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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

December 31, 2014

Commission file number: 1-11302

 

LOGO

Exact name of Registrant as specified in its charter:

Ohio

 

34-6542451

State or other jurisdiction of incorporation or organization:   IRS 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:   

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

  

Name of each exchange on which registered

Common Shares, $1 par value

   New York Stock Exchange

7.750% Non-Cumulative Perpetual Convertible Preferred Stock, Series A

   New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ü

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 ü No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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.

 

Large accelerated filer  ü   Accelerated filer   Non-accelerated filer   Smaller reporting company
  (Do not check if a smaller reporting company)

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

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $12,564,866,525 (based on the June 30, 2014, closing price of KeyCorp common shares of $14.33 as reported on the New York Stock Exchange). As of February 26, 2015, there were 855,324,689 common shares outstanding.

Certain specifically designated portions of KeyCorp’s definitive Proxy Statement for its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.


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Forward-looking Statements

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

 

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deterioration of commercial real estate market fundamentals;

 

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defaults by our loan counterparties or clients;

 

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adverse changes in credit quality trends;

 

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declining asset prices;

 

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our concentrated credit exposure in commercial, financial, and agricultural loans;

 

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

 

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changes in accounting policies, standards, and interpretations;

 

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

 

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

 

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negative outcomes from claims or litigation;

 

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

 

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increasing capital and liquidity standards under applicable regulatory rules;

 

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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;

 

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our ability to receive dividends from our subsidiary, KeyBank;

 

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downgrades in our credit ratings or those of KeyBank;

 

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

 

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

 

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

 

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the soundness of other financial institutions;

 

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

 

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our ability to timely and effectively implement our strategic initiatives;

 

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increased competitive pressure due to industry consolidation;

 

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

 

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

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-K and our subsequent reports on Forms 10-Q and 8-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.

 

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KEYCORP

2014 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

Item
Number

  Page
Number
 
PART I
1

Business

  4   
1A

Risk Factors

  18   
1B

Unresolved Staff Comments

  28   
2

Properties

  29   
3

Legal Proceedings

  29   
4

Mine Safety Disclosures

  29   
PART II
5

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  30   
6

Selected Financial Data

  31   
7

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

  32   
7A

Quantitative and Qualitative Disclosures About Market Risk

  104   
8

Financial Statements and Supplementary Data

  105   

Management’s Annual Report on Internal Control over Financial Reporting

  106   

Reports of Independent Registered Public Accounting Firm

  107   

Consolidated Financial Statements and Related Notes

  109   

Consolidated Balance Sheets

  109   

Consolidated Statements of Income

  110   

Consolidated Statements of Comprehensive Income

  111   

Consolidated Statements of Changes in Equity

  112   

Consolidated Statements of Cash Flows

  113   

Notes to Consolidated Financial Statements

  114   
9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  218   
9A

Controls and Procedures

  218   
9B

Other Information

  218   
PART III
10

Directors, Executive Officers and Corporate Governance

  219   
11

Executive Compensation

  219   
12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  219   
13

Certain Relationships and Related Transactions, and Director Independence

  219   
14

Principal Accountant Fees and Services

  219   
PART IV
15

Exhibits and Financial Statement Schedules

  220   

(a) (1) Financial Statements — See listing in Item 8 above

(a) (2) Financial Statement Schedules — None required

(a) (3) Exhibits

Signatures

  223   

Exhibits

 

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PART I

ITEM 1. BUSINESS

Overview

KeyCorp, organized in 1958 under the laws of the State of Ohio, is headquartered in Cleveland, Ohio. We are a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”), and are one of the nation’s largest bank-based financial services companies, with consolidated total assets of approximately $93.8 billion at December 31, 2014. KeyCorp is the parent holding company for KeyBank National Association (“KeyBank”), its principal subsidiary, through which most of our banking services are provided. Through KeyBank and certain other subsidiaries, we provide a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance, commercial mortgage servicing and special servicing, and investment banking products and services to individual, corporate, and institutional clients through two major business segments: Key Community Bank and Key Corporate Bank.

As of December 31, 2014, these services were provided across the country through KeyBank’s 994 full-service retail banking branches and a network of 1,287 automated teller machines (“ATMs”) in 12 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two business segments is included in the “Line of Business Results” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report, and in Note 23 (“Line of Business Results”) of the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data, which are incorporated herein by reference. KeyCorp and its subsidiaries had an average of 13,853 full-time equivalent employees for 2014.

In addition to the customary banking services of accepting deposits and making loans, our bank and trust company subsidiaries offer personal, securities lending and custody services, personal financial services, access to mutual funds, treasury services, investment banking and capital markets products, and international banking services. Through our bank, trust company, and registered investment adviser subsidiaries, we provide investment management services to clients that include large corporate and public retirement plans, foundations and endowments, high-net-worth individuals, and multi-employer trust funds established for providing pension or other benefits to employees.

We provide other financial services — both within and outside of our primary banking markets — through various nonbank subsidiaries. These services include community development financing, securities underwriting, and brokerage. We also provide merchant services to businesses directly and through an equity participation in a joint venture.

KeyCorp is a legal entity separate and distinct from its banks and other subsidiaries. Accordingly, the right of KeyCorp, its security holders and its creditors to participate in any distribution of the assets or earnings of its banks and other subsidiaries is subject to the prior claims of the creditors of such banks and other subsidiaries, except to the extent that KeyCorp’s claims in its capacity as a creditor may be recognized.

Important Terms Used in this Report

As used in this report, 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 solely to KeyCorp’s subsidiary bank, KeyBank National Association. KeyBank (consolidated) refers to the consolidated entity consisting of KeyBank and its subsidiaries.

The acronyms and abbreviations identified in Part II, Item 8. Note 1 (“Summary of Significant Accounting Policies”) hereof are used throughout this report, particularly in the Notes to Consolidated Financial Statements as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to that section as you read this report.

 

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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.

The following table presents the geographic diversity of Key Community Bank’s average deposits, commercial loans, and home equity loans.

 

    Geographic Region                          

Year ended

December 31, 2014

dollars in millions

  Pacific             Rocky
Mountains
            Indiana            

West
Ohio/

Michigan

            East
Ohio
           

Western

New
York

            Eastern
New
York
            New
England
            NonRegion     (a)     Total          

Average deposits

  $   11,301       $   4,984       $   2,320       $   4,344       $   9,026       $   4,931       $   7,892       $   2,895       $   2,632       $   50,325    

Percent of total

    22.5        %        9.9        %        4.6        %        8.6        %        17.9        %        9.8        %        15.7        %        5.8        %        5.2        %        100.0        %   

Average commercial loans

  $ 3,497       $ 1,702       $ 749       $ 1,138       $ 2,201       $ 573       $ 1,853       $ 745       $ 2,974       $ 15,432    

Percent of total

    22.7        %        11.0        %        4.8        %        7.4        %        14.3        %        3.7        %        12.0        %        4.8        %        19.3        %        100.0        %   

Average home equity loans

  $ 3,283       $ 1,580       $ 489       $ 850       $ 1,274       $ 815       $ 1,296       $ 651       $ 102       $ 10,340    

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 23 (“Line of Business Results”).

 

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Additional Information

The following financial data is included in this report in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, and is incorporated herein by reference as indicated below:

 

Description of Financial Data    Page(s)  

Selected Financial Data

     34   

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

     44   

Components of Net Interest Income Changes from Continuing Operations

     46   

Composition of Loans

     56   

Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates

     64   

Securities Available for Sale

     65   

Held-to-Maturity Securities

     66   

Maturity Distribution of Time Deposits of $100,000 or More

     68   

Allocation of the Allowance for Loan and Lease Losses

     88   

Summary of Loan and Lease Loss Experience from Continuing Operations

     90   

Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

     91   

Exit Loan Portfolio from Continuing Operations

     92   

Summary of Changes in Nonperforming Loans from Continuing Operations

     92   

Short-Term Borrowings

     201   

Our executive offices are located at 127 Public Square, Cleveland, Ohio 44114-1306, and our telephone number is (216) 689-3000. Our website is www.key.com, and the investor relations section of our website may be reached through www.key.com/ir. We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website, and available in print upon request from any shareholder to our Investor Relations Department, are the charters for our Audit Committee, Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee, and Risk Committee; our Corporate Governance Guidelines; the Code of Ethics for our directors, officers and employees; our Standards for Determining Independence of Directors; our Policy for Review of Transactions Between KeyCorp and Its Directors, Executive Officers and Other Related Persons; and our Statement of Political Activity. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any senior executive officer or director. 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. References to websites in this report are intended to be inactive textual references only.

Shareholders may obtain a copy of any of the above-referenced corporate governance documents by writing to our Investor Relations Department at Investor Relations, KeyCorp, 127 Public Square, Mailcode OH-01-27-0737, Cleveland, Ohio 44114-1306; by calling (216) 689-3000; or by sending an e-mail to investor_relations@keybank.com.

 

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Acquisitions and Divestitures

The information presented in Note 13 (“Acquisitions and Discontinued Operations”) is incorporated herein by reference.

Competition

The market for banking and related financial services is highly competitive. Key competes with other providers of financial services, such as bank holding companies, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers, and other local, regional, national, and global institutions that offer financial services. Some of our competitors are larger and may have more financial resources, while some of our competitors enjoy fewer regulatory constraints and may have lower cost structures. The financial services industry is likely to become more competitive as further technology advances enable more companies, including nonbank companies, to provide financial services. Technological advances may diminish the importance of depository institutions and other financial institutions. We compete by offering quality products and innovative services at competitive prices, and by maintaining our products and services offerings to keep pace with customer preferences and industry standards.

Mergers and acquisitions have led to increased concentration in the banking industry, placing added competitive pressure on Key’s core banking products and services.

Executive Officers of KeyCorp

KeyCorp’s executive officers are principally responsible for making policy for KeyCorp, subject to the supervision and direction of the Board of Directors. All executive officers are subject to annual election at the annual organizational meeting of the Board of Directors held each May.

Set forth below are the names and ages of the executive officers of KeyCorp as of December 31, 2014, the positions held by each at KeyCorp during the past five years, and the year each first became an executive officer of KeyCorp. Because Messrs. Buffie, Devine, Hartmann, and Kimble and Ms. Brady have been employed at KeyCorp for less than five years, information is being provided concerning their prior business experience. There are no family relationships among the directors or the executive officers.

Amy G. Brady (48)  — Ms. Brady is KeyCorp’s Chief Information Officer, serving in that role since May 2012. Prior to joining KeyCorp, Ms. Brady spent 25 years with Bank of America (a financial services institution), where she most recently served as Senior Vice President and Chief Information Officer, Enterprise Technology and Operations, supporting technology delivery and operations for crucial enterprise functions. Ms. Brady has been an executive officer of KeyCorp since she joined in 2012.

Craig A. Buffie (54)  — Mr. Buffie has been KeyCorp’s Chief Human Resources Officer since February 2013. Prior to joining KeyCorp, Mr. Buffie was employed for 27 years with Bank of America (a financial services institution), where he served in numerous human resources positions, including as a human resources executive for technology and operations for consumer and small business, as well as for its corporate and investment bank. Most recently, he was Head of Home Loan Originations for Bank of America. Mr. Buffie has been an executive officer of KeyCorp since joining in 2013.

Edward J. Burke (58)  — Mr. Burke has been the Co-President, Commercial and Private Banking of Key Community Bank since April 2014 and an Executive Officer of KeyCorp since May 2014. From 2005 until his election as Co-President, Mr. Burke was an Executive Vice President and head of KeyBank Real Estate Capital and Key Community Development Lending.

 

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Dennis A. Devine (43)  — Mr. Devine has been the Co-President, Consumer and Small Business of Key Community Bank since April 2014 and an Executive Officer of KeyCorp since May 2014. From 2012 to 2014, Mr. Devine served as Executive Vice President in various roles, including as head of the Consumer & Small Business Segment and head of Integrated Channels and Community Bank Strategy for Key Community Bank. Prior to joining Key in 2012, Mr. Devine served in various executive capacities with Citizens Financial Group and PNC Bank (financial services institutions).

Trina M. Evans (50)  — Ms. Evans has been the Director of Corporate Center for KeyCorp since August 2012, partnering with Key’s executive leadership team and Board of Directors to ensure alignment of strategy, objectives, priorities, and messaging across Key. Prior to this role, Ms. Evans was the Chief Administrative Officer for Key Community Bank and the Director of Client Experience for KeyBank. During her career with KeyCorp, she has served in a variety of senior management roles associated with the call center, internet banking, retail banking, distribution management and information technology. She became an executive officer of KeyCorp in March 2013.

Robert A. DeAngelis (53)  — Mr. DeAngelis has been the Director of the Enterprise Program Management Office for KeyCorp since November 2011, providing leadership for KeyCorp’s large-scale, organization-wide initiatives. He previously served as the Consumer Segment executive with responsibility for developing client strategies and programs for Key’s Community Bank Consumer and Small Business segments. He became an executive officer of KeyCorp in March 2013.

Christopher M. Gorman (54)  — Mr. Gorman has been the President of Key Corporate Bank since 2010. He previously served as a KeyCorp Senior Executive Vice President and head of Key National Banking during 2010. Mr. Gorman was an Executive Vice President of KeyCorp (2002 to 2010) and served as President of KeyBanc Capital Markets (2003 to 2010). He became an executive officer of KeyCorp in 2010.

Paul N. Harris (56)  — Mr. Harris has been the General Counsel and Secretary of KeyCorp since 2003 and an executive officer of KeyCorp since 2004.

William L. Hartmann (61)  — Mr. Hartmann has been the Chief Risk Officer of KeyCorp since July 2012. Mr. Hartmann joined KeyCorp in 2010 as its Chief Credit Officer. Prior to joining KeyCorp, Mr. Hartmann spent 29 years at Citigroup (a multinational financial services institution) where his most recent position was global head of Large Corporate Risk Management. While at Citigroup, he held numerous roles with increasing responsibility, including Chief Risk Officer, Asia Pacific, head of Global Portfolio Management, co-head of Leveraged Finance Capital Markets and global head of Loan Sales and Trading. Mr. Hartmann has been an executive officer of KeyCorp since 2012.

Donald R. Kimble (54)  — Mr. Kimble has been the Chief Financial Officer of KeyCorp since June 2013. Prior to joining KeyCorp, Mr. Kimble served as Chief Financial Officer of Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, after joining the company in August 2004, and also served as its Controller from August 2004 to November 2009. Mr. Kimble was also President and a director of Huntington Preferred Capital, Inc., a publicly-traded company, from August 2004 until May 2013. Mr. Kimble became an executive officer upon joining KeyCorp in June 2013.

Beth E. Mooney (59)  — Ms. Mooney has been the Chairman and Chief Executive Officer of KeyCorp since 2011, and an executive officer of KeyCorp since 2006. Prior to becoming Chairman and Chief Executive Officer, she served in a variety of roles with KeyCorp, including President and Chief Operating Officer and Vice Chair and head of Key Community Bank. Prior to joining KeyCorp, she served in a number of executive and senior finance roles with banks and bank holding companies across the United States. She has been a director of AT&T, a publicly-traded telecommunications company, since 2013.

Robert L. Morris (62)  — Mr. Morris has been the Chief Accounting Officer and an executive officer of KeyCorp since 2006.

 

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Supervision and Regulation

The regulatory framework applicable to BHCs and banks is intended primarily to protect customers and depositors, the DIF, consumers, taxpayers and the banking system as a whole, rather than to protect the security holders and creditors of financial services companies. Comprehensive reform of the legislative and regulatory environment for financial services companies occurred in 2010 and remains ongoing. We cannot predict changes in applicable laws, regulations or regulatory agency policies, but such changes may materially affect our business, financial condition, results of operations, or access to liquidity or credit.

Overview

As a BHC, KeyCorp is subject to regulation, supervision, and examination by the Federal Reserve under the BHCA. Under the BHCA, BHCs generally may not directly or indirectly own or control more than 5% of the voting shares, or substantially all of the assets, of any bank, without prior approval by the Federal Reserve. In addition, BHCs are generally prohibited from engaging in commercial or industrial activities.

Under federal law, a BHC must serve as a source of financial strength to its subsidiary depository institutions by providing financial assistance to them in the event of their financial distress. This support may be required when we do not have the resources to, or would prefer not to, provide it. Certain loans by a BHC to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the bankruptcy of a BHC, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Federal law establishes a system of regulation under which the Federal Reserve is the umbrella regulator for BHCs, while their subsidiaries are principally regulated by prudential and functional regulators: 1) the OCC for national banks and federal savings associations; 2) the FDIC for non-member state banks and savings associations; 3) the Federal Reserve for member state banks; 4) the CFPB for consumer financial products or services; 5) the SEC and FINRA for securities broker/dealer activities; 6) the SEC, CFTC, and NFA for swaps and other derivatives; and 7) state insurance regulators for insurance activities. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in a bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of securities functional regulation. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain identifiable risks.

Our national bank subsidiaries and their subsidiaries are subject to regulation, supervision and examination by the OCC. At December 31, 2014, we operated one full-service, FDIC-insured national bank subsidiary, KeyBank, and one national bank subsidiary that is limited to fiduciary activities. The FDIC also has certain regulatory, supervisory and examination authority over KeyBank and KeyCorp under the FDIA and the Dodd-Frank Act.

We have other financial services subsidiaries that are subject to regulation, supervision and examination by the Federal Reserve, as well as other applicable state and federal regulatory agencies and self-regulatory organizations. Because KeyBank engages in derivative transactions, in 2013 it provisionally registered as a swap dealer with the CFTC and became a member of the NFA, the self-regulatory organization for participants in the U.S. derivatives industry. Our securities brokerage and asset management subsidiaries are subject to supervision and regulation by the SEC, FINRA and state securities regulators, and our insurance subsidiaries are subject to regulation by the insurance regulatory authorities of the states in which they operate. Our other nonbank subsidiaries are subject to laws and regulations of both the federal government and the various states in which they are authorized to do business.

 

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Regulatory capital and liquidity

Federal banking regulators have promulgated risk-based capital and leverage ratio requirements applicable to Key and KeyBank (consolidated). The adequacy of regulatory capital is assessed periodically by federal banking agencies in their examination and supervision processes, and in the evaluation of applications in connection with certain expansion activities.

Regulatory capital requirements prior to January 1, 2015

At December 31, 2014, the minimum risk-based capital requirements adopted by federal banking regulators were based on a 1988 international accord (“Basel I”) developed by the Basel Committee on Banking Supervision (the “Basel Committee”). Prior to January 2015, Key and KeyBank (consolidated) were generally required to maintain a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital had to be “Tier 1 capital,” which consists of qualifying perpetual preferred stock, common shareholders’ equity (excluding AOCI other than the cumulative effect of foreign currency translation), a limited amount of qualifying trust preferred securities, and certain mandatorily convertible preferred securities. The remainder could consist of “Tier 2 capital,” including qualifying subordinated debt, certain hybrid capital instruments, perpetual debt, mandatory convertible debt instruments, qualifying perpetual preferred stock, and a limited amount of the allowance for credit losses. BHCs and banks with securities and commodities trading activities exceeding specified levels were required to maintain capital to cover their market risk exposure. Federal banking regulators also established a minimum leverage ratio requirement for banking organizations. The leverage ratio is Tier 1 capital divided by adjusted average total assets. At December 31, 2014, the minimum leverage ratio was 3% for BHCs and national banks that are considered “strong” by the Federal Reserve or the OCC, respectively, 3% for any BHC that had implemented the Federal Reserve’s risk-based capital measure for market risk, and 4% for all other BHCs and national banks. At December 31, 2014, the minimum leverage ratio for Key and KeyBank (consolidated) was 3% and 4%, respectively. BHCs and national banks may be expected to maintain ratios well above the minimum levels, depending upon their particular condition, risk profile, or growth plans. As presented in Note 22 (“Shareholders’ Equity”), at December 31, 2014, Key and KeyBank (consolidated) had regulatory capital in excess of all applicable minimum risk-based capital (including all adjustments for market risk) and leverage ratio requirements.

Basel III capital and liquidity frameworks

In December 2010, the Basel Committee released its final framework to strengthen international capital regulation of banks, and revised it in June 2011 and January 2014 (as revised, the “Basel III capital framework”). The Basel III capital framework requires higher and better-quality capital, better risk coverage, the introduction of a new leverage ratio as a backstop to the risk-based requirement, and measures to promote the buildup of capital that can be drawn down in periods of stress. The Basel III capital framework, among other things, introduces a new capital measure, “Common Equity Tier 1,” to be included in Tier 1 capital with other capital instruments meeting specified requirements, a capital conservation buffer, and a countercyclical capital buffer. The Basel III capital framework is being phased-in over a multi-year period.

In November 2011, the Basel Committee issued its final rule for a common equity surcharge on certain designated global systemically important banks (“G-SIBs”), which was revised in July 2013 (as revised, “Basel G-SIB framework”). Under the Basel G-SIB framework, a G-SIB is assessed a progressive 1.0% to 3.5% surcharge to the Common Equity Tier 1 capital conservation buffer based upon the bank’s systemic importance score. In December 2014, the Federal Reserve published an NPR (the “U.S. G-SIB NPR”) that would implement the Basel G-SIB framework for U.S. G-SIBs, but with expected surcharges ranging from 1.0% to 4.5%, and would include a new indicator to address the perceived risks of short-term wholesale funding. At December 31, 2014, and based on 2013 year-end data, there were eight U.S. BHCs (none of which included KeyCorp) designated as G-SIBs under the Basel G-SIB framework. In addition, the U.S. G-SIB NPR would require each

 

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U.S. top-tier BHC with consolidated total assets of at least $50 billion and not a subsidiary of a foreign banking organization, such as KeyCorp, to determine annually whether it is a U.S. G-SIB by using five categories that measure global systemic importance — size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity. Comments on the U.S. G-SIB NPR are due by March 2, 2015.

The Basel Committee published its international liquidity standards in 2010, and revised them in January 2013, January 2014, and October 2014 (as revised, the “Basel III liquidity framework”). It established quantitative standards for liquidity by introducing a liquidity coverage ratio (“Basel III LCR”) and a net stable funding ratio (“Basel III NSFR”).

The Basel III LCR, calculated as the ratio of the stock of high-quality liquid assets (“HQLAs”) divided by total net cash outflows over 30 consecutive calendar days, must be at least 100%. The implementation of Basel III LCR began on January 1, 2015, with minimum requirements beginning at 60%, rising in annual steps of 10% until full implementation on January 1, 2019.

The Basel III NSFR, calculated as the ratio of the available amount of stable funding divided by the required amount of stable funding, must be at least 100%. The Basel III NSFR becomes effective on January 1, 2018.

U.S. implementation of the Basel III capital framework

In October 2013, the federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the “Regulatory Capital Rules”), which generally implement the Basel III capital framework as described above in the United States. Under the Regulatory Capital Rules, certain large U.S.-domiciled BHCs and banks (each, an “advanced approaches banking organization”) must satisfy minimum qualifying criteria using organization-specific internal risk measures and management processes for calculating risk-based capital requirements as well as follow certain methodologies to calculate their total risk-weighted assets. Since neither KeyCorp nor KeyBank has at least $250 billion in total consolidated assets or at least $10 billion of total on-balance sheet foreign exposure, neither KeyCorp nor KeyBank is an advanced approaches banking organization. Instead, each of them is a “standardized approach banking organization.”

New minimum capital and leverage ratio requirements

Under the Regulatory Capital Rules, a standardized approach banking organization, like KeyCorp, will be required to meet the minimum capital and leverage ratios set forth in the table below. At December 31, 2014, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.7% under Basel III. Also at December 31, 2014, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios would be as set forth in the table below.

Estimated Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In

Regulatory Capital Rules

 

Ratios (including Capital conservation buffer)   

Key

December 31, 2014

Estimated

           

Minimum

January 1,
2015

           

Phase-in

Period

  

Minimum

January 1,
2019

        

Common Equity Tier 1 (a)

     10.7        %         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

     11.0          6.0        None      6.0    

Tier 1 Capital + Capital conservation buffer

          6.0        1/1/16 - 1/1/19      8.5    

Total Capital

     13.1          8.0        None      8.0    

Total Capital + Capital conservation buffer

          8.0        1/1/16 - 1/1/19      10.5    

Leverage (c)

     10.5                4.0              None      4.0          

 

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(a) See Figure 4 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computation for estimated Common Equity Tier 1. The table reconciles the GAAP performance measure to the corresponding non-GAAP measure, which provides a basis for period-to-period comparisons.

 

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

 

(c) As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018. Because KeyCorp has less than $700 billion in consolidated total assets and less than $10 trillion in assets under custody, KeyCorp is not subject to the supplemental leverage buffer requirement of at least 2%, which becomes effective January 1, 2018.

Revised prompt corrective action capital category ratios

Federal prompt corrective action regulations under the FDIA group FDIC-insured depository institutions into one of five prompt corrective action capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In addition to implementing the Basel III capital framework in the U.S., the Regulatory Capital Rules also revised, effective January 1, 2015, the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions under the federal banking regulators’ prior prompt corrective action regulations. The Prior and Revised Prompt Corrective Action table, below, identifies the capital category threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the prior and the revised prompt corrective action rules.

“Well Capitalized” and “Adequately Capitalized” Capital Category Ratios Under Prior and

Revised Prompt Corrective Action Rules

 

Prompt Corrective Action

   Capital Category        
   Well Capitalized (a)      Adequately Capitalized        
Ratio    Revised             Prior             Revised             Prior        

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 (b)

     5.0                5.0                4.0                3.0 or 4.0     

 

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

 

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

We believe that, as of December 31, 2014, KeyBank (consolidated) would have met all revised “well capitalized” prompt corrective action capital and leverage ratio requirements under the Regulatory Capital Rules if such requirements had been effective at that time. The prompt corrective action regulations, however, apply only to FDIC-insured depository institutions (like KeyBank) and not to BHCs (like KeyCorp). Moreover, since the regulatory capital categories under these regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyBank.

U.S. implementation of the Basel III liquidity framework

In October 2014, the 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 (excluding KeyCorp) and a modified version of the LCR (“Modified LCR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp).

KeyBank will not be subject to the LCR or the Modified LCR under the Liquidity Coverage Rules unless the OCC affirmatively determines that application to KeyBank is appropriate in light of its asset size, level of

 

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complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. The LCR and Modified LCR created by the Liquidity Coverage Rules are also an enhanced prudential liquidity standard consistent with the Dodd-Frank Act.

Because KeyCorp is a Modified LCR BHC under the Liquidity Coverage Rules, Key will be required to maintain its ratio of high-quality liquid assets to its total net cash outflow amount, determined by prescribed assumptions in a standardized hypothetical stress scenario over a 30-calendar day period, at least at 90% by January 1, 2016, and at least at 100% by January 1, 2017. Throughout December 2014, our estimated Modified LCR was approximately in the mid-80% range. 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 composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings. Calculation of Key’s Modified LCR is required on a monthly basis, unlike on a daily basis for those U.S. banking organizations that are subject to the LCR rather than the Modified LCR.

Capital planning and stress testing

The Federal Reserve’s capital plan rule requires each U.S.-domiciled, top-tier BHC with total consolidated assets of at least $50 billion (like KeyCorp) to develop and maintain a written capital plan supported by a robust internal capital adequacy process. The capital plan must be submitted annually to the Federal Reserve for supervisory review in connection with its annual CCAR. The supervisory review includes an assessment of many factors, including Key’s ability to maintain capital above each minimum regulatory capital ratio and above a Tier 1 common ratio of 5% on a pro forma basis under expected and stressful conditions throughout the planning horizon. KeyCorp is also subject to the Federal Reserve capital plan rule and supervisory guidance regarding the declaration and payment of dividends and capital redemptions repurchases, including the supervisory expectation in certain circumstances for prior notification to, and consultation with, Federal Reserve supervisory staff.

The Federal Reserve’s annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S. BHCs and of the policies and practices these BHCs use to assess their capital needs. Through CCAR, the Federal Reserve assesses the capital plans of these BHCs to ensure that they have both sufficient capital to continue operations throughout times of financial and economic stress and robust, forward-looking capital planning processes that account for their unique risks. The Federal Reserve expects BHCs subject to CCAR to have sufficient capital to withstand a highly adverse operating environment and to be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. In addition, the Federal Reserve evaluates the planned capital actions of these BHCs, including planned capital distributions such as dividend payments or stock repurchases.

KeyCorp filed its 2015 CCAR capital plan on January 5, 2015. Under the Federal Reserve’s October 2014 CCAR instructions and guidance, KeyCorp’s 2015 capital plan was required to reflect the Regulatory Capital Rules, including their minimum regulatory capital ratios and transition arrangements, as well as Key’s Tier 1 common ratio for each quarter of the planning horizon using the definitions of Tier 1 capital and total risk-weighted assets as in effect in 2014, as well as a transition plan for full implementation of the Regulatory Capital Rules.

As part of the annual CCAR, the Federal Reserve conducts an annual supervisory stress test on KeyCorp. As part of this test, the Federal Reserve projects revenue, expenses, losses, and resulting post-stress capital levels, regulatory capital ratios, and the Tier 1 common ratio under conditions that affect the U.S. economy or the financial condition of KeyCorp, including supervisory baseline, adverse, and severely adverse scenarios, that are determined annually by the Federal Reserve. Results from the 2015 CCAR, which will include the annual supervisory stress test methodology and certain firm-specific results for the participating 31 covered companies (including KeyCorp), will be publicly released by the Federal Reserve. The Federal Reserve has announced that the results from the supervisory stress test and the 2015 CCAR will be released on March, 5, 2015, and March 11, 2015, respectively.

KeyCorp and KeyBank must also conduct their own company-run stress tests to assess the impact of stress scenarios (including supervisor-provided baseline, adverse, and severely adverse scenarios and, for KeyCorp, one

 

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KeyCorp-defined baseline scenario and at least one KeyCorp-defined one stress scenario) on their consolidated earnings, losses, and capital over a nine-quarter planning horizon, taking into account their current condition, risks, exposures, strategies, and activities. While KeyBank must only conduct an annual stress test, KeyCorp must conduct both an annual and a mid-cycle stress test. KeyCorp and KeyBank are required to report the results of their annual stress tests to the Federal Reserve and OCC in early January of each year. KeyCorp is required to report the results of its 2015 mid-cycle stress test to the Federal Reserve during the period of July 5, 2015 to August 4, 2015, inclusive. Summaries of the results of these company-run stress tests are disclosed each year under the “Regulatory Disclosure” tab of Key’s Investor Relations website: http://www.key.com/ir.

Dividend restrictions

Federal banking law and regulations impose limitations on the payment of dividends by our national bank subsidiaries (like KeyBank). Historically, dividends paid by KeyBank have been an important source of cash flow for KeyCorp to pay dividends on its equity securities and interest on its debt. Dividends by our national bank subsidiaries are limited to the lesser of the amounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a bank’s undivided profits. Moreover, under the FDIA, an insured depository institution may not pay a dividend if the payment would cause it to be in a less than “adequately capitalized” prompt corrective action capital category or if the institution is in default in the payment of an assessment due to the FDIC. For more information about the payment of dividends by KeyBank to KeyCorp, please see Note 3 (“Restrictions on Cash, Dividends and Lending Activities”) in this report.

FDIA, Resolution Authority and Financial Stability

Deposit insurance and assessments

The DIF provides insurance coverage for domestic deposits funded through assessments on insured depository institutions like KeyBank. The amount of deposit insurance coverage for deposits is $250,000 per depository.

The FDIC must assess the premium based on an insured depository intuition’s assessment base, calculated as its average consolidated total assets minus its average tangible equity. KeyBank’s current annualized premium assessments can range from $.025 to $.45 for each $100 of its assessment base. The rate charged depends on KeyBank’s performance on the FDIC’s “large and highly complex institution” risk-assessment scorecard, which includes factors such as KeyBank’s regulatory rating, its ability to withstand asset and funding-related stress, and the relative magnitude of potential losses to the FDIC in the event of KeyBank’s failure.

Conservatorship and receivership of insured depository institutions

Upon the insolvency of an insured depository institution, the FDIC will be appointed as receiver or, in rare circumstances, conservator for the insolvent institution under the FDIA. In an insolvency, the FDIC may repudiate or disaffirm any contract to which the institution is a party if the FDIC determines that performance of the contract would be burdensome and that disaffirming or repudiating the contract would promote orderly administration of the institution’s affairs. If the contractual counterparty made a claim against the receivership (or conservatorship) for breach of contract, the amount paid to the counterparty would depend upon, among other factors, the receivership (or conservatorship) assets available to pay the claim and the priority of the claim relative to others. In addition, the FDIC may enforce most contracts entered into by the insolvent institution, notwithstanding any provision that would terminate, cause a default, accelerate or give other rights under the contract solely because of the insolvency, the appointment of the receiver (or conservator), or the exercise of rights or powers by the receiver (or conservator). The FDIC may also transfer any asset or liability of the insolvent institution without obtaining approval or consent from the institution’s shareholders or creditors. These provisions would apply to obligations and liabilities of KeyCorp’s insured depository institution subsidiaries, such as KeyBank, including obligations under senior or subordinated debt issued to public investors.

 

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Receivership of certain SIFIs

The Dodd-Frank Act created a new resolution regime, as an alternative to bankruptcy, known as the “orderly liquidation authority” (“OLA”) for certain SIFIs, including BHCs and their affiliates. Under the OLA, the FDIC would generally be appointed as receiver to liquidate and wind up a failing SIFI. The determination that a SIFI should be placed into OLA receivership is made by the U.S. Treasury Secretary, who must conclude that the SIFI is in default or in danger of default and that the SIFI’s failure poses a risk to the stability of the U.S. financial system. This determination must come after supermajority recommendations by the Federal Reserve and the FDIC, and consultation between the U.S. Treasury Secretary and the President.

If the FDIC is appointed as receiver under the OLA, its powers and the rights and obligations of creditors and other relevant parties would be determined exclusively under the OLA. The powers of a receiver under the OLA are generally based on the FDIC’s powers as receiver for insured depository institutions under the FDIA. Certain provisions of the OLA were modified to reduce disparate treatment of creditors’ claims between the U.S. Bankruptcy Code and the OLA. However, substantial differences between the two regimes remain, including the FDIC’s right to disregard claim priority in some circumstances, the use of an administrative claims procedure under OLA to determine creditors’ claims (rather than a judicial procedure in bankruptcy), the FDIC’s right to transfer claims to a bridge entity, and limitations on the ability of creditors to enforce contractual cross-defaults against potentially viable affiliates of the entity in receivership. OLA liquidity would be provided through credit support from the U.S. Treasury and assessments made, first, on claimants against the receivership that received more in the OLA resolution than they would have received in ordinary liquidation (to the full extent of the excess), and second, if necessary, on SIFIs, like KeyCorp, utilizing a risk-based methodology.

In December 2013, the FDIC published a notice for comment regarding its “single point of entry” resolution strategy under the OLA. This strategy involves the appointment of the FDIC as receiver for the SIFI’s top-level U.S. holding company only, while permitting the operating subsidiaries of the failed holding company to continue operations uninterrupted. As receiver, the FDIC would establish a bridge financial company for the failed holding company and would transfer the assets and a very limited set of liabilities of the receivership estate. The claims of unsecured creditors and other claimants in the receivership would be satisfied by the exchange of their claims for the securities of one or more new holding companies emerging from the bridge company. The FDIC has not taken any subsequent regulatory action relating to this resolution strategy under OLA since the comment period ended in March 2014.

Depositor preference

The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors (including claims of its depositors that have subrogated to the FDIC) and certain claims for administrative expenses of the FDIC as receiver have priority over other general unsecured claims. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will be placed ahead of unsecured, nondeposit creditors, including the institution’s parent BHC and subordinated creditors, in order of priority of payment.

Resolution plans

BHCs with at least $50 billion in total consolidated assets, like KeyCorp, are required to periodically submit to the Federal Reserve and FDIC a plan discussing how the company could be rapidly and orderly resolved if the company failed or experienced material financial distress. Insured depository institutions with at least $50 billion in total consolidated assets, like KeyBank, are also required to submit a resolution plan to the FDIC. These plans are due annually by December 31 of each year. For 2014, KeyCorp and KeyBank elected to submit a joint resolution plan given Key’s organizational structure and business activities and the significance of KeyBank to Key. This resolution plan, the second required from KeyCorp and KeyBank, was submitted on December 2,

 

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2014. In January 2015, the Federal Reserve and FDIC made available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, that submitted plans in December 2014. The public section of the joint resolution plan of KeyCorp and KeyBank is available at http://www.federalreserve.gov/bankinforeg/resolution-plans.htm.

Financial Stability Oversight Council

The Dodd-Frank Act created the FSOC, a systemic risk oversight body, to (i) identify risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected SIFIs, or that could arise outside the financial services marketplace, (ii) promote market discipline by eliminating expectations that the U.S. government will shield shareholders, creditors, and counterparties from losses in the event of failure, and (iii) respond to emerging threats to the stability of the U.S. financial system. The FSOC is responsible for facilitating regulatory coordination, information collection and sharing, designating nonbank financial companies for consolidated supervision by the Federal Reserve, designating systemic financial market utilities and systemic payment, clearing, and settlement activities requiring prescribed risk management standards and heightened federal regulatory oversight, recommending stricter standards for SIFIs, and, together with the Federal Reserve, determining whether action should be taken to break up firms that pose a grave threat to U.S. financial stability.

The Bank Secrecy Act

The BSA requires all financial institutions (including banks and securities broker-dealers) to, among other things, maintain a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements. Key has established and maintains an anti-money laundering program to comply with the BSA’s requirements.

Other Regulatory Developments under the Dodd-Frank Act

Consumer Financial Protection Bureau

Title X of the Dodd-Frank Act created the CFPB, a consumer financial services regulator with supervisory authority over banks and their affiliates with assets of more than $10 billion, like Key, for compliance with federal consumer protection laws. The CFPB also regulates financial products and services sold to consumers and has rulemaking authority with respect to federal consumer financial laws. Any new regulatory requirements promulgated by the CFPB or modifications in the interpretations of existing regulations could require changes to Key’s consumer-facing businesses. The Dodd-Frank Act also gives the CFPB broad data collecting powers for fair lending for both small business and mortgage loans, as well as extensive authority to prevent unfair, deceptive and abusive practices.

Debit Card Interchange

Federal Reserve Regulation II — Debit Card Interchange Fees and Routing (the “Interchange Fee Rule”) — limits debit card interchange fees and eliminates exclusivity arrangements between issuers and networks for debit card transactions. The relevant portions of the Interchange Fee Rule became effective October 1, 2011. The Interchange Fee Rule allows debit card issuers to recover from merchants an interchange fee of $.21 per transaction, a fee of five basis points of the value of the transaction, and an additional $.01 fraud prevention adjustment. Retail merchants and merchant groups filed suit to challenge the Interchange Fee Rule. Their challenge was unsuccessful.

“Volcker Rule”

In December 2013, federal banking regulators issued a joint final rule (the “Final Rule”) implementing Section 619 of the Dodd-Frank Act, known as the “Volcker Rule.” The Final Rule prohibits “banking entities,”

 

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such as KeyCorp, KeyBank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as “covered funds”) and engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments.

The Final Rule excepts certain transactions from the general prohibition against proprietary trading, including: transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and, transactions as a fiduciary on behalf of customers. Banking entities may also engage in risk-mitigating hedges if the entity can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis. Banking entities with more than $50 billion in total consolidated assets and liabilities, like Key, that engage in permitted trading transactions are required to implement enhanced compliance programs, to regularly report data on trading activities to the regulators, and to provide a CEO attestation that the entity’s compliance program is reasonably designed to comply with the Final Rule.

Although the Final Rule became effective on April 1, 2014, on December 18, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2016, with respect to covered funds. The Federal Reserve further indicated its intent to grant an additional one-year extension of the compliance deadline until July 21, 2017, and indicated it would re-evaluate its rules relating to the process by which banking entities would be able to apply for further five-year extensions. Key does not anticipate that the proprietary trading restrictions in the Final Rule will have a material impact on its business, but it may be required to divest certain fund investments as discussed in more detail under the heading “Other investments” in Item 7 of this report.

Enhanced prudential standards and early remediation requirements

Under the Dodd-Frank Act, the Federal Reserve must impose enhanced prudential standards and early remediation requirements upon BHCs, like KeyCorp, with at least $50 billion in total consolidated assets. Prudential standards must include enhanced risk-based capital requirements and leverage limits, liquidity requirements, risk-management and risk committee requirements, resolution plan requirements, credit exposure report requirements, single counterparty credit limits (“SCCL”), supervisory and company-run stress test requirements and, for certain financial companies, a debt-to-equity limit. Early remediation requirements must include limits on capital distributions, acquisitions, and asset growth in early stages of financial decline and capital restoration plans, capital raising requirements, limits on transactions with affiliates, management changes, and asset sales in later stages of financial decline, which are to be triggered by forward-looking indicators including regulatory capital and liquidity measures.

The stress test requirements applicable to KeyCorp were implemented by a final rule adopted by the Federal Reserve in 2012. The resolution plan requirements applicable to KeyCorp were implemented by a joint final rule adopted by the Federal Reserve and FDIC in 2011.

In March 2014, the Federal Reserve published a final rule to implement certain of these required enhanced prudential standards. The enhanced prudential standards implemented by this final rule were (i) the incorporation of the Regulatory Capital Rules through the Federal Reserve’s previously finalized rules on capital planning and stress tests, (ii) liquidity requirements relating to cash flow projections, a contingency funding plan, liquidity risk limits, monitoring liquidity risks (with respect to collateral, legal entities, currencies, business lines, and intraday exposures), liquidity stress testing, and a liquidity buffer, (iii) the risk management framework, the risk committee, and the chief risk officer as well as the corporate governance requirements as they relate to liquidity risk management, including the requirements that apply to the board of directors, the risk committee, senior management, and the independent review function, and (iv) a 15-to-1 debt-to-equity limit for companies that the FSOC determines pose a “grave threat” to U.S. financial stability. KeyCorp was required to comply with the final rule starting on January 1, 2015.

 

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The SCCL and the early remediation requirements published in January 2012 by the Federal Reserve as a proposed rule, however, were not included as part of the March 2014 final rule. The Federal Reserve has indicated that is conducting a quantitative impact study and will take into account the Basel Committee’s April 2014 large exposures regime before finalizing the SCCL. It is unclear when the Federal Reserve will finalize the early remediation requirements. No credit exposure reporting requirements, which must be implemented jointly by the Federal Reserve and FDIC, have yet been proposed. The Federal Reserve has indicated that both the Federal Reserve and FDIC recognize that such reports would be most useful and complete if developed in conjunction with the SCCL.

Bank transactions with affiliates

Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates, including the bank’s parent BHC and certain companies the parent BHC may be deemed to control for these purposes. Transactions covered by these provisions must be on arm’s-length terms, and cannot exceed certain amounts which are determined with reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. These provisions materially restrict the ability of KeyBank to fund its affiliates, including KeyCorp, KeyBanc Capital Markets Inc., certain of the Victory mutual funds with which we continue to have a relationship, and KeyCorp’s nonbanking subsidiaries engaged in making merchant banking investments (and certain companies in which these subsidiaries have invested).

Provisions added by the Dodd-Frank Act expanded the scope of (i) the definition of affiliate to include any investment fund having any bank or BHC-affiliated company as an investment adviser, (ii) credit exposures subject to the prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral, the quantitative limits, and the collateralization requirements to now include credit exposures arising out of derivative, repurchase agreement, and securities lending/borrowing transactions, and (iii) transactions subject to quantitative limits to now also include credit collateralized by affiliate-issued debt obligations that are not securities. In addition, these provisions require that a credit extension to an affiliate remain secured in accordance with the collateral requirements at all times that it is outstanding, rather than the previous requirement of only at the inception or upon material modification of the transaction. These provisions also raise significantly the procedural and substantive hurdles required to obtain a regulatory exemption from the affiliate transaction requirements. While these provisions became effective on July 21, 2012, the Federal Reserve has not yet issued a proposed rule to implement them.

New assessments, fees and other charges

Certain provisions of the Dodd-Frank Act require or authorize certain U.S. governmental departments, agencies and instrumentalities to collect new or higher assessments, fees and other charges from BHCs and banks, like KeyCorp and KeyBank. The U.S. Treasury has established an assessment schedule to collect from SIFIs, including KeyCorp, based on their average total consolidated assets semiannual assessments to pay the expenses of the OFR, including the expenses of the FSOC and certain expenses for implementing the orderly liquidation activities of the FDIC. The Federal Reserve has established an annual assessment upon SIFIs, including KeyCorp, based on their average total consolidated assets for the Federal Reserve’s examination, supervision, and regulation of such companies. The OCC has changed its semi-annual assessment upon large national banks, like KeyBank, to reflect its Dodd-Frank Act authority to do so.

 

ITEM 1A.  RISK FACTORS

As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. The risks and uncertainties described below are not the only risks we face.

 

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Our ERM program incorporates risk management throughout our organization to identify, understand, and manage the risks presented by our business activities. Our ERM program identifies Key’s major risk categories as: credit risk, compliance risk, operational risk, capital and liquidity risk, market risk, reputation risk, strategic risk, and model risk. These risk factors, and other risks we may face, are discussed in more detail in other sections of this report.

I.  Credit Risk

Should the fundamentals of the commercial real estate market deteriorate, our financial condition and results of operations could be adversely affected.

The U.S. economy remains vulnerable, and any reversal in broad macro trends would threaten the recovery in commercial real estate. The improvement of certain economic factors, such as unemployment and real estate asset values and rents, has continued to lag behind the overall economy. These economic factors generally affect certain industries like real estate and financial services more significantly. A significant portion of our clients are active in these industries. Furthermore, financial services companies with a substantial lending business, like ours, are dependent upon the ability of their borrowers to make debt service payments on loans.

A portion of our commercial real estate loans are construction loans. Typically these properties are not fully leased at loan origination; the borrower may require additional leasing through the life of the loan to provide cash flow to support debt service payments. If we experienced weaknesses similar to those experienced at the height of the economic downturn, then we would experience a slowing in the execution of new leases, which may also lead to existing lease turnover.

We are subject to the risk of defaults by our loan counterparties and clients.

Many of our routine transactions expose us to credit risk in the event of default of our counterparty or client. Our credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due us. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of counterparties and clients, including financial statements, credit reports and other information. We may also rely on representations of those counterparties, clients, or other third parties as to the accuracy and completeness of that information. The inaccuracy of that information or those representations affects our ability to accurately evaluate the default risk of a counterparty or client.

Various factors may cause our allowance for loan and lease losses to increase.

We maintain an ALLL (a reserve established through a provision for loan and lease losses charged to expense) that represents our estimate of losses based on our evaluation of risks within our existing portfolio of loans. The level of the allowance reflects our ongoing evaluation of industry concentrations; specific credit risks; loan and lease loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and incurred losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, the stagnation of certain economic indicators that we are more susceptible to, such as unemployment and real estate values, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may recommend an increase in the ALLL. Bank regulatory agencies periodically review our ALLL and, based on judgments that can differ somewhat from those of our own management, may recommend an increase in the provision for loan and lease losses or the recognition of further loan charge-offs. In addition, if charge-offs in future periods exceed the ALLL (i.e., if the loan and lease allowance is inadequate), we will need additional loan and lease loss provisions to increase the ALLL, which would decrease our net income and capital.

