial lease financing		14			15			18			19			22

Total commercial loans		116			99			126			147			199
Real estate — residential mortgage		81			89			105			107			98
Home equity:
Key Community Bank		174			178			188			205			198
Other		10			11			11			15			13

Total home equity loans		184			189			199			220			211
Consumer other — Key Community Bank		2			2			2			3			2
Credit cards		1			1			1			4			4
Consumer other:
Marine		16			15			15			26			25
Other		1			1			1			1			2

Total consumer other		17			16			16			27			27

Total consumer loans		285			297			323			361			342

Total nonperforming loans^(c)		401			396			449			508			541
Nonperforming loans held for sale		—			1			1			1			13
OREO		16			12			12			15			15
Other nonperforming assets		1			1			7			7			10

Total nonperforming assets	$	418		$	410		$	469		$	531		$	579

Accruing loans past due 90 days or more	$	71		$	83		$	89		$	71		$	90
Accruing loans past due 30 through 89 days		340			274			267			318			288
Restructured loans — accruing and nonaccruing^(d)		264			266			294			338			349
Restructured loans included in nonperforming loans^(d)		136			142			178			214			228
Nonperforming assets from discontinued operations — education lending business		9			19			20			25			23
Nonperforming loans to period-end portfolio loans		.71	%		.71	%		.81	%		.93	%		1.01	%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets		.74			.74			.85			.97			1.08

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

(b)	See Figure 19 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.

(c)	Loan balances exclude $14 million, $15 million, $16 million, $16 million, and $18 million of PCI loans at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, 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 38, nonperforming assets increased during the third quarter of 2014. The increase was primarily attributable to nonperforming loans in our commercial, financial and agricultural portfolio due to the addition of one nonperforming loan with a balance of $17 million. As shown in Figure 39, our exit loan portfolio accounted for $43 million, or 10%, of our total nonperforming assets at September 30, 2014, compared to $43 million, or 10%, at June 30, 2014.

At September 30, 2014, the carrying amount of our commercial nonperforming loans outstanding represented 62% of their contractual amount owed, total nonperforming loans outstanding represented 74% of their contractual amount owed, and nonperforming assets in total were carried at 74% of their original contractual amount. At the same date, OREO represented 80% of its original contractual amount owed, while loans held for sale and other nonperforming assets in the aggregate represented 49% of the contractual amount owed.

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At September 30, 2014, our twenty largest nonperforming loans totaled $72 million, representing 18% of total nonperforming loans. At September 30, 2013, our twenty largest nonperforming loans totaled $119 million, representing 22% of total nonperforming loans.

Figure 39 shows the composition of our exit loan portfolio at September 30, 2014, and June 30, 2014, the net loan charge-offs recorded on this portfolio for the third quarter of 2014 and the second quarter of 2014, and the nonperforming status of these loans at September 30, 2014, and June 30, 2014. The exit loan portfolio represented 4% of total loans and loans held for sale at September 30, 2014, compared to 4% of total loans and loans held for sale at June 30, 2014. In the first quarter of 2014, our European lease financing portfolios were moved to our exit portfolio. Additional information about loan sales is included in this report under the headings “Loans held for sale” and “Loan sales.”

Figure 39. Exit Loan Portfolio from Continuing Operations


	Balance Outstanding				Change 9-30-14 vs.			Net Loan Charge-offs						Balance on Nonperforming Status
in millions	9-30-14		6-30-14		6-30-14			9-30-14^(c)			6-30-14^(c)			9-30-14		6-30-14
Residential properties — homebuilder	$	11	$	19	$	(8	)	$	1			—		$	10	$	7
Marine and RV floor plan		7		23		(16	)		—			—			5		6
Commercial lease financing^(a)		1,046		1,154		(108	)		(1	)	$	(5	)		1		3

Total commercial loans		1,064		1,196		(132	)		—			(5	)		16		16
Home equity — Other		283		300		(17	)		1			1			10		11
Marine		828		888		(60	)		2			5			16		15
RV and other consumer		57		61		(4	)		1			(1	)		1		1

Total consumer loans		1,168		1,249		(81	)		4			5			27		27

Total exit loans in loan portfolio	$	2,232	$	2,445	$	(213	)	$	4			—		$	43	$	43

Discontinued operations — education lending business (not included in exit loans above)^(b)	$	2,375	$	4,162	$	(1,787	)	$	7		$	7		$	9	$	19

(a)

Includes (1) the business aviation, commercial vehicle, office products, construction, and industrial leases; (2) Canadian lease financing portfolios; (3) European lease financing portfolios; and (4) all remaining balances related to lease in, lease out; sale in, lease out; service contract leases; and qualified technological equipment leases.

(b)	June 30, 2014, balance includes loans in Key’s consolidated education loan securitization trusts.

(c)	Credit amounts indicate recoveries exceeded charge-offs.

Figure 40 shows the types of activity that caused the change in our nonperforming loans during each of the last five quarters. Loans placed on nonaccrual status decreased $52 million during the third quarter of 2014 compared to third quarter of 2013 due to continued improvement in market liquidity.

Figure 40. Summary of Changes in Nonperforming Loans from Continuing Operations


	2014									2013
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	396		$	449		$	508		$	541		$	652
Loans placed on nonaccrual status		109			79			98			129			161
Charge-offs		(49	)		(56	)		(57	)		(66	)		(78	)
Loans sold		—			(21	)		(3	)		(19	)		(61	)
Payments		(13	)		(17	)		(21	)		(46	)		(43	)
Transfers to OREO		(7	)		(4	)		(3	)		(5	)		(2	)
Loans returned to accrual status		(35	)		(34	)		(73	)		(26	)		(88	)

Balance at end of period^(a)	$	401		$	396		$	449		$	508		$	541

(a)	Loan balances exclude $14 million, $15 million, $16 million, $16 million, and $18 million of PCI loans at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, respectively.

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Figure 41 shows the types of activity that caused the change in our nonperforming loans held for sale during each of the last five quarters.

Figure 41. Summary of Changes in Nonperforming Loans Held for Sale from Continuing Operations


	2014							2013
in millions	Third			Second		First		Fourth			Third
Balance at beginning of period	$	1		$	1	$	1	$	13		$	14
Net advances / (payments)		—			—		—		(1	)		(1	)
Loans sold		(2	)		—		—		(11	)		—
Valuation adjustments		1			—		—		—			—

Balance at end of period		—		$	1	$	1	$	1		$	13

Figure 42 shows the factors that contributed to the change in our OREO during each of the last five quarters.

Figure 42. Summary of Changes in Other Real Estate Owned, Net of Allowance, from Continuing Operations


	2014									2013
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	12		$	12		$	15		$	15		$	18
Properties acquired — nonperforming loans		7			4			3			5			2
Valuation adjustments		(1	)		(1	)		(1	)		—			(1	)
Properties sold		(2	)		(3	)		(5	)		(5	)		(4	)

Balance at end of period	$	16		$	12		$	12		$	15		$	15

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 will be subject to heightened prudential standards and regulation due to their systemic importance. This heightened level of regulation will increase our operational risk. We have created work teams to respond to and analyze the regulatory requirements that have been or will be promulgated as a result of the enactment of the Dodd-Frank Act. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation or foregone opportunities.

We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules, and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.

The Operational Risk Management Program provides the framework for the structure, governance, roles, and responsibilities, as well as the content, to manage operational risk for Key. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee, a senior management committee, oversees our level of operational risk and directs and supports our operational infrastructure and related activities. This committee and the Operational Risk Management function are an integral part of our ERM Program. Our Risk Review function periodically assesses the overall effectiveness of our Operational Risk Management Program and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Audit Committee and independently supports the Audit Committee’s oversight of these controls.

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Cybersecurity

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 consumer 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, material harm to our customers, and have not had a material adverse effect on our results of operations.

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 115 of our 2013 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 100 through 103 of our 2013 Form 10-K.

At September 30, 2014, $14 billion, or 16%, of our total assets were measured at fair value on a recurring basis. Approximately 97% of these assets, before netting adjustments, were classified as Level 1 or Level 2 within the fair value hierarchy. At September 30, 2014, $880 million, 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.

During the third quarter of 2014, $15 million of our total assets were measured at fair value on a nonrecurring basis. All of these assets were classified as Level 3. At September 30, 2014, there were no liabilities measured at fair value on a nonrecurring basis.

During the first nine months of 2014, 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 Non-Sovereign Debt Exposures

Our total European sovereign and non-sovereign debt exposure is presented in Figure 43.