 

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Declining asset prices could adversely affect us.

During the Great Recession, the volatility and disruption that the capital and credit markets experienced reached extreme levels. This severe market disruption led to the failure of several substantial financial institutions, causing the widespread liquidation of assets and constraining the credit markets. These asset sales, along with asset sales by other leveraged investors, including some hedge funds, rapidly drove down prices and valuations across a wide variety of traded asset classes. Asset price deterioration has a negative effect on the valuation of many of the asset categories represented on our balance sheet, and reduces our ability to sell assets at prices we deem acceptable. A further recession would likely reverse recent positive trends in asset prices.

We have concentrated credit exposure in commercial, financial and agricultural loans.

As of December 31, 2014, approximately 72% of our loan portfolio consisted of commercial, financial and agricultural loans, commercial real estate loans, including commercial mortgage and construction loans, and commercial leases. These types of loans are typically larger than residential real estate loans and consumer loans, and have a different risk profile that includes, among other risks, a borrower’s failure to comply with applicable environmental laws and regulations. The deterioration of a larger loan or a group of these loans could cause a significant increase in nonperforming loans, which would result in net loss of earnings from these loans, an increase in the provision for loan and lease losses, and an increase in loan charge-offs.

II.  Compliance Risk

We are subject to extensive and increasing government regulation and supervision.

As a financial services institution, we are subject to extensive federal and state regulation and supervision, which has increased in recent years due to the implementation of the Dodd-Frank Act and other financial reform initiatives. Banking regulations are primarily intended to protect depositors’ funds, the DIF, consumers, taxpayers, and the banking system as a whole, not our debtholders or shareholders. These regulations increase our costs and affect our lending practices, capital structure, investment practices, dividend policy, ability to repurchase our common shares, and growth, among other things.

We face increased regulation of our industry as a result of current and future initiatives intended to provide financial market stability and enhance the liquidity and solvency of financial institutions. We expect continued intense scrutiny from our bank supervisors in the examination process and aggressive enforcement of regulations at the federal and state levels, particularly due to KeyBank’s and KeyCorp’s status as covered institutions under the Dodd-Frank Act’s heightened prudential standards and regulations. We also face increased regulation from efforts designed to protect consumers from financial abuse. Although many parts of the Dodd-Frank Act are now in effect, other parts continue to be implemented. As a result, some uncertainty remains as to the aggregate impact upon Key of the Dodd-Frank Act.

Changes to existing statutes, regulations or regulatory policies or their interpretation or implementation, and becoming subject to additional heightened regulatory practices, requirements, or expectations, could affect us in substantial and unpredictable ways. These changes may subject us to additional costs and increase our litigation risk should we fail to appropriately comply. Such changes may also limit the types of financial services and products we may offer, affect the investments we make, and change the manner in which we operate.

Additionally, federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and affiliated parties. These enforcement actions may be initiated for violations of laws and regulations, for practices determined to be unsafe or unsound, or for practices or acts that are determined to be unfair, deceptive, or abusive.

For more information, see “Supervision and Regulation” in Item 1 of this report.

 

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Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.

The FASB, regulatory agencies, and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of Key’s financial statements. Additionally, those bodies that establish and interpret the accounting standards (such as the FASB, SEC, and banking regulators) may change prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how Key records and reports its financial condition and results of operations. In some cases, Key could be required to retroactively apply a new or revised standard, resulting in changes to previously reported financial results.

III.  Operational Risk

Our information systems may experience an interruption or breach in security.

We rely heavily on communications, information systems (both internal and provided by third parties) and the Internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

In the event of a failure, interruption or breach of our information systems, we may be unable to avoid impact to our customers. Other U.S. financial service institutions and companies have reported breaches, some severe, in the security of their websites or other systems and several financial institutions, including Key, experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, phishing, cyberattacks, and other means. To date, none of these efforts has had a material adverse effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. Our security systems may not be able to protect our information systems from similar attacks due to the rapid evolution and creation of sophisticated cyberattacks. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action, and reputational harm.

We rely on third parties to perform significant operational services for us.

Third parties perform significant operational services on our behalf. These third-party vendors are subject to similar risks as Key relating to cybersecurity, breakdowns or failures of their own systems or employees. One or more of our vendors may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by the third-party vendor. Certain of our vendors may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. Financial or operational difficulties of a vendor could also impair our operations if those difficulties interfere with the vendor’s ability to serve us. Additionally, some of our outsourcing arrangements are located overseas and, therefore, are subject to risks unique to the regions in which they operate. If a critical vendor is unable to meet our needs in a timely manner or if the services or products provided by such a vendor are terminated or otherwise delayed and if we are not able to develop alternative sources for these services and products quickly and cost-effectively, it could have a material adverse effect on

 

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our business. Additionally, regulatory guidance adopted by federal banking regulators in 2013 related to how banks select, engage and manage their outside vendors may affect the circumstances and conditions under which we work with third parties and the cost of managing such relationships.

We are subject to claims and litigation.

From time to time, customers, vendors or other parties may make claims and take legal action against us. We maintain reserves for certain claims when deemed appropriate based upon our assessment that a loss is probable, consistent with applicable accounting guidance. At any given time we have a variety of legal actions asserted against us in various stages of litigation. Resolution of a legal action can often take years. Whether any particular claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and adversely affect how the market perceives us and our products and services as well as impact customer demand for those products and services.

We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number and risk of these investigations and proceedings has increased in recent years with regard to many firms in the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank Act and the creation of the CFPB.

There have also been a number of highly publicized legal claims against financial institutions involving fraud or misconduct by employees, and we run the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

We are subject to operational risk.

We are subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events. Operational risk includes the risk of fraud by employees, clerical and record-keeping errors, nonperformance by vendors, threats to cybersecurity, and computer/telecommunications malfunctions. Operational risk also encompasses compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business, such as certain loan processing functions. For example, breakdowns or failures of our vendors’ systems or employees could be a source of operational risk to us. Resulting losses from operational risk could take the form of explicit charges, increased operational costs, harm to our reputation, inability to secure insurance, litigation, regulatory intervention or sanctions or foregone business opportunities.

Our controls and procedures may fail or be circumvented, and our methods of reducing risk exposure may not be effective.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. We also maintain an ERM program designed to identify, measure, monitor, report and analyze our risks. Any system of controls and any system to reduce risk exposure, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Additionally, instruments, systems and strategies used to hedge or otherwise manage exposure to various types of market compliance, credit, liquidity, operational and business risks and enterprise-wide risk could be less effective than anticipated. As a result, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk.

 

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Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Natural disasters, including severe weather events of increasing strength and frequency, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business or upon our customers. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

IV.  Capital and Liquidity Risk

Capital and liquidity requirements imposed by the Dodd-Frank Act require banks and BHCs to maintain more and higher quality capital and higher quality, lower-yielding liquid assets than has historically been the case.

New and evolving capital standards resulting from the Dodd-Frank Act and the Regulatory Capital Rules adopted by our regulators will have a significant impact on banks and BHCs, including Key. For a detailed explanation of the new capital and liquidity rules that became effective for us on a phased-in basis on January 1, 2015, see the section titled “Regulatory capital and liquidity” under the heading “Supervision and Regulation” in Item 1 of this report.

The Federal Reserve’s new capital standards will require Key to maintain more and higher quality capital and could limit our business activities (including lending) and our ability to expand organically or through acquisitions. They could also result in our taking steps to increase our capital that may be dilutive to shareholders or limit our ability to pay dividends or otherwise return capital to shareholders.

In addition, the new liquidity standards will require us to increase our holdings of higher-quality, lower-yielding liquid assets, may require us to change our mix of investment alternatives, and may impact business relationships with certain customers. They could reduce our ability to invest in longer-term assets even if more desirable from a balance sheet management perspective.

In addition, the Federal Reserve requires bank holding companies to obtain approval before making a “capital distribution,” such as paying or increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve has detailed the processes that bank holding companies should maintain to ensure they hold adequate capital under severely adverse conditions and have ready access to funding before engaging in any capital activities. These rules could limit Key’s ability to make distributions, including paying out dividends or buying back shares. For more information, see “Supervision and Regulation” in Item 1 of this report.

Federal agencies may take actions that disrupt the stability of the U.S. financial system.

Since 2008, the federal government has taken unprecedented steps to provide stability to and confidence in the financial markets. For example, the Federal Reserve maintains a variety of stimulus policy measures designed to maintain a low interest rate environment. In light of recent moderate improvements in the U.S. economy, federal agencies may no longer support such initiatives. The discontinuation of such initiatives may have a negative impact, perhaps severe, on the financial markets. These effects could include a sudden move to higher debt yields, which could have a chilling effect on borrowing. In addition, new initiatives or legislation may not be implemented, or, if implemented, may not be adequate to counter any negative effects of discontinuing programs or, in the event of an economic downturn, to support and stabilize a troubled economy.

We rely on dividends by our subsidiaries for most of our funds.

We are a legal entity separate and distinct from our subsidiaries. With the exception of cash that we may raise from debt and equity issuances, we receive substantially all of our cash flow from dividends by our subsidiaries. Dividends by our subsidiaries are the principal source of funds for the dividends we pay on our equity securities

 

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and interest and principal payments on our debt. Federal banking law and regulations limit the amount of dividends that KeyBank (KeyCorp’s largest subsidiary) can pay. For further information on the regulatory restrictions on the payment of dividends by KeyBank, see “Supervision and Regulation” in Item 1 of this report.

In the event KeyBank is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our equity securities. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

We are subject to liquidity risk, which could negatively affect our funding levels.

Market conditions or other events could negatively affect the level of or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences.

Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions (including by reducing our reliance on wholesale funding sources), a substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, borrowing under certain secured wholesale facilities, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may not be available under stressed conditions.

Our credit ratings affect our liquidity position.

The rating agencies regularly evaluate the securities of KeyCorp and KeyBank, and their ratings of our long-term debt and other securities are based on a number of factors, including our financial strength, ability to generate earnings, and other factors. Some of these factors are not entirely within our control, such as conditions affecting the financial services industry and the economy and changes in rating methodologies as a result of the Dodd-Frank Act. We may not be able to maintain our current credit ratings. A downgrade of the securities of KeyCorp or KeyBank could adversely affect our access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us, reducing our ability to generate income.

V.  Market Risk

A reversal of the U.S. economic recovery and a return to volatile or recessionary conditions in the U.S. or abroad could negatively affect our business or our access to capital markets.

A worsening of economic and market conditions, downside shocks, or a return to recessionary economic conditions could result in adverse effects on Key and others in the financial services industry. Additionally, the prolonged low-interest rate environment, despite a generally improving economy, has presented a challenge for Key and affected our business and financial performance. The low-interest rate environment may persist for some time even as the economy continues to improve, and may continue to have a negative impact on our performance.

In particular, we could face some of the following risks, and other unforeseeable risks, in connection with a downturn in the economic and market environment or in the face of downside shocks or a recession, whether in the United States or internationally:

 

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A loss of confidence in the financial services industry and the equity markets by investors, placing pressure on the price of Key’s common shares or decreasing the credit or liquidity available to Key;

 

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  ¿  

A decrease in consumer and business confidence levels generally, decreasing credit usage and investment or increasing delinquencies and defaults;

 

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A decrease in household or corporate incomes, reducing demand for Key’s products and services;

 

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A decrease in the value of collateral securing loans to Key’s borrowers or a decrease in the quality of Key’s loan portfolio, increasing loan charge-offs and reducing Key’s net income;

 

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A decrease in our ability to liquidate positions at market prices;

 

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The extended continuation of the current low-interest rate environment, continuing or increasing downward pressure to our net interest income;

 

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A decrease in the accuracy and viability of our quantitative models;

 

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An increase in competition and consolidation in the financial services industry;

 

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Increased concern over and scrutiny of the capital and liquidity levels of financial institutions generally, and those of our transaction counterparties specifically;

 

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A decrease in confidence in the creditworthiness of the United States or other governments whose securities we hold; and

 

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An increase in limitations on or the regulation of financial services companies like Key.

We are subject to interest rate risk, which could adversely affect net interest income.

Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rate controls being applied by the Federal Reserve, could influence the amount of interest we receive on loans and securities, the amount of interest we pay on deposits and borrowings, our ability to originate loans and obtain deposits, and the fair value of our financial assets and liabilities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, net interest income, and therefore our earnings, would be adversely affected. Conversely, earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.

Our methods for simulating and analyzing our interest rate exposure are discussed more fully under the heading “Risk Management — Management of interest risk exposure” found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Our profitability depends upon economic conditions in the geographic regions where we have significant operations and on certain market segments with which we conduct significant business.

We have concentrations of loans and other business activities in geographic regions where our bank branches are located — Pacific; Rocky Mountains; Indiana; West Ohio/Michigan; East Ohio; Western New York; Eastern New York; and New England — and potential exposure to geographic regions outside of our branch footprint. The moderate U.S. economic recovery has been experienced unevenly in the various regions where we operate, and continued improvement in the overall U.S. economy may not result in similar improvement, or any improvement at all, in the economy of any particular geographic region. Adverse conditions in a geographic region such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of borrowers in these regions to repay their loans, decrease the value of collateral securing loans made in these regions, or affect the ability of our customers in these regions to continue conducting business with us.

 

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Additionally, a significant portion of our business activities are concentrated with the real estate, health care and utilities market segments. The profitability of some of these market segments depends upon the health of the overall economy, seasonality, the impact of regulation, and other factors that are beyond our control and may be beyond the control of our customers in these market segments.

An economic downturn in one or more geographic regions where we conduct our business, or any significant or prolonged impact on the profitability of one or more of the market segments with which we conduct significant business activity, could adversely affect the demand for our products and services, the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. We have exposure to many different industries and counterparties in the financial services industries, and we routinely execute transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by one or more financial services institutions have led to, and may cause, market-wide liquidity problems and losses. Many of our transactions with other financial institutions expose us to credit risk in the event of default of a counterparty or client. In addition, our credit risk may be affected when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due us.

VI.  Reputation Risk

Damage to our reputation could significantly harm our businesses.

Our ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by our reputation. Public perception of the financial services industry has declined as a result of the Great Recession. We face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of our information systems, and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry may have a significant adverse effect on our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses.

VII.   Strategic Risk

We may not realize the expected benefits of our strategic initiatives.

Our ability to compete depends on a number of factors, including among others, our ability to develop and successfully execute our strategic plans and initiatives. Our strategic priorities include growing profitably and maintaining financial strength; effectively managing risk and reward; engaging a high-performing, talented, and diverse workforce; and embracing the changes required by our clients and the marketplace. Acquiring and expanding customer relationships, including by “cross-selling” additional or new products to them, is also very important to our business model and our ability to grow revenue and earnings. Our inability to execute on or achieve the anticipated outcomes of our strategic priorities may affect how the market perceives us and could impede our growth and profitability.

 

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We operate in a highly competitive industry.

We face substantial competition in all areas of our operations from a variety of competitors, some of which are larger and may have more financial resources than us. Our competitors primarily include national and super-regional banks as well as smaller community banks within the various geographic regions in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and other local, regional, national, and global financial services firms. In addition, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks. Mergers and acquisitions have led to increased concentration in the banking industry, placing added competitive pressure on Key’s core banking products and services. We expect the competitive landscape of the financial services industry to become even more intensified as a result of legislative, regulatory, structural and technological changes.

Our ability to compete successfully depends on a number of factors, including: our ability to develop and execute strategic plans and initiatives; our ability to develop, maintain and build long-term customer relationships based on quality service and competitive prices; our ability to develop competitive products and technologies demanded by our customers, maintaining our high ethical standards and safe and sound assets; and industry and general economic trends. Increased competition in the financial services industry, and our failure to perform in any of these areas, could significantly weaken our competitive position, which could adversely affect our growth and profitability.

Maintaining or increasing our market share depends upon our ability to adapt our products and services to evolving industry standards and consumer preferences, while maintaining competitive prices.

The continuous, widespread adoption of new technologies, including internet services and mobile devices (including smartphones and tablets), requires us to evaluate our product and service offerings to ensure they remain competitive. Our success depends, in part, on our ability to adapt our products and services, as well as our distribution of them, to evolving industry standards and consumer preferences. New technologies have altered consumer behavior by allowing consumers to complete transactions such as paying bills or transferring funds directly without the assistance of banks. New products allow consumers to maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and related income generated from those deposits.

The increasing pressure from our competitors, both bank and nonbank, to keep pace and adopt new technologies and products and services requires us to incur substantial expense. We may be unsuccessful in developing or introducing new products and services, modifying our existing products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, sufficiently developing or maintaining a loyal customer base or offering products and services at prices lower than the prices offered by our competitors. These risks may affect our ability to achieve growth in our market share and could reduce both our revenue streams from certain products and services and our revenues from our net interest income.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract, retain, motivate, and develop key people. Competition for the best people in most of our business activities is ongoing and can be intense, and we may not be able to retain or hire the people we want or need to serve our customers. To attract and retain qualified employees, we must compensate these employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense.

 

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Various restrictions on compensation of certain executive officers were imposed under the Dodd-Frank Act and other legislation and regulations. In addition, our incentive compensation structure is subject to review by the Federal Reserve, who may identify deficiencies in the structure, causing us to make changes that may affect our ability to offer competitive compensation to these individuals. Our ability to attract and retain talented employees may be affected by these developments, or any new executive compensation limits and regulations.

Potential acquisitions or strategic partnerships may disrupt our business and dilute shareholder value.

Acquiring other banks, bank branches, or other businesses involves various risks commonly associated with acquisitions or partnerships, including exposure to unknown or contingent liabilities of the target company; diversion of our management’s time and attention; significant integration risk with respect to employees, accounting systems, and technology platforms; our inability to realize anticipated revenue and cost benefits and synergies; increased regulatory scrutiny; and, the possible loss of key employees and customers of the target company. We regularly evaluate merger and acquisition and strategic partnership opportunities and conduct due diligence activities related to possible transactions. As a result, mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values. Therefore, some dilution of our tangible book value and net income per common share could occur in connection with any future transaction. Additionally, if an acquisition or strategic partnership were to occur, we may fail to realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits.

VIII.  Model Risk

We rely on quantitative models to manage certain accounting, risk management and capital planning functions.

We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the CCAR capital planning process). Our modeling methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.

As a result, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Furthermore, strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses.

Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. The failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2.  PROPERTIES

The headquarters of KeyCorp and KeyBank are located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 2014, Key leased approximately 686,002 square feet of the complex, encompassing the first 23 floors and the 54th through 56th floors of the 57-story Key Tower. As of the same date, KeyBank owned 450 and leased 544 branches. The lease terms for applicable branches are not individually material, with terms ranging from month-to-month to 99 years from inception.

Branches and ATMs by Region

 

      Pacific      Rocky
Mountains
     Indiana     

West Ohio/

Michigan

     East Ohio     

Western

New York

    

Eastern

New York

    

New

England

     Total  

Branches

     252        130        65        100        149        83        149        66        994  

ATMs

     296        164        72        123        249        112        188        83        1,287  

ITEM 3.  LEGAL PROCEEDINGS

The information in the Legal Proceedings section of Note 20 (“Commitments, Contingent Liabilities and Guarantees”) of the Notes to Consolidated Financial Statements 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 operations for a particular period, depending upon the size of the loss or our income for that particular period.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The dividend restrictions discussion in the “Supervision and Regulation” section in Item 1. Business of this report, and the disclosures included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements contained in Item 8 of this report, are incorporated herein by reference:

 

  Page(s)  

Discussion of our common shares, shareholder information and repurchase activities in the section captioned “Capital — Common shares outstanding”

  69       

Presentation of annual and quarterly market price and cash dividends per common share and discussion of dividends in the section captioned “Capital — Dividends”

  34, 68, 96       

Discussion of dividend restrictions in the “Liquidity risk management — Liquidity for KeyCorp” section, Note 3 (“Restrictions on Cash, Dividends and Lending Activities”), and Note 22 (“Shareholders’ Equity”)

  85, 130, 210       

KeyCorp common share price performance (2010-2014) graph

  69       

From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase, or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be material.

As 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 in the open market or through privately negotiated transactions. Share repurchases under the 2014 capital plan began in the second quarter of 2014 and included repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the remaining 2014 capital plan authorization are expected to be executed through the first quarter of 2015.

We completed $128 million of common share repurchases during the fourth quarter of 2014 under our 2014 capital plan authorization.

The following table summarizes our repurchases of our common shares for the three months ended December 31, 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)

October 1 — 31

                               2,482,427     $ 12.77                                                  2,560,755                                                21,516,532  

November 1 — 30

  6,487,088                               13.39       6,486,428     14,604,429  

December 1 — 31

  739,781         13.27       738,500     13,477,895  

Total

  9,709,296     $ 13.22       9,785,683  
  

 

 

              
    

 

 

                                  

 

(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 October 31, 2014, at $13.20; on November 30, 2014, at $13.50; and on December 31, 2014, at $13.90.

 

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ITEM 6.  SELECTED FINANCIAL DATA

The information included under the caption “Selected Financial Data” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 32 is incorporated herein by reference.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (the “MD&A”)

 

  Page Number  

Introduction

  33                       

Terminology

  33                       

Selected financial data

  34                       

Economic overview

  35                       

Long-term financial goals

  36                       

Corporate strategy

  36                       

Strategic developments

  37                       

Highlights of Our 2014 Performance

  38                       

Financial performance

  38                       

Results of Operations

  42                       

Net interest income

  42                       

Noninterest income

  46                       

Noninterest expense

  49                       

Income taxes

  50                       

Line of Business Results

  51                       

Key Community Bank summary of operations

  51                       

Key Corporate Bank summary of operations

  53                       

Other Segments

  55                       

Financial Condition

  56                       

Loans and loans held for sale

  56                       

Securities

  65                       

Other investments

  67                       

Deposits and other sources of funds

  67                       

Capital

  68                       

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

  73                       

Off-balance sheet arrangements

  73                       

Contractual obligations

  74                       

Guarantees

  74                       

Risk Management

  75                       

Overview

  75                       

Market risk management

  76                       

Liquidity risk management

  82                       

Credit risk management

  86                       

Operational and compliance risk management

  93                       

Fourth Quarter Results

  94                       

Earnings

  94                       

Net interest income

  94                       

Noninterest income

  95                       

Noninterest expense

  95                       

Provision for loan and lease losses

  95                       

Income taxes

  95                       

Critical Accounting Policies and Estimates

  99                       

Allowance for loan and lease losses

  99                       

Valuation methodologies

  100                       

Derivatives and hedging

  101                       

Contingent liabilities, guarantees and income taxes

  102                       

European Sovereign and Non-Sovereign Debt Exposure

  103                       

Throughout the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations. These terms are defined in Note 1 (“Summary of Significant Accounting Policies”), which begins on page 114.

 

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Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for each of the past three years. Some tables 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 that we refer to are presented in the table of contents.

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 solely to KeyCorp’s subsidiary bank, KeyBank National Association. KeyBank (consolidated) refers to the consolidated entity consisting of KeyBank and its subsidiaries.

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” in Item 1 of this report, 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 — Capital adequacy” in this MD&A 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 (“Summary of Significant Accounting Policies”).

 

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Table of Contents

Figure 1. Selected Financial Data

 

dollars in millions, except per share amounts 2014   2013   2012   2011   2010   (a)

Compound
Annual
Rate
of Change

(2010-2014)

 

YEAR ENDED DECEMBER 31,

Interest income

$ 2,554   $ 2,620   $ 2,705   $ 2,889   $ 3,408     (5.6 )%

Interest expense

  261     295     441     622     897      (21.9

Net interest income

  2,293     2,325      2,264      2,267     2,511      (1.8

Provision (credit) for loan and lease losses

  59     130     229     (60   638      (37.9

Noninterest income

  1,797     1,766     1,856     1,688     1,954      (1.7

Noninterest expense

  2,759     2,820     2,818     2,684     3,034      (1.9

Income (loss) from continuing operations before income taxes

  1,272     1,141     1,073     1,331     793     9.9  

Income (loss) from continuing operations attributable to Key

  939     870     835     955     577     10.2  

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

  (39   40     23     (35   (23   N/M   

Net income (loss) attributable to Key

  900     910     858     920     554     10.2  

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

  917     847     813     848     413     17.3  

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

  (39   40     23     (35   (23   N/M   

Net income (loss) attributable to Key common shareholders

  878     887     836     813     390     17.6  

 

 

PER COMMON SHARE

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

$ 1.05   $ .93   $ .87   $ .91   $ .47     17.4 %

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

  (.04   .04     .02     (.04   (.03   N/M   

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

  1.01     .98     .89     .87     .45     17.5  

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

$ 1.04   $ .93   $ .86   $ .91   $ .47     17.2 %

Income (loss) from discontinued operations, net of taxes — assuming dilution (b)

  (.04   .04     .02     (.04   (.03   N/M   

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

  .99     .97     .89     .87     .44     17.6  

Cash dividends paid

  .25     .215     .18     .10     .04     44.3 %

Book value at year end

  11.91     11.25     10.78     10.09     9.52     4.6  

Tangible book value at year end

  10.65     10.11     9.67     9.11     8.45     4.7  

Market price at year end

  13.90     13.42     8.42     7.69     8.85     9.4  

Dividend payout ratio

  24.8   21.9   20.2   11.49   8.89   N/A   

Weighted-average common shares outstanding (000)

  871,464     906,524     938,941     931,934     874,748      (.1

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

  878,199     912,571     943,259     935,801     878,153     —    

 

 

AT DECEMBER 31.

Loans

$ 57,381   $ 54,457   $ 52,822   $ 49,575   $ 50,107     2.7 %

Earning assets

  82,269     79,467     75,055     73,729     76,211     1.5  

Total assets

  93,821     92,934     89,236     88,785     91,843     .4  

Deposits

  71,998     69,262     65,993     61,956     60,610     3.5  

Long-term debt

  7,875     7,650     6,847     9,520     10,592      (5.8

Key common shareholders’ equity

  10,239     10,012     9,980     9,614     8,380     4.1  

Key shareholders’ equity

  10,530     10,303     10,271     9,905     11,117      (1.1

 

 

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS

Return on average total assets

  1.08   1.03   1.03   1.16   .66   N/A   

Return on average common equity

  9.01     8.48     8.25     9.17     5.06     N/A   

Return on average tangible common equity (e)

  10.04     9.45     9.16     10.20     5.73     N/A   

Net interest margin (TE)

  2.97     3.12     3.21     3.16     3.26     N/A   

Cash efficiency ratio (e)

  66.1     67.5     67.4     67.3     67.3     N/A   

 

 

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS

Return on average total assets

  .99   1.02   .99   1.04   .59   N/A   

Return on average common equity

  8.63     8.88      8.48      8.79     4.78     N/A   

Return on average tangible common equity (e)

  9.61     9.90     9.42     9.78     5.41     N/A   

Net interest margin (TE)

  2.94     3.02     3.13     3.09     3.16     N/A   

Loan to deposit (f)

  84.6     83.8     85.8     87.0     90.3     N/A   

 

 

CAPITAL RATIOS AT DECEMBER 31,

Key shareholders’ equity to assets

  11.22   11.09   11.51   11.16   12.10   N/A   

Key common shareholders’ equity to assets

  10.91     10.78     11.18     10.83     9.12     N/A   

Tangible common equity to tangible assets (e)

  9.88     9.80     10.15     9.88     8.19     N/A   

Tier 1 common equity (e)

  11.17     11.22     11.36     11.26     9.34     N/A   

Tier 1 risk-based capital

  11.90     11.96     12.15     12.99     15.16     N/A   

Total risk-based capital

  13.89     14.33     15.13     16.51     19.12     N/A   

Leverage

  11.26     11.11     11.41     11.79     13.02     N/A   

 

 

TRUST AND BROKERAGE ASSETS

Assets under management

$ 39,157   $ 36,905   $ 34,744   $ 51,732   $ 59,815     N/A   

Nonmanaged and brokerage assets

  49,147     47,418     35,550     30,639     28,069     N/A   

 

 

OTHER DATA

Average full-time-equivalent employees

  13,853     14,783     15,589     15,381     15,610     (2.4 )% 

Branches

  994     1,028     1,088     1,058     1,033      (.8

 

 

 

(a) Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation.

 

(b) 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 13 (“Acquisitions and Discontinued Operations”).

 

(c) EPS may not foot due to rounding.

 

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

 

(e) See Figure 4 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 securitizations trusts for periods prior to 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).

Economic overview

The economy continued its modest recovery in 2014, with overall GDP starting slowly and accelerating as the year progressed, resulting in 2.4% growth. The year began with GDP contracting 2.1% in the first quarter, due to extreme weather halting consumer spending and investment. In the second quarter, growth of 4.6% more than reversed the first quarter’s decline. Pent-up consumer demand was the largest contributor to the growth, as the impact of extreme weather conditions in the first quarter faded. In the third quarter, growth accelerated as consumers spent money saved at the gas pump. Oil prices dropped 46% over the last half of the year, giving consumers a boost in discretionary income. The fourth quarter saw growth slow to 2.6% as consumer spending continued to be a bright spot. The stock market continued its climb in 2014, with the S&P 500 equity index increasing 11%, compared to a 30% increase in 2013. Globally, the economic recovery slowed; central banks in developed nations maintained easy money policies. In Europe, the recovery stalled and the risk of deflation rose, leading the European Central Bank to consider further action. Emerging markets struggled as well — demand decreased, exports dropped, and China grew at its slowest rate in 24 years.

For 2014, 2.95 million new jobs were added in the U.S. The unemployment rate fell further, from 6.97% at December 31, 2013, to 5.70% at December 31, 2014. While job growth was a factor, the majority of the improvement was driven by a decrease in the labor force participation rate, which declined to its lowest level in over 35 years. Wage growth deteriorated through much of the year and income growth was weak, indicative of slack in the labor market. However, consumer spending held up reasonably well, resulting in a falling savings rate. A slowing rate of inflation supported real incomes, and therefore spending, throughout the year. By December 2014, headline inflation was down to .8%, compared to 1.5% one year ago, mainly due to the decline in fuel prices. Core inflation also remained low throughout the year, ending 2014 at 1.6%, down from 1.7% in 2013.

As the economy expanded further and job growth accelerated, the housing market gained traction, with slight improvement across nearly all metrics in 2014. Slow household formation continues to be a factor, however, and sales growth remains relatively modest. Existing home sales finished 2014 at a seasonally adjusted annual rate of 5.04 million, up slightly from December 2013. New home sales ended the year on a solid note, reaching a seasonally adjusted annual rate of 481,000 in December 2014, up 8.8% from 2013. The pace of price appreciation slowed, with the median price for existing homes up 5.5% year-over-year in November 2014, compared to 9.9% in 2013. Housing starts accelerated further, up 9% over 2013, driven primarily by substantial gains in both single and multi-family construction.

The Federal Reserve remained active and accommodative in 2014, keeping the federal funds target rate near zero, expanding its balance sheet further, and making significant changes to its communications. Janet Yellen replaced Ben Bernanke as the Federal Reserve Chairman in February 2014. The Federal Reserve started tapering the pace of asset purchases by $10 billion, from $85 billion per month to $75 billion per month, in January and concluded purchasing securities in October. However, the Federal Open Market Committee (“FOMC”) decided to maintain the existing policy of reinvesting principal payments to help accommodate financial conditions. In addition, the Federal Reserve kept its forward guidance unchanged in December, explicitly stating that the federal funds rate will be kept near zero for a considerable time. Low inflation remains a concern; the FMOC acknowledged lower energy prices were a factor in holding inflation under their longer-run objective of 2.0%. The 10-year U.S. Treasury yield began the year at 3.0%, and was range-bound from 2.7% to 2.9% for the first quarter of the year, driven by disappointing weather-related economic data. Around the year’s halfway point, with rising concerns over global growth, the 10-year U.S. Treasury yield began to decrease, approaching 2.0% by the end of the year as the stock market continued to rally.

 

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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 three and twelve months ended December 31, 2014.

Figure 2. Evaluation of Our Long-Term Financial Goals

 

KEY Business Model

Key Metrics  (a)   4Q14     

 

Year ended

December 31, 2014

  

  

  Targets   

Balance sheet efficiency

Loan-to-deposit ratio  (b)   85 %      85 %      90 - 100 %   

Moderate risk profile

NCOs to average loans   .22 %      .20 %      .40 - .60 %   
Provision to average loans   .15 %      .11 %   

High quality, diverse

revenue streams

Net interest margin   2.94 %      2.97 %      > 3.50 %   
Noninterest income to total revenue   45 %      44 %      > 40 %   

Positive operating leverage

Cash efficiency ratio  (c)   64.4 %      66.1 %      < 60 %   

Execution of strategy

Return on average assets   1.12 %      1.08 %      1.00 - 1.25 %   

 

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

 

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

 

(c) Excludes intangible asset amortization; Non-GAAP measures: see Figure 4 for reconciliation.

Corporate strategy

We remain committed to enhancing long-term shareholder value by continuing to execute our relationship business model, growing our franchise, and being disciplined in our management of capital. Our 2014/2015 strategic focus is to add new clients and to expand our relationships with existing clients. We intend to pursue this strategy by continuing to control and reduce expenses; being more productive from the front office to the back office; effectively balancing risk and rewards within our moderate risk profile; and engaging, retaining and inspiring our diverse and high performing workforce. Our strategic priorities for enhancing long-term shareholder value are described below.

 

¿ Grow profitably — We will continue to focus on growing revenue and creating a more efficient operating environment. We expect our relationship business model to keep generating organic growth as it helps us expand engagement with existing clients and attract new customers. We will leverage our continuous improvement culture to create a more efficient cost structure that is aligned, sustainable, and consistent with the current operating environment and supports our relationship business model.

 

¿ Acquire and expand targeted relationships — We have taken purposeful steps to enhance our ability to acquire and expand targeted relationships. Our local delivery of a broad product set and industry expertise allows us to match client needs and market conditions to deliver the best solutions.

 

¿ Effectively manage risk and rewards — Our risk management activities are focused on ensuring we properly identify, measure, and manage risks across the entire company to maintain safety and soundness and maximize profitability.

 

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¿ Maintain financial strength — With the foundation of a strong balance sheet, we will remain focused on sustaining strong reserves, liquidity and capital. We will work closely with our Board of Directors and regulators to manage capital to support our clients’ needs and create shareholder value. Our capital remains a competitive advantage for us.

 

¿ Engage a high performing, talented and diverse workforce — Every day our employees provide our clients with great ideas, extraordinary service and smart solutions. We will continue to engage our high performing, talented and diverse workforce to create an environment where they can make a difference, own their careers, be respected and feel a sense of pride.

Strategic developments

We initiated the following actions during 2014 to support our corporate strategy:

 

¿ We continued to take actions to drive growth and efficiency. These actions included leadership changes to leverage our alignment, accelerate momentum, and drive growth. We 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 continued 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 34 branches and reduced headcount in our fixed income trading business during 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 strengthened its sales management process and saw a lift in sales productivity. Key Corporate Bank continued 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 was 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.

 

¿ Our strong risk management practices and a more favorable credit environment resulted in another year of positive credit quality trends. For 2014, net loan charge-offs were .20% of average loans, well below our targeted range, and nonperforming assets decreased 17.9% from the year-ago period.

 

¿ Capital management remained a priority. During 2014, we completed $355 million of common share repurchases under our 2014 capital plan authorization. In addition, we completed $141 million of common share repurchases in the first quarter of 2014 under our 2013 capital plan for a total of $496 million of open market common share repurchases during 2014. Common share repurchases under the 2014 capital plan are expected to be executed through the first quarter of 2015.

 

¿ The Board declared a quarterly dividend of $.055 per common share for the first quarter of 2014. Our 2014 capital plan 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, third, and fourth quarters of 2014, which brought our annual dividend to $.25 per common share for 2014.

 

¿

At December 31, 2014, our capital ratios remained strong with a Tier 1 common equity ratio of 11.17%, our loan loss reserves were adequate at 1.38% to period-end loans, and we were core funded with a loan-to-

 

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  deposit ratio of 85%. We believe our strong capital position provides us with the flexibility to support our clients and our business needs, and to evaluate other appropriate capital deployment opportunities.

Highlights of Our 2014 Performance

Financial performance

For 2014, we announced net income from continuing operations attributable to Key common shareholders of $917 million, or $1.04 per common share. These results compare to net income from continuing operations attributable to Key common shareholders of $847 million, or $.93 per common share, for 2013.

Figure 3 shows our continuing and discontinued operating results for the past three years.

Figure 3. Results of Operations

 

Year ended December 31,

in millions, except per share amounts

  2014       2013       2012    

SUMMARY OF OPERATIONS

Income (loss) from continuing operations attributable to Key

    $         939          $         870          $         835     

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

  (39)        40        23     

 

 

Net income (loss) attributable to Key

    $ 900          $ 910          $ 858     
  

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations attributable to Key

    $ 939          $ 870          $ 835     

Less:        Dividends on Series A Preferred Stock

  22        23        22     

 

 

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

  917        847        813     

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

  (39)        40        23     

 

 

Net income (loss) attributable to Key common shareholders

    $ 878          $ 887          $ 836     
     

 

 

    

 

 

    

 

 

 

PER COMMON SHARE — ASSUMING DILUTION

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

    $ 1.04          $ .93          $ .86     

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

  (.04)        .04        .02     

 

 

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

    $ .99          $ .97          $ .89     
  

 

 

    

 

 

    

 

 

 
                            

 

(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 13 (“Acquisitions and Discontinued Operations”).

 

(b) EPS may not foot due to rounding.

Our 2014 full-year results reflect success in executing our strategy by generating positive operating leverage and maintaining strong risk management and disciplined capital management. We continued to invest in our businesses to accelerate growth. During the third quarter of 2014, we acquired Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm. We added bankers across our franchise, expanded our payment capabilities, and enhanced technology in areas such as mobile, online, and cyber security. In addition, as part of our actions to drive efficiency, we closed 34 branches and exited nonstrategic assets that were not consistent with our relationship strategy, such as international leasing. We remain committed to generating positive operating leverage and delivering on our long-term goal of achieving a cash efficiency ratio below 60%.

Our taxable-equivalent net interest income for 2014 was $2.3 billion, and the net interest margin was 2.97%. These results compare to taxable-equivalent net interest income of $2.3 billion and a net interest margin of 3.12% for the prior year. The decreases in net interest income, which declined $31 million, and the 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. In 2015, we expect net interest income and net interest margin to benefit from anticipated higher rates, with net interest income growth in the low- to mid-single-digit percentage range compared to 2014 and net interest margin to be stable to slightly higher later in 2015.

 

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Our noninterest income was $1.8 billion, up $31 million, or 1.8%, from 2013. Investment banking and debt placement fees benefited from our business model and had a record high year, increasing $64 million from 2013. Net gains (losses) from principal investing were $26 million higher than prior year, and trust and investment services income increased $10 million. These increases were partially offset by declines of $21 million in operating lease income and other leasing, $20 million in service charges on deposits accounts, $12 million in mortgage servicing fees, and $9 million in consumer mortgage income. Other income also decreased $15 million. In 2015, we expect mid-single-digit growth compared to 2014, including the full-year impact of the recently-acquired Pacific Crest Securities.

Our noninterest expense was $2.8 billion, a decrease of $61 million, or 2.2%, from 2013. We recognized $80 million of efficiency- and pension-related charges in 2014 compared to $117 million in 2013. Personnel expense declined $18 million, driven by lower net technology contract labor, severance, and employee benefits, partially offset by higher incentive compensation and stock-based compensation. Nonpersonnel expense decreased $43 million, primarily due to declines in net occupancy costs of $14 million, provision (credit) for losses on lending-related commitments of $10 million, and equipment expense of $8 million. In 2015, we expect noninterest expense to be relatively stable with 2014.

Average loans totaled $55.7 billion for 2014, compared to $53.1 billion in 2013. Commercial, financial and agricultural loan growth of $2.7 billion from the prior year 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 mostly offset by run-off in our designated consumer exit portfolio. For 2015, we anticipate average loans growth in the mid-single-digit range, benefiting from the strength in our commercial businesses.

Average deposits, excluding deposits in foreign office, totaled $67.3 billion for 2014, an increase of $1.9 billion compared to 2013. Demand deposits and NOW and money market deposit accounts each increased $1.4 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 consolidated loan to deposit ratio was 84.6% at December 31, 2014, compared to 83.8% at December 31, 2013.

Our asset quality statistics continued to improve during 2014. The provision for loan and lease losses was $59 million for 2014 compared to $130 million for 2013. Net loan charge-offs declined to $113 million, or .20%, of average loan balances for 2014, compared to $168 million, or .32%, for 2013. In addition, our nonperforming loans declined to $418 million, or .73%, of period-end loans at December 31, 2014, compared to $508 million, or .93%, at December 31, 2013. Our ALLL was $794 million, or 1.38%, of period-end loans, compared to $848 million, or 1.56%, at December 31, 2013, and represented 190% and 166.9% coverage of nonperforming loans at December 31, 2014, and December 31, 2013, respectively. In 2015, we expect net loan charge-offs to average loans to remain below our long-term targeted range of 40 to 60 basis points and the provision for loan and lease losses to approximate net loan charge-offs.

Our tangible common equity ratio and Tier 1 common ratio both remain strong at December 31, 2014, at 9.88% and 11.17% respectively, compared to 9.80% and 11.22%, respectively, at December 31, 2013. We have identified four primary uses of capital:

 

  1. Investing in our businesses, supporting our clients, and loan growth;

 

  2. Maintaining or increasing our common share dividend;

 

  3. Returning capital in the form of common share repurchases to our shareholders; and

 

  4. Remaining disciplined and opportunistic about how we invest in our franchise to include selective acquisitions over time.

Our capital management remains focused on creating value. During 2014, we announced an 18% increase in the common share dividend and repurchased $496 million of common shares, resulting in a peer-leading shareholder payout of approximately 82% of our 2014 net income.

 

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The Federal Reserve is currently reviewing of our 2015 capital plan under the CCAR process. Until such time as it has completed its review and has no objection to our plan, we are not permitted to implement our capital plan for periods after the first quarter of 2015. Should we receive an objection to our plan, it would likely delay any actions on capital management until later in the calendar year. For more information about the CCAR process, see “Capital planning and stress testing” under “Supervision and Regulation” in Item 1 of this report.

Figure 4 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 4 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. The Federal Reserve focuses 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” in Item 1 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 4 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.

 

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Figure 4. GAAP to Non-GAAP Reconciliations

Year ended December 31,

 

dollars in millions   2014            2013            2012            2011            2010     (a)  
                                                                                          

Tangible common equity to tangible assets at period end

                       

Key shareholders’ equity (GAAP)

  $ 10,530        $ 10,303        $ 10,271        $ 9,905        $ 11,117    

Less:

  

Intangible assets  (b)

    1,090          1,014          1,027          934          938    
  

Series B Preferred Stock

    —             —             —             —             2,446    
  

Series A Preferred Stock  (c)

    282          282          291          291          291    
                                                                                    
  

Tangible common equity (non-GAAP)

  $ 9,158        $ 9,007        $ 8,953        $ 8,680        $ 7,442    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Total assets (GAAP)

  $ 93,821        $ 92,934        $ 89,236        $ 88,785        $ 91,843    

Less:

  

Intangible assets  (b)

    1,090          1,014          1,027          934          938    
                                                                                    
  

Tangible assets (non-GAAP)

  $ 92,731        $ 91,920        $ 88,209        $ 87,851        $ 90,905    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Tangible common equity to tangible assets ratio (non-GAAP)

    9.88        %         9.80        %         10.15        %         9.88        %         8.19        %   

Tier 1 common equity at period end

                       

Key shareholders’ equity (GAAP)

  $ 10,530        $ 10,303        $ 10,271        $ 9,905        $ 11,117    

Qualifying capital securities

    339          339          339          1,046          1,791    

Less:

  

Goodwill

    1,057          979          979          917          917    
  

Accumulated other comprehensive income (loss)  (d)

    (395        (394        (172        (72        (66  
  

Other assets  (e)

    83          89          114          72          248    
                                                                                    
  

Total Tier 1 capital (regulatory)

    10,124          9,968          9,689          10,034          11,809    

Less:

  

Qualifying capital securities

    339          339          339          1,046          1,791    
  

Series B Preferred Stock

    —             —             —             —             2,446    
  

Series A Preferred Stock  (c)

    282          282          291          291          291    
                                                                                    
  

Total Tier 1 common equity (non-GAAP)

  $ 9,503        $ 9,347        $ 9,059        $ 8,697        $ 7,281    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Net risk-weighted assets (regulatory)

  $     85,100        $     83,328        $     79,734        $     77,214        $     77,921    

Tier 1 common equity ratio (non-GAAP)

    11.17        %         11.22        %         11.36        %         11.26        %         9.34        %   

Pre-provision net revenue

                       

Net interest income (GAAP)

  $ 2,293        $ 2,325        $ 2,264        $ 2,267        $ 2,511    

Plus:

  

Taxable-equivalent adjustment

    24          23          24          25          26    
  

Noninterest income (GAAP)

    1,797          1,766          1,856          1,688          1,954    

Less:

  

Noninterest expense (GAAP)

    2,759          2,820          2,818          2,684          3,034    
                                                                                    

Pre-provision net revenue from continuing operations (non-GAAP)

  $ 1,355        $ 1,294        $ 1,326        $ 1,296        $ 1,457    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Average tangible common equity

                       

Average Key shareholders’ equity (GAAP)

  $ 10,467        $ 10,276        $ 10,144        $ 10,133        $ 10,895    

Less:

  

Intangible assets (average)  (f)

    1,039          1,021          978          935          959    
  

Series B Preferred Stock (average)

    —             —             —             590          2,438    
  

Series A Preferred Stock (average)

    291          291          291          291          291    
                                                                                    
  

Average tangible common equity (non-GAAP)

  $ 9,137        $ 8,964        $ 8,875        $ 8,317        $ 7,207    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Return on average tangible common equity from continuing operations

                       

Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)

  $ 917        $ 847        $ 813        $ 848        $ 413    

Average tangible common equity (non-GAAP)

    9,137          8,964          8,875          8,317          7,207    

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

    10.04        %         9.45        %         9.16        %         10.20        %         5.73        %   

Return on average tangible common equity consolidated

                       

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

  $ 878        $ 887        $ 836        $ 813        $ 390    

Average tangible common equity (non-GAAP)

    9,137          8,964          8,875          8,317          7,207    

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

    9.61        %         9.90        %         9.42        %         9.78        %         5.41        %   

Cash efficiency ratio

                       

Noninterest expense (GAAP)

  $ 2,759        $ 2,820        $ 2,818        $ 2,684        $ 3,034    

Less:

  

Intangible asset amortization (GAAP)

    39          44          23          4          14    
                                                                                    
  

Adjusted noninterest expense (non-GAAP)

  $ 2,720        $ 2,776        $ 2,795        $ 2,680        $ 3,020    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Net interest income (GAAP)

  $ 2,293        $ 2,325        $ 2,264        $ 2,267        $ 2,511    

Plus:

  

Taxable-equivalent adjustment

    24          23          24          25          26    
  

Noninterest income (GAAP)

    1,797          1,766          1,856          1,688          1,954    
                                                                                    
  

Total taxable-equivalent revenue (non-GAAP)

  $ 4,114        $ 4,114        $ 4,144        $ 3,980        $ 4,491    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Cash efficiency ratio (non-GAAP)

    66.1        %         67.5        %         67.4        %         67.3        %         67.3        %   
                                                                                          

 

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(a) Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation.

 

(b) For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, intangible assets exclude $68 million, $92 million, and $123 million, respectively, of period-end purchased credit card receivables.

 

(c) Net of capital surplus for the years ended December 31, 2014, and December 31, 2013.

 

(d) 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.

 

(e) 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 December 31, 2014, December 31, 2013, December 31, 2012, and December 31, 2011. There were disallowed deferred tax assets of $158 million at December 31, 2010.

 

(f) For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, average intangible assets exclude $79 million, $107 million, and $55 million, respectively, of average purchased credit card receivables.

Figure 4. GAAP to Non-GAAP Reconciliations, continued

Year ended December 31,

dollars in millions 2014      
               

Common Equity Tier 1 under the Regulatory Capital Rules (estimates)

Tier 1 common equity under current regulatory rules

$ 9,503  

Adjustments from current regulatory rules to the Regulatory Capital Rules:

Deferred tax assets and other (g)

  (89
               

Common Equity Tier 1 anticipated under the Regulatory Capital Rules (h)

$ 9,414  
    

 

 

   

Net risk-weighted assets under current regulatory rules

$         85,100  

Adjustments from current regulatory rules to the Regulatory Capital Rules:

Loan commitments less than one year

  1,139  

Past due loans

  129  

Mortgage servicing assets (i)

  484  

Deferred tax assets (i)

  267  

Other

  1,059  
               

Total risk-weighted assets anticipated under the Regulatory Capital Rules (h)

$ 88,178  
    

 

 

   

Common Equity Tier 1 ratio under the Regulatory Capital Rules

  10.68      %   
               

 

(g) Includes the deferred tax assets subject to future taxable income for realization, primarily tax credit carryforwards, as well as the deductible portion of purchased credit card receivables.

 

(h) 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.”

 

(i) Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%.

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.

 

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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 5 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five years. 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 years. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing taxable-equivalent net interest income by average earning assets.

Taxable-equivalent net interest income for 2014 was $2.317 billion, and the net interest margin was 2.97%. These results compare to taxable-equivalent net interest income of $2.348 billion and a net interest margin of 3.12% for the prior year. The decreases in net interest income, which declined $31 million, and the 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 and wholesale borrowings.

Taxable-equivalent net interest income for 2013 increased $60 million compared to 2012 due to an increase in average loans, a more favorable funding mix, and higher loan fees, partially offset by lower earning asset yields. The net interest margin declined nine basis points primarily resulting from lower earning asset yields, which were partially offset by a more favorable funding mix.

Average earning assets totaled $78.1 billion for 2014, compared to $75.4 billion in 2013. Commercial, financial and agricultural loan growth of $2.7 billion from the prior year 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 mostly offset by run-off in our designated consumer exit portfolio.

Average deposits, excluding deposits in foreign office, totaled $67.3 billion for 2014, an increase of $1.9 billion compared to 2013. Demand deposits and NOW and money market deposit accounts each increased $1.4 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.

 

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Figure 5. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations

 

  2014       2013    

Year ended December 31,

dollars in millions

    Average
    Balance
       Interest   (a) Yield/
Rate
  (a)       Average
    Balance
       Interest   (a) Yield/
Rate
  (a)

ASSETS

Loans: (b), (c)

Commercial, financial and agricultural

$ 26,375      (d )   $ 866     3.28      %    $     23,723      (d )   $ 855     3.60   %

Real estate — commercial mortgage

  7,999     303     3.79     7,591     312     4.11  

Real estate — construction

  1,061     43     4.07     1,058     45     4.25  

Commercial lease financing

  4,239     156     3.67     4,683     172     3.67  
 

Total commercial loans

  39,674     1,368     3.45     37,055     1,384     3.73  

Real estate — residential mortgage

  2,201     96     4.37     2,185     98     4.49  

Home equity:

Key Community Bank

  10,340     405     3.91     10,086     397     3.93  

Other

  299     23     7.80     377     29     7.70  
 

Total home equity loans

  10,639     428     4.02     10,463     426     4.07  

Consumer other — Key Community Bank

  1,501     104     6.92     1,404     103     7.33  

Credit cards

  712     78     10.95     701     83     11.86  

Consumer other:

Marine

  894     56     6.22     1,172     74     6.26  

Other

  58     4     7.70     74     6     8.32  
 

Total consumer other

  952     60     6.31     1,246     80     6.38  
 

Total consumer loans

  16,005     766     4.79     15,999     790     4.94  
 

Total loans

  55,679     2,134     3.83     53,054     2,174     4.10  

Loans held for sale

  570     21     3.76     532     20     3.72  

Securities available for sale (b), (e)

  12,210     277     2.27     12,689     311     2.49  

Held-to-maturity securities (b)

  4,949     93     1.88     4,387     82     1.87  

Trading account assets

  932     25     2.70     756     21     2.78  

Short-term investments

  2,886     6     .21     2,948     6     .20  

Other investments (e)

  865     22     2.53     1,028     29     2.84  
 

Total earning assets

  78,091     2,578     3.30     75,394     2,643     3.51  

Allowance for loan and lease losses

  (818   (879

Accrued income and other assets

  9,806     9,662  

Discontinued assets

  3,828     5,036  
 

Total assets

$ 90,907   $ 89,213  
  

 

 

                 

 

 

              

LIABILITIES

NOW and money market deposit accounts

$ 34,283     48     .14   $ 32,846     53     .16  

Savings deposits

  2,446     1     .02     2,505     1     .04  

Certificates of deposit ($100,000 or more) (f)

  2,616     35     1.35     2,829     50     1.76  

Other time deposits

  3,495     32     .91     4,084     53     1.30  

Deposits in foreign office

  615     1     .23     567     1     .23  
 

Total interest-bearing deposits

  43,455     117     .27     42,831     158     .37  

Federal funds purchased and securities sold under repurchase agreements

  1,182     2     .16     1,802     2     .13  

Bank notes and other short-term borrowings

  597     9     1.49     394     8     1.89  

Long-term debt (f), (g)

  5,161     133     2.68     4,184     127     3.28  
 

Total interest-bearing liabilities

  50,395     261     .52     49,211     295     .60  

Noninterest-bearing deposits

  24,410     23,046  

Accrued expense and other liabilities

  1,791     1,656  

Discontinued liabilities (g)

  3,828     4,995  
 

Total liabilities

  80,424     78,908  

EQUITY

Key shareholders’ equity

  10,467     10,276  

Noncontrolling interests

  16     29  
 

Total equity

  10,483     10,305  
 

Total liabilities and equity

$     90,907   $ 89,213  
  

 

 

                 

 

 

              

Interest rate spread (TE)

  2.78     %      2.91   %
 

Net interest income (TE) and net interest margin (TE)

  2,317     2.97     %      2,348     3.12   %
            

 

 

                 

 

 

    

TE adjustment (b)

  24     23  
 

Net interest income, GAAP basis

$     2,293   $     2,325  
      

 

 

                 

 

 

          
 

 

(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 $93 million, $95 million, and $36 million of assets from commercial credit cards for the years ended December 31, 2014, December 31, 2013, and December 31, 2012, respectively.

 

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Figure 5. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations (Continued)

 

2012      2011             2010             Compound Annual Rate of
Change (2010-2014)
       
Average
Balance
           Interest      (a)    Yield/
Rate
     (a)      Average
Balance
          Interest      (a)    Yield/
Rate
     (a)      Average
Balance
    (h)    Interest      (a), (h)    Yield/
Rate
     (a), (h)      Average
Balance
                Interest         
                                                        
                                                        
$     21,141        (d )     $ 810           3.83         %       $     17,507        $     705           4.03         %       $     17,500        $ 813           4.64         %         8.6        %         1.3        %   
  7,656         339           4.43           8,437          380           4.50           10,027          491           4.90           (4.4        (9.2  
  1,171         56           4.74           1,677          73           4.36           3,495          149           4.26           (21.2        (22.0  
  5,142         187           3.64           5,846          293           5.01           6,754          352           5.21           (8.9        (15.0  
     
  35,110     1,392     3.96     33,467     1,451     4.34     37,776     1,805     4.78     1.0     (5.4
  2,049     100     4.86     1,850     97     5.25     1,828     102     5.57     3.8     (1.2
  9,520     384     4.03     9,390     387     4.12     9,773     411     4.20     1.1     (.3
  473     37     7.81     598     46     7.66     751     57     7.59     (16.8   (16.6
     
  9,993     421     4.21     9,988     433     4.34     10,524     468     4.45     .2     (1.8
  1,269     121     9.53     1,167     113     9.62     1,158     132     11.44     5.3     (4.7
  288     40     13.99     —       —        —        —        —        —        N/M      N/M   
  1,551     97     6.26     1,992     125     6.28     2,497     155     6.23     (18.6   (18.4
  102     8     8.14     142     11     7.87     188     15     7.87     (21.0   (23.2
     
  1,653     105     6.38     2,134     136     6.38     2,685     170     6.34     (18.7   (18.8
     
  15,252     787     5.16     15,139     779     5.14     16,195     872     5.39     (.2   (2.6
     
  50,362     2,179     4.33     48,606     2,230     4.59     53,971     2,677     4.96     .6     (4.4
  579     20     3.45     387     14     3.58     453     17     3.62     4.7     4.3  
  13,422     399     3.08     18,766     584     3.20     18,800     646     3.50     (8.3   (15.6
  3,511     69     1.97     514     12     2.35     20     2     10.56     N/M      115.5  
  718     18     2.48     878     26     2.97     1,068     37     3.47     (2.7   (7.5
  2,116     6     .27     2,543     6     .25     2,684     6     .24     1.5     —     
  1,141     38     3.27     1,264     42     3.14     1,442     49     3.08     (9.7   (14.8
     
  71,849     2,729     3.82     72,958     2,914     4.02     78,438     3,434     4.39     (.1   (5.6
  (919   (1,250   (2,207   (18.0
  9,912     10,341     11,243     (2.7
  5,573     6,247     6,677     (10.5
     
$ 86,415   $ 88,296   $ 94,151     (.7   %   

 

 

                 

 

 

                  

 

 

                         
$ 29,673     56     .19   $ 27,001     71     .26   $ 25,712     91     .35     5.9     %      (12.0
  2,218     1     .05     1,958     1     .06     1,867     1     .06     5.6     —     
  3,574     94     2.64     4,931     149     3.02     8,486     275     3.24     (21.0   (33.8
  5,386     104     1.92     7,185     166     2.31     10,545     301     2.86     (19.8   (36.1
  767     2     .23     807     3     .30     926     3     .34     (7.9   (19.7
     
  41,618     257     .62     41,882     390     .93     47,536     671     1.41     (1.8   (29.5
  1,814     4     .19     1,981     5     .27     2,044     6     .31     (10.4   (19.7
  413     7     1.69     619     11     1.84     545     14     2.63     1.8     (8.5
  4,673     173     4.10     7,293     216     3.18     7,211     206     3.09     (6.5   (8.4
     
  48,518     441     .92     51,775     622     1.21     57,336     897     1.58     (2.5   (21.9
  20,217     17,381     15,856     9.0  
  1,958     2,658     3,131     (10.6
  5,555     6,232     6,677     (10.5
     
  76,248     78,046     83,000     (.6
  10,144     10,133     10,895     (.8
  23     117     256     (42.6
     
  10,167     10,250     11,151     (1.2
     
$ 86,415   $ 88,296   $ 94,151     (.7   %   

 

 

                 

 

 

                  

 

 

                         
  2.90     %      2.81     %      2.81     %   
     
  2,288     3.21     %      2,292     3.16     %      2,537     3.26     %      (1.8
         

 

 

                  

 

 

                  

 

 

              
  24     25     26     (1.6
     
$ 2,264   $     2,267   $     2,511     (1.8   %   
   

 

 

                  

 

 

                  

 

 

                    
                                                                                                                                                                        

 

(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.

 

(h) Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation.

 

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Figure 6 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled “Financial Condition” contains additional discussion about changes in earning assets and funding sources.

Figure 6. Components of Net Interest Income Changes from Continuing Operations

 

     2014 vs. 2013          2013 vs. 2012      
in millions    Average
Volume
    Yield/
Rate
    Net
Change
    (a)    Average
Volume
    Yield/
Rate
    Net
Change
    (a)

INTEREST INCOME

                 

Loans

   $       105     $       (145   $       (40      $ 113     $ (118   $ (5  

Loans held for sale

     1       —          1          (2     2       —       

Securities available for sale

     (11     (23     (34        (21     (67     (88  

Held-to-maturity securities

     11       —          11          17       (4     13    

Trading account assets

     5       (1     4          1       2       3    

Short-term investments

     —          —          —             2       (2     —       

Other investments

     (4     (3     (7        (4     (5     (9  
   

Total interest income (TE)

     107       (172     (65        106       (192     (86  
                 

INTEREST EXPENSE

                 

NOW and money market deposit accounts

     2       (7     (5        6       (9     (3  

Certificates of deposit ($100,000 or more)

     (4     (11     (15        (17     (27     (44  

Other time deposits

     (7     (14     (21        (22     (29     (51  

Deposits in foreign office

     —          —          —             —          (1     (1  
   

Total interest-bearing deposits

     (9     (32     (41        (33     (66     (99  

Federal funds purchased and securities sold under repurchase agreements

     (1     1       —             —          (2     (2  

Bank notes and other short-term borrowings

     3       (2     1          —          1       1    

Long-term debt

     27       (21     6          (17     (29     (46  
   

Total interest expense

     20       (54     (34        (50     (96     (146  
   

Net interest income (TE)

   $ 87     $ (118   $ (31      $ 156     $ (96   $ 60    
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   
   

 

(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 7, noninterest income for 2014 was $1.8 billion, up $31 million, or 1.8%, from 2013. Investment banking and debt placement fees benefited from our business model and had a record high year, increasing $64 million from 2013. Net gains (losses) from principal investing were $26 million higher than prior year, and trust and investment services income increased $10 million, primarily due to the third quarter 2014 acquisition of Pacific Crest Securities. These increases were partially offset by declines of $21 million in operating lease income and other leasing, $20 million in service charges on deposits accounts, $12 million in mortgage servicing fees, and $9 million in consumer mortgage income. Other income also decreased $15 million.

In 2013, noninterest income decreased $90 million, or 4.8%, compared to 2012. Operating lease income and other leasing gains decreased $84 million, primarily due to fewer early terminations in the leveraged lease portfolio. Consumer mortgage income declined $21 million, and net gains (losses) from principal investing decreased $20 million. Other income also declined $46 million, primarily due to gains on the redemption of trust preferred securities in the prior year. These decreases were partially offset by increases of $34 million in mortgage servicing fees, $27 million in cards and payments income, and $18 million in trust and investment services income.

 

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Figure 7. Noninterest Income

 

Year ended December 31,                                 Change 2014 vs. 2013                 
dollars in millions    2014      2013      2012      Amount     Percent        
               

Trust and investment services income

   $ 403      $ 393      $ 375      $ 10       2.5        %   

Investment banking and debt placement fees

     397        333        327        64       19.2    

Service charges on deposit accounts

     261        281        287        (20     (7.1  

Operating lease income and other leasing gains

     96        117        201        (21     (17.9  

Corporate services income

     178        172        168        6       3.5    

Cards and payments income

     166        162        135        4       2.5    

Corporate-owned life insurance income

     118        120        122        (2     (1.7  

Consumer mortgage income

     10        19        40        (9     (47.4  

Mortgage servicing fees

     46        58        24        (12     (20.7  

Net gains (losses) from principal investing

     78        52        72        26       50.0    

Other income (a)

     44        59        105        (15     (25.4  

Total noninterest income

   $     1,797      $     1,766      $ 1,856      $ 31       1.8        %   
  

 

 

    

 

 

    

 

 

    

 

 

     
    

 

 

    

 

 

    

 

 

    

 

 

           

 

(a) Included in this line item is our “Dealer trading and derivatives income (loss).” Additional detail is provided in Figure 8.

Figure 8. Dealer Trading and Derivatives Income (Loss)

 

Year ended December 31,                               Change 2014 vs. 2013            
dollars in millions    2014      2013      2012      Amount      Percent        

Dealer trading and derivatives income (loss), proprietary (a), (b)

   $     (18)       $     (14)       $     (2)         $              (4)         N/M     

Dealer trading and derivatives income (loss), nonproprietary (b)

            27                (20)         (74.1     %   

Total dealer trading and derivatives income (loss)

   $     (11)       $      13       $      4         $            (24)         N/M     
  

 

 

    

 

 

    

 

 

    

 

 

      
    

 

 

    

 

 

    

 

 

    

 

 

            

 

(a) For the year ended December 31, 2014, income of $4 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 year ended December 31, 2013, income of $3 million related to foreign exchange and interest rate derivative trading was offset by losses related to fixed income, equity securities trading, commodity derivative trading, and credit portfolio management activities. For the year ended December 31, 2012, equity securities trading and credit portfolio management securities trading constitute the majority of this amount. These losses were partially offset by income of $6 million related to fixed income, foreign exchange, interest rate, and commodity derivative trading 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 this report.

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

Trust and investment services income

Trust and investment services income is one of our largest sources of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 9. For 2014, trust and investment services income increased $10 million, or 2.5%, from the prior year primarily due to the third quarter 2014 acquisition of Pacific Crest Securities. For 2013, trust and investment services income increased $18 million, or 4.8%, from the prior year.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At December 31, 2014, our bank, trust, and registered investment advisory subsidiaries had assets under management of $39.2 billion, compared to $36.9 billion at December 31, 2013 and $34.7 billion at December 31, 2012. As shown in Figure 9, increases across all portfolios were primarily attributable to market appreciation.

 

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Figure 9. Assets Under Management

 

December 31,                             Change 2014 vs. 2013            
dollars in millions    2014      2013      2012      Amount      Percent        

Assets under management by investment type:

                

Equity

   $ 21,393      $ 20,971      $ 18,013      $ 422        2.0        %   

Securities lending

     4,835        3,422        3,147        1,413        41.3    

Fixed income

     10,023        9,767        10,872        256        2.6    

Money market

     2,906        2,745        2,712        161        5.9    
     

Total

   $     39,157      $ 36,905      $ 34,744      $ 2,252        6.1        %   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   
     

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. For 2014, investment banking and debt placement fees increased $64 million, or 19.2%, from the prior year. For 2013, investment banking and debt placement fees increased $6 million, or 1.8%. These increases reflect the benefits of our business model — focusing on targeted industries — including the addition of the technology sector with the 2014 acquisition of Pacific Crest Securities.

Service charges on deposit accounts

Service charges on deposit accounts declined $20 million, or 7.1%, in 2014 compared to the prior year, and $6 million, or 2.1%, in 2013 compared to the prior year due to lower maintenance fees and overdraft charges.

Operating lease income and other leasing gains

Operating lease income and other leasing gains decreased $21 million, or 17.9%, during 2014 compared to the prior year, and $84 million, or 41.8%, in 2013 compared to 2012 due to lower gains on the early terminations of leveraged leases. Product run-off also contributed to the declines between years. Accordingly, as shown in Figure 10, operating lease expense related to the rental of leased equipment also declined between years.

Corporate services income

Corporate services income increased $6 million, or 3.5%, in 2014 compared to 2013, driven by higher non-yield loan fees, and $4 million, or 2.4%, in 2013 compared to 2012 primarily due to an increase in letter of credit fees.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $4 million, or 2.5%, in 2014 compared to 2013. Credit card fees were higher due to growth in both rate and volume while increased merchant fees were driven by volume. Cards and payments income increased $27 million, or 20%, in 2013 compared to 2012 primarily due to the third quarter 2012 credit card portfolio acquisition.

Consumer mortgage income

Consumer mortgage income declined $9 million, or 47.4%, in 2014 compared to 2013, and $21 million, or 52.5%, in 2013 compared to 2012 primarily due to lower mortgage originations caused by increasing mortgage interest rates.

Mortgage servicing fees

Mortgage servicing fees decreased $12 million, or 20.7%, in 2014 compared to 2013 due to lower special servicing fees. Mortgage servicing fees increased $34 million, or 141.7%, in 2013 compared to 2012 due to higher levels of core servicing and special servicing fees as a result of the 2013 acquisition of a commercial mortgage servicing portfolio.

 

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Other income

Other income, which consists primarily of gain on sale of certain loans, other service charges, and certain dealer trading income, decreased $15 million, or 25.4%, in 2014 compared to 2013, and $46 million, or 43.8%, in 2013 compared to 2012 due to declines in various miscellaneous income categories.

Noninterest expense

As shown in Figure 10, noninterest expense for 2014 was $2.8 billion, a decrease of $61 million, or 2.2%, from 2013. We recognized $80 million of efficiency- and pension-related charges in 2014 compared to $117 million in 2013. We also recognized $22 million of noninterest expense related to Pacific Crest Securities, which we acquired in the third quarter of 2014. As shown in Figure 11, personnel expense declined $18 million, driven by lower net technology contract labor, severance, and employee benefits, partially offset by higher incentive compensation and stock-based compensation. Nonpersonnel expense decreased $43 million, primarily due to declines in net occupancy costs of $14 million, provision (credit) for losses on lending-related commitments of $10 million, and equipment expense of $8 million.

Noninterest expense for 2013 was $2.8 billion, up $2 million, or .1%, from 2012. In 2013, expenses attributable to the 2012 acquisitions of the credit card portfolios and Western New York branches increased $40 million, and we recognized $117 million of expenses related to our efficiency initiative and a pension settlement charge. As shown in Figure 11, personnel expense increased by $39 million in 2013, driven by higher levels of incentive compensation, employee benefits, and severance expense, partially offset by a decline in stock-based compensation. Nonpersonnel expense decreased $37 million, primarily due to declines in several expense categories: $39 million in business services and professional fees, $17 million in marketing, $11 million in other expense, and $10 million in operating lease expense. These declines in nonpersonnel expense were partially offset by increases of $24 million in provision (credit) for losses on lending-related commitments, $21 in intangible asset amortization, and $15 million in net occupancy costs.

Figure 10. Noninterest Expense

 

Year ended December 31,

dollars in millions

                          Change 2014 vs. 2013      
   2014     2013      2012     Amount     Percent  

Personnel

   $     1,591     $ 1,609      $ 1,570     $ (18     (1.1 ) % 

Net occupancy

     261       275        260       (14     (5.1

Computer processing

     158       156        164       2       1.3  

Business services and professional fees

     156       151        190       5       3.3  

Equipment

     96       104        107       (8     (7.7

Operating lease expense

     42       47        57       (5     (10.6

Marketing

     49       51        68       (2     (3.9

FDIC assessment

     30       30        31       —         —    

Intangible asset amortization

     39       44        23       (5     (11.4

Provision (credit) for losses on lending-related commitments

     (2     8        (16     (10     N/M   

OREO expense, net

     5       7        15       (2     (28.6

Other expense

     334       338        349       (4     (1.2

Total noninterest expense

   $ 2,759     $     2,820      $     2,818     $ (61     (2.2 ) % 
  

 

 

   

 

 

    

 

 

   

 

 

   

Average full-time equivalent employees (a)

     13,853       14,783        15,589       (930     (6.3 ) % 

 

(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.

Personnel

As shown in Figure 11, personnel expense, the largest category of our noninterest expense, decreased by $18 million, or 1.1%, in 2014 compared to 2013. Declines in net technology contract labor of $17 million, severance

 

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of $14 million, and employee benefits of $12 million all contributed to the decrease in personnel expense. These declines were partially offset by increases in incentive compensation of $19 million and stock-based compensation of $9 million related to the performance of our business and the third quarter 2014 acquisition of Pacific Crest Securities.

Personnel expense increased by $39 million, or 2.5%, from 2012 to 2013. Incentive compensation increased $28 million. Severance expense and employee benefits increased $15 million and $12 million, respectively, as a result of staff reductions related to our efficiency initiative. Employee benefits included a $27 million pension settlement charge. These increases in personnel expense were partially offset by a decrease of $14 million in stock-based compensation.

Figure 11. Personnel Expense

 

Year ended December 31,

dollars in millions

                            Change 2014 vs. 2013            
   2014      2013      2012      Amount     Percent         

Salaries

   $         894      $         897      $         902      $ (3     (.3     %   

Technology contract labor, net

     55        72        69        (17     (23.6  

Incentive compensation

     337        318        290                19       6.0    

Employee benefits

     237        249        237        (12     (4.8  

Stock-based compensation (a)

     44        35        49        9       25.7    

Severance

     24        38        23        (14     (36.8  

Total personnel expense

   $ 1,591      $ 1,609      $ 1,570      $ (18     (1.1     %   
  

 

 

    

 

 

    

 

 

    

 

 

     
    

 

 

    

 

 

    

 

 

    

 

 

           

 

(a) Excludes directors’ stock-based compensation of $2 million in 2014, $3 million in 2013, and $4 million in 2012, reported as “other expense” in Figure 10.

Operating lease expense

Operating lease expense decreased $5 million, or 10.6%, in 2014 compared to 2013, and $10 million, or 17.5%, in 2013 compared to 2012 primarily due to product run-off. Income related to the rental of leased equipment is presented in Figure 7 as “operating lease income and other leasing gains.”

Intangible asset amortization

Intangible asset amortization decreased $5 million, or 11.4%, in 2014 compared to 2013 due to the accelerated basis of amortization for the core deposit and PCCR intangibles. Intangible asset amortization increased $21 million, or 91.3%, in 2013 compared to 2012 due to the 2012 acquisitions of the credit card portfolio and Western New York branches. Additional information regarding our intangible assets can be found in Note 10 (“Goodwill and Other Intangible Assets”).

Other expense

Other expense comprises various miscellaneous expense items such as travel and entertainment, technology service providers, and franchise and business taxes. Other expense declined $4 million, or 1.2%, in 2014 compared to 2013, and $11 million, or 3.2%, in 2013 compared to 2012 due to fluctuations in several of those line items.

Income taxes

We recorded a tax provision from continuing operations of $326 million for 2014, compared to a tax provision of $271 million for 2013, and $231 million for 2012. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 25.6% for 2014, compared to 23.7% for 2013, and 21.4% for 2012.

 

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Our federal tax (benefit) expense differs from the amount that would be calculated using the federal statutory tax rate, primarily because we generate income from investments in tax-advantaged assets, such as corporate-owned life insurance, earn credits associated with investments in low-income housing projects, and make periodic adjustments to our tax reserves. In 2014, our effective tax rate was positively impacted by 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. In addition, in 2014, 2013 and 2012, our effective tax rate was lower due to the early termination of certain leveraged leases that resulted in nontaxable gains pursuant to a prior settlement with the IRS.

We recorded a valuation allowance of $.3 million at December 31, 2014, compared to $1 million at December 31, 2013, and $3 million at December  31, 2012, against the gross deferred tax assets for certain state net operating loss and state credit carryforwards.

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 23 (“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 certain lines of business, and explains “Other Segments” and “Reconciling Items.”

Figure 12 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 each of the past three years.

Figure 12. Major Business Segments - Taxable-Equivalent (“TE”) Revenue from Continuing Operations and Income (Loss) from Continuing Operations Attributable to Key

 

Year ended December 31,               Change 2014 vs. 2013      

dollars in millions

  2014     2013     2012     Amount      Percent     

REVENUE FROM CONTINUING OPERATIONS (TE)

             

Key Community Bank

   $     2,217     $     2,316     $     2,308     $ (99      (4.3 )%   

Key Corporate Bank

     1,630       1,536       1,499       94        6.1    

Other Segments

     271       263       353       8        3.0      

Total Segments

     4,118       4,115       4,160       3        .1  

Reconciling Items

     (4     (1     (16     (3      N/M       

Total

   $ 4,114     $ 4,114     $ 4,144       —          —      
  

 

 

   

 

 

   

 

 

   

 

 

      

INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY

             

Key Community Bank

   $ 234     $ 205     $ 162     $ 29        14.1  

Key Corporate Bank

     497       475       425       22        4.6    

Other Segments

     226       220       204       6        2.7      

Total Segments

     957       900       791       57        6.3    

Reconciling Items

     (18     (30     44       12        N/M       

Total

   $ 939     $ 870     $ 835     $ 69        7.9  
  

 

 

   

 

 

   

 

 

   

 

 

      
                                               

Key Community Bank summary of operations

As shown in Figure 13, Key Community Bank recorded net income attributable to Key of $234 million for 2014, compared to $205 million for 2013, and $162 million for 2012. The increase in 2014 was primarily due to a reduced provision for loan and lease losses and lower noninterest expense.

 

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Taxable-equivalent net interest income declined $84 million, or 5.5%, from 2013. Average loans and leases grew $794 million while average deposits increased $521 million compared to 2013. The positive contribution to net interest income from loan and deposit growth was more than offset by a reduction in the value of deposits in 2014 compared to one year ago.

Noninterest income decreased $15 million, or 1.9%, from 2013. Service charges on deposit accounts declined $19 million from 2013 primarily due to reduced overdraft fees resulting from changes in posting order. Consumer mortgage income decreased $9 million from 2013 due to lower refinancing activity, and operating leasing income and other leasing gains declined $4 million. These decreases in noninterest income were partially offset by an $8 million increase in cards and payments income and a $9 million increase in other miscellaneous income.

The provision for loan and lease losses declined $81 million, or 52.3%, from 2013. Net loan charge-offs decreased $31 million from 2013 as a result of continued progress in the economic environment and further improvement in the credit quality of the portfolio.

Noninterest expense declined $65 million, or 3.5%, from 2013. Personnel expense decreased $26 million, primarily due to declines in salaries, incentive compensation, and employee benefits. Nonpersonnel expense declined $39 million, primarily due to decreases in outside loan servicing fees, computer processing, intangible asset amortization, and other support costs.

In 2013, Key Community Bank’s net income attributable to Key increased $43 million from the prior year. Taxable-equivalent net interest income declined $5 million from 2012. The positive contribution to net interest income from loan and deposit growth was offset by a reduction in the value of deposits in 2013 driven by the prolonged low rate environment. Noninterest income increased $13 million from 2012. Trust and investment services income increased due to higher assets under management resulting from market appreciation and increased production. Cards and payments income increased due to the full-year impact of the credit card portfolio acquisition in 2012. These increases in noninterest income were partially offset by a decline in consumer mortgage income primarily due to lower originations. The provision for loan and lease losses increased $5 million. Noninterest expense declined $65 million from 2012 due to Key’s efficiency initiative. Personnel expense decreased primarily due to declines in salaries and employee benefits. Nonpersonnel expense declined primarily due to decreases in business services and professional fees, computer processing, and other support costs.

Figure 13. Key Community Bank

 

Year ended December 31,                             Change 2014 vs. 2013            
dollars in millions    2014      2013      2012      Amount     Percent        

SUMMARY OF OPERATIONS

               

Net interest income (TE)

   $ 1,448      $ 1,532      $ 1,537      $ (84     (5.5     %   

Noninterest income

     769        784        771        (15     (1.9  

Total revenue (TE)

     2,217        2,316        2,308        (99     (4.3  

Provision (credit) for loan and lease losses

     74        155        150        (81     (52.3  

Noninterest expense

     1,770        1,835        1,900        (65     (3.5  

Income (loss) before income taxes (TE)

     373        326        258        47       14.4    

Allocated income taxes (benefit) and TE adjustments

     139        121        96        18       14.9    

Net income (loss) attributable to Key

   $ 234      $ 205      $ 162      $ 29       14.1        %   
  

 

 

    

 

 

    

 

 

    

 

 

     

AVERAGE BALANCES

               

Loans and leases

   $ 30,105      $ 29,311      $ 27,202      $ 794       2.7        %   

Total assets

     32,231        31,634        29,622        597       1.9    

Deposits

     50,325        49,804        48,708        521       1.0    

Assets under management at year end

   $     39,157      $     36,815      $     34,537      $     2,342       6.4        %   

 

   

 

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ADDITIONAL KEY COMMUNITY BANK DATA

 

Year ended December 31,                          Change 2014 vs. 2013            
dollars in millions    2014     2013     2012     Amount     Percent          

NONINTEREST INCOME

            

Trust and investment services income

   $          291     $            291     $             280       —         —      

Services charges on deposit accounts

     218       237       239     $ (19     (8.0     %   

Cards and payments income

     152       144       118       8       5.6    

Other noninterest income

     108       112       134       (4     (3.6  

Total noninterest income

   $ 769     $ 784     $ 771     $ (15     (1.9     %   
  

 

 

   

 

 

   

 

 

   

 

 

     
                               

AVERAGE DEPOSITS OUTSTANDING

            

NOW and money market deposit accounts

   $ 27,526     $ 26,620     $ 24,404     $ 906       3.4        %   

Savings deposits

     2,436       2,495       2,208       (59     (2.4  

Certificates of deposits ($100,000 or more)

     2,048       2,331       3,064       (283     (12.1  

Other time deposits

     3,488       4,078       5,370       (590     (14.5  

Deposits in foreign office

     314       279       291                   35       12.5    

Noninterest-bearing deposits

     14,513       14,001       13,371       512       3.7    

Total deposits

   $ 50,325     $ 49,804     $ 48,708     $ 521       1.0        %   
  

 

 

   

 

 

   

 

 

   

 

 

     
                               

HOME EQUITY LOANS

            

Average balance

   $ 10,340     $ 10,086     $ 9,520        

Weighted-average loan-to-value ratio (at date of origination)

     71   %      71   %      70   %       

Percent first lien positions

     60       58       55        

OTHER DATA

            

Branches

     994       1,028       1,088        

Automated teller machines

     1,287       1,335       1,611        

Key Corporate Bank summary of operations

As shown in Figure 14, Key Corporate Bank recorded net income attributable to Key of $497 million for 2014, compared to $475 million for 2013 and $425 million for 2012. The 2014 increase was driven by an increase in net interest income and noninterest income, partially offset by an increase in noninterest expense.

Taxable-equivalent net interest income increased $45 million, or 5.7%, in 2014 compared to 2013. The growth was primarily driven by a $28 million increase in the earning asset spread, as the increase in earning asset balances more than offset the decrease in the spread rate year-over-year. In addition, there were increases in other components of net interest income.

Noninterest income increased $49 million, or 6.5%, from 2013. Investment banking and debt placement fees increased $63 million driven by the strength of Key’s business model. Corporate services income increased $11 million due to growth in non-yield loan fees associated with increases in loans. Trust and investment services income increased $8 million due to the recently-acquired Pacific Crest Securities. These increases were partially offset by a $17 million decrease in other noninterest income mostly due to lower gains realized on the disposition of certain investments held by the Real Estate Capital line of business, and a $12 million decline in mortgage servicing fees due to lower special servicing fees.

The provision for loan and lease losses was a credit of $2 million in 2014, compared to a credit of $3 million in 2013. The 2014 credit was driven by continued improvement in credit quality within the portfolio, as the quality of new business volume exceeded that of the legacy portfolio. Net loan charge-offs decreased from $3 million in 2013 to a $19 million recovery in 2014.

Noninterest expense increased $49 million, or 6.1%, from 2013. This increase was primarily driven by a $38 million increase in personnel expense due to higher incentive compensation expense related to the performance

 

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of the Key Corporate Bank and the impact of the recently-acquired Pacific Crest Securities. In addition, there were increases in various other expense categories.

In 2013, Key Corporate Bank’s net income attributable to Key increased $50 million from the prior year. Taxable-equivalent net interest income increased $4 million in 2013 compared to 2012, as increases in earning asset spread from higher earning asset balances offset a decrease in deposit spread from a decline in rates. Noninterest income increased $33 million as increases in mortgage servicing fees, gains realized on the disposition of certain investments held by the Real Estate Capital line of business, and investment banking and debt placement fees more than offset decreases in operating lease income and other leasing gains. The provision for loan and lease losses decreased $33 million due to improved credit quality with the portfolio. Noninterest expense increased $6 million driven by higher provision (credit) for losses on lending-related commitments and personnel expense. These expense increases were partially offset by decreases in operating lease expense and net OREO expense.

Figure 14. Key Corporate Bank

 

Year ended December 31,                           Change 2014 vs. 2013             
dollars in millions    2014     2013     2012      Amount     Percent         

SUMMARY OF OPERATIONS

              

Net interest income (TE)

   $ 830     $ 785     $ 781      $ 45       5.7         %   

Noninterest income

     800       751       718        49       6.5     

Total revenue (TE)

     1,630       1,536       1,499        94       6.1     

Provision (credit) for loan and lease losses

     (2     (3     30        1       N/M      

Noninterest expense

     848       799       793        49       6.1     

Income (loss) before income taxes (TE)

     784       740       676        44       5.9     

Allocated income taxes and TE adjustments

     285       265       248        20       7.5     

Net income (loss)

     499       475       428        24       5.1     

Less: Net income (loss) attributable to noncontrolling interests

     2       —         3        2       N/M      

Net income (loss) attributable to Key

   $ 497     $ 475     $ 425      $ 22       4.6         %   
  

 

 

   

 

 

   

 

 

    

 

 

      

AVERAGE BALANCES

              

Loans and leases

   $     22,452     $     19,822     $     18,328      $       2,630       13.3         %   

Loans held for sale

     549       492       500        57       11.6     

Total assets

     26,312       23,628       22,252        2,684       11.4     

Deposits

     16,793       15,696       12,572        1,097       7.0         %   

Assets under management at year end

     —       $ 90     $ 207      $ (90     N/M      
                                              

ADDITIONAL KEY CORPORATE BANK DATA

 

Year ended December 31,                            Change 2014 vs. 2013            
dollars in millions    2014     2013      2012      Amount     Percent        

NONINTEREST INCOME

              

Trust and investment services income

   $         112     $         104      $ 99      $         8       7.7        %   

Investment banking and debt placement fees

     392       329        320        63       19.1    

Operating lease income and other leasing gains

     63       62        74        1       1.6    

Corporate services income

     131       120        117        11       9.2    

Service charges on deposit accounts

     43       44        48        (1     (2.3  

Cards and payments income

     14       18        20        (4     (22.2  

Payments and services income

     188       182        185        6       3.3    

Mortgage servicing fees

     46       58        25        (12     (20.7  

Other noninterest income

     (1     16        15        (17     N/M     

Total noninterest income

   $ 800     $ 751      $       718      $ 49       6.5        %   
  

 

 

   

 

 

    

 

 

    

 

 

     
                                              

 

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Other Segments

Other Segments consist of Corporate Treasury, Community Development, our Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $226 million for 2014, compared to $220 million for 2013 and $204 million for 2012. Taxable-equivalent net interest income and noninterest income both increased $4 million compared to 2013. Noninterest expense declined $17 million from the prior year. These improvements were partially offset by an increase in the provision for loan and lease losses of $10 million.

In 2013, Other Segments’ net income attributable to Key increased $16 million from the prior year. Taxable-equivalent net interest income increased $68 million. The provision for loan and lease losses declined $74 million and noninterest expense decreased $34 million. These improvements were partially offset by a decrease in noninterest income of $158 million.

 

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Financial Condition

Loans and loans held for sale

Figure 15 shows the composition of our loan portfolio at December 31 for each of the past five years.

Figure 15. Composition of Loans

 

  2014   2013   2012      

  December 31,

  dollars in millions

Amount      Percent  
of Total  
       Amount      Percent  
of Total  
       Amount   Percent  
of Total  
     

  COMMERCIAL

  Commercial, financial and agricultural (a), (b)

$ 27,982     48.8      %    $       24,963     45.8      %    $ 23,242     44.0        %   

  Commercial real estate: (c)

  Commercial mortgage

  8,047     14.0     7,720     14.2     7,720     14.6    

  Construction

  1,100       1.9           1,093       2.0           1,003     1.9    

  Total commercial real estate loans

  9,147     15.9     8,813     16.2     8,723     16.5    

  Commercial lease financing (d)

  4,252       7.4           4,551       8.4           4,915     9.3    

  Total commercial loans

  41,381     72.1     38,327     70.4     36,880     69.8    

  CONSUMER

  Real estate — residential mortgage

  2,225     3.9     2,187     4.0     2,174     4.1    

  Home equity:

  Key Community Bank

  10,366     18.1     10,340     19.0     9,816     18.6    

  Other

  267       .5           334       .6           423     .8    

  Total home equity loans

  10,633     18.6     10,674     19.6     10,239     19.4    

  Consumer other — Key Community Bank

  1,560     2.7     1,449     2.7     1,349     2.5    

  Credit cards

  754     1.3     722     1.3     729     1.4    

  Consumer other:

  Marine

  779     1.3     1,028     1.9     1,358     2.6    

  Other

  49       .1           70       .1           93     .2    

  Total consumer other

  828       1.4           1,098       2.0           1,451     2.8    

  Total consumer loans

  16,000       27.9           16,130       29.6           15,942     30.2    

  Total loans (e), (f)

$       57,381     100.0      %      $ 54,457     100.0      %      $     52,822     100.0        %   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

   
                                                     
  2011   2010                  
   Amount      Percent  
of Total  
       Amount      Percent  
of Total  
                 

  COMMERCIAL

  Commercial, financial and agricultural

$ 19,759     39.9      %    $ 16,441     32.8        %   

  Commercial real estate:

  Commercial mortgage

  8,037     16.2     9,502     19.0    

  Construction

  1,312       2.6           2,106       4.2    

  Total commercial real estate loans

  9,349     18.8     11,608     23.2    

  Commercial lease financing

  5,674       11.4           6,471       12.9    

  Total commercial loans

  34,782     70.1     34,520     68.9    

  CONSUMER

  Real estate — residential mortgage

  1,946     3.9     1,844     3.7    

  Home equity:

  Key Community Bank

  9,229     18.6     9,514     19.0    

  Other

  535       1.1           666       1.3    

  Total home equity loans

  9,764     19.7     10,180     20.3    

  Consumer other — Key Community Bank

  1,192     2.4     1,167     2.3    

  Credit cards

  —       —       —       —      

  Consumer other:

  Marine

  1,766     3.6     2,234     4.5    

  Other

  125       .3           162       .3    

  Total consumer other

  1,891       3.9           2,396       4.8    

  Total consumer loans

  14,793       29.9           15,587       31.1    

  Total loans (e)

$ 49,575     100.0      %    $ 50,107     100.0        %   
  

 

 

      

 

 

      

 

 

      

 

 

           
                                   

 

  (a) Loan balances include $88 million, $94 million, and $90 million of commercial credit card balances at December 31, 2014, December 31, 2013, and December 31, 2012, respectively.

 

  (b) See Figure 16 for a more detailed breakdown of our commercial, financial and agricultural loan portfolio at December 31, 2014, and December 31, 2013.

 

  (c) See Figure 17 for a more detailed breakdown of our commercial real estate loan portfolio at December 31, 2014.

 

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  (d) Commercial lease financing includes receivables of $302 million and $58 million held as collateral for a secured borrowing at December 31, 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 first quarter of 2015. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”).

 

  (e) Total loans exclude loans of $2.3 billion at December 31, 2014, $4.5 billion at December 31, 2013, $5.2 billion at December 31, 2012, $5.8 billion at December 31, 2011, and $6.5 billion at December 31, 2010, related to the discontinued operations of the education lending business.

 

  (f) At December 31, 2014, total loans include purchased loans of $138 million, of which $13 million were PCI loans. At December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. At December 31, 2012, total loans include purchased loans of $217 million, of which $23 million were PCI loans.

At December 31, 2014, total loans outstanding from continuing operations were $57.4 billion, compared to $54.5 billion at the end of 2013, and $52.8 billion at the end of 2012. Loans related to the discontinued operations of the education lending business and excluded from total loans were $2.3 billion at December 31, 2014, $4.5 billion at December 31, 2013, and $5.2 billion at December 31, 2012. Further information regarding our discontinued operations is provided in Note 13 (“Acquisitions and Discontinued Operations”). 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.”

Commercial loan portfolio

Commercial loans outstanding were $41.4 billion at December 31, 2014, an increase of $3.1 billion, or 8%, compared to December 31, 2013.

Commercial, financial and agricultural.     As shown in Figure 15, our commercial, financial and agricultural loans, also referred to as “commercial and industrial,” represent 49% and 46% of our total loan portfolio at December 31, 2014, and 2013, respectively, and are the largest component of our total loans. The loans consist of fixed and variable rate loans to our large, middle market and small business clients. These loans increased $3 billion, or 12.1%, from one year ago.

Figure 16 provides our commercial, financial, and agricultural loans by industry classification as of December 31, 2014, and 2013.

Figure 16. Commercial, Financial and Agricultural Loans

 

     December 31, 2014            December 31, 2013        
dollars in millions    Amount      Percent
of Total
             Amount      Percent
of Total
       

Industry classification:

               

Services

     $ 6,053        21.6        %         $ 6,036        24.2        %   

Manufacturing

     4,621        16.5          4,238        17.0    

Public utilities

     1,938        6.9          1,838        7.4    

Financial services

     2,844        10.2          2,155        8.6    

Wholesale trade

     2,294        8.2          1,838        7.4    

Retail trade

     1,089        3.9          993        4.0    

Mining

     946        3.4          634        2.5    

Dealer floor plan

     1,439        5.2          1,345        5.4    

Property management

     834        3.0          877        3.5    

Transportation

     1,407        5.0          953        3.8    

Building contractors

     683        2.4          526        2.1    

Agriculture/forestry/fishing

     675        2.4          542        2.2    

Insurance

     257        .9          169        .7    

Public administration

     501        1.8          432        1.7    

Communications

     196        .7          204        .8    

Other

     2,205        7.9                2,183        8.7    

Total

     $     27,982              100.0        %         $     24,963              100.0        %   
  

 

 

    

 

 

      

 

 

    

 

 

   
                                               

Commercial, financial and agricultural loans increased $3 billion, or 12.1%, from the same period last year, with Key Corporate Bank increasing $2.7 billion and Key Community Bank up $553 million. We have experienced

 

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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 .3% and 9%, respectively, when compared to one year ago. The services and manufacturing industries represented 22% and 17%, respectively, of the total commercial, financial and agricultural loan portfolio at December 31, 2014, and 24% and 17%, respectively, at December 31, 2013. At the end of each period provided in Figure 16 above, loans in the services and manufacturing industry classifications accounted for approximately 40% of our total commercial, financial and agricultural loan portfolio.

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 $17 million, or .3%, compared to last year. Loans in the manufacturing classification grew by $383 million, or 9% 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.

Our loans in the financial services and transportation classifications increased 32% and 48%, respectively, compared to the prior year. The increase in financial services loans was primarily attributable to higher issuances of revolving facilities to finance companies and additional REIT balances. The increase in transportation loans was primarily attributable to loan growth for rail cars and shipping containers.

Our oil and gas loan portfolio focuses on lending to middle market companies and represents 2% of total loans outstanding at December 31, 2014. We have over 10 years of experience in energy lending with over 20 specialists dedicated to oil and gas. Credit quality on these loans remains solid.