Figure 43. European Sovereign and Non-Sovereign Debt Exposures


September 30, 2014 in millions	Short-and Long- Term Commercial Total^(a)		Foreign Exchange and Derivatives with Collateral^(b)			Net Exposure
France:
Sovereigns		—		—			—
Non-sovereign financial institutions		—	$	2		$	2
Non-sovereign non-financial institutions	$	41		—			41

Total		41		2			43
Germany:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		1			1
Non-sovereign non-financial institutions		208		—			208

Total		208		1			209
Greece:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Iceland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Ireland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		4		—			4

Total		4		—			4
Italy:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		64		—			64

Total		64		—			64
Netherlands:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		27		—			27

Total		27		—			27
Portugal:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		—		—			—

Total		—		—			—
Spain:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		55		—			55

Total		55		—			55
Switzerland:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		(2	)		(2	)
Non-sovereign non-financial institutions		85		—			85

Total		85		(2	)		83
United Kingdom:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		2			2
Non-sovereign non-financial institutions		154		—			154

Total		154		2			156
Other Europe:^(c)
Sovereigns		—		—			—
Non-sovereign financial institutions		—		—			—
Non-sovereign non-financial institutions		109		—			109

Total		109		—			109
Total Europe:
Sovereigns		—		—			—
Non-sovereign financial institutions		—		3			3
Non-sovereign non-financial institutions		747		—			747

Total	$	747	$	3		$	750

(a)	This column represents our outstanding leases.

(b)

This column represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients’ trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls.

(c)

Other Europe consists of the following countries: Austria, Belarus, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, Hungary, Lithuania, Luxembourg, Malta, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. Approximately 99% of our exposure in Other Europe is in Belgium, Finland, and Sweden.

Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; 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 3. Quantitative and Qualitative Disclosure about Market Risk

The information presented in the “Market risk management” section of the Management’s Discussion & Analysis of Financial Condition & Results of Operations is incorporated herein by reference.

Item 4. Controls and Procedures

As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), to ensure that information required to be disclosed by KeyCorp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to KeyCorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, KeyCorp’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report. No changes were made to KeyCorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorp’s internal control over financial reporting.

PART II.OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in the Legal Proceedings section of Note 15 (“Contingent Liabilities and Guarantees”) of the Notes to Consolidated Financial Statements (Unaudited) is incorporated herein by reference.

On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operation for a particular period, depending upon the size of the loss or our income for that particular period.

Item 1A. Risk Factors

For a discussion of certain risk factors affecting us, see the section titled “Supervision and Regulation” in Part I, Item 1. Business, on pages 7-18 of our 2013 Form 10-K; Part I, Item 1A. Risk Factors, on pages 18-28 of our 2013 Form 10-K; the section titled “Supervision and regulation” in this Form 10-Q; and our disclosure regarding forward-looking statements in this Form 10-Q.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase, or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be material.

In January 2014, we submitted to the Federal Reserve and provided to the OCC our 2014 capital plan under the annual CCAR process. On March 26, 2014, the Federal Reserve announced that it did not object to our 2014 capital plan. The 2014 capital plan includes a common share repurchase program of up to $542 million. Share repurchases under the capital plan have been authorized by our Board and include repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2014 capital plan are expected to be executed through the first quarter of 2015.

We completed $119 million of common share repurchases during the third quarter of 2014 under our 2014 capital plan authorization.

The following table summarizes our repurchases of our common shares for the three months ended September 30, 2014.


Calendar month	Total number of shares repurchased ^(a)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased as part of publicly announced plans or programs ^(b)
July 1 - 31		2,466,690	$	13.72		2,459,845		29,596,298
August 1 - 31		6,370,516		13.34		6,370,232		23,198,509
September 1 - 30		206		13.71		—		23,685,587

Total		8,837,412	$	13.45		8,830,077

(a)	Includes common shares repurchased in the open market and 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 July 31, 2014, at $13.54; on August 31, 2014, at $13.61; and on September 30, 2014, at $13.33.

Item 6. Exhibits

15	Acknowledgment of Independent Registered Public Accounting Firm.

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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The following materials from KeyCorp’s Form 10-Q Report for the quarterly period ended September 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

Information Available on Website

KeyCorp makes available free of charge on its website, www.key.com, its 2013 Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after KeyCorp electronically files such material with, or furnishes it to, the SEC. We also make available a summary of filings made with the SEC of statements of beneficial ownership of our equity securities filed by our directors and officers under Section 16 of the Exchange Act. The “Regulatory Disclosure” tab of the investor relations section of our website includes public disclosures concerning our annual and mid-year stress-testing activities under the Dodd-Frank Act. Information contained on or accessible through our website or any other website referenced in this report is not part of this report.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.


		KEYCORP
		(Registrant)

Date: November 4, 2014
		By: Robert L. Morris
		Chief Accounting Officer (Principal Accounting Officer)

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