Commercial real estate loans.     CRE loans represent 16% of our total loan portfolio at December 31, 2014, and December 31, 2013. These CRE loans, including both owner- and nonowner-occupied properties, represented 22% of our commercial loan portfolio at December 31, 2014, compared to 23% one year ago. These loans have increased $334 million, or 3.8%, to $9.1 billion at December 31, 2014, from $8.8 billion at December 31, 2013. Our 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 61% of our average year-to-date CRE loans, compared to 56% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of CRE.

Figure 17 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 17, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.

As presented in Figure 17, at December 31, 2014, our CRE portfolio included mortgage loans of $8 billion and construction loans of $1.1 billion, representing 14% and 2%, respectively, of our total loans. Nonowner-occupied loans represented 11% of our total loans and owner-occupied loans represented 5% of our total loans. The average size of mortgage loans originated during 2014 was $4.9 million, and our largest mortgage loan at December 31, 2014, had a balance of $105 million. At December 31, 2014, our average construction loan commitment was $5.9 million. Our largest construction loan commitment was $49.8 million, and our largest construction loan amount outstanding was $42.2 million.

Also shown in Figure 17, at December 31, 2014, 70% of our CRE loans were for nonowner-occupied properties, compared to 67% at December 31, 2013. Approximately 15% and 16% of these loans were construction loans at December 31, 2014, and 2013, respectively. Typically, these properties are not fully leased at the origination of the loan. The borrower relies upon additional leasing through the life of the construction loan to provide the cash flow necessary to support debt service payments. A significant decline in economic growth, and in turn, in rental rates and occupancy, would adversely affect our portfolio of construction loans.

 

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Figure 17. Commercial Real Estate Loans

 

December 31, 2014

dollars in millions

  Geographic Region          

Percent of

Total

                   

Commercial

Mortgage

 
  West     Southwest     Central     Midwest     Southeast     Northeast     National     Total           Construction        

Nonowner-occupied:

                                                                                                   

Retail properties

    $ 167       $     133       $ 95       $ 119       $ 183       $ 59       $ 129       $ 885       9.7        %          $ 107       $ 778  

Multifamily properties

    489       143       425       531       762       126       181       2,657       29.0           551       2,106  

Health facilities

    198       —         192       149       115       259       171       1,084       11.9           99       985  

Office buildings

    230       14       145       97       48       98       —         632       6.9           86       546  

Warehouses

    170       10       27       105       81       84       102       579       6.3           29       550  

Manufacturing facilities

    19       —         11       6       56       1       —         93       1.0           16       77  

Hotels/Motels

    37       —         7       17       17       6       —         84       .9           —         84  

Residential properties

    1       —         24       2       4       13       —         44       .5           12       32  

Land and development

    8       —         8       6       12       11       —         45       .5           35       10  

Other

    61       —         15       14       67       78       102       337       3.7                   14       323  

Total nonowner-occupied

    1,380       300       949       1,046       1,345       735       685       6,440       70.4           949       5,491  

Owner-occupied

    1,138       7       312       622       48       580       —         2,707       29.6                   151       2,556  

Total

    $     2,518       $     307       $     1,261       $     1,668       $     1,393       $     1,315       $     685         $     9,147       100.0        %          $     1,100       $     8,047  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

               

 

 

   

 

 

 

Nonowner-occupied:

  

                       

Nonperforming loans

    $ 1       —         —         $ 8       —         $ 12       —         $ 21       N/M            $ 10       $ 11  

Accruing loans past due 90 days or more

    —         —         —         —         —         3       —         3       N/M            —         3  

Accruing loans past due 30 through 89 days

    1       —       $ 4       2       —         2       —         9       N/M                    —         9  

 

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 2014, nonperforming loans related to our nonowner-occupied properties decreased by $2 million from $23 million at December 31, 2013, to $21 million at December 31, 2014, as a result of continued improvement in asset quality and market conditions. This category of loans declined by $104 million during 2013.

Since December 31, 2013, our nonowner-occupied CRE portfolio has increased by approximately $567 million, or 9.7%, as many of our clients have taken advantage of opportunities to permanently refinance their loans at historically low interest rates.

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 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 December 31, 2014, and 12% at December 31, 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

 

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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.

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 2014, there were $22 million of new restructured commercial loans compared to $69 million of new restructured commercial loans in 2013.

For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 5 (“Asset Quality”).

Figure 18. Commercial TDRs by Note Type and Accrual Status

 

December 31,              
in millions    2014      2013  

Commercial TDRs by Note Type

                 

Tranche A

     $             40         $             107   

    Total Commercial TDRs

     $ 40         $ 107   
  

 

 

    

 

 

 

 

 

Commercial TDRs by Accrual Status

                 

Nonaccruing

     $ 36         $ 52   

Accruing

            55   

    Total Commercial TDRs

     $ 40         $ 107   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

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

 

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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 5 (“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 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.

 

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As of December 31, 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 $130 million, or .8%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 97% of this portfolio at December 31, 2014, originated from 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 $26 million, or .3%, over the past 12 months as a result of stabilized home values, improved employment, and favorable borrowing conditions.

As shown in Figure 13, we hold the first lien position for approximately 60% of the Key Community Bank home equity portfolio at December 31, 2014, and 58% at December 31, 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 ratio. This information is used in establishing the ALLL. Our methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.”

Regulatory guidance issued in January 2012 addressed specific risks and required actions within home equity portfolios associated with second lien loans. This regulatory guidance related to the classification of second lien home equity loans was implemented prospectively, and therefore prior periods were not adjusted. At December 31, 2014, 40% of our home equity portfolio is secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.

Figure 19 summarizes our home equity loan portfolio by source at the end of each of the last five years, as well as certain asset quality statistics and yields on the portfolio as a whole.

Figure 19. Home Equity Loans

 

December 31,  
dollars in millions    2014     2013            2012            2011     2010  

SOURCES OF YEAR END LOANS

                

Key Community Bank

   $         10,366         $         10,340            $         9,816            $         9,229         $         9,514    

Other

     267         334              423              535         666    

Total

   $ 10,633         $ 10,674            $ 10,239          $ 9,764         $ 10,180    
  

 

 

   

 

 

      

 

 

   

 

  

 

 

   

 

 

 

 

 

Nonperforming loans at year end

   $ 195         $ 220            $ 231   (a), (b)          $ 120         $ 120    

Net loan charge-offs for the year

     32         66            118            130         175    

Yield for the year

     4.02   %     4.07   %          4.21   %          4.34   %     4.45   %

 

(a) Includes $48 million of performing home equity second liens that are subordinate to first liens and 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January 2012.

 

(b) Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in regulatory guidance that was updated in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs.

 

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Loans held for sale

As shown in Note 4 (“Loans and Loans Held for Sale”), our loans held for sale were $734 million at December 31, 2014, compared to $611 million at December 31, 2013. During 2014, we recorded net gains (losses) from loan sales of $97 million. There were no loans held for sale related to the discontinued operations of the education lending business at December 31, 2014, and 2013.

At December 31, 2014, loans held for sale included $638 million of commercial mortgages, which increased by $331 million from December 31, 2013, $63 million of commercial, financial and agricultural loans, which decreased by $215 million from December 31, 2013, $18 million of residential mortgage loans, which increased by $1 million from December 31, 2013, and $15 million of commercial lease financing, which increased $6 million from December 31, 2013. Valuations are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. We review our assumptions quarterly. For additional information related to the valuation of loans held for sale, see Note 6 (“Fair Value Measurements”).

Loan sales

As shown in Figure 20, during 2014, we sold $4.4 billion of CRE loans, $407 million of residential real estate loans, and $376 million of commercial loans. Most of these sales came from the held-for-sale portfolio.

Among the factors that we consider in determining which loans to sell are:

 

¿ our business strategy for particular lending areas;

 

¿ whether particular lending businesses meet established performance standards or fit with our relationship banking strategy;

 

¿ our A/LM needs;

 

¿ the cost of alternative funding sources;

 

¿ the level of credit risk;

 

¿ capital requirements; and

 

¿ market conditions and pricing.

Figure 20 summarizes our loan sales for 2014 and 2013.

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

 

in millions    Commercial      Commercial
Real Estate
     Commercial
Lease
Financing
     Residential
Real Estate
     Total  

2014

              

Fourth quarter

        $ 29            $ 2,333            $         80            $         103            $         2,545   

Third quarter

     179         913         48         127         1,267   

Second quarter

     152         679         45         104         980   

First quarter

     16         489         39         73         617   

    Total

        $         376            $         4,414            $ 212            $ 407            $ 5,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

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(a) Excludes education loans of $147 million sold during 2013 that relate to the discontinued operations of the education lending business.

Figure 21 shows loans that are either administered or serviced by us but not recorded on the balance sheet. The table includes loans that have been sold.

Figure 21. Loans Administered or Serviced

 

December 31,

in millions

   2014       2013       2012       2011       2010   

Commercial real estate loans

   $ 191,407       $ 177,731       $ 107,630       $ 99,608       $ 117,071   

Education loans (a)

     1,589         —           —           —           —     

Commercial lease financing

     722         717         520         521         706   

Commercial loans

     344         327         343         306         269   

    Total

    $         194,062        $         178,775        $         108,493        $         100,435        $         118,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(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 13 (“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 $194 billion of loans administered or serviced at December 31, 2014. Additional information about this recourse arrangement is included in Note 20 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with FNMA.”

We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as “other income”) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing of CRE loans. Additional information about our mortgage servicing assets is included in Note 9 (“Mortgage Servicing Assets”).

Maturities and sensitivity of certain loans to changes in interest rates

Figure 22 shows the remaining maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. At December  31, 2014, approximately 27.2% of these outstanding loans were scheduled to mature within one year.

Figure 22. Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates

 

December 31, 2014

in millions

   Within One Year         One - Five Years         Over Five Years         Total     

Commercial, financial and agricultural

     $ 8,145         $ 15,807         $ 4,030         $ 27,982   

Real estate — construction

     321         688         91         1,100   

Real estate — residential and commercial mortgage

     2,247         4,332         3,693         10,272   
     $             10,713         $             20,827         $             7,814         $             39,354   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with floating or adjustable interest rates (a)

        $ 17,855         $ 3,899         $ 21,754   

Loans with predetermined interest rates (b)

        2,972         3,915         6,887   
  

 

 

 
      

 

 

 
        $ 20,827         $ 7,814         $ 28,641   
     

 

 

    

 

 

    

 

 

 

 

 

 

(a) Floating and adjustable rates vary in relation to other interest rates (such as the base lending rate) or a variable index that may change during the term of the loan.

 

(b) Predetermined interest rates either are fixed or may change during the term of the loan according to a specific formula or schedule.

 

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Securities

Our securities portfolio totaled $18.4 billion at December 31, 2014, compared to $17.1 billion at December 31, 2013. Available-for-sale securities were $13.4 billion at December 31, 2014, compared to $12.3 billion at December 31, 2013. Held-to-maturity securities were $5 billion at December 31, 2014, compared to $4.8 billion at December 31, 2013.

As shown in Figure 23, 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 6 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques,” and Note 7 (“Securities”).

Figure 23. Mortgage-Backed Securities by Issuer

 

 December 31,

 in millions

   2014        2013        2012    

 FHLMC

     $         5,666        $ 7,047        $ 7,923    

 FNMA

     4,998          5,978          5,246    

 GNMA

     7,636          3,997          2,746    

 Total (a)

     $ 18,300        $         17,022        $         15,915    
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) Includes securities held in the available-for-sale and held-to-maturity portfolios.

Securities available for sale

The majority of our securities available-for-sale portfolio consists of Federal Agency CMOs and mortgage-backed securities. CMOs are debt securities secured by a pool of mortgages or mortgage-backed securities. These mortgage securities generate interest income, serve as collateral to support certain pledging agreements, and provide liquidity value under upcoming regulatory requirements. At December 31, 2014, we had $13.3 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $12.3 billion at December 31, 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 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 future regulatory requirements.

 

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Figure 24 shows the composition, yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 7 (“Securities”).

Figure 24. 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)

December 31, 2014

Remaining maturity:

One year or less

$ 1   $ 278     —       —     $ 279     3.18

After one through five years

  15     10,956   $ 2,028   $ 32     13,031     2.21  

After five through ten years

  7     36     4     —       47     2.54  

After ten years

  —         —         3       —             3       5.51  

Fair value

$ 23   $ 11,270   $ 2,035   $ 32   $ 13,360     —    

Amortized cost

  22     11,310     2,004     29     13,365     2.24

Weighted-average yield (c)

  4.61    %   2.22    %   2.28    %   9.50      %      2.24    %  (d)   —    

Weighted-average maturity

  4.4 years        3.6 years        3.6 years        3.7 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

December 31, 2012

Fair value

$ 49   $ 11,464   $ 538   $ 43   $ 12,094     —    

Amortized cost

  47       11,148       491       42           11,728       2.91

 

(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 December 31, 2014, that have no stated yield.

Held-to-maturity securities

Federal Agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance comprises foreign bonds and capital securities. Figure 25 shows the composition, yields and remaining maturities of these securities.

Figure 25. Held-to-Maturity Securities

 

dollars in millions Collateralized
Mortgage
Obligations
  Other
Mortgage-
backed
Securities
       Other
Securities
       Total        Weighted-
Average
Yield
  (a)  

December 31, 2014

Remaining maturity:

One year or less

  —       —     $ 9   $ 9     2.42      %   

After one through five years

$ 4,672     —       11     4,683     1.91  

After five through ten years

  83   $ 240           —             323           2.58  

Amortized cost

$ 4,755   $ 240   $ 20   $ 5,015     1.95      %   

Fair value

                4,713     241     20     4,974     —    

Weighted-average yield

  1.91     2.73      %      2.47      %     (b)       1.95      %     (b)       —    

Weighted-average maturity

  3.4 years        7.7 years              1.5 years                    3.6 years            —    

December 31, 2013

Amortized cost

$ 4,736     —     $ 20   $ 4,756     1.83      %   

Fair value

  4,597     —             20           4,617           —    

December 31, 2012

Amortized cost

$ 3,913   $ —     $ 18   $ 3,931     1.92      %   

Fair value

  3,974     —             18           3,992           —    

 

(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 December 31, 2014, that have no stated yield.

 

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Other investments

Principal investments — investments in equity and debt instruments made by our Principal Investing unit — represented 53% of other investments at December 31, 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 $104 million at December 31, 2014, and $141 million at December 31, 2013, while the fair value of the indirect investments was $302 million at December 31, 2014, and $413 million at December 31, 2013. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. On December 18, 2014, the Federal Reserve extended the conformance period to July 21, 2016, for all banking entities with respect to covered funds. The Federal Reserve also indicated its intent to exercise the authority granted by Section 13 of the Bank Holding Company Act to grant the final one-year extension until July 21, 2017. If this authority is not exercised by the Federal Reserve, Key is permitted to file for a one-year extension, 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 extension, if not granted automatically, and hold the investments. As of December 31, 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 this report.

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 $10 million at December 31, 2014 and $23 million at December 31, 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. As of December 31, 2014, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $78 million, which includes $13 million of net unrealized losses. These net gains are recorded as “net gains (losses) from principal investing” on the income statement. Additional information regarding these investments is provided in Note 6 (“Fair Value Measurements”).

Deposits and other sources of funds

Domestic deposits are our primary source of funding. During 2014, average domestic deposits were $67.3 billion and represented 86% of the funds we used to support loans and other earning assets, compared to $65.3 billion and 87% during 2013. The composition of our average deposits is shown in Figure 5 in the section entitled “Net interest income.”

The increase in average domestic deposits from 2013 to 2014 was due to increases in demand deposits of $1.4 billion and NOW and money market deposit accounts of $1.4 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 $2.4 billion during 2014, compared to $2.8 billion during 2013. The change from 2013 was caused by a $620 million decrease in federal funds purchased and securities sold under agreements to repurchase partially offset by a $48 million increase in foreign office deposits and a $203 million increase in bank notes and other short-term borrowings.

 

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At December 31, 2014, Key had $2.6 billion in time deposits of $100,000 or more. Figure 26 shows the maturity distribution of these deposits.

Figure 26. Maturity Distribution of Time Deposits of $100,000 or More

 

December 31, 2014

in millions

   Domestic
Offices
     Foreign
Offices
     Total  

Remaining maturity:

        

Three months or less

   $ 400        $ 564        $ 964    

After three through six months

     197          —            197    

After six through twelve months

     447          —            447    

After twelve months

     996          —            996    

Total

   $         2,040        $         564        $         2,604    
  

 

 

    

 

 

    

 

 

 
   

Capital

At December 31, 2014, our shareholders’ equity was $10.5 billion, up $227 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.

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 began in the second quarter of 2014 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.

Through the fourth quarter of 2014, we repurchased $355 million of common shares under our 2014 capital plan authorization. During the first quarter of 2014, we completed $141 million of common shares under our 2013 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 Item 1 of this report under the heading “Regulatory capital and liquidity.”

Consistent with the 2014 capital plan, we made a dividend payment of $.065 per share on our common shares during each of the second, third, and fourth quarters of 2014, totaling $169 million, and a dividend payment of $.055 per share, or $49 million, during the first quarter of 2014.

We also made four quarterly dividend payments of $1.9375 per share totaling $22 million on our Series A Preferred Stock during 2014.

 

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Common shares outstanding

Our common shares are traded on the New York Stock Exchange under the symbol KEY with 28,673 holders of record at December 31, 2014. Our book value per common share was $11.91 based on 859.4 million shares outstanding at December 31, 2014, compared to $11.25 based on 890.7 million shares outstanding at December 31, 2013. At December 31, 2014, our tangible book value per common share was $10.65, compared to $10.11 at December 31, 2013.

Figure 45 in the section entitled “Fourth Quarter Results” shows the market price ranges of our common shares, per common share earnings, and dividends paid by quarter for each of the last two years.

Figure 27 compares the price performance of our common shares (based on an initial investment of $100 on December 31, 2009, and assuming reinvestment of dividends) with that of the Standard & Poor’s 500 Index and a group of other banks that constitute our peer group. The peer group consists of the banks that make up the Standard & Poor’s 500 Regional Bank Index and the banks that make up the Standard & Poor’s 500 Diversified Bank Index. We are included in the Standard & Poor’s 500 Index and the peer group.

Figure 27. Common Share Price Performance (2010 – 2014) (a)

 

LOGO

 

  (a) Share price performance is not necessarily indicative of future price performance.

Figure 28 shows activities that caused the change in our outstanding common shares over the past two years.

Figure 28. Changes in Common Shares Outstanding

 

            2014 Quarters         
in thousands    2014        Fourth        Third        Second        First        2013    

Shares outstanding at beginning of period

     890,724          868,477          876,823          884,869          890,724          925,769    

Common shares repurchased

     (36,285)          (9,786)          (8,830)          (7,824)          (9,845)          (41,599)    

Shares reissued (returned) under employee benefit plans

     4,964          712          484          (222)          3,990          6,554    

Shares outstanding at end of period

     859,403          859,403          868,477          876,823          884,869          890,724    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   

At December 31, 2014, we had 157.6 million treasury shares, compared to 126.2 million treasury shares at December 31, 2013. During 2014, common shares outstanding decreased by 31 million shares from share repurchases under our 2013 and 2014 capital plans and the net activity in our employee benefit plans. 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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As discussed in further detail in the “Supervision and Regulation” section in Item 1 of this report under the heading “Capital planning and stress testing,” we are required to annually submit a capital plan to the Federal Reserve setting forth planned capital actions, including any share repurchases our Board of Directors and management intend to make during the year (subject to the Federal Reserve’s notice of non-objection). Pursuant to that requirement, we have submitted to the Federal Reserve for review our 2015 capital plan.

Capital adequacy

Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remained in excess of regulatory requirements at December 31, 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 1 of this report. Our shareholders’ equity to assets ratio was 11.22% at December 31, 2014, compared to 11.09% at December 31, 2013. Our tangible common equity to tangible assets ratio was 9.88% at December 31, 2014, compared to 9.80% at December 31, 2013.

Federal banking regulators have promulgated minimum risk-based capital and leverage ratio requirements for BHCs like KeyCorp and their banking subsidiaries like KeyBank. Prior to January 1, 2015, Key and KeyBank (consolidated) were each required to maintain a minimum Tier 1 risk-based capital ratio of 4.00% and a total risk-based capital ratio of 8.00%, while Key was required to maintain a minimum Tier 1 leverage ratio of 3.00% and KeyBank (consolidated) was required to maintain a minimum Tier 1 leverage ratio of 4.00%. At December 31, 2014, our Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio were 11.90%, 13.89%, and 11.26%, respectively, compared to 11.96%, 14.33%, and 11.11%, respectively, at December 31, 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, which began January 1, 2015, for standardized approach banking organizations such as KeyCorp, will result in our trust preferred securities issued by the KeyCorp capital trusts being treated only as Tier 2 capital by 2016. The trust preferred securities issued by the KeyCorp capital trusts contribute $339 million, or 40, 38, and 39 basis points, to our Tier 1 risk-based capital ratio of 11.90%, Tier 1 leverage ratio of 11.26%, and total risk-based capital ratio of 13.89%, respectively, at December 31, 2014. The new minimum capital and leverage ratios under the Regulatory Capital Rules together with the estimated ratios of Key at December 31, 2014, calculated on a fully phased-in basis, are set forth under the heading “New minimum capital and leverage ratio requirements” in the “Supervision and Regulation” section in Item 1 of this report.

As previously indicated in the “Supervision and Regulation” section of Item 1 of this report under the heading “Revised prompt corrective action capital category ratios,” the prompt corrective action capital category regulations do not apply to BHCs. If, however, these regulations did apply to BHCs, we believe KeyCorp would qualify for the “well capitalized” capital category at December 31, 2014. Moreover, after accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and therefore as Tier 2 instead) as of December 31, 2014, we estimate KeyCorp would still qualify for the “well capitalized” capital category under the regulatory capital regulations in effect before January 1, 2015, with an estimated Tier 1 risk-based capital ratio, estimated Tier 1 leverage ratio, and estimated total risk-based capital ratio of 11.50%, 10.88%, and 13.89%, respectively. The new threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the Regulatory Capital Rules are described in the “Supervision and Regulation” section of Item 1 of this report under the heading “Revised prompt corrective action capital category ratios.” Since the regulatory capital categories under these regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyCorp. A discussion of the regulatory capital standards and other related capital adequacy regulatory standards is included in the section “Regulatory capital and liquidity” in “Supervision and Regulation” under Item 1 of this report.

 

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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. The Federal Reserve’s assessment of capital adequacy focuses 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, and BHCs. Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount prior to January 1, 2015, by federal banking regulations; this measure is considered to be a non-GAAP financial measure. Figure 4 in the “Highlights of Our 2014 Performance” section reconciles Key shareholders’ equity, the GAAP performance measure, to Tier 1 common equity, the corresponding non-GAAP measure. Our Tier 1 common equity ratio was 11.17% at December 31, 2014, compared to 11.22% at December 31, 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 December 31, 2014, and December 31, 2013, we had no net deferred tax assets deducted from Tier 1 capital and risk-weighted assets. At December 31, 2014, for Key’s consolidated operations, we had a federal net deferred tax asset of $195 million and a state deferred tax asset of $22 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. We have recorded a valuation allowance of less than $1 million against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards at December 31, 2014, compared to $1 million at December 31, 2013.

 

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Figure 29 represents the details of our regulatory capital position at December 31, 2014, and December 31, 2013.

Figure 29. Capital Components and Risk-Weighted Assets

 

December 31,

dollars in millions

   2014       2013    

TIER 1 CAPITAL

    

Key shareholders’ equity

   $                     10,530       $                     10,303    

Qualifying capital securities

     339         339    

Less:

  Goodwill      1,057         979    
  Accumulated other comprehensive income (a)      (395)         (394)    
    Other assets (b)      83         89    
    Total Tier 1 capital      10,124         9,968    

TIER 2 CAPITAL

    

Allowance for losses on loans and liability for losses on
lending-related commitments (c)

     859         924    

Net unrealized gains on equity securities available for sale

     1         1    

Qualifying long-term debt

     840         1,048    
    Total Tier 2 capital      1,700         1,973    
  Total risk-based capital    $ 11,824       $ 11,941    
    

 

 

   

 

 

 

TIER 1 COMMON EQUITY

    

Tier 1 capital

   $ 10,124       $ 9,968    

Less:

  Qualifying capital securities      339         339    
    Series A Preferred Stock (d)      282         282    
  Total Tier 1 common equity    $ 9,503       $ 9,347    
    

 

 

   

 

 

 

RISK-WEIGHTED ASSETS

    

Risk-weighted assets on balance sheet

   $ 66,054       $ 65,505    

Risk-weighted off-balance sheet exposure

     19,360         17,778    

Less:

  Goodwill      1,057         979    
  Other assets (b)      120         458    

Plus:

  Market risk-equivalent assets      863         1,482    
  Gross risk-weighted assets      85,100         83,328    

Less:

  Excess allowance for loan and lease losses      —         —    
  Net risk-weighted assets    $ 85,100       $ 83,328    
    

 

 

   

 

 

 

AVERAGE QUARTERLY TOTAL ASSETS

   $ 91,116       $ 91,141    
    

 

 

   

 

 

 

CAPITAL RATIOS

    

Tier 1 risk-based capital

     11.90       11.96  

Total risk-based capital

     13.89         14.33    

Leverage (e)

     11.26         11.11    

Tier 1 common equity

     11.17         11.22    
                      

 

(a) 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.

 

(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 December 31, 2014, and December 31, 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 $29 million, and $39 million of allowance classified as “discontinued assets” on the balance sheet at December 31, 2014, and December 31, 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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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-balance sheet arrangements

We are party to various types of off-balance sheet arrangements, which could lead to contingent liabilities or risks of loss that are not reflected on the balance sheet.

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.

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). Additional information regarding the nature of VIEs and our involvement with them is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Basis of Presentation,” and in Note 11 (“Variable Interest Entities”).

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

Commitments to extend credit or funding

Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These commitments generally carry variable rates of interest and have fixed expiration dates or other termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan or being fully utilized, the total amount of an outstanding commitment may significantly exceed any related cash outlay. Further information about our loan commitments at December 31, 2014, is presented in Note 20 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Commitments to Extend Credit or Funding.” Figure 30 shows the remaining contractual amount of each class of commitment to extend credit or funding. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss if the borrower were to draw upon the full amount of the commitment and then default on payment for the total amount of the then outstanding loan.

 

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Other off-balance sheet arrangements

Other off-balance sheet arrangements include financial instruments that do not meet the definition of a guarantee in accordance with the applicable accounting guidance, and other relationships, such as liquidity support provided to asset-backed commercial paper conduits, indemnification agreements and intercompany guarantees. Information about such arrangements is provided in Note 20 under the heading “Other Off-Balance Sheet Risk.”

Contractual obligations

Figure 30 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments at December 31, 2014, by the specific time periods in which related payments are due or commitments expire.

Figure 30. Contractual Obligations and Other Off-Balance Sheet Commitments

 

December 31, 2014

in millions

  

Within 1  

year  

    

After 1  

through 3  

years  

    

After 3  

through 5  

years  

    

After 5  

years  

     Total    

Contractual obligations: (a)

              

Deposits with no stated maturity

   $ 66,135          —            —            —          $ 66,135    

Time deposits of $100,000 or more

     1,608        $ 831        $ 92        $ 73          2,604    

Other time deposits

     1,774          1,239          118          128          3,259    

Federal funds purchased and securities sold under repurchase agreements

     575          —            —            —            575    

Bank notes and other short-term borrowings

     423          —            —            —            423    

Long-term debt

     1,296          1,679          2,645          2,255          7,875    

Noncancelable operating leases

     116          197          143          370          826    

Liability for unrecognized tax benefits

     6          —            —            —            6    

Purchase obligations:

              

Banking and financial data services

     66          121          64          5          256    

Telecommunications

     17          22          11          —            50    

Professional services

     22          32          10          —            64    

Technology equipment and software 

     61          70          52          2          185    

Other

     6          16          3          —            25    

Total purchase obligations

     172          261          140          7          580    

Total

   $ 72,105        $ 4,207        $ 3,138        $ 2,833        $ 82,283    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Lending-related and other off-balance sheet commitments:

              

Commercial, including real estate

   $ 8,954        $ 8,311        $ 9,715        $ 964        $ 27,944    

Home equity

     230          1,050          1,009          4,875          7,164    

Credit cards

     3,762          —            —            —            3,762    

Purchase cards

     63          —            —            —            63    

When-issued and to-be-announced securities commitments

     102          —            —            —            102    

Commercial letters of credit

     110          9          2          —            121    

Principal investing commitments

     28          16          11          5          60    

Liabilities of certain limited partnerships and other commitments

     1          —            —            —            1    

Total

   $         13,250        $         9,386        $         10,737        $         5,844        $         39,217    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                              

 

(a) Deposits and borrowings exclude interest.

Guarantees

We are a guarantor in various agreements with third parties. As guarantor, we may be contingently liable to make payments to the guaranteed party based on changes in a specified interest rate, foreign exchange rate or other

 

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variable (including the occurrence or nonoccurrence of a specified event). These variables, known as underlyings, may be related to an asset or liability, or another entity’s failure to perform under a contract. Additional information regarding these types of arrangements is presented in Note 20 under the heading “Guarantees.”

Risk Management

Overview

Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, compliance, operational, capital and liquidity, 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 requirements, independent auditors’ qualifications and independence, and the performance of the internal audit function and independent auditors. The Audit Committee meets with management and approves significant policies relating to the risk areas overseen by the Audit Committee. The Audit Committee has responsibility over all risk review functions, including internal audit, financial reporting, legal matters, and fraud risk. The Audit Committee also receives reports on enterprise risk. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases.

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

The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.

Our ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework, and governance structure for the management of risks across the entire company. The ERM Committee reports to the Board’s Risk Committee. Annually, the Board reviews and approves the ERM Policy, as well as the risk appetite, including corporate risk tolerances for major risk categories. We use a risk-adjusted capital framework to manage risks. This framework is approved and managed by the ERM Committee.

 

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Tier 2 Risk Governance Committees support the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. Risk Governance Committees include attendees from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor, and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing, and reporting risk information. Risk Review 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.

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

 

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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. 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” and Note 6 (“Fair Value Measurements”) in this report. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.

Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions, and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.

 

¿ Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments may include positions in municipal bonds, bonds backed by the U.S. government, agency and corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks.

 

¿ Interest rate derivatives include interest rate swaps, caps and floors, which are transacted primarily to accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio create exposures to interest rate risk.

 

¿ Credit derivatives 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.

 

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Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level.

The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s 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 December 31, 2014, and December 31, 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 $.9 million at December 31, 2014, and $1.0 million at December 31, 2013. The decrease in aggregate VaR was primarily due to reduced exposures in credit and interest rate derivatives. Figure 31 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended December 31, 2014, and December 31, 2013.

Figure 31. VaR for Significant Portfolios of Covered Positions

 

     2014      2013  
     Three months ended December 31,             Three months ended December 31,         
in millions                       High                         Low                         Mean        December 31,                         High                         Low                    Mean      December 31,    

Trading account assets:

                       

Fixed income

   $ .5      $ .3      $ .4      $ .4      $ 1.2      $ .5      $ .8      $ .6    

Derivatives:

                       

Interest rate

   $ .3        —        $ .1      $ .1      $ .5      $ .2      $ .3      $ .2    

Credit

     .3      $ .1        .2        .3        .4        .1        .3        .1    
                                                                         

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 $2.6 million at December 31, 2014, and $2.9 million at December 31, 2013. Figure 32 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended December 31, 2014, and December 31, 2013, as used for market risk capital charge calculation purposes.

 

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Figure 32. Stressed VaR for Significant Portfolios of Covered Positions

 

     2014      2013  
     Three months ended December 31,             Three months ended December 31,         
in millions                       High                         Low                         Mean          December 31,                         High                         Low                         Mean          December 31,    

Trading account assets:

                       

Fixed income

   $ 1.6      $ .8      $ 1.2      $ 1.2      $ 3.7      $ 1.4      $ 2.4      $ 1.7    

Derivatives:

                       

Interest rate

   $ .8      $ .1      $ .2      $ .2      $ 1.5      $ .5      $ 1.0      $ .5    

Credit

     1.0        .4        .7        .9        1.2        .4        .8        .4    

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.

 

  ¿ “Gap risk is the exposure to changes in interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (for example, deposits used to fund loans) do not mature or reprice at the same time.

 

  ¿ “Basis risk” is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes.

 

  ¿

“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

 

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  occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve.

 

  ¿ “Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or 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 12 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 33 presents the results of the simulation analysis at December 31, 2014, and December 31, 2013. At December 31, 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 12 months would adversely affect net interest income over the same period by more than 4%. As shown in Figure 33, we are operating within these levels as of December 31, 2014.

 

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Figure 33. Simulated Change in Net Interest Income

 

December 31, 2014

                   

Basis point change assumption (short-term rates)

     -25          +200       

Tolerance level

     -4.00        -4.00    

Interest rate risk assessment

     -.96        3.20    

December 31, 2013

                   

Basis point change assumption (short-term rates)

     -25          +200       

Tolerance level

     -4.00        -4.00    

Interest rate risk assessment

     -1.33        3.00    

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 33. 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.

Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase modestly 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 12-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 12-, 24-, and 36-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 December 31, 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

 

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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 34 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a “receive fixed/pay variable” interest rate swap. The volume, maturity and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 8 (“Derivatives and Hedging Activities”).

Figure 34. Portfolio Swaps by Interest Rate Risk Management Strategy

 

  December 31, 2014          
         

 

Weighted-Average

  December 31, 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)

$ 9,700     $ (4       1.8             .8     .2   $ 9,300     $ 6     

Receive fixed/pay variable — conventional debt

  5,124       209     3.8     2.4       .2       5,074       201    

Pay fixed/receive variable — conventional debt

  50       (7   13.5     .2       3.6       105       —    

 

 

Total portfolio swaps

$                 14,874     $                 198    (b)     2.5     1.3     .2   $             14,479     $                 207   (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 $49 million and $61 million for December 31, 2014, and December 31, 2013, respectively.

Liquidity risk management

Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions.

Governance structure

We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entity’s capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding.

The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Board of Directors, the ERM Committee, the ALCO, and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The Market Risk Management group, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are in compliance with the Federal Reserve Board’s Enhanced Prudential 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.

 

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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 December 31, 2014, are shown in Figure 35. 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.

Figure 35. Credit Ratings

 

December 31, 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+         BB+   

Moody’s

     P-2         Baa1         Baa2         Baa3         Ba1   

Fitch

     F1         A-         BBB+         BB+         BB   

DBRS

     R-2(high)         BBB(high)         BBB         BBB         N/A   

KEYBANK

              

 

              

Standard & Poor’s

     A-2         A-         BBB+         N/A         N/A   

Moody’s

     P-2         A3         Baa1         N/A         N/A   

Fitch

     F1         A-         BBB+         N/A         N/A   

DBRS

     R-1(low)         A(low)         BBB(high)         N/A         N/A   

 

 

Managing liquidity risk

Most of our liquidity risk is derived from our lending activities, which inherently 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. The assessments of liquidity risk are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board approved policy limits.

We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for both KeyCorp and KeyBank. In a “heightened monitoring mode,” we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed.

We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain 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

 

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December 31, 2014, totaled $15 billion, consisting of $10.4 billion of unpledged securities, $799 million of securities available for secured funding at the Federal Home Loan Bank of Cincinnati (“FHLB”), and $3.8 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 December 31, 2014, our unused borrowing capacity secured by loan collateral was $18.7 billion at the Federal Reserve Bank of Cleveland and $2.8 billion at the FHLB. In 2014, Key’s outstanding FHLB advances decreased by $24 million due to repayments.

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. Throughout December 2014, our estimated Modified LCR was approximately in the mid-80% range. 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 composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings.

Additional information about the Liquidity Coverage Ratio is included in the “Supervision and Regulation” section under the heading “U.S. implementation of the Basel III liquidity framework” in Item 1 of this report.

Long-term liquidity strategy

Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Key’s client-based relationship strategy provides for a strong core deposit base 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 December 31, 2014, our loan-to-deposit ratio was 85%), 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”), that are designed to enable the parent company and KeyBank to raise funds in the public and private debt markets. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. These liquidity programs are reviewed from time to time by the Board of Directors and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs. During the second quarter of 2014, the KeyCorp shelf registration statement on file with the SEC, including the Medium-Term Note Program, was updated. In connection with the updated Medium-Term Note Program, the Board of Directors authorized KeyCorp to issue up to $4 billion of debt, and revoked all prior issuance authority under previous KeyCorp shelf registration statements including through previous medium-term note programs.

In 2014, Key’s aggregate outstanding note balance, net of unamortized discounts and adjustments related to hedging with derivative financial instruments was unchanged. On July 1, 2014, $750 million of subordinated bank debt matured. On November 24, 2014, $750 million of 2.50% Senior Notes due 2019 were issued.

 

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Liquidity for KeyCorp

The primary source of liquidity for KeyCorp is from subsidiary dividends, primarily from KeyBank. KeyCorp has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries’ obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and pay dividends to shareholders.

We use a parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the months into the future where projected obligations can be met with the current amount of liquidity 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 December 31, 2014, KeyCorp held $2.2 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 2014, KeyBank paid KeyCorp $300 million in dividends; nonbank subsidiaries did not pay any cash dividends or noncash dividends to KeyCorp. KeyCorp did not make any capital infusions to KeyBank during 2014. As of December 31, 2014, KeyBank had $935 million of capacity to pay dividends to KeyCorp.

Our liquidity position and recent activity

Over the past 12 months our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of 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 information on repurchases of common shares by KeyCorp is included in Part II, Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this report. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements and other factors. The amounts involved may be material, individually or collectively.

We generate cash flows from operations and from investing and financing activities. We have approximately $195 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of December 31, 2014. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $7 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 $11 million. Accordingly, we have included the total amount as a deferred tax liability at December 31, 2014.

The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the years ended December 31, 2014, and December 31, 2013.

 

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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 December 31, 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 $43 million at December 31, 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 associated with a particular extension of credit to a third party. At December 31, 2014, we used credit default swaps with a notional amount of $309 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 December 31, 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.

 

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We may also manage the loan portfolio using portfolio swaps and bulk purchases and sales. Our overarching goal is to manage the loan portfolio within a specified range of asset quality.

Allowance for loan and lease losses

At December 31, 2014, the ALLL was $794 million, or 1.38% of period-end loans, compared to $848 million, or 1.56%, at December 31, 2013. The allowance includes $40 million that was specifically allocated for impaired loans of $302 million at December 31, 2014, compared to $42 million that was allocated for impaired loans of $358 million one year ago. For more information about impaired loans, see Note 5 (“Asset Quality”). At December 31, 2014, the ALLL was 190.0% of nonperforming loans, compared to 166.9% at December 31, 2013.

Selected asset quality statistics for each of the past five years are presented in Figure 36. The factors that drive these statistics are discussed in the remainder of this section.

Figure 36. Selected Asset Quality Statistics from Continuing Operations

 

Year ended December 31,                               
dollars in millions    2014       2013       2012       2011       2010    

Net loan charge-offs

   $ 113       $ 168       $ 345       $ 541       $ 1,570    

Net loan charge-offs to average loans

     .20       .32       .69       1.11       2.91  

Allowance for loan and lease losses

   $ 794       $ 848       $ 888       $ 1,004       $ 1,604    

Allowance for credit losses (a) 

     830         885         917         1,049         1,677    

Allowance for loan and lease losses to period-end loans

     1.38       1.56       1.68       2.03       3.20  

Allowance for credit losses to period-end loans

     1.45         1.63         1.74         2.12         3.35    

Allowance for loan and lease losses to nonperforming loans

             190.0                 166.9                 131.8                 138.1                 150.2    

Allowance for credit losses to nonperforming loans

     198.6         174.2         136.1         144.3         157.0    

Nonperforming loans at period end (b) 

   $ 418       $ 508       $ 674       $ 727       $ 1,068    

Nonperforming assets at period end

     436         531         735         859         1,338    

Nonperforming loans to period-end portfolio loans

     .73       .93       1.28       1.47       2.13  

Nonperforming assets to period-end portfolio loans plus

          

OREO and other nonperforming assets

     .76         .97         1.39         1.73         2.66    

 

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

 

(b) Loan balances exclude $13 million, $16 million, and $23 million of PCI loans at December 31, 2014, December 31, 2013, and December 31, 2012, 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.” 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.

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. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at December 31, 2014, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

 

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As shown in Figure 37, our ALLL decreased by $54 million, or 6.4%, during the past 12 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 12 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 $36 million at December 31, 2014. When combined with our ALLL, our total allowance for credit losses represented 1.45% of period-end loans at December 31, 2014, compared to 1.63% at December 31, 2013.

Figure 37. Allocation of the Allowance for Loan and Lease Losses

 

    2014     2013     2012  

December 31,

dollars in millions

  Total
Allowance
    Percent of
Allowance
to Total
Allowance
    Percent of
Loan Type
to Total
Loans
    Total
Allowance
    Percent of
Allowance
to Total
Allowance
    Percent of
Loan Type
to Total
Loans
    Total
Allowance
    Percent of
Allowance
to Total
Allowance
    Percent of
Loan Type
to Total
Loans
 

Commercial, financial and agricultural

  $ 391       49.2   %      48.8   %    $ 362       42.7   %      45.8   %    $ 327               36.8   %      44.0   % 

Commercial real estate:

                 

Commercial mortgage

    148       18.7       14.0       165       19.4       14.2       198       22.3       14.6  

Construction

    28       3.5       1.9       32       3.8       2.0       41       4.6       1.9  

Total commercial real estate loans

    176       22.2       15.9       197       23.2       16.2       239       26.9       16.5  

Commercial lease financing

    56       7.1       7.4       62       7.3       8.4       55       6.2       9.3  

Total commercial loans

    623       78.5       72.1       621       73.2       70.4       621       69.9       69.8  

Real estate — residential mortgage

    23       2.9       3.9       37       4.4       4.0       30       3.4       4.1  

Home equity:

                 

Key Community Bank

    66       8.3       18.1       84       9.9       19.0       105       11.8       18.6  

Other

    5       .6       .5       11       1.3       .6       25       2.8       .8  

Total home equity loans

    71       8.9       18.6       95       11.2       19.6       130       14.6       19.4  

Consumer other — Key Community Bank

    22       2.8       2.7       29       3.4       2.7       38       4.3       2.5  

Credit cards

    33       4.1       1.3       34       4.0       1.3       26       2.9       1.4  

Consumer other:

                 

Marine

    21       2.7       1.3       29       3.4       1.9       39       4.4       2.6  

Other

    1       .1       .1       3       .4       .1       4       .5       .2  

Total consumer other

    22       2.8       1.4       32       3.8       2.0       43       4.9       2.8  

Total consumer loans

    171       21.5       27.9       227       26.8       29.6       267       30.1       30.2  

Total (a)

  $ 794       100.0   %      100.0   %    $ 848       100.0   %      100.0   %    $     888       100.0   %      100.0   % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       
    2011     2010        
     
 
Total
Allowance
  
  
   
 
 
 
Percent of
Allowance
to Total
Allowance
  
  
  
  
   
 
 
 
Percent of
Loan Type
to Total
Loans
  
  
  
  
   
 
Total
Allowance
  
  
   
 
 
 
Percent of
Allowance
to Total
Allowance
  
  
  
  
   
 
 
 
Percent of
Loan Type
to Total
Loans
  
  
  
  
     

Commercial, financial and agricultural

  $ 334       33.2   %      39.1   %    $ 485       30.2   %      32.8   %       

Commercial real estate:

                 

Commercial mortgage

    272       27.1       16.2       416       25.9       19.0        

Construction

    63       6.3       2.7       145       9.1       4.2        

Total commercial real estate loans

    335       33.4       18.9       561       35.0       23.2        

Commercial lease financing

    78       7.8       12.2       175       10.9       12.9        

Total commercial loans

    747       74.4       70.2       1,221       76.1       68.9        

Real estate — residential mortgage

    37       3.7       3.9       49       3.1       3.7        

Home equity:

                 

Key Community Bank

    103       10.2       18.6       120       7.5       19.0        

Other

    29       2.9       1.1       57       3.5       1.3        

Total home equity loans

    132       13.1       19.7       177       11.0       20.3        

Consumer other — Key Community Bank

    41       4.1       2.4       57       3.6       2.3        

Credit cards

    —         —         —         —         —         —          

Consumer other:

                 

Marine

    46       4.6       3.5       89       5.5       4.5        

Other

    1       .1       .3       11       .7       .3        

Total consumer other

    47       4.7       3.8       100       6.2       4.8        

Total consumer loans

    257       25.6       29.8       383       23.9       31.1        

Total (a)

  $         1,004       100.0   %      100.0   %    $ 1,604       100.0   %      100.0   %       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

(a) Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $29 million at December 31, 2014, $39 million at December 31, 2013, $55 million at December 31, 2012, $104 million at December 31, 2011, and $114 million at December 31, 2010.

 

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Our provision (credit) for loan and lease losses was $59 million for 2014, compared to $130 million for 2013. Our net loan charge-offs were $113 million for 2014, compared to $168 million for 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.

Credit quality on our oil and gas loan portfolio, which represents 2% of total loans at December 31, 2014, remains solid, with net loan charge-offs lower than those on our overall portfolio. Our ALLL reflects the estimated impact of current oil prices at December 31, 2014.

Net loan charge-offs

Net loan charge-offs for 2014 totaled $113 million, or .20% of average loans, compared to net loan charge-offs of $168 million, or .32%, for the same period last year. Figure 38 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 39.

Over the past 12 months, net loan charge-offs decreased $55 million. This decrease is attributable to continued improvement in asset quality as reflected in the asset quality statistics shown in Figure 40. As shown in Figure 41, our exit loan portfolio contributed a total of $13 million in net loan charge-offs for 2014. Net loan charge-offs for 2013 in our exit loan portfolio were $17 million. The decrease in net loan charge-offs in our exit loan portfolio was primarily driven by lower levels of net loan charge offs in the consumer exit loan portfolios during 2014.

Figure 38. Net Loan Charge-offs from Continuing Operations (a)

 

Year ended December 31,                               
dollars in millions    2014     2013     2012     2011     2010  

Commercial, financial and agricultural

   $ 12      $ 23      $ 17      $ 119      $ 478   

Real estate — commercial mortgage

           (7)        79        103        330   

Real estate — construction

     (12)        (11)        19        56        336   

Commercial lease financing

     —          12              17        63   

Total commercial loans

           17        120        295        1,207   

Home equity — Key Community Bank

     28        52        88        89        116   

Home equity — Other

           14        30        41        59   

Credit cards

     33        27        11        —          —     

Marine

     14        14        37        48        86   

Other

     32        44        59        68        102   

Total consumer loans

     111        151        225        246        363   

Total net loan charge-offs

   $         113      $         168      $         345      $         541      $         1,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                          

Net loan charge-offs to average loans

     .20      .32      .69      1.11      2.91 

Net loan charge-offs from discontinued operations — education lending business

   $ 31      $ 37      $ 58      $ 123      $ 121   
                                          

 

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

 

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Figure 39. Summary of Loan and Lease Loss Experience from Continuing Operations

 

Year ended December 31,

dollars in millions

   2014     2013     2012     2011     2010   

Average loans outstanding

   $ 55,679     $ 53,054     $ 50,362     $ 48,606     $ 53,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Allowance for loan and lease losses at beginning of period

   $ 848     $ 888     $ 1,004     $ 1,604     $ 2,534   

Loans charged off:

          

Commercial, financial and agricultural (a)

     45       62       80       169       565   

Real estate — commercial mortgage

     6       20       102       113       360   

Real estate — construction

     5       3       24       83       380   

 

 

Total commercial real estate loans (b)

     11       23       126       196       740   

Commercial lease financing

     10       27       27       42       88   

 

 

Total commercial loans

     66       112       233       407       1,393   

Real estate — residential mortgage

     10       20       27       29       36   

Home equity:

          

Key Community Bank

     37       62       99       100       123   

Other

     9       20       35       45       62   

 

 

Total home equity loans

     46       82       134       145       185   

Consumer other — Key Community Bank

     30       31       38       45       64   

Credit cards

     34       30       11       —         —     

Consumer other:

          

Marine

     23       29       59       80       129   

Other

     2       4       6       9       15   

 

 

Total consumer other

     25       33       65       89       144   

 

 

Total consumer loans

     145       196       275       308       429   

 

 

Total loans charged off

     211       308       508       715       1,822   

Recoveries:

          

Commercial, financial and agricultural (a)

     33       39       63       50       87   

Real estate — commercial mortgage

     4       27       23       10       30   

Real estate — construction

     17       14       5       27       44   

 

 

Total commercial real estate loans (b)

     21       41       28       37       74   

Commercial lease financing

     10       15       22       25       25   

 

 

Total commercial loans

     64       95       113       112       186   

Real estate — residential mortgage

     2       2       3       3        

Home equity:

          

Key Community Bank

     9       10       11       11        

Other

     5       6       5       4        

 

 

Total home equity loans

     14       16       16       15       10   

Consumer other — Key Community Bank

     6       7       6       8        

Credit cards

     1       3       —         —         —     

Consumer other:

          

Marine

     9       15       22       32       43   

Other

     2       2       3       4        

 

 

Total consumer other

     11       17       25       36       47   

 

 

Total consumer loans

     34       45       50       62       66   

 

 

Total recoveries

     98       140       163       174       252   

 

 

Net loans charged off

     (113     (168     (345     (541     (1,570)   

Provision (credit) for loan and lease losses

     59       130       229       (60     638   

Foreign currency translation adjustment

     —         (2     —         1        

 

 

Allowance for loan and lease losses at end of year

   $ 794     $ 848     $ 888     $ 1,004     $ 1,604   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability for credit losses on lending-related commitments at beginning of the year

   $ 37     $ 29     $ 45     $ 73     $ 121   

Provision (credit) for losses on lending-related commitments

     (1     8       (16     (28     (48)   

 

 

Liability for credit losses on lending-related commitments at end of the year (c)

   $ 36     $ 37     $ 29     $ 45     $ 73   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for credit losses at end of the year

   $ 830     $ 885     $ 917     $ 1,049     $ 1,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs to average loans

     .20   %      .32   %      .69   %      1.11   %      2.91 

Allowance for loan and lease losses to period-end loans

     1.38       1.56       1.68       2.03       3.20   

Allowance for credit losses to period-end loans

     1.45       1.63       1.74       2.12       3.35   

Allowance for loan and lease losses to nonperforming loans

     190.0       166.9       131.8       138.1       150.2   

Allowance for credit losses to nonperforming loans

     198.6       174.2       136.1       144.3       157.0   

Discontinued operations — education lending business:

          

Loans charged off

   $ 45     $ 55     $ 75     $ 138     $ 129   

Recoveries

     14       18       17       15        

 

 

Net loan charge-offs

   $ (31   $ (37   $ (58   $ (123   $ (121)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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(a) See Figure 16 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 17 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.

Nonperforming assets

Figure 40 shows the composition of our nonperforming assets. These assets totaled $436 million at December 31, 2014, and represented .76% of portfolio loans, OREO and other nonperforming assets, compared to $531 million, or .97%, at December 31, 2013. See Note 1 under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” for a summary of our nonaccrual and charge-off policies.

Figure 40. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

 

December 31,                               
dollars in millions    2014      2013      2012      2011      2010   

Commercial, financial and agricultural (a)

   $ 59      $ 77      $ 99      $ 188      $ 242   

Real estate — commercial mortgage

     34        37        120        218        255   

Real estate — construction

     13        14        56        54        241   

 

 

Total commercial real estate loans (b)

     47        51        176        272        496   

Commercial lease financing

     18        19        16        27        64   

 

 

Total commercial loans

     124        147        291        487        802   

Real estate — residential mortgage

     79        107        103        87        98   

Home equity:

          

Key Community Bank

     185        205        210        108        102   

Other

     10        15        21        12        18   

 

 

Total home equity loans

     195        220        231        120        120   

Consumer other — Key Community Bank

                              

Credit cards

                 11        —          —     

Consumer other:

          

Marine

     15        26        34        31        42   

Other

                              

 

 

Total consumer other

     16        27        36        32        44   

 

 

Total consumer loans

     294        361        383        240        266   

 

 

Total nonperforming loans (c)

     418        508        674        727        1,068   

Nonperforming loans held for sale

     —                25        46        106   

OREO

     18        15        22        65        129   

Other nonperforming assets

     —                14        21        35   

 

 

Total nonperforming assets

   $         436      $         531      $         735      $         859      $         1,338   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                          

Accruing loans past due 90 days or more

   $ 96      $ 71      $ 78      $ 164      $ 239   

Accruing loans past due 30 through 89 days

     235        318        424        441        476   

Restructured loans — accruing and nonaccruing (d)

     270        338        320        276        297   

Restructured loans included in nonperforming loans (d)

     157        214        249        191        202   

Nonperforming assets from discontinued operations — education lending business

     11        25        20        23        40   

Nonperforming loans to year-end portfolio loans

     .73      .93      1.28      1.47      2.13 

Nonperforming assets to year-end portfolio loans plus OREO and other nonperforming assets

     .76        .97        1.39        1.73        2.66   
                                          

 

(a) See Figure 16 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 17 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 $13 million, $16 million, and $23 million of PCI loans at December 31, 2014, December 31, 2013, and December 31, 2012, 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 40, nonperforming assets decreased during 2014, having declined for the past five years. Most of the reduction came from nonperforming loans in our consumer and commercial loan portfolios. As

 

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shown in Figure 41, our exit loan portfolio accounted for $41 million, or 9%, of total nonperforming assets at December 31, 2014, compared to $56 million, or 11%, at December 31, 2013.

At December 31, 2014, the approximate carrying amount of our commercial nonperforming loans outstanding represented 74% of their original contractual amount, total nonperforming loans outstanding represented 79% of their contractual amount, and total nonperforming assets represented 79% of their original contractual amount. At the same date, OREO represented 79% of its original contractual amount.

At December 31, 2014, our 20 largest nonperforming loans totaled $88 million, representing 21% of total loans on nonperforming status from continuing operations, compared to $86 million, representing 17% in the prior year.

Figure 41 shows the composition of our exit loan portfolio at December 31, 2014, and 2013, the net loan charge-offs recorded on this portfolio, and the nonperforming status of those loans at these dates. The exit loan portfolio represented 4% of total loans and loans held for sale at December 31, 2014, and 2013. Additional information about loan sales is included in the “Loans and loans held for sale” section under “Loan sales.”

Figure 41. Exit Loan Portfolio from Continuing Operations

 

     Balance
Outstanding
    

 

 

Change
12-31-14 vs.

12-31-13

     Net Loan
Charge-offs
    Balance on
Nonperforming
Status
 
in millions    12-31-14      12-31-13         12-31-14 (c)     12-31-13 (c)     12-31-14      12-31-13  

Residential properties — homebuilder

   $ 10        $ 20       $ (10)         —        $     $      $  

Marine and RV floor plan

            24         (17)         —          (3             

Commercial lease financing (a)

     967         782         185       $ (5     (11            —     

Total commercial loans

     984         826         158         (5     (13     15         13   

Home equity — Other

     267         334         (67)               14        10         16   

Marine

     779         1,028         (249)         14        14        15         26   

RV and other consumer

     54         70         (16)         —                        

Total consumer loans

     1,100         1,432         (332)         18        30        26         43   

Total exit loans in loan portfolio

   $ 2,084       $ 2,258       $ (174)       $ 13      $ 17      $ 41       $ 56   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Discontinued operations — education lending business (not included in exit loans above) (b)

   $         2,295       $         4,497         $        (2,202)       $         31      $         37      $         11       $         25   
                                                              

 

(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) December 31, 2013, balance includes loans in Key’s consolidated education loan securitization trusts.

 

(c) Credit amounts indicate recoveries exceeded charge-offs.

Figure 42 shows the types of activity that caused the change in our nonperforming loans during each of the last four quarters and the years ended December 31, 2014, and 2013. Loans placed on nonaccrual status decreased $339 million during 2014 compared to 2013 due to continued improvement in market liquidity.

Figure 42. Summary of Changes in Nonperforming Loans from Continuing Operations

 

            2014 Quarters         
in millions    2014      Fourth      Third      Second      First      2013  

Balance at beginning of period

   $ 508       $ 401       $ 396       $ 449       $ 508       $ 674   

Loans placed on nonaccrual status

     389         103         109         79         98         728   

Charge-offs

     (211)         (49)         (49)         (56)         (57)         (309)   

Loans sold

     (26)         (2)         —           (21)         (3)         (127)   

Payments

     (68)         (17)         (13)         (17)         (21)         (208)   

Transfers to OREO

     (20)         (6)         (7)         (4)         (3)         (21)   

Loans returned to accrual status

     (154)         (12)         (35)         (34)         (73)         (229)   

Balance at end of period (a)

   $         418       $         418       $         401       $         396       $         449       $         508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                       

 

(a) Loan balances exclude $13 million and $16 million of PCI loans at December 31, 2014, and December 31, 2013, respectively.

 

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Figure 43 shows the types of activity that caused the change in our nonperforming loans held for sale during each of the last four quarters and the years ended December 31, 2014, and 2013.

Figure 43. Summary of Changes in Nonperforming Loans Held for Sale from Continuing Operations

 

      2014 Quarters      
in millions 2014   Fourth   Third   Second   First   2013  

Balance at beginning of period

$         1      —      $         1    $   $   $ 25   

Net advances / (payments)

  —        —        —        —        —        (3)   

Loans sold

  (2)      —        (2)      —        —        (19)   

Valuation adjustments

      —        1        —        —        (2)   

Balance at end of period

  —        —        —      $         1    $         1    $         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                       

Figure 44 shows the factors that contributed to the change in our OREO during 2014 and 2013. As shown in this figure, the increase in 2014 was primarily attributable to a decrease in properties sold during 2014.

Figure 44. Summary of Changes in Other Real Estate Owned, Net of Allowance, from Continuing Operations

 

      2014 Quarters      
in millions 2014   Fourth   Third   Second   First   2013  

Balance at beginning of period

$         15    $ 16    $ 12    $ 12    $ 15    $ 22   

Properties acquired — nonperforming loans

  20                      21   

Valuation adjustments

  (5)      (2)      (1)      (1)      (1)      (6)   

Properties sold

  (12)      (2)      (2)      (3)      (5)      (22)   

Balance at end of period

$ 18    $         18    $         16    $         12    $         12    $         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 are subject to heightened prudential standards and regulation due to their systemic importance. This heightened level of regulation has increased 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

 

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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.

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.

Fourth Quarter Results

Figure 45 shows our financial performance for each of the past eight quarters. Highlights of our results for the fourth quarter of 2014 are summarized below.

Earnings

Our fourth quarter net income from continuing operations attributable to Key common shareholders was $246 million, or $.28 per common share, compared to $229 million, or $.26 per common share, for the fourth quarter of 2013.

On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2014 was 1.12%, compared to 1.08% for the fourth quarter of 2013. The annualized return on average common equity from continuing operations was 9.50% for the fourth quarter of 2014, compared to 9.10% for the year-ago quarter.

Net interest income

Our taxable-equivalent net interest income was $588 million for the fourth quarter of 2014, and the net interest margin was 2.94%. These results compare to taxable-equivalent net interest income of $589 million and a net interest margin of 3.01% for the fourth quarter of 2013. The decrease in net interest margin was largely attributable to lower earning asset yields and higher levels of excess liquidity driven by commercial deposit growth.

 

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Noninterest income

Our noninterest income was $490 million for the fourth quarter of 2014, compared to $453 million for the year-ago quarter. The fourth quarter reflects a record high quarter for investment banking and debt placement fees, which increased $42 million, benefiting from our business model. Trust and investment services income increased $14 million, mostly due to a full-quarter impact of the recently-acquired Pacific Crest Securities. Corporate services income also increased $13 million, driven by higher derivatives income and non-yield loan fees. These increases were partially offset by declines in other income of $12 million, mortgage servicing fees of $11 million, and operating lease income and other leasing gains of $11 million.

Noninterest expense

Our noninterest expense was $704 million for the fourth quarter of 2014, compared to $712 million for the same period last year. This decline reflects lower efficiency- and pension-related charges and other expense. These decreases were slightly offset by higher incentive compensation expense related to the performance of our business and a full-quarter impact of the recently-acquired Pacific Crest Securities.

Provision for loan and lease losses

Our provision for loan and lease losses was $22 million for the fourth quarter of 2014, compared to $19 million for the year-ago quarter. Our ALLL was $794 million, or 1.38% of total period-end loans, at December 31, 2014, compared to $848 million, or 1.56%, at December 31, 2013.

Net loan charge-offs for the fourth quarter of 2014 totaled $32 million, or .22% of average loans, compared to $37 million, or .27%, for the same period last year.

Income taxes

For the fourth quarter of 2014, we recorded a tax provision from continuing operations of $94 million, compared to a tax provision of $70 million for the fourth quarter of 2013. The effective tax rate for the fourth quarter of 2014 was 27.2%, compared to 23% for the same quarter one year ago, due to an increase in pre-tax income.

 

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Figure 45. Selected Quarterly Financial Data

 

     2014 Quarters     2013 Quarters         

dollars in millions, except per share amounts

     Fourth        Third        Second        First        Fourth        Third        Second        First       

FOR THE PERIOD

                   

Interest income

   $ 646     $ 639     $ 639     $ 630     $ 649     $ 647     $ 657     $ 667      

Interest expense

     64       64       66       67       66       69       76       84      

Net interest income

     582       575       573       563        583       578       581       583      

Provision (credit) for loan and lease losses

     22       21       10       6       19       28       28       55      

Noninterest income

     490       417       455       435       453       459       429       425      

Noninterest expense

     704       704       689       662       712       716       711       681      

Income (loss) from continuing operations before income taxes

     346       267       329       330       305       293       271       272      

Income (loss) from continuing operations attributable to Key

     251       203       247       238       235       235       199       201      

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

     2       (17     (28     4       (5     37       5           

Net income (loss) attributable to Key

     253       186       219       242       230       272       204       204      

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

     246       197       242       232       229       229       193       196      

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

     2       (17     (28     4       (5     37       5           

Net income (loss) attributable to Key common shareholders

     248       180       214       236       224       266       198       199      

PER COMMON SHARE

                   

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

   $ .29     $ .23     $ .28     $ .26     $ .26     $ .25     $ .21     $ .21      

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

     —         (.02     (.03     —         (.01 )       .04        .01        —        

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

     .29       .21       .24       .27       .25        .29        .22        .22      

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

     .28       .23       .27       .26       .26        .25        .21        .21      

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

     —         (.02     (.03     —         (.01 )       .04        .01        —        

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

     .28       .21       .24       .26       .25        .29        .22       .21      

Cash dividends paid

     .065       .065       .065       .055       .055       .055       .055       .05      

Book value at period end

     11.91       11.74       11.65       11.43       11.25       11.05       10.89       10.89      

Tangible book value at period end

     10.65       10.47       10.50       10.28       10.11       9.92       9.77       9.78      

Market price:

                   

High

     14.18       14.62       14.59       14.70       13.55       12.63       11.09       10.19      

Low

     11.55       12.97       12.90       12.25       11.24       11.05       9.29       8.29      

Close

     13.90       13.33       14.33       14.24       13.42       11.40       11.04       9.96      

Weighted-average common shares outstanding (000)

     858,811       867,350       875,298       884,727       890,516       901,904       913,736       920,316      

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

     886,186       874,122       902,137       891,890       897,712       908,253       918,628       926,051      

AT PERIOD END

                   

Loans

   $ 57,381     $ 56,155     $ 55,600     $ 55,445     $ 54,457     $ 53,597     $ 53,101     $ 52,574      

Earning assets

     82,269       78,310       78,457       77,692       79,467       77,085       76,717       75,066      

Total assets

     93,821       89,784       91,798       90,802       92,934       90,708       90,639       89,198      

Deposits

     71,998       68,456       67,799       67,266       69,262       68,535       67,721       64,654      

Long-term debt

     7,875       7,172       8,213       7,712       7,650       6,154       6,666       7,785      

Key common shareholders’ equity

     10,239       10,195       10,213       10,112       10,012       9,915       9,938       10,049      

Key shareholders’ equity

     10,530       10,486       10,504       10,403       10,303       10,206       10,229       10,340      

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS

                   

Return on average total assets

     1.12     .92     1.14     1.13     1.08     1.12     .95     .99          %   

Return on average common equity

     9.50       7.68       9.55       9.33       9.10       9.13       7.72       7.96      

Return on average tangible common equity (d)

     10.64       8.55       10.60       10.38       10.13       10.18       8.60       8.87      

Net interest margin (TE)

     2.94       2.96       2.98       3.00       3.01       3.11       3.13       3.24      

Cash efficiency ratio (d)

     64.4       69.5       65.8       64.9       67.4       67.5       69.1       66.0      

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS

                   

Return on average total assets

     1.10     .81     .96     1.09     1.00     1.22     .92     .94          %   

Return on average common equity

     9.58       7.01       8.44       9.50         8.90       10.61       7.92       8.08      

Return on average tangible common equity (d)

     10.72       7.81       9.37       10.56       9.91       11.82       8.82       9.01      

Net interest margin (TE)

     2.93       2.94       2.94       2.95       2.91       3.06       3.07       3.16      

Loan to deposit (e)

     84.6       87.4       87.1       87.5       83.8       83.8       83.6       86.9      

CAPITAL RATIOS AT PERIOD END

                   

Key shareholders’ equity to assets

     11.22     11.68     11.44     11.46     11.09     11.25     11.29     11.59          %   

Key common shareholders’ equity to assets

     10.91       11.36       11.13       11.14       10.78       10.94       10.96       11.27      

Tangible common equity to tangible assets (d)

     9.88       10.26       10.15       10.14       9.80       9.93       9.96       10.24      

Tier 1 common equity (d)

     11.17       11.26       11.25       11.27       11.22       11.17       11.18       11.40      

Tier 1 risk-based capital

     11.90       12.01       11.99       12.01       11.96       11.92       11.93       12.19      

Total risk-based capital

     13.89       14.10       14.14       14.23       14.33       14.37       14.65       15.02      

Leverage

     11.26       11.15       11.24       11.30       11.11       11.33       11.25       11.36      

TRUST AND BROKERAGE ASSETS

                   

Assets under management

   $ 39,157     $ 39,283     $ 39,669     $ 38,893     $ 36,905     $ 36,110     $ 35,544     $ 35,714      

Nonmanaged and brokerage assets

     49,147       48,273       48,728       47,396       47,418       38,525       37,759       37,115      

OTHER DATA

                   

Average full-time-equivalent employees

     13,590       13,905       13,867       14,055       14,197       14,555       14,999       15,396      

Branches

     994       997       1,009       1,027       1,028       1,044       1,052       1,084      

 

(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.

 

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  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 13 (“Acquisitions and Discontinued Operations”).

 

(b) EPS may not foot due to rounding.

 

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

 

(d) See Figure 46 entitled “Selected Quarterly 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.

 

(e) Represents period-end consolidated total loans and loans held for sale (excluding education loans in securitizations trusts for periods prior to September 30, 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).

 

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Figure 46. Selected Quarterly GAAP to Non-GAAP Reconciliations

 

    Three months ended        
dollars in millions   12-31-14             9-30-14             6-30-14             3-31-14             12-31-13             9-30-13             6-30-13             3-31-13        

Tangible common equity to tangible assets at period end

                               

Key shareholders’ equity (GAAP)

  $     10,530       $     10,486       $     10,504       $     10,403       $     10,303       $     10,206       $     10,229       $     10,340    

Less:

 

Intangible assets (a)

    1,090         1,105         1,008         1,012         1,014         1,017         1,021         1,024    
 

Series A Preferred Stock  (b)

    282         282         282         282         282         282         282         291    
                                                                                                                               
 

Tangible common equity (non-GAAP)

  $ 9,158       $ 9,099       $ 9,214       $ 9,109       $ 9,007       $ 8,907       $ 8,926       $ 9,025    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total assets (GAAP)

  $ 93,821       $ 89,784       $ 91,798       $ 90,802       $ 92,934       $ 90,708       $ 90,639       $ 89,198    

Less:

 

Intangible assets (a)

    1,090         1,105         1,008         1,012         1,014         1,017         1,021         1,024    
                                                                                                                               
 

Tangible assets (non-GAAP)

  $ 92,731       $ 88,679       $ 90,790       $ 89,790       $ 91,920       $ 89,691       $ 89,618       $ 88,174    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Tangible common equity to tangible assets ratio (non-GAAP)

    9.88        %        10.26        %        10.15        %        10.14        %        9.80        %        9.93        %        9.96        %        10.24        %   

Tier 1 common equity at period end

                               

Key shareholders’ equity (GAAP)

  $ 10,530       $ 10,486       $ 10,504       $ 10,403       $ 10,303       $ 10,206       $ 10,229       $ 10,340    

Qualifying capital securities

    339         340         339         339         339         340         339         339    

Less:

 

Goodwill

    1,057         1,051         979         979         979         979         979         979    
 

Accumulated other comprehensive income (loss)  (c)

    (395       (366       (328       (367       (394       (409       (359       (204  
 

Other assets  (d)

    83         110         86         84         89         96         101         106    
                                                                                                                               
 

Total Tier 1 capital (regulatory)

    10,124         10,031         10,106         10,046         9,968         9,880         9,847         9,798    

Less:

 

Qualifying capital securities

    339         340         339         339         339         340         339         339    
 

Series A Preferred Stock  (b)

    282         282         282         282         282         282         282         291    
                                                                                                                               
 

Total Tier 1 common equity (non-GAAP)

  $ 9,503       $ 9,409       $ 9,485       $ 9,425       $ 9,347       $ 9,258       $ 9,226       $ 9,168    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net risk-weighted assets (regulatory)

  $ 85,100       $ 83,547       $ 84,287       $ 83,637       $ 83,328       $ 82,913       $ 82,528       $ 80,400    

Tier 1 common equity ratio (non-GAAP)

    11.17        %        11.26        %        11.25        %        11.27        %        11.22        %        11.17        %        11.18        %        11.40        %   

Average tangible common equity

                               

Average Key shareholders’ equity (GAAP)

  $ 10,562       $ 10,473       $ 10,459       $ 10,371       $ 10,272       $ 10,237       $ 10,314       $ 10,279    

Less:

 

Intangible assets (average)  (e)

    1,096         1,037         1,010         1,013         1,016         1,019         1,023         1,027    
 

Series A Preferred Stock (average)

    291         291         291         291         291         291         291         291    
                                                                                                                               
 

Average tangible common equity (non-GAAP)

  $ 9,175       $ 9,145       $ 9,158       $ 9,067       $ 8,965       $ 8,927       $ 9,000       $ 8,961    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Return on average tangible common equity from continuing operations

                               

Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)

  $ 246       $ 197       $ 242       $ 232       $ 229       $ 229       $ 193       $ 196    

Average tangible common equity (non-GAAP)

    9,175         9,145         9,158         9,067         8,965         8,927         9,000         8,961    

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

    10.64        %        8.55        %        10.60        %        10.38        %        10.13        %        10.18        %        8.60        %        8.87        %   

Return on average tangible common equity consolidated

                               

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

  $ 248       $ 180       $ 214       $ 236       $ 224       $ 266       $ 198       $ 199    

Average tangible common equity (non-GAAP)

    9,175         9,145         9,158         9,067         8,965         8,927         9,000         8,961    

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

    10.72        %        7.81        %        9.37        %        10.56        %        9.91        %        11.82        %        8.82        %        9.01        %   

Cash efficiency ratio

                               

Noninterest expense (GAAP)

  $ 704       $ 704       $ 689       $ 662       $ 712       $ 716       $ 711       $ 681    

Less:

 

Intangible asset amortization (GAAP)

    10         10         9         10         10         12         10         12    
                                                                                                                               
 

Adjusted noninterest expense (non-GAAP)

  $ 694       $ 694       $ 680       $ 652       $ 702       $ 704       $ 701       $ 669    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net interest income (GAAP)

  $ 582       $ 575       $ 573       $ 563       $ 583       $ 578       $ 581       $ 583    

Plus:

 

Taxable-equivalent adjustment

    6         6         6         6         6         6         5         6    
 

Noninterest income (GAAP)

    490         417         455         435         453         459         429         425    
                                                                                                                               
 

Total taxable-equivalent revenue (non-GAAP)

  $ 1,078       $ 998       $ 1,034       $ 1,004       $ 1,042       $ 1,043       $ 1,015       $ 1,014    
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Cash efficiency ratio (non-GAAP)

    64.4        %        69.5        %        65.8        %        64.9        %        67.4        %        67.5        %        69.1        %        66.0        %   

 

(a) For the three months ended December 31, 2014, September 30, 2014, June 30, 2014, and March 31, 2014, intangible assets exclude $68 million, $72 million, $79 million, and $84 million, respectively, of period-end purchased credit card receivables. For the three months ended December 31, 2013, September 30, 2013, June 30, 2013, and March 31, 2013, intangible assets exclude $92 million, $99 million, $107 million, and $114 million, respectively, of period-end purchased credit card receivables.

 

(b) Net of capital surplus for all periods subsequent to March 31, 2013.

 

(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.

 

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(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 any quarter-end during 2014 and 2013.

 

(e) For the three months ended December 31, 2014, September 30, 2014, June 30, 2014, and March 31, 2014, average intangible assets exclude $69 million, $76 million, $82 million, and $89 million, respectively, of average purchased credit card receivables. For the three months ended December 31, 2013, September 30, 2013, June 30, 2013, and March 31, 2013, average intangible assets exclude $96 million, $103 million, $110 million, and $118 million, respectively, of average purchased credit card receivables.

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”) 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.

As described below, we rely heavily on the use of judgment, assumptions and estimates to make a number of core decisions. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee.

Allowance for loan and lease losses

The loan portfolio is the largest category of assets on our balance sheet. We consider a variety of data to determine probable losses incurred in the loan portfolio and to establish an allowance that is sufficient to absorb those losses. For example, we apply expected loss rates to existing loans with similar risk characteristics and exercise judgment to assess the impact of factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Other considerations include expected cash flows and estimated collateral values.

For all commercial and consumer TDRs, regardless of size, as well as all other impaired commercial loans with an outstanding balances of $2.5 million or greater, we conduct further analysis to determine the probable loss and assign a specific allowance to the loan if deemed appropriate. For example, a specific allowance may be assigned — even when sources of repayment appear sufficient — if we remain uncertain that an impaired loan will be repaid in full.

We continually assess the risk profile of the loan portfolio and adjust the ALLL when appropriate. The economic and business climate in any given industry or market is difficult to gauge and can change rapidly, and the effects of those changes can vary by borrower. However, since our total loan portfolio is well diversified in many respects, and the risk profile of certain segments of the loan portfolio may be improving while the risk profile of others is deteriorating, we may decide to change the level of the allowance for one segment of the portfolio without changing it for any other segment.

In addition to adjusting the ALLL to reflect market conditions, we also may adjust the allowance because of unique events that are likely to cause actual losses to vary abruptly and significantly from expected losses. For example, class action lawsuits brought against an industry segment (e.g., one that used asbestos in its product) can cause a precipitous deterioration in the risk profile of borrowers doing business in that segment. Conversely, the dismissal of such lawsuits can improve the risk profile. In either case, historical loss rates for that industry segment would not have provided a precise basis for determining the appropriate level of allowance.

 

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Even minor changes in the level of estimated losses can significantly affect management’s determination of the appropriate allowance because those changes must be applied across a large portfolio. To illustrate, an increase in estimated losses equal to one-tenth of one percent of our consumer loan portfolio as of December 31, 2014, would indicate the need for a $16 million increase in the allowance. The same increase in estimated losses for the commercial loan portfolio would result in a $41 million increase in the allowance. Such adjustments to the ALLL can materially affect financial results. Following the above examples, a $16 million increase in the consumer loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately $10 million, or $.01 per common share; a $41 million increase in the commercial loan portfolio allowance would have reduced earnings on an after-tax basis by approximately $26 million, or $.03 per common share.

As we make decisions regarding the allowance, we benefit from a lengthy organizational history and experience with credit evaluations and related outcomes. Nonetheless, if our underlying assumptions later prove to be inaccurate, the ALLL would likely need to be adjusted, possibly having an adverse effect on our results of operations.

Our accounting policy related to the allowance is disclosed in Note 1 under the heading “Allowance for Loan and Lease Losses.”

Valuation methodologies

We follow the applicable accounting guidance for fair value measurements and disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using internally developed models, which are based on third-party data as well as our judgment, assumptions and estimates regarding credit quality, liquidity, interest rates and other relevant market available inputs. We describe our application of this accounting guidance, the process used to determine fair values, and the fair value hierarchy in Note 1 under the heading “Fair Value Measurements,” and in Note 6 (“Fair Value Measurements”).

Valuation methodologies often involve significant judgment, particularly when there are no observable active markets for the items being valued. To determine the values of assets and liabilities, as well as the extent to which related assets may be impaired, we make assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results. The outcomes of valuations that we perform have a direct bearing on the recorded amounts of assets and liabilities, including loans held for sale, principal investments, goodwill, and pension and other postretirement benefit obligations.

At December 31, 2014, $15.1 billion, or 16%, of our total assets were measured at fair value on a recurring basis. Substantially all of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At December 31, 2014, $1.2 billion, or 1%, of our total liabilities were measured at fair value on a recurring basis. Substantially all of these liabilities were classified as Level 1 or Level 2.

At December 31, 2014, $18 million, or less than 1%, of our total assets were measured at fair value on a nonrecurring basis. All of these assets were classified as Level 3. At December 31, 2014, there were no liabilities measured at fair value on a nonrecurring basis.

A discussion of the valuation methodology applied to our loans held for sale is included in Note 1 under the heading “Loans Held for Sale.”

Our principal investments include direct and indirect investments, predominantly in privately-held companies. The fair values of these investments are determined by considering a number of factors, including the target company’s financial condition and results of operations, values of public companies in comparable businesses, market liquidity, and the nature and duration of resale restrictions. The fair value of principal investments was

 

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$406 million at December 31, 2014. A 10% positive or negative variance in that fair value would have increased or decreased our 2014 earnings by approximately $41 million ($25 million after tax, or $.03 per common share).

The valuation and testing methodologies used in our analysis of goodwill impairment are summarized in Note 1 under the heading “Goodwill and Other Intangible Assets.” Accounting guidance that was effective for us on January 1, 2012, permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. We did not choose to utilize this qualitative assessment in our annual goodwill impairment testing in the fourth quarter of 2014. Therefore, the first step in testing for impairment is to determine the fair value of each reporting unit. Our reporting units for purposes of this testing are our two major business segments: Key Community Bank and Key Corporate Bank. Fair values are estimated using comparable external market data (market approach) and discounted cash flow modeling that incorporates an appropriate risk premium and earnings forecast information (income approach). We believe the estimates and assumptions used in the goodwill impairment analysis for our reporting units are reasonable. However, if actual results and market conditions differ from the assumptions or estimates used, the fair value of each reporting unit could change in the future.

The second step of impairment testing is necessary only if the carrying amount of either reporting unit exceeds its fair value, suggesting goodwill impairment. In such a case, we would estimate a hypothetical purchase price for the reporting unit (representing the unit’s fair value) and then compare that hypothetical purchase price with the fair value of the unit’s net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. An impairment loss would be recognized as a charge to earnings if the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill. We continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly. The acquisition of Pacific Crest Securities during the third quarter of 2014 resulted in a $78 million increase in the goodwill at the Key Corporate Bank unit. At December 31, 2014, the Key Community Bank reporting unit had $979 million in goodwill and the Key Corporate Bank reporting unit had $78 million in goodwill. Additional information is provided in Note 10 (“Goodwill and Other Intangible Assets”).

The primary assumptions used in determining our pension and other postretirement benefit obligations and related expenses, including sensitivity analysis of these assumptions, are presented in Note 16 (“Employee Benefits”).

When potential asset impairment is identified, we must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) to apply the appropriate accounting treatment. For example, unrealized losses on securities available for sale that are deemed temporary are recorded in shareholders’ equity; those deemed “other-than-temporary” are recorded in either earnings or shareholders’ equity based on certain factors. Additional information regarding temporary and other-than-temporary impairment on securities available for sale at December 31, 2014, is provided in Note 7 (“Securities”).

Derivatives and hedging

We use primarily interest rate swaps to hedge interest rate risk for asset and liability management purposes. These derivative instruments modify the interest rate characteristics of specified on-balance sheet assets and liabilities. Our accounting policies related to derivatives reflect the current accounting guidance, which provides that all derivatives should be recognized as either assets or liabilities on the balance sheet at fair value, after taking into account the effects of master netting agreements. Accounting for changes in the fair value (i.e., gains or losses) of a particular derivative depends on whether the derivative has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship.

The application of hedge accounting requires significant judgment to interpret the relevant accounting guidance, as well as to assess hedge effectiveness, identify similar hedged item groupings, and measure changes in the fair value of the hedged items. We believe our methods of addressing these judgments and applying the accounting

 

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guidance are consistent with both the guidance and industry practices. However, interpretations of the applicable accounting guidance continue to change and evolve. In the future, these evolving interpretations could result in material changes to our accounting for derivative financial instruments and related hedging activities. Although such changes may not have a material effect on our financial condition, a change could have a material adverse effect on our results of operations in the period in which it occurs. Additional information relating to our use of derivatives is included in Note 1 under the heading “Derivatives,” and Note 8 (“Derivatives and Hedging Activities”).

Contingent liabilities, guarantees and income taxes

Note 20 (“Commitments, Contingent Liabilities and Guarantees”) summarizes contingent liabilities arising from litigation and contingent liabilities arising from guarantees in various agreements with third parties under which we are a guarantor, and the potential effects of these items on the results of our operations. We record a liability for the fair value of the obligation to stand ready to perform over the term of a guarantee, but there is a risk that our actual future payments in the event of a default by the guaranteed party could exceed the recorded amount. See Note 20 for a comparison of the liability recorded and the maximum potential undiscounted future payments for the various types of guarantees that we had outstanding at December 31, 2014.

It is not always clear how the Internal Revenue Code and various state tax laws apply to transactions that we undertake. In the normal course of business, we may record tax benefits and then have those benefits contested by the IRS or state tax authorities. We have provided tax reserves that we believe are adequate to absorb potential adjustments that such challenges may necessitate. However, if our judgment later proves to be inaccurate, the tax reserves may need to be adjusted, which could have an adverse effect on our results of operations and capital.

Additionally, we conduct quarterly assessments that determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments are subjective and may change. Based on these criteria, and in particular our projections for future taxable income, we currently believe it is more-likely-than-not that we will realize our net deferred tax asset in future periods. However, if our assessments prove incorrect, they could have a material adverse effect on our results of operations in the period in which they occur. For further information on our accounting for income taxes, see Note 12 (“Income Taxes”).

During 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 47.

Figure 47. European Sovereign and Non-Sovereign Debt Exposures

 

December 31, 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

     —       $ (4   $ (4
   

Non-sovereign non-financial institutions

   $ 35               35  
 

Total

     35         (4     31  

Germany:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —         (2     (2
   

Non-sovereign non-financial institutions

     200               200  
 

Total

     200         (2     198  

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

                  3  
 

Total

                  3  

Italy:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —                
   

Non-sovereign non-financial institutions

     58               58  
 

Total

     58               58  

Netherlands:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —                
   

Non-sovereign non-financial institutions

     23               23  
 

Total

     23               23  

Portugal:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —                
   

Non-sovereign non-financial institutions

     —                
 

Total

     —                

Spain:

         
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —                
   

Non-sovereign non-financial institutions

     47               47  
 

Total

     47               47  

Switzerland:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —         (3     (3
   

Non-sovereign non-financial institutions

     83               83  
 

Total

     83         (3     80  

United Kingdom:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —         5       5  
   

Non-sovereign non-financial institutions

     118               118  
 

Total

     118         5       123  

Other Europe: (c)

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —                
   

Non-sovereign non-financial institutions

     102               102  
 

Total

     102               102  

Total Europe:

       
 

Sovereigns

     —                
 

Non-sovereign financial institutions

     —         (4     (4
   

Non-sovereign non-financial institutions

     669              669  
 

Total

   $             669      $             (4   $             665  
    

 

 

    

 

 

   

 

 

 
                               

 

(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.

 

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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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information included under the caption “Risk Management — Market risk management” in the MD&A beginning on page 76 is incorporated herein by reference.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial performance for each of the past eight quarters is summarized in Figure 45 contained in the “Fourth Quarter Results” section in the MD&A.

 

     Page Number  

Management’s Annual Report on Internal Control over Financial Reporting

     106   

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

     107   

Report of Independent Registered Public Accounting Firm

     108   

Consolidated Balance Sheets

     109   

Consolidated Statements of Income

     110   

Consolidated Statements of Comprehensive Income

     111   

Consolidated Statements of Changes in Equity

     112   

Consolidated Statements of Cash Flows

     113   

Notes to Consolidated Financial Statements

     114   

Note 1. Summary of Significant Accounting Policies

     114   

Note 2. Earnings Per Common Share

     129   

Note 3. Restrictions on Cash, Dividends and Lending Activities

     130   

Note 4. Loans and Loans Held for Sale

     131   

Note 5. Asset Quality

     132   

Note 6. Fair Value Measurements

     145   

Note 7. Securities

     160   

Note 8. Derivatives and Hedging Activities

     163   

Note 9. Mortgage Servicing Assets

     172   

Note 10. Goodwill and Other Intangible Assets

     173   

Note 11. Variable Interest Entities

     174   

Note 12. Income Taxes

     177   

Note 13. Acquisitions and Discontinued Operations

     179   

Note 14. Securities Financing Activities

     187   

Note 15. Stock-Based Compensation

     188   

Note 16. Employee Benefits

     192   

Note 17. Short-Term Borrowings

     201   

Note 18. Long-Term Debt

     202   

Note 19. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

     204   

Note 20. Commitments, Contingent Liabilities and Guarantees

     205   

Note 21. Accumulated Other Comprehensive Income

     209   

Note 22. Shareholders’ Equity

     210   

Note 23. Line of Business Results

     212   

Note 24. Condensed Financial Information of the Parent Company

     216   

 

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Management’s Annual Report on Internal Control over Financial Reporting

We are responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with U.S. generally accepted accounting principles and reflect our best estimates and judgments. We believe the financial statements and notes present fairly our financial position, results of operations and cash flows in all material respects.

We are responsible for establishing and maintaining a system of internal control that is designed to protect our assets and the integrity of our financial reporting. This corporate-wide system of controls includes self-monitoring mechanisms and written policies and procedures, prescribes proper delegation of authority and division of responsibility, and facilitates the selection and training of qualified personnel.

All employees are required to comply with our code of ethics. We conduct an annual certification process to ensure that our employees meet this obligation. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, we believe our system provides reasonable assurance that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.

The Board of Directors discharges its responsibility for our financial statements through its Audit Committee. This committee, which draws its members exclusively from the non-management directors, also hires the independent registered public accounting firm.

Management’s Assessment of Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over our financial reporting. We have assessed the effectiveness of our internal control and procedures over financial reporting using criteria described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that assessment, we believe we maintained an effective system of internal control over financial reporting as of December 31, 2014. Our independent registered public accounting firm has issued an attestation report, dated March 2, 2015, on our internal control over financial reporting, which is included in this annual report.

 

LOGO

Beth E. Mooney

Chairman, Chief Executive Officer and President

 

LOGO

Donald R. Kimble

Chief Financial Officer

 

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

on Internal Control over Financial Reporting

The Board of Directors and Shareholders of KeyCorp

We have audited KeyCorp’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). KeyCorp’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on KeyCorp’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, KeyCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of KeyCorp as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March 2, 2015 expressed an unqualified opinion thereon.

 

 

Cleveland, Ohio

March 2, 2015

LOGO

 

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

The Board of Directors and Shareholders of KeyCorp

We have audited the accompanying consolidated balance sheets of KeyCorp as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of KeyCorp’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KeyCorp at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), KeyCorp’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 2, 2015 expressed an unqualified opinion thereon.

 

 

Cleveland, Ohio

March 2, 2015

LOGO

 

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Consolidated Balance Sheets

 

December 31,  
in millions, except per share data    2014        2013   

 

 

ASSETS

     

Cash and due from banks

   $                 653        $                 617   

Short-term investments

     4,269          5,590   

Trading account assets

     750          738   

Securities available for sale

     13,360          12,346   

Held-to-maturity securities (fair value: $4,974 and $4,617)

     5,015          4,756   

Other investments

     760          969   

Loans, net of unearned income of $682 and $805

     57,381          54,457   

Less: Allowance for loan and lease losses

     794           848   

 

 

Net loans

     56,587           53,609   

Loans held for sale

     734          611   

Premises and equipment

     841          885   

Operating lease assets

     330          305   

Goodwill

     1,057          979   

Other intangible assets

     101          127   

Corporate-owned life insurance

     3,479          3,408   

Derivative assets

     609          407   

Accrued income and other assets (including $1 of consolidated
LIHTC guaranteed funds VIEs, see Note 11) (a)

  

 

2,952  

 

  

 

3,015 

 

Discontinued assets (including $191 of loans in portfolio at fair value)

     2,324          4,572   

 

 

Total assets

   $ 93,821         $ 92,934   
  

 

 

    

 

 

 

LIABILITIES

     

Deposits in domestic offices:

     

NOW and money market deposit accounts

   $ 34,536        $ 33,952   

Savings deposits

     2,371          2,472   

Certificates of deposit ($100,000 or more)

     2,040          2,631   

Other time deposits

     3,259          3,648   

 

 

Total interest-bearing deposits

     42,206          42,703   

Noninterest-bearing deposits

     29,228          26,001   

Deposits in foreign office — interest-bearing

     564          558   

 

 

Total deposits

     71,998          69,262   

Federal funds purchased and securities sold under repurchase agreements

     575          1,534   

Bank notes and other short-term borrowings

     423          343   

Derivative liabilities

     784          414   

Accrued expense and other liabilities

     1,621          1,557   

Long-term debt

     7,875          7,650   

Discontinued liabilities

     3          1,854   

 

 

Total liabilities

     83,279          82,614   

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 and 2,904,839 shares

     291          291   

Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905 and 1,016,969,905 shares

     1,017           1,017   

Capital surplus

     3,986           4,022   

Retained earnings

     8,273           7,606   

Treasury stock, at cost (157,566,493 and 126,245,538 shares)

     (2,681)          (2,281)   

Accumulated other comprehensive income (loss)

     (356)          (352)   

 

 

Key shareholders’ equity

     10,530          10,303   

Noncontrolling interests

     12          17   

 

 

Total equity

     10,542          10,320   

 

 

Total liabilities and equity

   $ 93,821        $ 92,934   
  

 

 

    

 

 

 

 

 

 

(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.

 

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Consolidated Statements of Income

 

Year ended December 31,            
dollars in millions, except per share amounts 2014    2013    2012   

 

 

INTEREST INCOME

Loans

$         2,110     $         2,151     $         2,155    

Loans held for sale

  21       20       20    

Securities available for sale

  277       311       399    

Held-to-maturity securities

  93       82       69    

Trading account assets

  25       21       18    

Short-term investments

  6       6       6    

Other investments

  22       29       38    

 

 

Total interest income

  2,554       2,620       2,705    

INTEREST EXPENSE

Deposits

  117       158       257    

Federal funds purchased and securities sold under repurchase agreements

  2       2       4    

Bank notes and other short-term borrowings

  9       8       7    

Long-term debt

  133       127       173    

 

 

Total interest expense

  261       295       441    

 

 

NET INTEREST INCOME

  2,293       2,325       2,264    

Provision (credit) for loan and lease losses

  59       130       229    

 

 

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

  2,234       2,195       2,035    

NONINTEREST INCOME

Trust and investment services income

  403       393       375    

Investment banking and debt placement fees

  397       333       327    

Service charges on deposit accounts

  261       281       287    

Operating lease income and other leasing gains

  96       117       201    

Corporate services income

  178       172       168    

Cards and payments income

  166       162       135    

Corporate-owned life insurance income

  118       120       122    

Consumer mortgage income

  10       19       40    

Mortgage servicing fees

  46       58       24    

Net gains (losses) from principal investing

  78       52       72    

Other income (a)

  44       59       105    

 

 

Total noninterest income

  1,797       1,766       1,856    

NONINTEREST EXPENSE

Personnel

  1,591       1,609       1,570    

Net occupancy

  261       275       260    

Computer processing

  158       156       164    

Business services and professional fees

  156       151       190    

Equipment

  96       104       107    

Operating lease expense

  42       47       57    

Marketing

  49       51       68    

FDIC assessment

  30       30       31    

Intangible asset amortization

  39       44       23    

Provision (credit) for losses on lending-related commitments

  (2)       8       (16)    

OREO expense, net

  5       7       15    

Other expense

  334       338       349    

 

 

Total noninterest expense

  2,759       2,820       2,818    

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

  1,272       1,141       1,073    

Income taxes

  326       271       231    

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

  946       870       842    

Income (loss) from discontinued operations, net of taxes of ($23), $26 and $14 (see Note 13)

  (39)       40       23    

 

 

NET INCOME (LOSS)

  907       910       865    

Less: Net income (loss) attributable to noncontrolling interests

  7       —         7    

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

$ 900     $ 910     $ 858    
  

 

 

    

 

 

    

 

 

 

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

$ 917     $ 847     $ 813    

Net income (loss) attributable to Key common shareholders

  878       887       836    

Per common share:

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

$ 1.05     $ .93     $ .87    

Income (loss) from discontinued operations, net of taxes

  (.04)       .04       .02    

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

  1.01       .98       .89    

Per common share — assuming dilution:

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

$ 1.04     $ .93     $ .86    

Income (loss) from discontinued operations, net of taxes

  (.04)       .04       .02    

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

  .99       .97       .89    

Cash dividends declared per common share

$ .25     $ .215     $ .18    

Weighted-average common shares outstanding (000)

  871,464       906,524       938,941    

Effect of convertible preferred stock

  —         —         —      

Effect of common share options and other stock awards

  6,735       6,047       4,318    

 

 

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

  878,199       912,571       943,259    

 

 

 

(a) For the years ended December 31, 2014, 2013, and 2012, net securities gains (losses) totaled less than $1 million, $1 million, and less than $1 million, respectively. For 2014, 2013, and 2012, we did not have any impairment losses related to securities.

 

(b) EPS may not foot due to rounding.

 

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

See Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Comprehensive Income

 

Year ended December 31,                     
in millions    2014      2013      2012  

 

 

Net income (loss)

   $         907      $         910      $         865  

Other comprehensive income (loss), net of tax:

        

Net unrealized gains (losses) on securities available for sale, net of income taxes of $35, ($173), and ($58)

     59        (292)         (98)   

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $2, ($17), and $12

     3        (29)         20  

Foreign currency translation adjustments, net of income taxes of ($8), ($3), and ($3)

     (20)         (13)         10  

Net pension and postretirement benefit costs, net of income taxes of ($27), $63, and ($17)

     (46)         106        (28)   
   

Total other comprehensive income (loss), net of tax

     (4)         (228)         (96)   

 

 

Comprehensive income (loss)

     903        682        769  

Less: Comprehensive income attributable to noncontrolling interests

     7        —          7  

 

 

Comprehensive income (loss) attributable to Key

   $ 896      $ 682      $ 762  
  

 

 

    

 

 

    

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Changes in Equity

 

  Key Shareholders’ Equity      
dollars in millions, except per share amounts Preferred Shares
Outstanding
(000)
  Common Shares
Outstanding
(000)
  Preferred
Stock
  Common
Shares
  Capital
Surplus
  Retained
Earnings
  Treasury
Stock, at
Cost
  Accumulated
Other
Comprehensive
Income (Loss)
  Noncontrolling
Interests
 
   

BALANCE AT DECEMBER 31, 2011

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

Net income (loss)

  858     7  

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($58)

  (98

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

  20  

Foreign currency translation adjustments, net of income taxes of ($3)

  10  

Net pension and postretirement benefit costs, net of income taxes of ($17)

  (28

Deferred compensation

  17  

Cash dividends declared on common shares ($.18 per share)

  (169

Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share)

  (22

Common shares repurchased

  (30,637   (251

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

  3,398     (85   114  

Net contribution from (distribution to) noncontrolling interests

  14  

 

 

BALANCE AT DECEMBER 31, 2012

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

Net income (loss)

  910     —    

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($173)

  (292

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)

  (13

Net pension and postretirement benefit costs, net of income taxes of $63

  106  

Cash dividends declared on common shares ($.215 per share)

  (194

Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share)

  (23

Common shares repurchased

  (41,599   (474

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

  6,554     (104   145  

Net contribution from (distribution to) noncontrolling interests

  (21

 

 

BALANCE AT DECEMBER 31, 2013

  2,905     890,724   $ 291   $ 1,017   $ 4,022   $ 7,606   $ (2,281 $ (352 $ 17  

Net income (loss)

  900     7  

Other comprehensive income (loss):

Net unrealized gains (losses) on securities available for sale, net of income taxes of $35

  59  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $2

  3  

Foreign currency translation adjustments, net of income taxes of ($8)

  (20

Net pension and postretirement benefit costs, net of income taxes of ($27)

  (46

Deferred compensation

  2  

Cash dividends declared on common shares ($.25 per share)

  (218

Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share)

  (22

Common shares repurchased

  (36,285   (484

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

  4,964     (38   84  

LIHTC guaranteed funds put

  7  

Net contribution from (distribution to) noncontrolling interests

  (12

 

 

BALANCE AT DECEMBER 31, 2014

  2,905     859,403   $ 291   $ 1,017   $ 3,986   $ 8,273   $ (2,681 $ (356 $ 12  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Cash Flows

 

Year ended December 31,                     
in millions    2014      2013      2012  

 

 

OPERATING ACTIVITIES

        

Net income (loss)

   $ 907        $ 910        $ 865    

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

        

Provision (credit) for loan and lease losses

     59          130          229    

Provision (credit) for losses on lending-related commitments

     (2)          8          (16)    

Provision (credit) for losses on LIHTC guaranteed funds

     (7)          4          —    

Depreciation, amortization and accretion expense, net

     227          220          235    

Increase in cash surrender value of corporate-owned life insurance

     (106)          (106)          (110)    

Stock-based compensation expense

     44          35          49    

FDIC reimbursement (payments), net of FDIC expense

     1          296          26    

Deferred income taxes (benefit)

     5          29          35    

Proceeds from sales of loans held for sale

     5,386          5,595          5,535    

Originations of loans held for sale, net of repayments

     (5,415)          (5,440)          (5,189)    

Net losses (gains) from sale of loans held for sale

     (97)          (115)          (144)    

Net losses (gains) from principal investing

     (78)          (52)          (72)    

Net losses (gains) and writedown on OREO

     3          6          13    

Net losses (gains) on leased equipment

     (35)          (43)          (111)    

Net losses (gains) on sales of fixed assets

     7          12          2    

Net securities losses (gains)

     —          (1)          —    

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

     (12)          (133)          18    

Other operating activities, net

     403          338          (66)    

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     1,320          1,547          1,299    

INVESTING ACTIVITIES

        

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

     (114)          601          776    

Proceeds from sale of residual interests

     57          —          —    

Proceeds from sale of Victory

     10          131          —    

Net decrease (increase) in short-term investments, excluding acquisitions

     1,358          (1,650)          (421)    

Purchases of securities available for sale

     (3,797)          (5,222)          (1,772)    

Proceeds from sales of securities available for sale

     —          35          1    

Proceeds from prepayments and maturities of securities available for sale

     2,860          4,470          5,551    

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

     850          847          660    

Purchases of held-to-maturity securities

     (1,109)          (1,672)          (2,481)    

Purchases of other investments

     (49)          (46)          (66)    

Proceeds from sales of other investments

     334          187          28    

Proceeds from prepayments and maturities of other investments

     4          6          197    

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

     (3,296)          (2,026)          (2,935)    

Proceeds from sales of portfolio loans

     120          185          277    

Proceeds from corporate-owned life insurance

     35          31          33    

Purchases of premises, equipment, and software

     (97)          (100)          (164)    

Proceeds from sales of premises and equipment

     1          8          1    

Proceeds from sales of other real estate owned

     17          23          67    

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (2,816)          (4,192)          (248)    

FINANCING ACTIVITIES

        

Net increase (decrease) in deposits, excluding acquisitions

     2,736          2,333          1,989    

Net increase (decrease) in short-term borrowings

     (879)          (18)          (152)    

Net proceeds from issuance of long-term debt

     1,727          2,573          837    

Payments on long-term debt

     (1,355)          (1,545)          (3,394)    

Repurchase of common shares

     (484)          (474)          (251)    

Net proceeds from reissuance of common shares

     27          26          2    

Cash dividends paid

     (240)          (217)          (191)    

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     1,532          2,678          (1,160)    

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     36          33          (109)    

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR

     617          584          693    

 

 

CASH AND DUE FROM BANKS AT END OF YEAR

   $ 653        $ 617        $ 584    
  

 

 

    

 

 

    

 

 

 

 

 

Additional disclosures relative to cash flows:

        

Interest paid

   $ 281        $ 293        $ 464    

Income taxes paid (refunded)

     131          185          84    

Noncash items:

        

Assets acquired

   $ 41        $ 41        $ 1,283    

Liabilities assumed

     17          —          2,059    

Reduction of secured borrowing and related collateral

     152          —          —    

LIHTC guaranteed funds put

     7          —          —    

Loans transferred to portfolio from held for sale

     19          9          41    

Loans transferred to held for sale from portfolio

     16          61          118    

Loans transferred to other real estate owned

     23          21          38    

 

 

See Notes to Consolidated Financial Statements.

 

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1. Summary of Significant Accounting Policies

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

 

   

ABO: Accumulated benefit obligation.

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.

BHCA: Bank Holding Company Act of 1956, as amended.

BHCs: Bank holding companies.

CCAR: Comprehensive Capital Analysis and Review.

CFPB: Consumer Financial Protection Bureau.

CFTC: Commodities Futures Trading Commission.

CMBS: Commercial mortgage-backed securities.

CMO: Collateralized mortgage obligation.

Common shares: Common Shares, $1 par value.

DIF: Deposit Insurance Fund of the FDIC.

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.

FDIA: Federal Deposit Insurance Act, as amended.

FDIC: Federal Deposit Insurance Corporation.

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

FHLMC: Federal Home Loan Mortgage Corporation.

FINRA: Financial Industry Regulatory Authority.

FNMA: Federal National Mortgage Association.

FSOC: Financial Stability Oversight Council.

FVA: Fair value of employee benefit plan assets.

GAAP: U.S. generally accepted accounting principles.

GNMA: Government National Mortgage Association.

IRS: Internal Revenue Service.

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.

NFA: National Futures Association.

N/M: Not meaningful.

NOW: Negotiable Order of Withdrawal.

NPR: Notice of proposed rulemaking.

NYSE: New York Stock Exchange.

OCC: Office of the Comptroller of the Currency.

OCI: Other comprehensive income (loss).

OFR: Office of Financial Research of the U.S. Department of Treasury.

OREO: Other real estate owned.

OTTI: Other-than-temporary impairment.

QSPE: Qualifying special purpose entity.

PBO: Projected benefit obligation.

PCCR: Purchased credit card relationship.

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.

Organization

We are one of the nation’s largest bank-based financial services companies, with consolidated total assets of $93.8 billion at December 31, 2014. We provide deposit, lending, cash management, and investment services to individuals and small and medium-sized businesses through our subsidiary, KeyBank. We also provide a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public

 

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and private debt and equity, syndications, and derivatives to middle market companies in selected industries throughout the United States through our subsidiary, KeyBanc Capital Markets. As of December 31, 2014, KeyBank operated 994 full-service retail banking branches and 1,287 automated teller machines in 12 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two major business segments, Key Community Bank and Key Corporate Bank, is included in Note 23 (“Line of Business Results”).

Use of Estimates

Our accounting policies conform to GAAP and prevailing practices within the financial services industry. We must make certain estimates and judgments when determining the amounts presented in our consolidated financial statements and the related notes. If these estimates prove to be inaccurate, actual results could differ from those reported.

Basis of Presentation

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

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

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.

Noncontrolling Interests

Our Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business have noncontrolling interests that are accounted for in accordance with the applicable accounting guidance, which allows us to report noncontrolling interests in subsidiaries as a component of equity on the balance sheet. “Net income (loss)” on the income statement includes Key’s revenues, expenses, gains and losses, together with revenues, expenses, gains and losses pertaining to the noncontrolling interests. The portion of net results attributable to the noncontrolling interests is disclosed separately on the face of the income statement to arrive at the “net income (loss) attributable to Key.”

Statements of Cash Flows

Cash and due from banks are considered “cash and cash equivalents” for financial reporting purposes.

 

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Loans

Loans are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs. We defer certain nonrefundable loan origination and commitment fees, and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield.

Direct financing leases are carried at the aggregate of the lease receivable plus estimated unguaranteed residual values, less unearned income and deferred initial direct fees and costs. Unearned income on direct financing leases is amortized over the lease terms using a method approximating the interest method that produces a constant rate of return. Deferred initial direct fees and costs are amortized over the lease terms as an adjustment to the yield.

Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged leases is recognized on a basis that produces a constant rate of return on the outstanding investment in the leases, net of related deferred tax liabilities, during the years in which the net investment is positive.

The residual value component of a lease represents the fair value of the leased asset at the end of the lease term. We rely on industry data, historical experience, independent appraisals and the experience of the equipment leasing asset management team to value lease residuals. Relationships with a number of equipment vendors give the asset management team insight into the life cycle of the leased equipment, pending product upgrades and competing products.

In accordance with applicable accounting guidance for leases, residual values are reviewed at least annually to determine if an other-than-temporary decline in value has occurred. In the event of such a decline, the residual value is adjusted to its fair value. Impairment charges are included in noninterest expense, while net gains or losses on sales of lease residuals are included in “other income” on the income statement.

Loans Held for Sale

Our loans held for sale at December 31, 2014, and December 31, 2013, are disclosed in Note 4 (“Loans and Loans Held for Sale”). These loans, which we originated and intend to sell, are carried at the lower of aggregate cost or fair value. Fair value is determined based on available market data for similar assets, expected cash flows, and appraisals of underlying collateral or the credit quality of the borrower. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off. Subsequent declines in fair value are recognized as a charge to noninterest income. When a loan is placed in the held-for-sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold.

Nonperforming Loans

Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming loans do not include loans held for sale or PCI loans.

We generally classify commercial loans as nonperforming and stop accruing interest (i.e., designate the loan “nonaccrual”) when the borrower’s principal or interest payment is 90 days past due unless the loan is well-secured and in the process of collection. Commercial loans are also placed on nonaccrual status when payment is not past due but we have serious doubts about the borrower’s ability to comply with existing repayment terms. Once a loan is designated nonaccrual (and as a result impaired), the interest accrued but not collected generally is charged against the ALLL, and payments subsequently received generally are applied to principal. However, if we believe that all principal and interest on a commercial nonaccrual loan ultimately are collectible, interest income may be recognized as received. 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.

 

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We generally classify consumer loans as nonperforming and stop accruing interest when the borrower’s payment is 120 days past due, unless the loan is well-secured and in the process of collection. Any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. Secured loans that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are designated as nonperforming and TDRs. Our charge-off policy for most consumer loans takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due. Credit card loans and similar unsecured products continue to accrue interest until the account is charged off at 180 days past due.

Commercial and consumer loans may be returned to accrual status if we are reasonably assured that all contractually due principal and interest are collectible and the borrower has demonstrated a sustained period (generally six months) of repayment performance under the contracted terms of the loan and applicable regulation.

Impaired Loans

A nonperforming loan is considered to be impaired and assigned a specific reserve when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement.

All commercial and consumer TDRs regardless of size and all impaired commercial loans with an outstanding balance of $2.5 million or greater are individually evaluated for impairment. Nonperforming loans of less than $2.5 million and smaller-balance homogeneous loans (residential mortgage, home equity loans, marine, etc.) are aggregated and collectively evaluated for impairment. The amount of the reserve is estimated based on the criteria outlined in the “Allowance for Loan and Lease Losses” section of this note.

Allowance for Loan and Lease Losses

The ALLL represents our estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. We establish the amount of this allowance by analyzing the quality of the loan portfolio at least quarterly, and more often if deemed necessary. We segregate our loan portfolio between commercial and consumer loans and develop and document our methodology to determine the ALLL accordingly. We believe these portfolio segments represent the most appropriate level for determining our historical loss experience, as well as the level at which we monitor credit quality and risk characteristics of the portfolios. Commercial loans, which generally have larger individual balances, constitute a significant portion of our total loan portfolio. The consumer portfolio typically includes smaller-balance homogeneous loans.

We estimate the appropriate level of our ALLL by applying expected loss rates to existing loans with similar risk characteristics. Expected loss rates for commercial loans are derived from a statistical analysis of our historical default and loss severity experience. The analysis utilizes probability of default and loss given default to assign loan grades using our internal risk rating system. Our expected loss rates are reviewed quarterly and updated as necessary. As of December 31, 2014, the probability of default ratings was based on our default data for the period from January 2008 through October 2014, which encompasses the last downturn period as well as our more recent positive credit experience. We adjust expected loss rates based on calculated estimates of the average time period from initial loss indication to the initial loss recorded for an individual loan.

Expected loss rates for consumer loans are derived from a statistical analysis of our historical default and loss severity experience. Consumer loans are analyzed quarterly in homogeneous product-type pools that share similar attributes and are assigned an expected loss rate that represents expected losses over the next 12 months. The estimate of the average time period from initial loss indication to initial loss recorded for consumer loans is 1 to 2 years.

 

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The ALLL may be adjusted to reflect our current assessment of many qualitative factors that may not be directly measured in the statistical analysis of expected loss, including:

 

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changes in international, national, regional, and local economic and business conditions;

 

¿  

changes in the experience, ability, and depth of our lending management and staff;

 

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changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices;

 

¿  

changes in the nature and volume of the loan portfolio, including the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

 

¿  

changes in the volume and/or severity of past due, nonaccrual, and adversely classified or graded loans; and

 

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external factors, such as competition, legal developments, and regulatory requirements.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million or greater, we conduct further analysis to determine the probable loss content and assign a specific 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 balances of TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses.

While quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, there have been no changes to the accounting policies or methodology we used to estimate the ALLL.

Liability for Credit Losses on Lending-Related Commitments

The liability for credit losses inherent in lending-related commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. This liability totaled $36 million at December 31, 2014, and $37 million at December 31, 2013. We establish the amount of this liability by considering both historical trends and current market conditions quarterly, or more often if deemed necessary.

Fair Value Measurements

We follow the applicable accounting guidance for fair value measurements and disclosures for all applicable financial and nonfinancial assets and liabilities. This guidance defines fair value, establishes a framework for measurement, and addresses disclosures about fair value measurements. Fair value-related guidance applies only when other guidance requires or permits assets or liabilities to be measured at fair value; it does not expand the use of fair value to any new circumstances.

Accounting guidance defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. In other words, fair value represents an exit price at the measurement date. Market participants are buyers and sellers who are independent, knowledgeable, and willing and able to transact in the principal (or most advantageous) market for the asset or liability being measured. Current market conditions, including imbalances between supply and demand, are considered in determining fair value.

 

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We value our assets and liabilities based on the principal market where each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, valuation is based on the most advantageous market (i.e., the market where the asset could be sold at a price that maximizes the amount to be received or the liability transferred at a price that minimizes the amount to be paid). In the absence of observable market transactions, we consider liquidity valuation adjustments to reflect the uncertainty in pricing the instruments.

In measuring the fair value of an asset, we assume the highest and best use of the asset by a market participant — not just the intended use — to maximize the value of the asset. We also consider whether any credit valuation adjustments are necessary based on the counterparty’s credit quality.

When measuring the fair value of a liability, we assume that the transfer will not affect the associated nonperformance risk. Nonperformance risk is the risk that an obligation will not be satisfied, and encompasses not only our own credit risk (i.e., the risk that we will fail to meet our obligation), but also other risks such as settlement risk (i.e., the risk that upon termination or sale, the contract will not settle). We consider the effect of our own credit risk on the fair value for any period in which fair value is measured.

There are three acceptable techniques for measuring fair value: the market approach, the income approach, and the cost approach. The appropriate technique for valuing a particular asset or liability depends on the exit market, the nature of the asset or liability being valued, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment, and applying the valuation technique requires sufficient knowledge and expertise.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on our own information or assessment of assumptions used by other market participants in pricing the asset or liability. Our unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for Level 2 assets or liabilities are based on one or a combination of the following factors: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the measurement. We consider an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability. Assets and liabilities may transfer between levels based on the observable and unobservable inputs used at the valuation date, as the inputs may be influenced by certain market conditions. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period.

Typically, assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly. However, if the fair value measurement of an instrument does not necessarily result in a change in the amount recorded on the balance sheet, assets and liabilities are considered to be fair valued on a nonrecurring basis. This generally occurs when we apply accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment.

At a minimum, we conduct our valuations quarterly. Additional information regarding fair value measurements and disclosures is provided in Note 6 (“Fair Value Measurements”).

 

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Short-Term Investments

Short-term investments consist of segregated, interest-bearing deposits due from banks, the Federal Reserve, and certain non-U.S. banks as well as reverse repurchase agreements. Reverse repurchase agreements are further described under the “Repurchase agreements” heading in this section.

Trading Account Assets

Trading account assets are debt and equity securities, as well as commercial loans that we purchase and hold but intend to sell in the near term. These assets are reported at fair value. Realized and unrealized gains and losses on trading account assets are reported in “other income” on the income statement.

Securities

Securities available for sale.   Securities available for sale 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 “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 “other-than-temporary” are included in “other income” on the income statement or in AOCI in accordance with the applicable accounting guidance, as further described under the heading “Other-than-Temporary Impairments” in this note and in Note 7 (“Securities”).

“Other securities” held in the available-for-sale portfolio consist of marketable equity securities that are traded on a public exchange such as the NYSE or NASDAQ and convertible preferred stock of a privately held company.

Held-to-maturity securities.   Held-to-maturity securities 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.

Other-than-Temporary Impairments

If the amortized cost of a debt security is greater than its fair value and we intend to sell it, or it is more-likely-than-not that we will be required to sell it, before the expected recovery of the amortized cost, then the entire impairment is recognized in earnings. If we have no intent to sell the security, or it is more-likely-than-not that we will not be required to sell it, before expected recovery, then the credit portion of the impairment is recognized in earnings, while the remaining portion attributable to factors such as liquidity and interest rate changes is recognized in equity as a component of AOCI on the balance sheet. The credit portion is equal to the difference between the cash flows expected to be collected and the amortized cost of the debt security.

Generally, if the amortized cost of an equity security is greater than its fair value by more than 20% consistently for more than six months, the difference is considered to be other-than-temporary.

Other Investments

Principal investments — investments in equity and debt instruments made by our Principal Investing unit — represented 53% and 57% of other investments at December 31, 2014, and December 31, 2013, respectively, and included both direct investments (investments made in a particular company) and indirect investments (investments made through funds that include other investors). Principal investments are predominantly made in

 

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privately held companies and are carried at fair value ($406 million at December 31, 2014, and $554 million at December 31, 2013). Changes in fair values and realized gains and losses on sales of principal investments are reported as “net gains (losses) from principal investing” on the income statement.

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. The carrying amounts of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary. These adjustments are included in “other income” on the income statement.

Repurchase agreements

We enter into repurchase and reverse repurchase agreements primarily to acquire securities to cover short positions, to finance our investing positions, and to settle other securities obligations. Repurchase and reverse repurchase agreements are accounted for as collateralized financing transactions and recorded on our balance sheet at the amounts at which the securities will be subsequently sold or repurchased. The value of our repurchase and reverse repurchase agreements is based on the valuation of the underlying securities, as further described under the “Other assets and liabilities” heading in Note 6 (“Fair Value Measurements”). Fees received in connection with these transactions are recorded in interest income; fees paid are recorded in interest expense.

Derivatives

In accordance with applicable accounting guidance, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. The net increase or decrease in derivatives is included in “other operating activities, net” within the statement of cash flows.

Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the derivative has been designated and qualifies as part of a hedge relationship, and further, on the type of hedge relationship. For derivatives that are not designated as hedging instruments, any gain or loss is recognized immediately in earnings. A derivative that is designated and qualifies as a hedging instrument must be designated as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.

A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities, and commitments caused by changes in interest rates or other economic factors. 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 recognized in “other income” on the income statement, with no corresponding offset.

A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest rates or other economic factors. The effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet and reclassified to earnings in the same period in which the hedged transaction affects earnings. The ineffective portion of a cash flow hedge is included in “other income” on the income statement.

A net investment hedge is used to hedge the exposure of changes in the carrying value of investments as a result of changes in the related foreign exchange rates. 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. The ineffective portion of a net investment hedge is included in “other income” on the income statement.

 

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Hedge “effectiveness” is determined by the extent to which changes in the fair value of a derivative instrument offset changes in the fair value, cash flows, or carrying value attributable to the risk being hedged. If the relationship between the change in the fair value of the derivative instrument and the change in the hedged item falls within a range considered to be the industry norm, the hedge is considered “highly effective” and qualifies for hedge accounting. A hedge is “ineffective” if the relationship between the changes falls outside the acceptable range. In that case, hedge accounting is discontinued on a prospective basis. Hedge effectiveness is tested at least quarterly.

Additional information regarding the accounting for derivatives is provided in Note 8 (“Derivatives and Hedging Activities”).

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 8 (“Derivatives and Hedging Activities”).

Servicing Assets

We service commercial real estate loans. Servicing assets related to all commercial real estate loan servicing totaled $323 million at December 31, 2014, and $332 million at December 31, 2013, and are included in “accrued income and other assets” on the balance sheet.

Servicing assets and liabilities purchased or retained initially are measured at fair value. When no ready market value (such as quoted market prices, or prices based on sales or purchases of similar assets) is available to determine the fair value of servicing assets, fair value is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation is based on a number of assumptions, including the market cost of servicing, the discount rate, the prepayment rate, and the default rate.

We remeasure our servicing assets using the amortization method at each reporting date. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income and recorded in “mortgage servicing fees” on the income statement.

Servicing assets are evaluated quarterly for possible impairment. This process involves classifying the assets based on the types of loans serviced and their associated interest rates, and determining the fair value of each class. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced by recording a charge to income in the amount of such excess and establishing a valuation allowance. No impairment of servicing assets recorded for the years ended December 31, 2014, 2013, and 2012, was material in amount. Additional information pertaining to servicing assets is included in Note 9 (“Mortgage Servicing Assets”).

Business Combinations

We account for our business combinations using the acquisition method of accounting. Under this accounting method, the acquired company’s assets and liabilities are recorded at fair value at the date of acquisition, and the results of operations of the acquired company are combined with Key’s results from that date forward. Acquisition costs are expensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including intangible assets with finite lives) is recorded as goodwill. Our accounting policy for intangible assets is summarized in this note under the heading “Goodwill and Other Intangible Assets.”

 

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Additional information regarding acquisitions is provided in Note 13 (“Acquisitions and Discontinued Operations”).

Goodwill and Other Intangible Assets

Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Other intangible assets primarily are the net present value of future economic benefits to be derived from the purchase of credit card receivable assets and core deposits. Other intangible assets are amortized on either an accelerated or straight-line basis over periods ranging from 1  1 / 2 to 30 years. Goodwill and other types of intangible assets deemed to have indefinite lives are not amortized.

Relevant accounting guidance provides that goodwill and certain other intangible assets must be subjected to impairment testing at least annually. We perform quantitative goodwill impairment testing in the fourth quarter of each year. Our reporting units for purposes of this testing are our two business segments, Key Community Bank and Key Corporate Bank. We continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly.

The first step in goodwill impairment testing is to determine the fair value of each reporting unit. This amount is estimated using comparable external market data (market approach) and discounted cash flow modeling that incorporates an appropriate risk premium and earnings forecast information (income approach). The amount of capital being allocated to our reporting units as a proxy for the carrying value is based on risk-based regulatory capital requirements. If the carrying amount of a reporting unit exceeds its fair value, goodwill impairment may be indicated. In such a case, we would perform the second step of goodwill impairment testing, and we would estimate a hypothetical purchase price for the reporting unit (representing the unit’s fair value). Then we would compare that hypothetical purchase price with the fair value of the unit’s net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, the impairment loss represented by this difference is charged to earnings.

Additional information pertaining to goodwill and other intangible assets is included in Note 10 (“Goodwill and Other Intangible Assets”).

Purchased Loans

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased performing loans that do not have evidence of deterioration in credit quality at acquisition are recorded at fair value at the acquisition date. Any premium or discount associated with purchased performing loans is recognized as an expense or income based on the effective yield method of amortization. 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. These loans are initially recorded at fair value without recording an allowance for loan losses. Fair value of these loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those cash flows. PCI loans are generally accounted for on a pool basis, with pools formed based on the common characteristics of the loans, such as loan collateral type or loan product type. Each pool is accounted for as a single asset with one composite interest rate and an aggregate expectation of cash flows.

Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable amount,” is accreted into interest income over the life of the loans in each pool using the effective yield method. Accordingly, PCI loans are not subject to classification as nonaccrual (and nonperforming) in the same manner as originated loans. Rather, acquired PCI loans are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to contractual interest payments at the loan level. The difference between contractually

 

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required principal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable amount,” includes estimates of both the impact of prepayments and future credit losses expected to be incurred over the life of the loans in each pool.

After we acquire loans determined to be PCI loans, actual cash collections are monitored to determine if they conform to management’s expectations. Revised cash flow expectations are prepared, as necessary. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require us to establish an allowance for loan losses by recording a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and requires us to recalculate the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool.

A purchased loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. If the loan is sold, a gain or loss on sale is recognized and reported within noninterest income based on the difference between the sales proceeds and the carrying amount of the loan. In the case of a foreclosure, an individual loan is removed from the pool at an amount received from its resolution (fair value of the underlying collateral less costs to sell). Any difference between this amount and the loan carrying value is absorbed by the nonaccretable difference established for the entire pool. For loans resolved by payment in full, there is no difference between the amount received at resolution and the outstanding balance of the loan. In these cases, the remaining accretable amount balance is unaffected and any material change in remaining effective yield caused by removing the loan from the pool is addressed in connection with the subsequent cash flow re-assessment for the pool. PCI loans subject to modification are not removed from the pool even if those loans would otherwise be deemed TDRs since the pool, and not the individual loan, represents the unit of account.

Premises and Equipment

Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. We determine depreciation of premises and equipment using the straight-line method over the estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line method over the terms of the leases. Accumulated depreciation and amortization on premises and equipment totaled $1.3 billion at December 31, 2014, and $1.2 billion at December 31, 2013.

Internally Developed Software

We rely on company personnel and independent contractors to plan, develop, install, customize, and enhance computer systems applications that support corporate and administrative operations. Software development costs, such as those related to program coding, testing, configuration, and installation, are capitalized and included in “accrued income and other assets” on the balance sheet. The resulting asset, net of accumulated amortization, totaled $64 million at December 31, 2014, and $60 million at December 31, 2013, and is amortized using the straight-line method over its expected useful life (not to exceed five years). Costs incurred during the planning and post-development phases of an internal software project are expensed as incurred.

Software that is no longer used is written off to earnings immediately. When we decide to replace software, amortization of the phased-out software is accelerated to the expected replacement date.

Guarantees

In accordance with the applicable accounting guidance, we recognize liabilities, which are included in “accrued expense and other liabilities” on the balance sheet, for the fair value of our obligations under certain guarantees issued.

 

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If we receive a fee for a guarantee requiring liability recognition, the amount of the fee represents the initial fair value of the “stand ready” obligation. If there is no fee, the fair value of the stand ready obligation is determined using expected present value measurement techniques, unless observable transactions for comparable guarantees are available. The subsequent accounting for these stand ready obligations depends on the nature of the underlying guarantees. We account for our release from risk under a particular guarantee when the guarantee expires or is settled, or by a systematic and rational amortization method, depending on the risk profile of the guarantee.

Additional information regarding guarantees is included in Note 20 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Guarantees.”

Revenue Recognition

We recognize revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. Our principal source of revenue is interest income, which is recognized on an accrual basis primarily according to nondiscretionary formulas in written contracts, such as loan agreements or securities contracts.

Stock-Based Compensation

Stock-based compensation is measured using the fair value method of accounting. The measured cost is recognized over the period during which the recipient is required to provide service in exchange for the award. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest.

We recognize compensation cost for stock-based, mandatory deferred incentive compensation awards using the accelerated method of amortization over a period of approximately five years (the current year performance period and a four-year vesting period, which generally starts in the first quarter following the performance period) for awards granted in 2012 and after, and over a period of approximately four years (the current year performance period and a three-year vesting period, which generally starts in the first quarter following the performance period) for awards granted prior to 2012.

Employee stock options typically become exercisable at the rate of 25% per year, beginning one year after the grant date. Options expire no later than 10 years after their grant date. We recognize stock-based compensation expense for stock options with graded vesting using an accelerated method of amortization.

We use shares repurchased under our annual capital plan submitted to our regulators (treasury shares) for share issuances under all stock-based compensation programs other than the discounted stock purchase plan. Shares issued under the discounted stock purchase plan are purchased on the open market.

We estimate the fair value of options granted using the Black-Scholes option-pricing model, as further described in Note 15 (“Stock-Based Compensation”).

Marketing Costs

We expense all marketing-related costs, including advertising costs, as incurred.

Accounting Guidance Adopted in 2014

Pushdown accounting.     In November 2014, the FASB issued new accounting guidance that provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to

 

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apply pushdown accounting in the reporting period in which the change-in-control event occurs and should determine whether to elect to apply pushdown accounting for each individual change-in-control event. This accounting guidance was effective as of November 18, 2014, after which an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred have already been issued or made available to be issued, the application of this guidance would be a change in accounting principle. We did not change the accounting for previously recorded acquisitions based on this new guidance.

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 12 (“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 6 (“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 December 31, 2014

Derivatives and hedging.     In November 2014, the FASB issued new accounting guidance that clarifies how current guidance should be interpreted when evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. An entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, when evaluating the nature of a host contract. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and 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.

 

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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 have elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance is not expected to have a material effect 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 have elected to implement the new accounting guidance using a cumulative-effect approach. Our preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations. There are many aspects of the new accounting guidance that are still being interpreted, and therefore, the results of our materiality analysis may change based on the conclusions reached as to the application of the new guidance.

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

 

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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. We have elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

 

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2. Earnings Per Common Share

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

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

 

 Year ended December 31,                     
 dollars in millions, except per share amounts    2014        2013        2012    

 EARNINGS

        

 Income (loss) from continuing operations

     $ 946          $ 870          $ 842    

 Less: Net income (loss) attributable to noncontrolling interests

     7          —          7    

 Income (loss) from continuing operations attributable to Key

     939          870          835    

 Less: Dividends on Series A Preferred Stock

     22          23          22    

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

     917          847          813    

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

     (39)          40          23    

 Net income (loss) attributable to Key common shareholders

     $                 878          $                 887          $                 836    
  

 

 

    

 

 

    

 

 

 
   

 WEIGHTED-AVERAGE COMMON SHARES

        

 Weighted-average common shares outstanding (000)

     871,464          906,524          938,941    

 Effect of convertible preferred stock

     —          —          —    

 Effect of common share options and other stock awards

     6,735          6,047          4,318    

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

     878,199          912,571          943,259    
  

 

 

    

 

 

    

 

 

 
   

 EARNINGS PER COMMON SHARE

        

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

     $ 1.05          $ .93          $ .87    

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

     (.04)          .04          .02    

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

     1.01          .98          .89    

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

     $ 1.04          $ .93          $ .86    

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

     (.04)          .04          .02    

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

     .99          .97          .89    

 

 

 

(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 13 (“Acquisitions and Discontinued Operations”).

 

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

 

(c) EPS may not foot due to rounding.

 

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3. Restrictions on Cash, Dividends and Lending Activities

Federal law requires a depository institution to maintain a prescribed amount of cash or deposit reserve balances with its Federal Reserve Bank. KeyBank maintained average reserve balances aggregating $181 million in 2014 to fulfill these requirements.

Capital distributions from KeyBank and other subsidiaries are our principal source of cash flows for paying dividends on our common and preferred shares, servicing our debt, and financing corporate operations. 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 the dividend is declared.

During 2014, KeyBank paid KeyCorp a total of $300 million in dividends; nonbank subsidiaries did not pay any cash dividends or noncash dividends to KeyCorp. As of December 31, 2014, KeyBank had regulatory capacity to pay $935 million in dividends to KeyCorp. During 2014, KeyCorp did not make any cash capital infusions to KeyBank and made $9 million of cash capital infusions to nonbank subsidiaries. At December 31, 2014, KeyCorp held $2.2 billion in short-term investments, which can be used to pay dividends to shareholders, service debt, and finance corporate operations.

As indicated in the “Supervision and Regulation” section of Item 1 of this report under the heading “Bank transactions with affiliates,” federal law and regulation also restricts loans and advances from bank subsidiaries to their parent companies (and to nonbank subsidiaries of their parent companies), and requires those transactions to be secured.

 

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4. Loans and Loans Held for Sale

Our loans by category are summarized as follows:

 

 December 31,              
 in millions    2014        2013    

 Commercial, financial and agricultural (a)

       $                     27,982            $                     24,963    

 Commercial real estate:

     

 Commercial mortgage

     8,047          7,720    

 Construction

     1,100          1,093    

 Total commercial real estate loans

     9,147          8,813    

 Commercial lease financing (b)

     4,252          4,551    

 Total commercial loans

     41,381          38,327    

 Residential — Prime Loans:

     

 Real estate — residential mortgage

     2,225          2,187    

 Home equity:

     

 Key Community Bank

     10,366          10,340    

 Other

     267          334    

 Total home equity loans

     10,633          10,674    

 Total residential — prime loans

     12,858          12,861    

 Consumer other — Key Community Bank

     1,560          1,449    

 Credit cards

     754          722    

 Consumer other:

     

 Marine

     779          1,028    

 Other

     49          70    

 Total consumer other

     828          1,098    

 Total consumer loans

     16,000          16,130    

 Total loans (c) (d)

       $ 57,381            $ 54,457    
  

 

 

    

 

 

 

 

 

 

(a) Loan balances include $88 million and $94 million of commercial credit card balances at December 31, 2014, and December 31, 2013, respectively.

 

(b) Commercial lease financing includes receivables of $302 million and $58 million held as collateral for a secured borrowing at December 31, 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 first quarter of 2015. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”).

 

(c) At December 31, 2014, total loans include purchased loans of $138 million, of which $13 million were PCI loans. At December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans.

 

(d) Total loans exclude loans in the amount of $2.3 billion at December 31, 2014, and $4.5 billion at December 31, 2013, related to the discontinued operations of the education lending business.

We use interest rate swaps, which modify the repricing characteristics of certain loans, to manage interest rate risk. For more information about such swaps, see Note 8 (“Derivatives and Hedging Activities”).

Our loans held for sale by category are summarized as follows:

 

 December 31,

  in millions

   2014        2013    

 Commercial, financial and agricultural

   $ 63        $ 278    

 Real estate — commercial mortgage

                 638                      307    

 Commercial lease financing

     15          9    

 Real estate — residential mortgage

     18          17    

 Total loans held for sale

   $ 734        $ 611    
  

 

 

    

 

 

 

 

 

 

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Our summary of changes in loans held for sale follows:

 

 Year ended December 31,              
 in millions    2014        2013    

 Balance at beginning of the period

   $ 611        $ 599   

 New originations

                     5,681                          5,452    

 Transfers from (to) held to maturity, net

     (3)          52   

 Loan sales

     (5,289)          (5,480)    

 Loan draws (payments), net

     (266)          (12)    

 Balance at end of period

   $ 734        $ 611    
  

 

 

    

 

 

 

 

 

Commercial lease financing receivables primarily are direct financing leases, but also include leveraged leases. The composition of the net investment in direct financing leases is as follows:

 

 December 31,              
 in millions    2014        2013    

 Direct financing lease receivables

   $ 3,009        $ 3,176    

 Unearned income

     (205)          (219)    

 Unguaranteed residual value

     220          231    

 Deferred fees and costs

     18          21    

 Net investment in direct financing leases

    $                 3,042         $                 3,209    
  

 

 

    

 

 

 

 

 

At December 31, 2014, minimum future lease payments to be received are as follows: 2015 — $1 billion; 2016 — $767 million; 2017 — $474 million; 2018 — $276 million; 2019 — $156 million; and all subsequent years — $169 million. The allowance related to lease financing receivables is $56 million at December 31, 2014.

5. 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:

 

 December 31,              
 in millions    2014        2013    
                   

 Total nonperforming loans (a)

    $ 418         $ 508    

 Nonperforming loans held for sale

     —          1    

 OREO

     18          15    

 Other nonperforming assets

     —          7    

 Total nonperforming assets

    $ 436         $ 531    
  

 

 

    

 

 

 

 Nonperforming assets from discontinued operations — education lending (b)

    $ 11         $ 25    
  

 

 

    

 

 

 
                   

 Restructured loans included in nonperforming loans

    $ 157         $ 214    

 Restructured loans with an allocated specific allowance (c)

     82          71    

 Specifically allocated allowance for restructured loans (d)

     34          35    

 Accruing loans past due 90 days or more

    $ 96         $                     71    

 Accruing loans past due 30 through 89 days

                         235          318    

 

 

 

(a) Loan balances exclude $13 million and $16 million of PCI loans at December 31, 2014, and December 31, 2013, respectively.

 

(b) Includes restructured loans of approximately $17 million and $13 million at December 31, 2014, and December 31, 2013, respectively. See Note 13 (“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.

 

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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 December 31, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $20 million and $13 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 December 31, 2014.

At December 31, 2014, the approximate carrying amount of our commercial nonperforming loans outstanding represented 74% of their original contractual amount, total nonperforming loans outstanding represented 79% of their original contractual amount owed, and nonperforming assets in total were carried at 79% of their original contractual amount.

At December 31, 2014, our 20 largest nonperforming loans totaled $88 million, representing 21% of total loans on nonperforming status. At December 31, 2013, the 20 largest nonperforming loans totaled $86 million, representing 17% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $16 million for the year ended December 31, 2014, and $23 million for the year ended December 31, 2013.

 

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

 

December 31, 2014

in millions

   Recorded  
Investment   
    (a)    Unpaid  
Principal  
Balance   
    (b)    Specific  
Allowance  
     Average  
Recorded  
Investment  
 
With no related allowance recorded:                

Commercial, financial and agricultural

   $ 6          $ 17            —          $ 8    

Commercial real estate:

               

Commercial mortgage

     15            20            —            19    

Construction

     5              6              —            7    

Total commercial real estate loans

     20              26              —            26    

Total commercial loans

     26              43              —            34    

Real estate — residential mortgage

     24            24            —            30    
               

Home equity:

               

Key Community Bank

     62            63            —            63    

Other

     1              1              —            2    

Total home equity loans

     63            64            —            65    

Consumer other:

               

Marine

     2              2              —            2    

Total consumer other

     2              2              —            2    

Total consumer loans

     89              90              —            97    

Total loans with no related allowance recorded

     115            133            —            131    
               
With an allowance recorded:                

Commercial, financial and agricultural

     37            37          $ 9          28    

Commercial real estate:

               

Commercial mortgage

     6            6            2          6    

Construction

     3              3              1          2    

Total commercial real estate loans

     9              9              3          8    

Total commercial loans

     46              46              12          36    
               

Real estate — residential mortgage

     31            31            5          25    
               

Home equity:

               

Key Community Bank

     46            46            16          43    

Other

     11              11              2          11    

Total home equity loans

     57            57            18          54    
               

Consumer other — Key Community Bank

     4            4            —            3    

Credit cards

     4            4            —            4    

Consumer other:

               

Marine

     43            43            5          45    

Other

     2              2              —            2    

Total consumer other

     45              45              5          47    

Total consumer loans

     141              141              28          133    

Total loans with an allowance recorded

     187              187              40          169    

Total

   $             302          $             320          $             40        $             300    
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

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

 

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

 

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December 31, 2013

in millions

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

For the years ended December 31, 2014, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $7 million, $6 million, and $5 million, respectively.

At December 31, 2014, aggregate restructured loans (accrual and nonaccrual loans) totaled $270 million, compared to $338 million at December 31, 2013. We added $93 million in restructured loans during 2014, which were offset by $161 million in payments and charge-offs.

 

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A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2014, follows:

 

December 31, 2014

dollars in millions

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

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     14        $ 25        $ 23    

Commercial real estate:

        

Real estate — commercial mortgage

     10          38          13    

Real estate — construction

     1          5          —    

Total commercial real estate loans

     11          43          13    

Total commercial loans

     25          68          36    

Real estate — residential mortgage

     453          27          27    

Home equity:

        

Key Community Bank

     1,184          79          72    

Other

     158          4          4    

Total home equity loans

     1,342          83          76    

Consumer other — Key Community Bank

     37          2          1    

Credit cards

     290          2          2    

Consumer other:

        

Marine

     206          17          14    

Other

     38          1          1    

Total consumer other

     244          18          15    

Total consumer loans

     2,366          132          121    

Total nonperforming TDRs

     2,391          200          157    

Prior-year accruing (a)

        

Commercial, financial and agricultural

     20          6          3    

Commercial real estate:

        

Real estate — commercial mortgage

     1          2          1    

Total commercial real estate loans

     1          2          1    

Total commercial loans

     21          8          4    

Real estate — residential mortgage

     381          29          29    

Home equity:

        

Key Community Bank

     674          41          36    

Other

     310          9          8    

Total home equity loans

     984          50          44    

Consumer other — Key Community Bank

     45          2          2    

Credit cards

     514          4          2    

Consumer other:

        

Marine

     373          54          31    

Other

     67          2          1    

Total consumer other

     440          56          32    

Total consumer loans

     2,364          141          109    

Total prior-year accruing TDRs

     2,385          149          113    

Total TDRs

             4,776        $                     349        $                         270    
  

 

 

    

 

 

    

 

 

 

 

 

 

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

 

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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.

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 13 (“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

 

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due. During the year ended December 31, 2014, there were no significant commercial loan TDRs, and 84 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 year ended December 31, 2013, there were no significant commercial loan TDRs, and 672 consumer loan TDRs with a combined recorded investment of $31 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 post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs and other selected financial data.

 

December 31,

in millions

   2014        2013    

Commercial loans:

     

Interest rate reduction

   $ 13        $ 95    

Forgiveness of principal

     2          5    

Other

     25          7    

Total

   $ 40        $ 107    
  

 

 

    

 

 

 

Consumer loans:

     

Interest rate reduction

   $ 140        $ 130    

Forgiveness of principal

     4          5    

Other

     86          96    

Total

   $ 230        $ 231    
  

 

 

    

 

 

 

Total commercial and consumer TDRs (a)

   $ 270        $ 338    

Total loans

             57,381                  54,457    

 

(a) Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $5 million and $15 million at December 31, 2014, and December 31, 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.”

At December 31, 2014, approximately $56.6 billion, or 98.7%, of our total loans were current. At December 31, 2014, total past due loans and nonperforming loans of $749 million represented approximately 1.3% of total loans.

 

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

 

December 31, 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

  $ 27,858     $ 19     $ 14     $ 32     $ 59     $ 124           $ 27,982  

Commercial real estate:

               

Commercial mortgage

    7,981       6       10       16       34       66             8,047  

Construction

    1,084       2             1       13       16             1,100  

Total commercial real estate loans

    9,065       8       10       17       47       82             9,147  

Commercial lease financing

    4,172       30       21       11       18       80             4,252  

Total commercial loans

  $ 41,095     $ 57     $ 45     $ 60     $ 124     $ 286           $ 41,381  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate — residential mortgage

  $ 2,111     $ 12     $ 7     $ 4     $ 79     $ 102     $ 12     $ 2,225  

Home equity:

               

Key Community Bank

    10,098       46       22       14       185       267       1       10,366  

Other

    249       5       2       1       10       18             267  

Total home equity loans

    10,347       51       24       15       195       285       1       10,633  

Consumer other — Key Community Bank

    1,541       9       3       5       2       19             1,560  

Credit cards

    733       6       4       9       2       21             754  

Consumer other:

               

Marine

    746       11       5       2       15       33             779  

Other

    46       1             1       1       3             49  

Total consumer other

    792       12       5       3       16       36             828  

Total consumer loans

  $ 15,524     $ 90     $ 43     $ 36     $ 294     $ 463     $ 13     $ 16,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 56,619     $ 147     $ 88     $ 96     $ 418     $ 749     $ 13     $ 57,381  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                 

 

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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                 

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.

 

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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 $13 million and $16 million of PCI loans at December 31, 2014, and December 31, 2013, respectively, based on bond rating, regulatory classification, and payment activity as of December 31, 2014, and December 31, 2013, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category (a)  

 

December 31,

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

$ 311   $ 402   $ 2   $ 2   $ 1   $ 1   $ 513   $ 656   $ 827   $ 1,061  

A

  1,272     882     1     56         1     608     631     1,881     1,570  

BBB — BB

  24,949     22,368     7,527     7,129     956     920     2,952     3,080     36,384     33,497  

B

  686     521     287     282     105     32     112     117     1,190     952  

CCC — C

  764     790     230     250     38     139     67     67     1,099     1,246  

Total

$         27,982   $         24,963   $         8,047   $         7,719   $         1,100   $         1,093   $         4,252   $         4,551   $         41,381   $         38,326  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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)  

 

December 31,

in millions

                    
         Residential — Prime           

GRADE

     2014        2013     

Pass

   $ 12,552      $ 12,500     

Substandard

     293        346     

Total

   $         12,845      $         12,846     
  

 

 

    

 

 

    
    

 

 

    

 

 

    

 

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Credit Risk Profile Based on Payment Activity (a)

 

December 31,

in millions

Consumer — Key
Community Bank
  Credit cards   Consumer — Marine   Consumer — Other   Total    
  2014     2013     2014     2013     2014     2013     2014     2013     2014     2013  

Performing

$ 1,558   $ 1,446   $ 752   $ 718   $ 764   $ 1,002   $ 48   $ 69   $ 3,122   $ 3,235  

Nonperforming

  2     3     2     4     15     26     1     1     20     34  

Total

$         1,560   $         1,449   $         754   $         722   $         779   $         1,028   $         49   $         70   $         3,142   $         3,269  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(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.” 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 or 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 December 31, 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 December 31, 2014, the ALLL was $794 million, or 1.38% of loans, compared to $848 million, or 1.56% of loans, at December 31, 2013. At December 31, 2014, the ALLL was 190% of nonperforming loans, compared to 166.9% at December 31, 2013.

 

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

 

December 31,

in millions

   2014     2013     2012  

Balance at beginning of period — continuing operations

   $             848     $             888     $             1,004  

Charge-offs

     (211     (308     (508

Recoveries

     98       140       163  

Net loans and leases charged off

     (113     (168     (345

Provision for loan and lease losses from continuing operations

     59       130       229  

Foreign currency translation adjustment

     —         (2     —    

Balance at end of period — continuing operations

   $ 794     $ 848     $ 888  
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

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

 

     December 31,                         December 31,  
in millions    2013      Provision      Charge-offs      Recoveries         2014  

Commercial, financial and agricultural

   $ 362      $ 41     $ (45   $ 33      $ 391  

Real estate — commercial mortgage

     165        (15     (6     4        148  

Real estate — construction

     32        (16     (5     17        28  

Commercial lease financing

     62        (6     (10     10        56  

Total commercial loans

     621        4       (66     64        623  

Real estate — residential mortgage

     37        (6     (10     2        23  

Home equity:

            

Key Community Bank

     84        10       (37     9        66  

Other

     11        (2     (9     5        5  

Total home equity loans

     95        8       (46     14        71  

Consumer other — Key Community Bank

     29        17       (30     6        22  

Credit cards

     34        32       (34     1        33  

Consumer other:

            

Marine

     29        6       (23     9        21  

Other

     3        (2     (2     2        1  

Total consumer other:

     32        4       (25     11        22  

Total consumer loans

     227        55       (145     34        171  

Total ALLL — continuing operations

     848        59       (211     98        794  

Discontinued operations

     39        21       (45     14        29  

Total ALLL — including discontinued operations

   $         887      $         80       $        (256   $         112      $         823  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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     December 31,                         December 31,  
in millions    2012      Provision      Charge-offs      Recoveries         2013  

Commercial, financial and agricultural

   $ 327      $ 58     $ (62   $ 39      $ 362  

Real estate — commercial mortgage

     198        (40     (20     27        165  

Real estate — construction

     41        (20     (3     14        32  

Commercial lease financing

     55        19       (27     15        62  

Total commercial loans

     621        17       (112     95        621  

Real estate — residential mortgage

     30        25       (20     2        37  

Home equity:

            

Key Community Bank

     105        31       (62     10        84  

Other

     25        —         (20     6        11  

Total home equity loans

     130        31       (82     16        95  

Consumer other — Key Community Bank

     38        15       (31     7        29  

Credit cards

     26        35       (30     3        34  

Consumer other:

            

Marine

     39        4       (29     15        29  

Other

     4        1       (4     2        3  

Total consumer other:

     43        5       (33     17        32  

Total consumer loans

     267        111       (196     45        227  

Total ALLL — continuing operations

     888        128 (a)        (308     140        848  

Discontinued operations

     55        21       (55     18        39  

Total ALLL — including discontinued operations

   $         943      $         149       $        (363   $         158      $         887  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Includes $2 million of foreign currency translation adjustment.

 

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

Commercial, financial and agricultural

   $         334      $ 10     $ (80   $         63      $         327  

Real estate — commercial mortgage

     272        5       (102     23        198  

Real estate — construction

     63        (3     (24     5        41  

Commercial lease financing

     78        (18     (27     22        55  

Total commercial loans

     747        (6     (233     113        621  

Real estate — residential mortgage

     37        17       (27     3        30  

Home equity:

            

Key Community Bank

     103        90       (99     11        105  

Other

     29        26       (35     5        25  

Total home equity loans

     132        116       (134     16        130  

Consumer other — Key Community Bank

     41        29       (38     6        38  

Credit cards

     —          37       (11     —          26  

Consumer other:

            

Marine

     46        30       (59     22        39  

Other

     1        6       (6     3        4  

Total consumer other:

     47        36       (65     25        43  

Total consumer loans

     257        235       (275     50        267  

Total ALLL — continuing operations

     1,004        229       (508     163        888  

Discontinued operations

     104        9       (75     17        55  

Total ALLL — including discontinued operations

   $ 1,108      $         238       $        (583   $ 180      $ 943  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Our ALLL from continuing operations decreased by $54 million, or 6.4%, since 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 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 continued improved credit quality, 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.

 

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For continuing operations, the loans outstanding individually evaluated for impairment totaled $302 million, with a corresponding allowance of $40 million at December 31, 2014. Loans outstanding collectively evaluated for impairment totaled $57.1 billion, with a corresponding allowance of $753 million at December 31, 2014. At December 31, 2014, PCI loans evaluated for impairment totaled $13 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the year ended December 31, 2014. At December 31, 2013, the loans outstanding individually evaluated for impairment totaled $358 million, with a corresponding allowance of $42 million. Loans outstanding collectively evaluated for impairment totaled $54.1 billion, with a corresponding allowance of $805 million at December 31, 2013. At December 31, 2013, PCI loans evaluated for impairment totaled $16 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the year ended December 31, 2013.

A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2014, follows:

 

       Allowance      Outstanding  

December 31, 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

   $ 9      $ 382        —        $ 27,982     $ 43      $ 27,939       —    

Commercial real estate:

                  

Commercial mortgage

     2        146        —          8,047       21        8,025     $ 1  

Construction

     1        27        —          1,100       8        1,092       —    

Total commercial real estate loans

     3        173        —          9,147       29        9,117       1  

Commercial lease financing

     —          56        —          4,252       —          4,252       —    

Total commercial loans

     12        611        —          41,381       72        41,308       1  

Real estate — residential mortgage

     5        17      $ 1        2,225       55        2,159       11  

Home equity:

                  

Key Community Bank

     16        50        —          10,366       108        10,257       1  

Other

     2        3        —          267       12        255       —    

Total home equity loans

     18        53        —          10,633       120        10,512       1  

Consumer other — Key Community Bank

     —          22        —          1,560       4        1,556       —    

Credit cards

     —          33        —          754       4        750       —    

Consumer other:

                  

Marine

     5        16        —          779       45        734       —    

Other

     —          1        —          49       2        47       —    

Total consumer other

     5        17        —          828       47        781       —    

Total consumer loans

     28        142        1        16,000       230        15,758       12  

Total ALLL — continuing operations

     40        753        1        57,381       302        57,066       13  

Discontinued operations

     1        28        —          2,295 (a)       17        2,278 (a)       —    

Total ALLL — including discontinued operations

   $             41      $             781      $             1      $         59,676     $         319      $             59,344     $             13  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Amount includes $191 million of portfolio loans carried at fair value that are excluded from ALLL consideration.

 

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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.

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 $36 million at December 31, 2014. When combined with our ALLL, our total allowance for credit losses represented 1.45% of loans at December 31, 2014, compared to 1.63% at December 31, 2013.

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

 

Year ended December 31,

in millions

   2014     2013      2012  

Balance at beginning of period

   $ 37     $         29      $         45  

Provision (credit) for losses on lending-related commitments

     (1     8        (16

Balance at end of period

   $         36     $ 37      $ 29  
  

 

 

   

 

 

    

 

 

 
    

 

 

   

 

 

    

 

 

 

6. Fair Value Measurements

Fair Value Determination

As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters,

 

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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 for Level 1 and Level 2 instruments are presented to Accounting Policy for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note and in Note 13 (“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.”

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

 

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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. To determine fair value in such cases, depending on the complexity of the valuations required, we use internal models based on certain assumptions or a third-party valuation service. At December 31, 2014, our Level 3 instruments consist of a convertible preferred security. The security is 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 is 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

 

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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 December 31, 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 this report.

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 December 31, 2014. We did not provide any financial support to investees related to our direct and indirect investments for the years ended December 31, 2014, and December 31, 2013.

 

December 31, 2014

in millions

   Fair Value      Unfunded
Commitments
      

INVESTMENT TYPE

        

Indirect investments

        

Passive funds (a)

   $             9      $             1     

Co-managed funds (b)

     1        —       

Total

   $ 10      $ 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 two 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.

 

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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 December 31, 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.

 

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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 December 31, 2014, as well as financial support provided for the years ended December 31, 2014, and December 31, 2013:

 

              Financial support provided  
              Year ended December 31,  
     December 31, 2014      2014      2013  

in millions

   Fair Value     

Unfunded

Commitments

    

Funded

Commitments

    

Funded

Other

    

Funded

Commitments

    

Funded

Other

 

INVESTMENT TYPE

                 

Direct investments (a)

   $ 104        —          —        $ 3        —        $ 8  

Indirect investments (b)

     302      $ 60      $ 11        —        $ 23        —    

Total

   $             406      $             60      $             11      $             3      $             23      $             8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

(b) Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to 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

 

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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 procedures related to this credit valuation adjustment. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and 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.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

December 31, 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

     —        $ 555        —        $ 555  

States and political subdivisions

     —          38        —          38  

Collateralized mortgage obligations

     —             —          —    

Other mortgage-backed securities

     —          124        —          124  

Other securities

   $ 2        29        —          31  

Total trading account securities

     2        746        —          748  

Commercial loans

     —          2        —          2  

Total trading account assets

     2        748        —          750  

Securities available for sale:

           

States and political subdivisions

     —          23        —          23  

Collateralized mortgage obligations

     —          11,270        —          11,270  

Other mortgage-backed securities

     —          2,035        —          2,035  

Other securities

     22        —        $ 10        32  

Total securities available for sale

     22        13,328        10        13,360  

Other investments:

           

Principal investments:

           

Direct

     2        —          102        104  

Indirect

     —          —          302        302  

Total principal investments

     2        —          404        406  

Equity and mezzanine investments:

           

Direct

     —          —          —          —    

Indirect

     —          —          10        10  

Total equity and mezzanine investments

     —          —          10        10  

Total other investments

     2        —          414        416  

Derivative assets:

           

Interest rate

     —          924        13        937  

Foreign exchange

     91        2        —          93  

Commodity

     —          608        —          608  

Credit

     —          2        3        5  

Derivative assets

     91        1,536        16        1,643  

Netting adjustments (a)

     —          —          —          (1,034

Total derivative assets

     91        1,536        16        609  

Accrued income and other assets

     —          —          —          —    

Total assets on a recurring basis at fair value

   $ 117      $ 15,612      $ 440      $ 15,135  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES MEASURED ON A RECURRING BASIS

           

Bank notes and other short-term borrowings:

           

Short positions

   $ —        $ 423        —        $ 423  

Derivative liabilities:

           

Interest rate

     —          644        —          644  

Foreign exchange

     77        4        —          81  

Commodity

     —          594        —          594  

Credit

     —          6      $ 1        7  

Derivative liabilities

     77        1,248        1        1,326  

Netting adjustments (a)

     —          —          —          (542

Total derivative liabilities

     77        1,248        1        784  

Accrued expense and other liabilities

     —          —          —          —    

Total liabilities on a recurring basis at fair value

   $         77      $         1,671      $         1      $         1,207  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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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) 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.

 

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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 years ended December 31, 2014, and December 31, 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
         

Year ended December 31, 2014

                            

Securities available for sale

                            

Other securities

    —         —         $         10       —         —         —           —         $         10          —      

Other investments

                            

Principal investments

                            

Direct

  $         141     $         18        (c )       1     $ (58     —         —           —           102        $ 13       (c )  

Indirect

    413       57       (c )       8       (176     —         —           —           302          (26     (c )  

Equity and mezzanine investments

                            

Direct

    —         —           —         —         —         —           —           —            —      

Indirect

    23       (1     (c )       —         —       $ (12     —           —           10          (1     (c )  

Derivative instruments (a)

                            

Interest rate

    25       4       (d )       4       (3     —       $ 7       (f )     $ (24     (f )       13          —      

Commodity

    —         —           —         —         —         1       (f )       (1     (f )       —            —      

Credit

    3       (17     (d )       —         —         16       —                 —                 2            —            

 

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
         

Year ended December 31, 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       (11     (c )     $         8       (47     —         —            —          $ 141           (23     (c )  

Indirect

    436       58        (c )       23       (104     —         —            —            413           18       (c )  

Equity and mezzanine investments

                            

Direct

    —         —           —         —         —         —            —            —             8       (c )  

Indirect

    41       2       (c )       —         —         (20     —            —            23           2       (c )  

Derivative instruments (a)

                            

Interest rate

    19       (10     (d )       1       (2     —       $         46        (f )     $ (29     (f )       25           —      

Commodity

    1       (1     (d )       —         —         —         —            —            —             —      

Credit

    4       (8     (d )       —         —         7       —                  —                  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 years ended December 31, 2014, and December 31, 2013.

 

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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 December 31, 2014, and December 31, 2013:

 

      December 31, 2014     December 31, 2013  
in millions   Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

ASSETS MEASURED ON A NONRECURRING BASIS

               

Impaired loans

    —         —       $ 5       $ 5       —         —       $ 16       $ 16    

Loans held for sale (a)

    —         —         —               —         —         —         —    

Accrued income and other assets

    —         —         13         13       —         —         14         14    

Total assets on a nonrecurring basis at fair value

            —                 —       $         18       $         18               —                 —       $         30       $         30    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) During 2014, we transferred $11 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.

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.

 

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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 December 31, 2014, or December 31, 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 classify these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates, and discount rates.

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

Direct financing leases and operating lease assets held for sale .  Our KEF Accounting and Capital Markets groups are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF Capital Markets group reports to the President of the KEF line of business. A weekly report 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

 

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goodwill impairment testing performed during the fourth quarter of 2014. 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”).

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.

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 9 (“Mortgage Servicing Assets”).

 

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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 December 31, 2014, and December 31, 2013, along with the valuation techniques used, are shown in the following table:

 

December 31, 2014

dollars in millions

Fair Value of
Level 3 Assets
  Valuation Technique

Significant

Unobservable Input

Range

(Weighted-Average)

 

Recurring

               

Other investments —  principal investments —   direct:

$ 102   Individual analysis of the condition of each investment

Debt instruments

EBITDA multiple   5.40 - 6.00 (5.50)   

Equity instruments of private companies

EBITDA multiple (where applicable)   5.50 - 6.20 (5.80)   
          Revenue multiple (where applicable)   4.30 - 4.30 (4.30)   

Nonrecurring

               

Impaired loans

  5   Fair value of underlying collateral Discount   10.00 - 64.00% (62.00%)   

Goodwill

  1,057   Discounted cash flow and market data Earnings multiple of peers   11.40 - 15.90 (12.92)   
Equity multiple of peers   1.20 - 1.22 (1.21)   
Control premium   10.00 - 30.00% (19.70%)   
          Weighted-average cost of capital   13.00 - 14.00% (13.52%)   

 

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%)   

Fair Value Disclosures of Financial Instruments

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

 

  December 31, 2014  
      Fair Value  
in millions Carrying
Amount
  Level 1   Level 2   Level 3  

Netting

Adjustment

  Total  

ASSETS

Cash and short-term investments (a)

$ 4,922   $             4,922     —        —        —      $ 4,922  

Trading account assets (b)

  750     2   $ 748     —        —        750  

Securities available for sale (b)

              13,360     22               13,328   $ 10     —                    13,360  

Held-to-maturity securities (c)

  5,015     —        4,974     —        —        4,974  

Other investments (b)

  760     2     344     414     —        760  

Loans, net of allowance (d)

  56,587     —        —                  54,993     —        54,993  

Loans held for sale (b)

  734     —        —        734     —        734  

Mortgage servicing assets (e)

  323     —        —        417     —        417  

Derivative assets (b)

  609     91     1,536     16   $       (1,034 ) (f)     609  

LIABILITIES

Deposits with no stated maturity (a)

$ 66,135     —      $ 66,135     —        —      $ 66,135  

Time deposits (e)

  5,863   $ 564     5,361     —        —        5,925  

Short-term borrowings (a)

  998     —        998     —        —        998  

Long-term debt (e)

  7,875     7,625     626     —        —        8,251  

Derivative liabilities (b)

  784     77     1,248   $ 1   $ (542 ) (f)     784  

 

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  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  

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) 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.

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 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.

 

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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 ($1.8 billion at fair value) at December 31, 2014, and $2.4 billion ($2.0 billion at fair value) at December 31, 2013;

 

  ¿  

Portfolio loans at fair value of $191 million at December 31, 2014, and $147 million at December 31, 2013; and

 

  ¿  

Loans in the trusts at fair value of $2.0 billion at December 31, 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, 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, in accordance with the applicable accounting guidance, 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 13 (“Acquisitions and Discontinued Operations”).

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

7. Securities

The amortized cost, unrealized gains and losses, and fair value of our securities available for sale and held-to-maturity securities are presented in the following table. 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. For more information about our securities available for sale and held-to-maturity securities and the related accounting policies, see Note 1 (“Summary of Significant Accounting Policies”).

 

       2014      2013  

December 31,

in millions

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

SECURITIES AVAILABLE FOR SALE

                       

States and political subdivisions

   $         22      $         1        —         $         23      $         39      $         1        —        $         40  

Collateralized mortgage obligations

     11,310        96      $ 136        11,270        11,120        152      $ 272        11,000  

Other mortgage-backed securities

     2,004        32        1        2,035        1,270        27        11        1,286  

Other securities

     29        3        —          32        17        3        —          20  

Total securities available for sale

   $ 13,365      $ 132      $     137      $ 13,360      $ 12,446      $ 183      $ 283      $ 12,346  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD-TO-MATURITY SECURITIES

                       

Collateralized mortgage obligations

   $ 4,755      $ 15      $ 57      $ 4,713      $ 4,736      $ 6      $ 145      $ 4,597  

Other mortgage-backed securities

     240        1        —          241        —          —          —          —    

Other securities

     20        —          —          20        20        —          —          20  

Total held-to-maturity securities

   $ 5,015      $ 16      $ 57      $ 4,974      $ 4,756      $ 6      $         145      $ 4,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes our securities that were in an unrealized loss position as of December 31, 2014, and December 31, 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
     Fair Value      Gross
Unrealized
Losses
 

December 31, 2014

                 

Securities available for sale:

                 

Collateralized mortgage obligations

   $     3,019      $     52      $     2,932      $         84      $     5,951      $     136  

Other mortgage-backed securities

     —          —           78        1        78        1  

Other securities (a)

     4        —           2        —           6        —     

Held-to-maturity:

                 

Collateralized mortgage obligations

     1,005        11        1,994        46        2,999        57  

Total temporarily impaired securities

   $ 4,028      $ 63      $ 5,006      $ 131      $ 9,034      $ 194  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 (a)

     2        —           —           —           2        —     

Held-to-maturity:

                 

Collateralized mortgage obligations

     3,969        145        —           —           3,969        145  

Other securities (b)

     2        —           —           —           2        —     

Total temporarily impaired securities

   $ 9,951      $ 417      $ 157      $ 11      $ 10,108      $ 428  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Gross unrealized losses totaled less than $1 million for other securities available sale for the years ended December 31, 2014, and December 31, 2013.

 

(b) Gross unrealized losses totaled less than $1 million for other securities held-to-maturity for the year ended December 31, 2013.

At December 31, 2014, we had $136 million of gross unrealized losses related to 67 fixed-rate CMOs that we invested in as part of our overall A/LM strategy. These securities had a weighted-average maturity of 4.6 years at December 31, 2014. Since these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. We also had $1 million of gross unrealized losses related to 14 other mortgage-backed securities positions, which had a weighted-average maturity of 4.6 years at December 31, 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.

 

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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 year ended December 31, 2014.

 

Year ended December 31, 2014

  

in millions         

Balance at December 31, 2013

   $         4  

Impairment recognized in earnings

     —    

Balance at December 31, 2014

   $ 4  
  

 

 

 
          

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

 

Year ended December 31

in millions

   2014   (a)      2013   (b)      2012   (a)       

Realized gains

     —         $ 1        —        

Realized losses

     —                   —           —        

Net securities gains (losses)

     —         $ 1        —        
  

 

 

    

 

 

    

 

 

    
                               

 

(a) Realized gains and losses totaled less than $1 million for the year ended December 31, 2014, and December 31, 2012.

 

(b) Realized losses totaled less than $1 million for the year ended December 31, 2013.

At December 31, 2014, securities available for sale and held-to-maturity securities totaling $7.8 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
Available for Sale
     Held-to-Maturity
Securities
 

December 31, 2014

in millions

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $          276      $          279      $             9      $             9  

Due after one through five years

     13,040        13,031        4,683        4,641  

Due after five through ten years

     46        47        323        324  

Due after ten years

     3        3        —           —     

Total

   $ 13,365      $ 13,360      $ 5,015      $ 4,974  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

 

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8. Derivatives and Hedging Activities

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

The primary derivatives that we use are interest rate swaps, caps, floors, and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in 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 December 31, 2014, after taking into account the effects of bilateral collateral and master netting agreements, we had $55 million of derivative assets and a positive $10 million of derivative liabilities that relate to contracts entered into for hedging purposes. Our hedging derivative liabilities are in an asset position largely because we have contracts with positive fair values as a result of master netting agreements. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $554 million and derivative liabilities of $794 million that were not designated as hedging instruments.

Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives.”

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.

 

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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 December 31, 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.

 

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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 December 31, 2014, and December 31, 2013. The change in the notional amounts of these derivatives by type from December 31, 2013, to December 31, 2014, indicates the volume of our derivative transaction activity during 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:

 

  December 31, 2014   December 31, 2013  
      Fair Value       Fair Value  
in millions Notional
Amount
  Derivative
Assets
  Derivative
Liabilities
  Notional
Amount
  Derivative
Assets
  Derivative
Liabilities
 

Derivatives designated as hedging instruments:

Interest rate

$ 15,095   $ 272   $ 26   $ 14,487   $ 306   $ 37  

Foreign exchange

  371     8     —       190     4     1  

Total

  15,466     280     26     14,677     310     38  

Derivatives not designated as hedging instruments:

Interest rate

  43,771     665     618     46,173     733     702  

Foreign exchange

  4,024     85     81     4,701     59     56  

Commodity

  1,544     608     594     1,616     112     106  

Credit

  512     5     7     910     5     12  

Total

  49,851     1,363     1,300     53,400     909     876  

Netting adjustments (a)

  —       (1,034   (542   —       (812   (500

Net derivatives in the balance sheet

  65,317     609     784     68,077     407     414  

Other collateral (b)

  —       (155   (241   —       (72   (287

Net derivative amounts

$ 65,317   $ 454   $ 543   $ 68,077   $ 335   $ 127  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

 

(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 year ended December 31, 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 December 31, 2014.

 

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The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the years ended December 31, 2014, and December 31, 2013, and where they are recorded on the income statement.

 

      

Year ended December 31, 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    $             7      Long-term debt    Other income    $             (5)        (a )  

Interest rate

   Interest expense – Long-term debt      117                       

Total

      $ 124             $ (5)     
     

 

 

          

 

 

   
         

 

 

              

 

 

   
      

Year ended December 31, 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    $ (222)       Long-term debt    Other income    $ 222          (a )  

Interest rate

   Interest expense – Long-term debt      129                        

Total

      $ (93)             $ 222     
     

 

 

          

 

 

   
         

 

 

              

 

 

   

 

(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 year ended December 31, 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 December 31, 2014.

Considering the interest rates, yield curves, and notional amounts as of December 31, 2014, we would expect to reclassify an estimated $25 million of net losses on derivative instruments from AOCI to income during the next 12 months for our cash flow hedges. In addition, we expect to reclassify approximately $3 million of net gains related to terminated cash flow hedges from AOCI to income during the next 12 months. As of December 31, 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 December 31, 2014, AOCI reflected unrecognized after-tax gains totaling $17 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 December 31, 2014. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the year ended December 31, 2014.

 

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The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the years ended December 31, 2014, and December 31, 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.

 

    Year ended December 31, 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

  $ 50        Interest income – Loans      $                             67        Other income        —    

Interest rate

                        (8)        Interest expense – Long-term debt        (4)        Other income        —    

Interest rate

    (1)        Investment banking and debt placement fees        —         Other income        —    

Net Investment Hedges

         

Foreign exchange contracts

    27        Other Income        —         Other income        —    

Total

  $ 68        $ 63          —    
 

 

 

     

 

 

     

 

 

 
   

 

 

           

 

 

           

 

 

 

 

    Year ended December 31, 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

  $                     (19)        Interest income – Loans      $                     67        Other income        —    

Interest rate

    20        Interest expense – Long-term debt        (8)        Other income        —    

Interest rate

    —         Investment banking and debt placement fees        —         Other income        —    

Net Investment Hedges

         

Foreign exchange contracts

          Other Income        (3)        Other income        —    

Total

  $ 10        $ 56          —    
 

 

 

     

 

 

     

 

 

 
   

 

 

           

 

 

           

 

 

 

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

 

in millions December 31,
2013
  2014 Hedging
Activity
  Reclassification
of Gains to Net
Income
  December 31,
2014
 

AOCI resulting from cash flow and net investment hedges

$                     (11)    $                     43    $                     (40)    $                     (8)   

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.

 

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The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the years ended December 31, 2014, 2013, and 2012, and where they are recorded on the income statement.

 

      2014     2013     2012  

December 31,

in millions

  Corporate
Services
Income
    Other
Income
    Total     Corporate
Services
Income
    Other
Income
    Total     Corporate
Services
Income
    Other
Income
    Total  

NET GAINS (LOSSES)

                 

Interest rate

  $ 16       —       $ 16     $         17       —       $ 17     $ 24     $ (2   $ 22  

Foreign exchange

    34       —         34       38       —         38       36       —         36  

Commodity

    6               —         6       5               —         5       9               —         9  

Credit

    —       $ (21     (21     1     $ (15     (14     —         (20     (20

Total net gains (losses)

  $         56     $ (21   $         35     $ 61     $ (15   $         46     $         69     $ (22   $         47  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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 $518 million at December 31, 2014, and $308 million at December 31, 2013. The cash collateral netted against derivative liabilities totaled $26 million at December 31, 2014, and $4 million at December 31, 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 December 31, 2014, we posted $56 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.

 

December 31,

in millions

   2014      2013  

Largest gross exposure (derivative asset) to an individual counterparty

   $                     133      $                     121  

Collateral posted by this counterparty

     100        42  

Derivative liability with this counterparty

     31        106  

Collateral pledged to this counterparty

     —          33  

Net exposure after netting adjustments and collateral

     2        6  

 

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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.

 

December 31,

in millions

   2014      2013  

Interest rate

   $                     607      $                     633  

Foreign exchange

     41        23  

Commodity

     478        58  

Credit

     1        1  

Derivative assets before collateral

     1,127        715  

Less: Related collateral

     518        308  

Total derivative assets

   $ 609      $ 407  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

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 December 31, 2014, we had gross exposure of $955 million to broker-dealers and banks. We had net exposure of $204 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $23 million after considering $181 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, sometimes with entities other than broker-dealers and banks. Due to the smaller size and magnitude of the individual contracts with clients, we generally do not exchange collateral in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a credit valuation adjustment (included in “derivative assets”) in the amount of $9 million at December 31, 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. For the derivative counterparties that are not broker-dealers, banks, or clients, we generally exchange collateral. At December 31, 2014, we had gross exposure of $471 million to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $405 million on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve. In addition, the derivatives for one counterparty were guaranteed by a third party with a letter of credit totaling $30 million.

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.

 

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

 

December 31,

in millions

   2014     2013  
       Purchased     Sold      Net         Purchased      Sold      Net  

Single-name credit default swaps

   $                 (3                 —        $             (3   $             (7)       $             1      $             (6)   

Traded credit default swap indices

     1       —          1       —          —          —    

Other

     —         —          —         —          (1)         (1)   

Total credit derivatives

   $ (2     —        $ (2   $ (7)         —        $ (7)   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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.

 

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The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at December 31, 2014, and December 31, 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.

 

       2014           2013  

December 31,

dollars in millions

   Notional
Amount
     Average
Term
(Years)
     Payment /
Performance
Risk
            Notional
Amount
     Average
Term
(Years)
     Payment /
Performance
Risk
 

Single-name credit default swaps

   $             5        .72        .87       %    $             55        .77        22.28

Other

     6        2.89        9.58             13        5.03        8.82  

Total credit derivatives sold

   $ 11        —          —           $ 68        —          —    
  

 

 

             

 

 

       
    

 

 

                           

 

 

                   

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 December 31, 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 December 31, 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 $297 million, which includes $175 million in derivative assets and $472 million in derivative liabilities. We had $243 million in cash and securities collateral posted to cover those positions as of December 31, 2014. The aggregate fair value of all derivative contracts with credit risk contingent features held by KeyCorp as of December 31, 2014, that were in a net liability position totaled $7 million, which consists solely of derivative liabilities. We had $7 million in collateral posted to cover those positions as of December 31, 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 December 31, 2014, and December 31, 2013. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of December 31, 2014, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and additional collateral of less than $1 million would have been required as of December 31, 2014, and 2013.

 

December 31,

in millions

   2014      2013  
   Moody’s      S&P      Moody’s      S&P  

KeyBank’s long-term senior
unsecured credit ratings

     A3        A-        A3        A-  

One rating downgrade

   $                 1      $                 1      $ 6      $ 6  

Two rating downgrades

     1        1                        11                        11  

Three rating downgrades

     3        3        11        11  

 

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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 December 31, 2014, payments of up to $5 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 December 31, 2014, payments of less than $1 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.

9. 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. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Changes in the carrying amount of mortgage servicing assets are summarized as follows:

 

Year ended December 31,

in millions

   2014     2013  

Balance at beginning of period

   $ 332     $ 204  

Servicing retained from loan sales

     38       48  

Purchases

     51       150 (a)  

Amortization

     (98     (70

Balance at end of period

   $ 323     $ 332  
  

 

 

   

 

 

 
    

 

 

   

 

 

 

Fair value at end of period

   $               417     $               386  
  

 

 

   

 

 

 
    

 

 

   

 

 

 

 

(a) Amount includes $120 million in mortgage servicing assets that were acquired from Bank of America’s Global Mortgages & Securitized Products business during 2013. See Note 13 (“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 December 31, 2014, and December 31, 2013, along with the valuation techniques, are shown in the following table:

 

December 31, 2014

dollars in millions

   Valuation Technique   

Significant

Unobservable Input

  

Range

(Weighted-Average)

Mortgage servicing assets

   Discounted cash flow    Prepayment speed    1.30 - 12.70%(4.00%)
      Expected defaults    1.00 - 3.00%(1.90%)
      Residual cash flows discount rate    7.00 - 15.00%(7.80%)
      Escrow earn rate    0.70 - 3.10%(1.90%)
      Servicing cost    $150 - $2,748($1,075)
      Loan assumption rate    0.20 - 3.00%(1.50%)
          Percentage late    0.00 - 2.00%(0.32%)

December 31, 2013

dollars in millions

   Valuation Technique   

Significant

Unobservable Input

  

Range

(Weighted-Average)

Mortgage servicing assets

   Discounted cash flow    Prepayment speed    0.90 - 72.80%(11.00%)
      Expected defaults    1.10 - 3.00%(2.10%)
      Residual cash flows discount rate    7.00 - 15.00%(7.90%)
      Escrow earn rate    0.30 - 3.30%(1.50%)
      Servicing cost    $150 - $9,296($962)
      Loan assumption rate    0.00 - 3.00%(1.43%)
          Percentage late    0.00 - 2.00%(0.35%)

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

 

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critical to the valuation of servicing assets. At December 31, 2014, a 1.00% decrease in the value assigned to the escrow deposits would cause a $64 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 $7 million decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $46 million for the year ended December 31, 2014, and $58 million for the year ended December 31, 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” and Note 13 (“Acquisitions and Discontinued Operations”) under the heading “Mortgage Servicing Rights” in this report.

10. Goodwill and Other Intangible Assets

Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Other intangible assets are primarily the net present value of future economic benefits to be derived from the purchase of credit card receivable assets and core deposits. Additional information pertaining to our accounting policy for goodwill and other intangible assets is summarized in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Goodwill and Other Intangible Assets.”

Our annual goodwill impairment testing is performed as of October 1 each year. On that date in 2014, we determined that the estimated fair value of the Key Community Bank unit was 26% greater than its carrying amount; in 2013, the excess was 23%. On that date in 2014, we determined that the estimated fair value of the Key Corporate Bank unit was 16% greater than its carrying amount. There previously had been no goodwill associated with our Key Corporate Bank unit since the first quarter of 2009, when we recorded a $223 million pre-tax impairment charge and wrote off all of the remaining goodwill that had been assigned to that unit. If actual results, market conditions, and economic conditions were to differ from the assumptions and data used in this goodwill impairment testing, the estimated fair value of the Key Community Bank and Key Corporate Bank units could change. The carrying amounts of the Key Community Bank and Key Corporate Bank units represent the average equity based on risk-weighted regulatory capital for goodwill impairment testing and management reporting purposes.

Based on our quarterly review of impairment indicators during 2014 and 2013, it was not necessary to perform further reviews of goodwill recorded in our Key Community Bank or Key Corporate Bank units. We will continue to monitor the Key Community Bank unit as appropriate since it is particularly dependent upon economic conditions that impact consumer credit risk and behavior.

Changes in the carrying amount of goodwill by reporting unit are presented in the following table.

 

in millions    Key
Community
Bank
    

Key

Corporate

Bank

     Total  

BALANCE AT DECEMBER 31, 2012

   $ 979        —        $ 979  

Impairment losses based on results of interim impairment testing

     —          —          —    

BALANCE AT DECEMBER 31, 2013

     979        —          979  

Impairment losses based on results of interim impairment testing

     —          —          —    

Acquisition of Pacific Crest Securities

     —        $ 78          78  

BALANCE AT DECEMBER 31, 2014

   $             979      $                 78        $             1,057  
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

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The acquisition of Pacific Crest Securities during the third quarter of 2014 resulted in a $78 million increase in the goodwill recorded in the Key Corporate Bank unit. Additional information regarding the acquisition is provided in Note 13 (“Acquisitions and Discontinued Operations”).

As of December 31, 2014, we expected goodwill in the amount of $112 million to be deductible for tax purposes in future periods.

Accumulated impairment losses related to the Key Corporate Bank reporting unit totaled $665 million at December 31, 2014, 2013, and 2012. There were no accumulated impairment losses related to the Key Community Bank unit at December 31, 2014, 2013, and 2012.

The following table shows the gross carrying amount and the accumulated amortization of intangible assets subject to amortization.

 

       2014      2013  

December 31,

in millions

   Gross Carrying
Amount
     Accumulated
Amortization
     Gross Carrying
Amount
     Accumulated
Amortization
 

Intangible assets subject to amortization:

           

Core deposit intangibles

   $                 105      $                 82      $                 105      $                 70  

PCCR intangibles

     136        69        136        44  

Other intangible assets (a)

     148        137        135        135  

Total

   $ 389      $ 288      $ 376      $ 249  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Carrying amount and accumulated amortization excludes $18 million each at December 31, 2014, and December 31, 2013, related to the discontinued operations of Austin and the sale of Victory.

As a result of the acquisition of Pacific Crest Securities on September 3, 2014, intangible assets were recognized at their acquisition date fair value of $13 million. These intangible assets are being amortized on a straight line basis over an average useful life of five years.

As a result of the Western New York branches acquisition on July 13, 2012, a core deposit intangible asset was recognized at its acquisition date fair value of $40 million. This core deposit intangible asset is being amortized on an accelerated basis over its useful life of seven years. A second closing of this acquisition on September 14, 2012, relating exclusively to the purchase of credit card receivables, resulted in a PCCR intangible asset of $1 million that is being amortized on an accelerated basis over its useful life of eight years.

As a result of the purchase of Key-branded credit card assets from Elan Financial Services, Inc. on August 1, 2012, a PCCR intangible asset was recognized at its acquisition date fair value of $135 million. This PCCR asset is being amortized on an accelerated basis over its useful life of eight years.

Intangible asset amortization expense was $39 million for 2014, $44 million for 2013, and $23 million for 2012. Estimated amortization expense for intangible assets for each of the next five years is as follows: 2015 — $36 million; 2016 — $28 million; 2017 — $19 million; 2018 — $11 million; and 2019 — $5 million.

11. 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.

 

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¿ 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 loan securitization trusts is provided in Note 13 (“Acquisitions and Discontinued Operations”) under the heading “Education lending.”

 

     Consolidated VIEs      Unconsolidated VIEs  

December 31, 2014

in millions

  

Total

Assets

    

Total

Liabilities

    

Total

Assets

    

Total

Liabilities

     Maximum
Exposure to Loss
 

LIHTC funds

   $             1      $             1      $             55        —          —    

LIHTC investments

     N/A         N/A         1,234      $ 4      $ 521  

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 $5 million at December 31, 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 20 (“Commitments, 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 December 31, 2014, we estimated the settlement value of these third-party interests to be between zero and $4 million, while the recorded value, including reserves, totaled $5 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.

 

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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 December 31, 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 December 31, 2014, assets of these unconsolidated LIHTC operating partnerships totaled approximately $764 million. At December 31, 2014, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $407 million plus $110 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 December 31, 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 20 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.

 

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12. Income Taxes

Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.

 

Year ended December 31,

in millions

   2014     2013     2012  

Currently payable:

      

Federal

   $                     288      $                     216      $                     178   

State

     33        26        18   

Total currently payable

     321        242        196   

Deferred:

      

Federal

     16        39        41   

State

     (11     (10     (6

Total deferred

           29        35   

Total income tax (benefit) expense (a)

   $ 326      $ 271      $ 231   
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

 

(a) There was no income tax (benefit) expense recorded on securities transactions in 2014 and 2012. The income tax (benefit) expense on securities transactions totaled $1 million in 2013. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These taxes, which are recorded in “noninterest expense” on the income statement, totaled $17 million in 2014, $23 million in 2013, and $29 million in 2012.

Significant components of our deferred tax assets and liabilities included in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet, are as follows:

 

December 31,

in millions

   2014      2013  

Allowance for loan and lease losses

   $                     316      $                     334  

Employee benefits

     251        187  

Net unrealized securities losses

     17        45  

Federal credit carryforwards

     96        226  

State net operating losses and credits

     9        11  

Other

     312        302  

Gross deferred tax assets

     1,001        1,105  

Less: valuation allowance

     —          1  

Total deferred tax assets

     1,001        1,104  

Leasing transactions

     682        753  

Other

     125        141  

Total deferred tax liabilities

     807        894  

Net deferred tax assets (liabilities) (a)

   $ 194      $ 210  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) From continuing operations

We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, we have recorded a valuation allowance of less than $1 million dollars against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.

At December 31, 2014, we had a federal credit carryforward of $96 million. Additionally, we had state net operating loss carryforwards of $62 million and state credit carryforwards of $6 million, resulting in a net state deferred tax asset of $9 million. These carryforwards are subject to limitations imposed by tax laws and, if not utilized, will gradually expire through 2031.

 

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The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:

 

Year ended December 31,

dollars in millions

  2014     2013     2012  
  Amount      Rate     Amount      Rate     Amount      Rate  

Income (loss) before income taxes times 35%
statutory federal tax rate

   $ 445          35.0      $ 399          35.0      $ 376          35.0  

Amortization of tax-advantaged investments

    69          5.4         63          5.5         64          6.0    

Foreign tax adjustments

    10          .8         (4)          (.3)         1          .1    

Reduced tax rate on lease financing income

    (3)          (.2)         (13)          (1.2)         (50)          (4.7)    

Tax-exempt interest income

    (16)          (1.3)         (15)          (1.3)         (16)          (1.5)    

Corporate-owned life insurance income

    (41)          (3.2)         (42)          (3.7)         (43)          (4.0)    

Interest refund (net of federal tax benefit)

    (1)          (.1)         (1)          (.1)         —            —      

State income tax, net of federal tax benefit

    15          1.1         10          .9         8          .7    

Tax credits

    (134)          (10.5)         (130)          (11.4)         (119)          (11.1)    

Other

    (18)          (1.4)         4          .3         10          .9    

Total income tax expense (benefit)

  $         326                  25.6     $         271          23.7      $         231                  21.4  
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:

 

Year ended December 31,

in millions

   2014        2013    

Balance at beginning of year

   $ 6        $ 7     

Decrease related to other settlements with taxing authorities

     —          (1)     

Balance at end of year

   $                 6        $                 6     
  

 

 

    

 

 

 
    

 

 

    

 

 

 

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $6 million at both December 31, 2014, and December 31, 2013. We do not currently anticipate that the amount of unrecognized tax benefits will significantly change over the next 12 months.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest credits of $10.6 million in 2014, $1.4 million in 2013, and interest expense of $.2 million in 2012. We did not recover state tax penalties in 2014 and 2012, and recovered $.2 million in 2013. At December 31, 2014, we had an accrued interest payable of $1.2 million, compared to $1.1 million at December 31, 2013. Our liability for accrued state tax penalties was $.3 million at both December 31, 2014, and December 31, 2013.

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 December 31, 2014, our federal tax credit carryforward included in our federal deferred tax asset was reduced by $1 million.

We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2009 and forward. Currently, we are under audit for the tax years 2009-2012. As of December 31, 2014, the IRS has not proposed any significant adjustments. We are not subject to income tax examinations by other tax authorities for years prior to 2003.

 

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13. 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. During the fourth quarter of 2014, we recorded identifiable intangible assets of $13 million and goodwill of $78 million in Key Corporate Bank for this acquisition. The identifiable intangible assets and the goodwill related to this acquisition are non-deductible for tax purposes. Additional information regarding the identifiable intangible assets and the goodwill related to this acquisition is provided in Note 10 (“Goodwill and Other Intangible Assets”).

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 9 (“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 10 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, in accordance with the applicable accounting guidance, we 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.

 

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“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:

 

Year ended December 31,

in millions

   2014      2013      2012  

Net interest income

   $             77       $             105       $             119   

Provision (credit) for loan and lease losses

     21         20          

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

     56         85         110   

Noninterest income

     (111)         (136)         (49)   

Noninterest expense

     24         28         36   

Income (loss) before income taxes

     (79)         (79)         25   

Income taxes

     (30)         (29)          

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

   $ (49)       $ (50)       $ 16   
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

(a) Includes after-tax charges of $32 million for 2014, $40 million for 2013, and $50 million for 2012, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

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

 

December 31,

in millions

   2014      2013  

Held-to-maturity securities

   $ 1        —    

Trust loans at fair value

     —        $ 1,960  

Portfolio loans at fair value

     191        147  

Loans, net of unearned income (a)

     2,104        2,390  

Less: Allowance for loan and lease losses

     29        39  

Net loans

     2,266        4,458  

Trust accrued income and other assets at fair value

     —          20  

Accrued income and other assets

     38        45  

Total assets

   $             2,305      $             4,523  
  

 

 

    

 

 

 

Trust accrued expense and other liabilities at fair value

     —        $ 20  

Trust securities at fair value

     —          1,834  

Total liabilities

     —        $ 1,854  
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) At December 31, 2014, and December 31, 2013, unearned income was less than $1 million.

The discontinued education lending business consists of loans in portfolio (recorded at fair value) and loans in portfolio (recorded at carrying value with appropriate valuation reserves). The assets and liabilities in the securitization trusts (recorded at fair value) were removed with the deconsolidation of the securitization trusts on September 30, 2014.

At December 31, 2014, education loans include 1,612 TDRs with a recorded investment of approximately $17 million (pre-modification and post-modification). A specifically allocated allowance of $1 million was assigned to these loans as of December 31, 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 5 (“Asset Quality”).

 

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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; the assets cannot be sold and the liabilities cannot be transferred. The loans in the 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, and therefore, the securitization trusts were deconsolidated. 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 “income (loss) from discontinued operations, net of tax” on 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 year from the time the clean-up call was exercised. The portfolio loans were valued using an 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 December 31, 2014, there were $192 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 $191 million at December 31, 2014, and $147 million at December 31, 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 depicted 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.

 

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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 6 (“Fair Value Measurements”). The Working Group reviews all significant inputs and assumptions and approves the resulting fair values.

The Working Group reviews actual performance trends of the loans on a quarterly basis and uses statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models that incorporate delinquency and charge-off trends along with economic outlooks assist the Working Group to forecast future defaults. The Working Group uses this information to formulate the credit outlook related to the loans. 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 portfolio loans at fair value. Default expectations and discount rate changes have the most significant impact on the fair values of the loans. 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. This process was previously used in the valuation of the education loan securitization trust loans.

The valuation process for the portfolio loans that are accounted for at fair value is based on a discounted cash flow analysis using a model purchased from a third party that is maintained by Corporate Treasury. The valuation process begins with loan-by-loan level data that is aggregated into pools based on underlying loan structural characteristics (i.e., current unpaid principal balance, contractual term, interest rate). Cash flows for these loan pools are developed using a financial model that reflects certain assumptions for defaults, recoveries, status 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.

 

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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 December 31, 2014, and December 31, 2013:

 

December 31, 2014

dollars in millions

 

  

Fair Value of Level 3

Assets and Liabilities

 

    

Valuation

Technique

 

  

Significant

Unobservable Input

 

  

Range

(Weighted-Average)

 

 

Portfolio loans

   $             191      Discounted cash flow    Prepayment speed      5.40 – 5.60%(5.50%)   

accounted for at fair

         Loss severity      2.00 – 77.00%(25.66%)   

value

         Discount rate      3.90 – 4.00%(3.92%)   
         Default rate      .86 – 1.70%(1.12%)   
                             

 

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

   $         2,107      Discounted cash flow    Prepayment speed      4.00 – 13.50%(6.47%)   

portfolio loans

         Loss severity      2.00 – 79.50%(54.21%)   

accounted for at fair

         Discount rate      2.40 – 10.50%(3.50%)   

value

         Default rate      8.01 – 23.71%(18.43%)   
                             

Trust securities

     1,834      Discounted cash flow    Discount rate      1.60 – 3.50%(2.55%)   
                             

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 December 31, 2014, and December 31, 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.”

 

in millions

 

   December 31, 2014      December 31, 2013  
   Principal      Fair Value      Principal      Fair Value  

Trust loans at fair value

           

Accruing loans past due 90 days or more

     —          —        $ 25      $             25  

Loans placed on nonaccrual status

     —          —          12        12  

Portfolio loans at fair value

           

Accruing loans past due 90 days or more

   $ 5      $             5      $ 8      $ 8  

Loans placed on nonaccrual status

     —          —          —          —    

Portfolio loans at carrying value

           

Accruing loans past due 90 days or more

   $             29        N/A       $             35        N/A   

Loans placed on nonaccrual status

     11        N/A         10        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 December 31, 2014, and December 31, 2013.

 

in millionis

 

   December 31, 2014      December 31, 2013  
   Contractual
Amount
     Fair Value      Contractual
Amount
     Fair Value  

ASSETS

           

Portfolio loans

   $             192      $             191      $             140      $             147  

Trust loans

     —          —          1,964        1,960  

Trust other assets

     —          —          20        20  

LIABILITIES

           

Trust securities

     —          —        $ 1,958      $ 1,834  

Trust other liabilities

     —          —          20        20  

 

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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 December 31, 2014, and December 31, 2013.

 

December 31, 2014

in millions

   Level 1      Level 2      Level 3      Total  

ASSETS MEASURED ON A RECURRING BASIS

           

Portfolio loans

     —          —        $         191      $         191  

Total assets on a recurring basis at fair value

     —          —        $ 191      $ 191  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts and portfolio loans for the years ended December 31, 2014, and December 31, 2013.

 

in millions    Portfolio
Student
Loans
    Trust
Student
Loans
    Trust
Other
Assets
    Trust
Securities
    Trust
Other
Liabilities
 

Balance at December 31, 2012

   $             157     $             2,369     $             26     $             2,159     $             22  

Gains (losses) recognized in earnings (a)

     —         53       —         191       —    

Purchases

     152       —         —         —         —    

Sales

     (147     (152     —         —         —    

Settlements

     (15     (310     (6     (516     (2

Balance at December 31, 2013 (b)

   $ 147     $ 1,960     $ 20     $ 1,834     $ 20  

Gains (losses) recognized in earnings (a)

     (8     (34     —         33       —    

Purchases

     74       —         —         —         —    

Sales

     —         (74     —         —         —    

Settlements

     (22     (202     (1     (278     (3

Transfers out due to deconsolidation

     —         (1,650     (19     (1,589     (17

Balance at December 31, 2014 (b)

   $ 191       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                          

 

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

 

(b) There were no issuances, transfers into Level 3, or transfers out of Level 3 for the year ended December 31, 2013. There were no issuances or transfers into Level 3 for the year ended December 31, 2014.

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. At December 31, 2013, the only remaining asset of Victory was a $29 million Seller note. 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.

 

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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:

 

Year ended December 31,

in millions

   2014      2013      2012  

Net interest income

   $         12        —          —    

Noninterest income

     10      $             212      $             111  

Noninterest expense

     1        66        89  

Income (loss) before income taxes

     21        146        22  

Income taxes

     8        54        8  

Income (loss) from discontinued operations, net of taxes

   $ 13      $ 92      $ 14  
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

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

 

December 31,

in millions

   2014      2013       

Seller note  (a)

     —        $         29     

Total assets

     —        $ 29     
  

 

 

    

 

 

    

Accrued expense and other liabilities

     —          —       

Total liabilities

             —          —       
  

 

 

    

 

 

    

 

                      

 

(a) At December 31, 2013, the only remaining asset of Victory was the Seller note. The Seller note was paid off during the fourth quarter of 2014.

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.

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

 

December 31, 2013

in millions

   Level 1      Level 2      Level 3      Total  

ASSETS MEASURED ON A RECURRING BASIS

           

Seller note

     —          —        $         29      $         29  

Total assets on a recurring basis at fair value

     —          —        $ 29      $ 29  
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

The following table shows the change in the fair value of the Level 3 Victory Seller note for the years ended December 31, 2014, and December 31, 2013.

 

in millions    Seller note  

Balance at December 31, 2012

     —    

Gains (losses) recognized in earnings (a)

   $             (3

Issuances

     32  

Balance at December 31, 2013

     29  

Gains (losses) recognized in earnings (a)

     (1

Settlements

     (28

Balance at December 31, 2014 (b)

     —    
  

 

 

 
    

 

 

 

 

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

 

(b) There were no purchases, sales, settlements, transfers into Level 3, or transfers out of Level 3 for the year ended December 31, 2013. There were no purchases, sales, issuances, transfers into Level 3, or transfers out of Level 3 for the year ended December 31, 2014.

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.

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 Austin are as follows:

 

Year ended December 31,

in millions

   2014     2013     2012  

Noninterest expense

   $             4     $             1     $             10  

Income (loss) before income taxes

     (4     (1     (10

Income taxes

     (1     1       (3

Income (loss) from discontinued operations, net of taxes

   $ (3   $ (2   $ (7
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

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

 

December 31,

in millions

   2014      2013       

Cash and due from banks

   $             19      $             20     

Total assets

   $ 19      $ 20     
  

 

 

    

 

 

    

Accrued expense and other liabilities

   $ 3        —       

Total liabilities

   $ 3        —       
  

 

 

    

 

 

    
    

 

 

    

 

 

    

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

 

Year ended December 31,

in millions

   2014     2013      2012  

Net interest income

   $         89      $         105       $         119   

Provision (credit) for loan and lease losses

     21        20          

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

     68        85         110   

Noninterest income

     (101     76         62   

Noninterest expense

     29        95         135   

Income (loss) before income taxes

     (62     66         37   

Income taxes

     (23     26         14   

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

   $ (39   $ 40       $ 23   
  

 

 

   

 

 

    

 

 

 
    

 

 

   

 

 

    

 

 

 

 

(a) Includes after-tax charges of $32 million for 2014, $40 million for 2013, and $50 million 2012, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

 

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

 

December 31,

in millions

   2014      2013  

Cash and due from banks

   $             19       $             20   

Held-to-maturity securities

            —    

Seller note

     —          29   

Trust loans at fair value

     —          1,960   

Portfolio loans at fair value

     191         147   

Loans, net of unearned income (a)

     2,104         2,390   

Less: Allowance for loan and lease losses

     29         39   

Net loans

     2,266         4,458   

Trust accrued income and other assets at fair value

     —          20   

Accrued income and other assets

     38         45   

Total assets

   $ 2,324       $ 4,572   
  

 

 

    

 

 

 

Trust accrued expense and other liabilities at fair value

     —        $ 20   

Accrued expense and other liabilities

   $        —    

Trust securities at fair value

     —          1,834   

Total liabilities

   $      $ 1,854   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) At December 31, 2014, and December 31, 2013, unearned income was less than $1 million.

14. 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 December 31, 2014.

 

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

 

     December 31, 2014  
in millions    Gross Amount
Presented in
Balance Sheet
     Netting
Adjustments
   

(a)

   Collateral   (b)     Net
Amounts
 

Offsetting of financial assets:

            

Reverse repurchase agreements

   $ 3      $ (1      $ (2     —    

Securities borrowed

     —                  —              —         —    

Total

   $ 3      $ (1      $ (2     —    
  

 

 

    

 

 

      

 

 

   

 

 

 

Offsetting of financial liabilities:

                                      

Repurchase agreements

   $ 1      $ (1          —         —    

Total

   $ 1      $ (1        —         —    
  

 

 

    

 

 

      

 

 

   

 

 

 
   
     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     —    
  

 

 

    

 

 

      

 

 

   

 

 

 
    

 

 

    

 

 

        

 

 

   

 

 

 

 

(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.

15. Stock-Based Compensation

We maintain several stock-based compensation plans, which are described below. Total compensation expense for these plans was $46 million for 2014, $38 million for 2013, and $53 million for 2012. The total income tax benefit recognized in the income statement for these plans was $17 million for 2014, $14 million for 2013, and $20 million for 2012. Stock-based compensation expense related to awards granted to employees is recorded in “personnel expense” on the income statement; compensation expense related to awards granted to directors is recorded in “other expense.”

 

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Our compensation plans allow us to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other awards which may be denominated or payable in or valued by reference to our common shares or other factors, discounted stock purchases, and deferred compensation to eligible employees and directors. At December 31, 2014, we had 79,938,471 common shares available for future grant under our compensation plans. In accordance with a resolution adopted by the Compensation and Organization Committee of KeyCorp’s Board of Directors, we may not grant options to purchase common shares, restricted stock or other shares under any long-term compensation plan in an aggregate amount that exceeds 6% of our outstanding common shares in any rolling three-year period.

Stock Options

Stock options granted to employees generally become exercisable at the rate of 25% per year. No option granted by KeyCorp will be exercisable less than one year after, or expire later than ten years from, the grant date. The exercise price is the closing price of our common shares on the grant date.

We determine the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to determine the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. Because of these differences, the Black-Scholes model does not precisely value an employee stock option, but it is commonly used for this purpose. The model assumes that the estimated fair value of an option is amortized as compensation expense over the option’s vesting period.

The Black-Scholes model requires several assumptions, which we developed and update based on historical trends and current market observations. Our determination of the fair value of options is only as accurate as the underlying assumptions. The assumptions pertaining to options issued during 2014, 2013, and 2012 are shown in the following table.

 

Year ended December 31,    2014     2013     2012      

 

   

Average option life

     6.2 years       6.3 years       6.3 years    

Future dividend yield

     1.70   %      2.14   %      1.50   %   

Historical share price volatility

     .497       .495       .489    

Weighted-average risk-free interest rate

     1.9   %      1.1   %      1.2   %   

 

   

Under KeyCorp’s 2013 Equity Compensation Plan, the Compensation and Organization Committee has authority to approve all stock option grants but may delegate some of its authority to grant awards from time to time. The committee has delegated to our Chief Executive Officer the authority to grant equity awards, including stock options, to any employee who is not designated an “officer” for purposes of Section 16 of the Exchange Act. No more than 3,000,000 common shares may be issued under this authority.

The following table summarizes activity, pricing and other information for our stock options for the year ended December 31, 2014.

 

       Number of
Options
    Weighted-Average
Exercise Price Per
Option
     Weighted-Average
Remaining Life
(Years)
     Aggregate
Intrinsic
Value (a)
 

Outstanding at December 31, 2013

     25,705,942     $             19.83        

Granted

     730,611       12.92        

Exercised

     (3,050,309     8.72        

Lapsed or canceled

     (3,470,688     29.09        

Outstanding at December 31, 2014

     19,915,556     $ 19.67        3.8      $             58   
  

 

 

         
    

 

 

                           

Expected to vest

     3,045,216     $ 9.37        7.6      $ 14   

Exercisable at December 31, 2014

     16,635,502     $ 21.69        3.0      $ 44   
                                    

 

(a) The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. At December 31, 2014, the fair value of the underlying stock was less than the weighted-average exercise price per option.

 

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The weighted-average grant-date fair value of options was $5.26 for options granted during 2014, $3.55 for options granted during 2013, and $3.23 for options granted during 2012. Stock option exercises numbered 3,050,309 in 2014, 3,574,354 in 2013, and 421,846 in 2012. The aggregate intrinsic value of exercised options was $16 million for 2014, $13 million for 2013, and $1 million for 2012. As of December 31, 2014, unrecognized compensation cost related to nonvested options expected to vest under the plans totaled $4 million. We expect to recognize this cost over a weighted-average period of 2.4 years.

Cash received from options exercised was $26 million, $26 million, and $2 million in 2014, 2013, and 2012, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $2 million for 2014, $1 million for 2013, and less than $1 million for 2012.

Long-Term Incentive Compensation Program

Our Long-Term Incentive Compensation Program (the “Program”) rewards senior executives critical to our long-term financial success. Awards are granted annually in a variety of forms:

 

¿ deferred cash payments that generally vest and are payable at the rate of 25% per year;

 

¿ time-lapsed (service condition) restricted stock units payable in stock, which generally vest at the rate of 25% per year;

 

¿ performance units payable in stock, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels; and

 

¿ performance units payable in cash, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels.

Performance units vested in 2014 numbered 1,088,784 and were payable in cash. The total fair value of the performance units that vested in 2014 was $15 million. No performance units were scheduled to vest during 2013 and 2012; therefore, no corresponding payments were made during those years.

The following table summarizes activity and pricing information for the nonvested shares in the Program for the year ended December 31, 2014.

 

     Vesting Contingent on
Service Conditions
     Vesting Contingent on
Performance and Service
Conditions
 
       Number of
Nonvested
Shares
    Weighted-
Average
Grant-Date
Fair Value
     Number of
Nonvested
Shares
    Weighted-
Average
Grant-Date
Fair Value
 

Outstanding at December 31, 2013

     4,758,376     $ 8.94        4,643,110     $ 11.56  

Granted

     2,314,730       12.92        1,322,326       13.15  

Vested

     (1,679,312     8.94        (1,582,525     12.96  

Forfeited

 

    

 

(369,582

 

 

   

 

10.52

 

 

 

    

 

(308,591

 

 

   

 

13.08

 

 

 

Outstanding at December 31, 2014

     5,024,212     $   10.61        4,074,320     $   13.04  
  

 

 

      

 

 

   
    

 

 

            

 

 

         

The compensation cost of time-lapsed and performance-based restricted stock or unit awards granted under the Program is calculated using the closing trading price of our common shares on the grant date.

Unlike time-lapsed and performance-based restricted stock or units, we do not pay dividends during the vesting period for performance shares or units that may become payable in excess of targeted performance.

The weighted-average grant-date fair value of awards granted under the Program was $13.00 during 2014, $10.96 during 2013, and $8.07 during 2012. As of December 31, 2014, unrecognized compensation cost related to nonvested shares expected to vest under the Program totaled $46 million. We expect to recognize this cost over a weighted-average period of 2.3 years. The total fair value of shares vested was $36 million in 2014, $23 million in 2013, and $8 million during 2012.

 

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Other Restricted Stock Awards

We also may grant, upon approval by the Compensation and Organization Committee (or our Chief Executive Officer with respect to her delegated authority), other time-lapsed restricted stock or unit awards under various programs to recognize outstanding performance.

The following table summarizes activity and pricing information for the nonvested shares granted under these restricted stock or unit awards for the year ended December 31, 2014.

 

       Number of
Nonvested
Shares
    Weighted-Average
Grant-Date
Fair Value
      

Outstanding at December 31, 2013

     1,366,470     $             8.48     

Granted

     190,349       12.92     

Vested

     (634,787     8.68     

Forfeited

     (21,107     7.98     

Outstanding at December 31, 2014

     900,925     $ 9.21     
  

 

 

      
    

 

 

            

The weighted-average grant-date fair value of awards granted was $12.92 during 2014, $9.33 during 2013, and $7.98 during 2012. As of December 31, 2014, unrecognized compensation cost related to nonvested restricted stock or units expected to vest under these special awards totaled $3 million. We expect to recognize this cost over a weighted-average period of 2.3 years. The total fair value of restricted stock or units vested was $6 million during 2014, $12 million during 2013, and $14 million during 2012.

Deferred Compensation Plans

Our deferred compensation arrangements include voluntary and mandatory deferral programs for common shares awarded to certain employees and directors. Mandatory deferred incentive awards vest at the rate of 25% per year beginning one year after the deferral date for awards granted in 2012 and after, and 33-1/3% per year beginning one year after the deferral date for awards granted prior to 2012. Deferrals under the voluntary programs are immediately vested.

Several of our deferred compensation arrangements allow participants to redirect deferrals from common shares into other investments that provide for distributions payable in cash. We account for these participant-directed deferred compensation arrangements as stock-based liabilities and re-measure the related compensation cost based on the most recent fair value of our common shares. The compensation cost of all other nonparticipant-directed deferrals is measured based on the closing price of our common shares on the deferral date. We did not pay any stock-based liabilities during 2014, 2013, or 2012.

The following table summarizes activity and pricing information for the nonvested shares in our deferred compensation plans for the year ended December 31, 2014.

 

       Number of
Nonvested
Shares
    Weighted-Average
Grant-Date
Fair Value
      

Outstanding at December 31, 2013

     1,344,098     $             9.06     

Granted

     1,391,968       13.61     

Dividend equivalents

     38,188       13.77     

Vested

     (497,376     8.65     

Forfeited

     (54,263     12.04     

Outstanding at December 31, 2014

     2,222,615     $ 12.01     
  

 

 

      
    

 

 

            

The weighted-average grant-date fair value of awards granted was $13.61 during 2014, $11.18 during 2013, and $6.63 during 2012. As of December 31, 2014, unrecognized compensation cost related to nonvested shares expected to vest under our deferred compensation plans totaled $17 million. We expect to recognize this cost

 

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over a weighted-average period of 2.5 years. The total fair value of shares vested was $6 million during 2014, $7 million during 2013, and $7 million during 2012. Dividend equivalents presented in the preceding table represent the value of dividends accumulated during the vesting period.

Discounted Stock Purchase Plan

Our Discounted Stock Purchase Plan provides employees the opportunity to purchase our common shares at a 10% discount through payroll deductions or cash payments. Purchases are limited to $10,000 in any month and $50,000 in any calendar year, and are immediately vested. To accommodate employee purchases, we either issue treasury shares or acquire common shares on the open market on or around the fifteenth day of the month following the month employee payments are received. We issued 238,257 common shares at a weighted-average cost to the employee of $12.06 during 2014, 264,775 common shares at a weighted-average cost to the employee of $9.83 during 2013, and 301,794 common shares at a weighted-average cost to the employee of $7.30 during 2012.

Information pertaining to our method of accounting for stock-based compensation is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Stock-Based Compensation.”

16. Employee Benefits

In accordance with the applicable accounting guidance for defined benefit and other postretirement plans, we measure plan assets and liabilities as of the end of the fiscal year.

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.

Pre-tax AOCI not yet recognized as net pension cost was $587 million at December 31, 2014, and $529 million at December 31, 2013, consisting entirely of net unrecognized losses. During 2015, we expect to recognize $18 million of net unrecognized losses in pre-tax AOCI as net pension cost.

During 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 loss as reflected in the following table.

The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:

 

Year ended December 31,

in millions

   2014     2013     2012      

Interest cost on PBO

   $ 46     $ 42     $ 47    

Expected return on plan assets

     (66     (67     (70  

Amortization of losses

     16       19       16    

Settlement loss

 

    

 

23

 

 

 

   

 

27

 

 

 

   

 

—  

 

 

 

 

Net pension cost (benefit)

   $ 19     $ 21     $ (7  
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

Other changes in plan assets and benefit obligations recognized in OCI:

        

Net (gain) loss

   $ 97     $ (106   $ 63    

Amortization of losses

 

    

 

(39

 

 

   

 

(46

 

 

   

 

(16

 

 

 

Total recognized in comprehensive income

   $ 58     $ (152   $ 47    
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

Total recognized in net pension cost and comprehensive income

   $ 77     $ (131   $ 40    
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

 

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The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2014, and December 31, 2013.

The following table summarizes changes in the PBO related to our pension plans.

 

Year ended December 31,

in millions

 

  

2014

 

   

2013

 

     

PBO at beginning of year

   $         1,156     $         1,277    

Interest cost

     46       42    

Actuarial losses (gains)

     97       (54  

Benefit payments

     (93     (109  

PBO at end of year

   $ 1,206     $ 1,156    
  

 

 

   

 

 

   
    

 

 

   

 

 

   

The following table summarizes changes in the FVA.

 

Year ended December 31,

in millions

   2014     2013      

FVA at beginning of year

   $         970     $           942    

Actual return on plan assets

     66       119    

Employer contributions

     14       18    

Benefit payments

     (93     (109  

FVA at end of year

   $ 957     $ 970    
  

 

 

   

 

 

   
    

 

 

   

 

 

   

The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2014, and December 31, 2013.

 

December 31,

in millions

   2014     2013      

Funded status (a)

   $         (249   $         (186  
  

 

 

   

 

 

   

Net prepaid pension cost recognized consists of:

                  

Current liabilities

   $ (14   $ (14  

Noncurrent liabilities

     (235     (172  

Net prepaid pension cost recognized (b)

   $ (249   $ (186  
  

 

 

   

 

 

   
    

 

 

   

 

 

   

 

(a) The shortage of the FVA under the PBO.

 

(b) Represents the accrued benefit liability of the pension plans.

At December 31, 2014, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2015. We also do not expect to make any significant discretionary contributions during 2015.

At December 31, 2014, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2015 — $87 million; 2016 — $95 million; 2017 — $96 million; 2018 — $85 million; 2019 — $81 million; and $365 million in the aggregate from 2020 through 2024.

The ABO for all of our pension plans was $1.2 billion at December 31, 2014, and December 31, 2013. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:

 

December 31,                   
in millions    2014      2013     

PBO

   $     1,206      $     1,156     

ABO

     1,206        1,156     

Fair value of plan assets

     957        970     

 

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To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.

 

December 31,    2014     2013      

Discount rate

     3.50      4.25   

Compensation increase rate

     N/A        N/A     

To determine net pension cost, we assumed the following weighted-average rates.

 

Year ended December 31,    2014      2013      2012      

Discount rate

     4.25       3.25       4.00   

Compensation increase rate

     N/A         N/A         N/A     

Expected return on plan assets

     7.25        7.25        7.25    

We estimate that we will recognize $2 million in net pension cost for 2015, compared to $19 million for 2014, and $21 million for 2013. Costs are expected be less in 2015 than in 2014 unless the 2015 lump sum payments made under our primary qualified cash balance pension plan are greater than the plan’s interest cost component of net pension cost for the year. If this situation occurs during 2015, in accordance with the applicable accounting guidance for defined benefit plans, we will recognize in earnings a portion of the aggregate gain or loss recorded in AOCI. Absent settlement losses, costs are expected to be higher in 2015 due to a lower expected return on plan assets and a change to new morality tables and mortality improvements that were finalized by the Society of Actuaries on October 27, 2014. Costs increased in 2014 and 2013 because the amount of lump sum payments made under certain pension plans triggered settlement accounting, resulting in a settlement loss of $23 million and $27 million, respectively. Costs were less in 2014 than they were in 2013 due to the smaller settlement loss in 2014.

We determine the expected return on plan assets using a calculated market-related value of plan assets that smoothes what might otherwise be significant year-to-year volatility in net pension cost. Changes in the value of plan assets are not recognized in the year they occur. Rather, they are combined with any other cumulative unrecognized asset- and obligation-related gains and losses, and are reflected evenly in the market-related value during the five years after they occur as long as the market-related value does not vary more than 10% from the plan’s FVA.

We estimate that a 25 basis point increase or decrease in the expected return on plan assets would either decrease or increase, respectively, our net pension cost for 2015 by approximately $2 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2015 by approximately $1 million.

We determine the assumed discount rate based on the rate of return on a hypothetical portfolio of high quality corporate bonds with interest rates and maturities that provide the necessary cash flows to pay benefits when due.

The expected return on plan assets is determined by considering a number of factors, the most significant of which are:

 

  ¿  

Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible, and other securities, and forecasted returns that are modeled under various economic scenarios.

 

  ¿  

Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 7.25% for 2014, 2013, and 2012. As part of an annual reassessment of current and expected future capital market returns, we deemed a rate of 6.25% to be appropriate in estimating 2015 pension cost.

 

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The investment objectives of the pension funds are developed to reflect the characteristics of the plans, such as pension formulas, cash lump sum distribution features, and the liability profiles of the plans’ participants. An executive oversight committee reviews the plans’ investment performance at least quarterly, and compares performance against appropriate market indices. The pension funds’ investment objectives are to balance total return objectives with a continued management of plan liabilities, and to minimize the mismatch between assets and liabilities. These objectives are being implemented through liability driven investing and the adoption of a de-risking glide path. The following table shows the asset target allocations prescribed by the pension funds’ investment policies based on the plan’s funded status at December 31, 2014.

 

Asset Class    Target  
Allocation  
2014  
     

Equity securities:

    

U.S.

     20    

International

     16      

Fixed income securities

     40      

Convertible securities

     5      

Real assets

     13      

Other assets

     6      

Total

             100    
  

 

 

   
    

 

 

   

Equity securities include common stocks of domestic and foreign companies, as well as foreign company stocks traded as American Depositary Shares on U.S. stock exchanges. Debt securities include investments in domestic- and foreign-issued corporate bonds, U.S. government and agency bonds, international government bonds, and mutual funds. Convertible securities include investments in convertible bonds. Real assets include an investment in a diversified real asset strategy separate account designed to provide exposure to the three core real assets: Treasury Inflation-Protected Securities, commodities, and real estate. Other assets include investments in a multi-strategy investment fund and a limited partnership.

Although the pension funds’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.

The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”

Equity securities.     Equity securities traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 since quoted prices for identical securities in active markets are available.

Debt securities.     Substantially all debt securities are investment grade and include domestic- and foreign-issued corporate bonds and U.S. government and agency bonds. These securities are valued using evaluated prices based on observable inputs, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves, and interest rate movements. Debt securities are classified as Level 2.

Mutual funds.     Exchange-traded mutual funds listed or traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 because quoted prices for identical securities in active markets are available. All other investments in mutual funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.

Collective investment funds.     Investments in collective investment funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these investments are classified as Level 2.

 

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Insurance investment contracts and pooled separate accounts.     Deposits under insurance investment contracts and pooled separate accounts with insurance companies do not have readily determinable fair values and are valued using a methodology that is consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership 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 investment as reported by the insurance company; thus, these investments are classified as Level 3.

Other assets.     Other assets include an investment in a multi-strategy investment fund and an investment in a limited partnership. These investments do not have readily determinable fair values and are valued using a methodology consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership 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 investment as reported by the investment manager or general partner of the investment fund; thus, these investments are classified as Level 3.

The following tables show the fair values of our pension plan assets by asset class at December 31, 2014, and December 31, 2013.

 

December 31, 2014                                 
in millions    Level 1      Level 2      Level 3      Total       

ASSET CLASS

              

Equity securities:

              

U.S.

   $         161        —          —        $         161     

International

     10        —          —          10     

Debt securities:

              

Corporate bonds — U.S.

     —        $         43        —          43     

Corporate bonds — International

     —          7        —          7     

Government and agency bonds — U.S.

     —          253        —          253     

Government bonds — International

     —          1        —          1     

State and municipal bonds

     —          1        —          1     

Mutual funds:

              

U.S. equity

     18        —          —          18     

International equity

     28        —          —          28     

Fixed income — U.S.

     2        —          —          2     

Fixed income — International

     2        —          —          2     

Collective investment funds:

              

U.S. equity

     —          28        —          28     

International equity

     —          118        —          118     

Convertible securities

     —          45        —          45     

Fixed income securities

     —          16        —          16     

Short-term investments

     —          31        —          31     

Real assets

     —          113        —          113     

Insurance investment contracts and pooled separate accounts

     —          —        $ 14        14     

Other assets

     —          —          66        66     

 

    

Total net assets at fair value

   $ 221      $ 656      $           80      $ 957     
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

 

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December 31, 2013                                 
in millions    Level 1      Level 2      Level 3      Total       

ASSET CLASS

              

Equity securities:

              

U.S.

   $ 216        —          —        $ 216     

International

     24        —          —          24     

Debt securities:

              

Corporate bonds — U.S.

     —        $         74        —          74     

Corporate bonds — International

     —          11        —          11     

Government and agency bonds — U.S.

     —          73        —          73     

Government bonds — International

     —          1        —          1     

State and municipal bonds

     —          3        —          3     

Mutual funds:

              

U.S. equity

     11        —          —          11     

International equity

     34        —          —          34     

Fixed Income — U.S.

     3        —          —          3     

Fixed Income — International

     2        —          —          2     

Collective investment funds:

              

U.S. equity

     —          31        —          31     

International equity

     —          151        —          151     

Convertible securities

     —          54        —          54     

Fixed income securities

     —          7        —          7     

Short-term investments

     —          44        —          44     

Emerging markets

     —          44        —          44     

Real assets

     —          112        —          112     

Insurance investment contracts and pooled separate accounts

     —          —        $ 13        13     

Other assets

     —          —          62        62     

 

    

Total net assets at fair value

   $         290      $ 605      $           75      $         970     
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

The following table shows the changes in the fair values of our Level 3 plan assets for the years ended December 31, 2014, and December 31, 2013.

 

in millions    Insurance
Investment
Contracts and
Pooled
Separate
Accounts
     Other
Assets
     Total       

Balance at December 31, 2012

   $ 12      $ 56      $ 68     

Actual return on plan assets:

           

Relating to assets held at reporting date

     1        6        7     

Balance at December 31, 2013

   $ 13      $ 62      $ 75     

Actual return on plan assets:

           

Relating to assets held at reporting date

     1        4        5     

Balance at December 31, 2014

   $             14      $             66      $             80     
  

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

Other Postretirement Benefit Plans

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

We also maintained a death benefit plan that provided a death benefit for a very limited number of (i) former Key employees who retired from their employment with Key prior to 1994; (ii) former Key employees who elect a grandfathered pension benefit under the KeyCorp Cash Balance Pension Plan; and (iii) Key employees who otherwise were provided a historical death benefit at the time of their termination. The death benefit plan was noncontributory and funded by a separate VEBA trust. In the fourth quarter of 2012, we used the assets of the

 

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VEBA trust to purchase an insurance policy issued by a third-party insurance provider to fully fund the death benefits under the plan. Death benefits for all grandfathered employees are fully funded, administered, and paid by the third-party insurance provider, and the insurance company accepted all related funding obligations and administrative liability. Consequently, we terminated the death benefit plan and the VEBA trust effective December 31, 2012.

The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.

 

December 31,                  
in millions    2014     2013          

Net unrecognized losses (gains)

   $ 2     $ (12)      

Net unrecognized prior service credit

     (5                 (5)      

Total unrecognized AOCI

   $             (3   $ (17)      
  

 

 

   

 

 

    
    

 

 

   

 

 

    

During 2015, we expect to recognize $1 million of pre-tax AOCI resulting from prior service credit as a reduction of net postretirement benefit cost.

The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:

 

December 31,                        
in millions    2014     2013     2012         

Service cost of benefits earned

   $             1     $             1     $             1      

Interest cost on APBO

     3       3           

Expected return on plan assets

     (3     (3     (3)      

Amortization of prior service credit

     (1     (1     (1)      

Amortization of losses

     (1     —         —        

Net postretirement benefit cost

   $ (1     —         —        
  

 

 

   

 

 

   

 

 

    
    

 

 

   

 

 

   

 

 

    

Other changes in plan assets and benefit obligations recognized in OCI:

         

Net (gain) loss

   $ 13     $ (17   $ (3)      

Amortization of prior service credit

     1       1           

Amortization of losses

     1       —         —        

Total recognized in comprehensive income

   $ 15     $ (16   $ (2)      
  

 

 

   

 

 

   

 

 

    

Total recognized in net postretirement benefit cost and comprehensive income

   $ 14     $ (16   $ (2)      
  

 

 

   

 

 

   

 

 

    
    

 

 

   

 

 

   

 

 

    

The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2014, and December 31, 2013.

The following table summarizes changes in the APBO.

 

Year ended December 31,                   
in millions    2014       2013        

APBO at beginning of year

   $             65       $ 74      

Service cost

                

Interest cost

                

Plan participants’ contributions

                

Actuarial losses (gains)

     15         (6)      

Benefit payments

     (7)         (8)      

APBO at end of year

   $ 79       $             65      
  

 

 

    

 

 

    
    

 

 

    

 

 

    

 

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The following table summarizes changes in FVA.

 

Year ended December 31,                   
in millions    2014       2013        

FVA at beginning of year

   $ 57       $ 51      

Employer contributions

     (1)         —        

Plan participants’ contributions

                

Benefit payments

     (7)         (8)      

Actual return on plan assets

            13      

FVA at end of year

   $             56       $             57      
  

 

 

    

 

 

    
    

 

 

    

 

 

    

The following table summarizes the funded status of the postretirement plans, which corresponds to the amounts recognized in the balance sheets at December 31, 2014, and December 31, 2013.

 

December 31,                 
in millions    2014     2013      

Funded status (a)

   $ (23   $ (8  

Accrued postretirement benefit cost recognized (b)

                 (23                 (8  

 

(a) The shortage of the FVA under the APBO.

 

(b) Consists entirely of noncurrent liabilities.

There are no regulations that require contributions to the VEBA trust that funds our retiree healthcare plan, so there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trust, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2015, if any, will be minimal.

At December 31, 2014, we expect to pay the benefits from all funded and unfunded other postretirement plans as follows: 2015 — $5 million; 2016 — $5 million; 2017 — $5 million; 2018 — $5 million; 2019 — $5 million; and $24 million in the aggregate from 2020 through 2024.

To determine the APBO, we assumed discount rates of 3.75% at December 31, 2014, and 4.50% at December 31, 2013.

To determine net postretirement benefit cost, we assumed the following weighted-average rates.

 

Year ended December 31,      2014      2013      2012      

Discount rate

       4.50      3.50      4.00  

Expected return on plan assets

       5.25        5.25        5.58    

The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.

Assumed healthcare cost trend rates do not have a material impact on net postretirement benefit cost or obligations since the postretirement plan has cost-sharing provisions and benefit limitations.

We estimate that we will recognize an expense of less than $1 million in net postretirement benefit cost for 2015, compared to a credit of $1 million for 2014 and a credit of less than $1 million for 2013.

We estimate the expected returns on plan assets for the VEBA trust much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trust are to obtain a market rate of return,

 

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take into consideration the safety and/or risk of the investment, and to diversify the portfolio in order to satisfy the trust’s anticipated liquidity requirements. The following table shows the asset target allocations prescribed by the trust’s investment policy.

 

Asset Class    Target  
Allocation  
2014  
     

Equity securities

     80   %   

Fixed income securities

     10    

Convertible securities

     5    

Cash equivalents

     5    

Total

             100   %   
  

 

 

   
    

 

 

   

Investments consist of mutual funds and common investment funds that invest in underlying assets in accordance with the target asset allocations shown above. Exchange-traded mutual funds are valued using quoted prices and, therefore, are classified as Level 1. Investments in common investment funds are valued at their closing net asset value. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.

The following tables show the fair values of our postretirement plan assets by asset class at December 31, 2014, and December 31, 2013.

 

December 31, 2014                                 
in millions            Level 1      Level 2              Level 3      Total       

ASSET CLASS

              

Mutual funds:

              

U.S. equity

   $ 18        —          —        $ 18     

International equity

     1        —          —          1     

U.S. fixed income

     4        —          —          4     

International fixed income

     1        —          —          1     

Common investment funds:

              

U.S. equity

     —        $ 21        —          21     

International equity

     —          7        —          7     

Convertible securities

     —          3        —          3     

Short-term investments

     —          1        —          1     

Total net assets at fair value

   $         24      $         32                —        $         56     
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

 

December 31, 2013                                 
in millions            Level 1      Level 2              Level 3      Total       

ASSET CLASS

              

Mutual funds — U.S. equity

   $ 6        —          —        $ 6     

Common investment funds:

              

U.S. equity

     —        $ 29        —          29     

International equity

     —          9        —          9     

Convertible securities

     —          3        —          3     

Fixed income

     —          2        —          2     

Short-term investments

     —          8        —          8     

Total net assets at fair value

   $         6      $         51                —        $         57     
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage that is “actuarially equivalent” to the benefits under Medicare Part D. Based on our application of the relevant regulatory formula, we determined that the prescription drug coverage related to our retiree healthcare benefit plan is not actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2014, 2013, and 2012, we did not receive federal subsidies.

 

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The Patient Protection and Affordable Care Act and the Education Reconciliation Act of 2010, which were both signed into law in March 2010, changed the tax treatment of the federal subsidies described above. As a result of these laws, these subsidy payments become taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes requires the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. However, these tax law changes did not affect us, as we did not have a deferred tax asset recorded for Medicare Part D subsidies received.

Employee 401(k) Savings Plan

A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1% to 100% of eligible compensation, with up to 6% being eligible for matching contributions. Commencing January 1, 2010, an automatic enrollment feature was added to the plan for all new employees. The initial default contribution percentage for employees is 2% and will increase by 1% at the beginning of each plan year until the default contribution is 10% for plan years on and after January 1, 2012. The plan also permits us to provide a discretionary annual profit sharing contribution. We accrued a 2% contribution for 2014 and made contributions of 2% for 2013 and 2.4% for 2012 on eligible compensation for employees eligible on the last business day of the respective plan years. We also maintain a deferred savings plan that provides certain employees with benefits they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $70 million in 2014, $66 million in 2013, and $77 million in 2012.

17. Short-Term Borrowings

Selected financial information pertaining to the components of our short-term borrowings is as follows:

 

December 31,                       
dollars in millions    2014     2013     2012      

FEDERAL FUNDS PURCHASED

        

Balance at year end

   $             18     $             18     $             8    

Average during the year

     32       164       111    

Maximum month-end balance

     36       1,486       613    

Weighted-average rate during the year

     .10     .09     .14  

Weighted-average rate at December 31

     .08       .10       .15    

SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

        

Balance at year end

   $ 557     $ 1,516     $ 1,601    

Average during the year

     1,150       1,638       1,703    

Maximum month-end balance

     1,519       2,099       2,455    

Weighted-average rate during the year

     .16     .13     .19  

Weighted-average rate at December 31

     .01       .15       .14    

OTHER SHORT-TERM BORROWINGS

        

Balance at year end

   $ 423     $ 343     $ 287    

Average during the year

     597       394       413    

Maximum month-end balance

     996       466       599    

Weighted-average rate during the year

     1.49     1.89     1.69  

Weighted-average rate at December 31

     1.58       2.00       1.81    

Rates exclude the effects of interest rate swaps and caps, which modify the repricing characteristics of certain short-term borrowings. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).

As described below and in Note 18 (“Long-Term Debt”), KeyCorp and KeyBank have a number of programs and facilities that support our short-term financing needs. Certain subsidiaries maintain credit facilities with third parties, which provide alternative sources of funding. KeyCorp is the guarantor of some of the third-party facilities.

 

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Short-term credit facilities.     We maintain cash on deposit in our Federal Reserve account, which has reduced our need to obtain funds through various short-term unsecured money market products. This account, which was maintained at $3.8 billion at December 31, 2014, and the unpledged securities in our investment portfolio provide a buffer to address unexpected short-term liquidity needs. We also have secured borrowing facilities at the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank of Cleveland to satisfy short-term liquidity requirements. As of December 31, 2014, our unused secured borrowing capacity was $18.7 billion at the Federal Reserve Bank of Cleveland and $3.5 billion at the Federal Home Loan Bank of Cincinnati.

18. Long-Term Debt

The following table presents the components of our long-term debt, net of unamortized discounts and adjustments related to hedging with derivative financial instruments. We use interest rate swaps and caps, which modify the repricing characteristics of certain long-term debt, to manage interest rate risk. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).

 

December 31,              
dollars in millions    2014        2013    

Senior medium-term notes due through 2021 (a)

   $ 2,575        $ 2,553     

0.975% Subordinated notes due 2028 (b)

     162          162     

6.875% Subordinated notes due 2029 (b)

     113          103     

7.750% Subordinated notes due 2029 (b)

     147          133     

Total parent company

     2,997          2,951     

Senior medium-term notes due through 2039 (c)

     2,611          1,858     

7.413% Subordinated remarketable notes due 2027 (d)

     272          270     

5.80% Subordinated notes due 2014 (d)

     —            768     

4.95% Subordinated notes due 2015 (d)

     251          251     

5.45% Subordinated notes due 2016 (d)

     524          544     

5.70% Subordinated notes due 2017 (d)

     222          229     

4.625% Subordinated notes due 2018 (d)

     103          104     

6.95% Subordinated notes due 2028 (d)

     298          298     

Lease financing debt due through 2016 (e)

     —            5     

Secured borrowing due through 2020 (f)

     302          58     

Federal Home Loan Bank advances due through 2036 (g)

     200          224     

Investment Fund Financing due through 2052 (h)

     95          90     

Total subsidiaries

     4,878          4,699     

Total long-term debt

   $   7,875        $   7,650     
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) The senior medium-term notes had a weighted-average interest rate of 3.89% at December 31, 2014, and December 31, 2013. These notes had fixed interest rates at December 31, 2014, and December 31, 2013. One of the three notes can be redeemed one month prior to its maturity date, while the other two notes may not be redeemed prior to their maturity dates.

 

(b) See Note 19 (“Trust Preferred Securities Issued by Unconsolidated Subsidiaries”) for a description of these notes.

 

(c) Senior medium-term notes had weighted-average interest rates of 1.84% at December 31, 2014, and 1.58% at December 31, 2013. These notes had a combination of fixed and floating interest rates. Two of the six notes can be redeemed one month prior to their maturity dates, while the other four notes may not be redeemed prior to their maturity dates. The 2014 issuance was at a higher rate than the existing debt.

 

(d) These notes are all obligations of KeyBank. Only the subordinated remarketable notes due 2027 may be redeemed prior to their maturity dates.

 

(e) Lease financing debt was paid off during 2014 and had a weighted-average interest rate of 5.99% at December 31, 2013. This category of debt consisted primarily of nonrecourse debt collateralized by leased equipment under operating, direct financing, and sales-type leases.

 

(f) The secured borrowing had weighted-average interest rates of 4.41% at December 31, 2014, and 4.79% at December 31, 2013. This borrowing is collateralized by commercial lease financing receivables, and principal reductions are based on the cash payments received from the related receivables. Additional information pertaining to these commercial lease financing receivables is included in Note 4 (“Loans and Loans Held for Sale”).

 

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(g) Long-term advances from the Federal Home Loan Bank had a weighted-average interest rate of 3.47% at December 31, 2014, and December 31, 2013. These advances, which had a combination of fixed and floating interest rates, were secured by real estate loans and securities totaling $280 million at December 31, 2014, and $337 million at December 31, 2013.

 

(h) Investment Fund Financing had a weighted-average interest rate of 2.01% at December 31, 2014, and December 31, 2013.

At December 31, 2014, scheduled principal payments on long-term debt were as follows:

 

in millions    Parent      Subsidiaries      Total       

2015

   $         756       $         540       $         1,296      

2016

     —           1,381         1,381      

2017

     —           298         298      

2018

     745         1,126         1,871      

2019

     —           774         774      

All subsequent years

     1,496         759         2,255      

As described below, KeyBank and KeyCorp have a number of programs that support our long-term financing needs.

Global bank note program and predecessor programs.     In August 2012, KeyBank adopted a Global Bank Note Program permitting the issuance of up to $20 billion of notes domestically and abroad. Under the program, KeyBank is authorized to issue notes with original maturities of seven days or more for senior notes or five years or more for subordinated notes. Notes may be denominated in U.S. dollars or in foreign currencies. Amounts outstanding under the program are classified as “long-term debt” on the balance sheet.

For the purpose of issuing bank notes, the Global Bank Note Program replaces KeyBank’s prior bank note programs. Amounts outstanding under prior programs remain outstanding in accordance with their original terms and conditions and at their original stated maturities, and are classified as “long-term debt” on the balance sheet.

On February 1, 2013, KeyBank issued $1 billion of 1.65% Senior Bank Notes due February 1, 2018, under the Global Bank Note Program. On November 26, 2013, KeyBank issued $350 million of 1.10% Senior Notes and $400 million of Floating Rate Senior Notes, each due November 25, 2016. On November 24, 2014, KeyBank issued $750 million of 2.50% Senior Notes due December 15, 2019. At December 31, 2014, $17.5 billion remained available for future issuance under the Global Bank Note Program. On February 12, 2015, KeyBank issued $1 billion of 2.250% Senior Bank Notes due March 16, 2020; $16.5 billion remained available for future issuance under the Global Bank Note Program.

KeyCorp shelf registration, including Medium-Term Note Program .     KeyCorp has a shelf registration statement on file with the SEC under rules that allow companies to register various types of debt and equity securities without limitations on the aggregate amounts available for issuance. KeyCorp also maintains a Medium-Term Note Program that permits KeyCorp to issue notes with original maturities of nine months or more. During the second quarter of 2014, the KeyCorp shelf registration statement, including the Medium-Term Note Program, was updated. In connection with the updated Medium-Term Note Program, the Board of Directors authorized KeyCorp to issue up to $4 billion of debt, and revoked all prior issuance authority under previous KeyCorp shelf registration statements including through previous medium-term note programs. On November 13, 2013, KeyCorp issued $750 million of 2.30% Medium-Term Notes due December 13, 2018. At December 31, 2014, KeyCorp had authorized and available for issuance up to $4 billion of additional debt securities under the Medium-Term Note Program.

Issuances of capital securities or preferred stock by KeyCorp must be approved by the Board and cannot be objected to by the Federal Reserve.

 

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19. 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 1 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 began on January 1, 2015, and by 2016 will require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.

As of December 31, 2014, the trust preferred securities issued by the KeyCorp capital trusts represent $339 million, or 3.3%, 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

 

December 31, 2014

             

KeyCorp Capital I

   $ 156       $ 6      $ 162         .975     2028  

KeyCorp Capital II

     109         4        113         6.875       2029  

KeyCorp Capital III

     143         4        147         7.750       2029  

Total

   $ 408       $ 14      $ 422         4.926     —    
  

 

 

    

 

 

    

 

 

      
    

 

 

    

 

 

    

 

 

                  

December 31, 2013

   $ 384       $ 14      $ 398         4.777     —    
  

 

 

    

 

 

    

 

 

      
    

 

 

    

 

 

    

 

 

                  

 

(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 $68 million at December 31, 2014, and $44 million at December 31, 2013. See Note 8 (“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 $68 million at December 31, 2014, and $44 million at December 31, 2013. See Note 8 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.

 

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20. Commitments, Contingent Liabilities and Guarantees

Obligations under Noncancelable Leases

We are obligated under various noncancelable operating leases for land, buildings and other property, consisting principally of data processing equipment. Rental expense under all operating leases totaled $122 million in 2014, $122 million in 2013, and $121 million in 2012. Minimum future rental payments under noncancelable operating leases at December 31, 2014, are as follows: 2015 — $116 million; 2016 — $102 million; 2017 — $95 million; 2018 — $79 million; 2019 — $64 million; all subsequent years — $370 million.

Commitments to Extend Credit or Funding

Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These agreements generally carry variable rates of interest and have fixed expiration dates or termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan, our aggregate outstanding commitments may significantly exceed our eventual cash outlay.

Loan commitments involve credit risk not reflected on our balance sheet. We mitigate exposure to credit risk with internal controls that guide how we review and approve applications for credit, establish credit limits and, when necessary, demand collateral. In particular, we evaluate the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjust the allowance for credit losses on lending-related commitments. Additional information pertaining to this allowance is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Liability for Credit Losses on Lending-Related Commitments,” and in Note 5 (“Asset Quality”).

The following table shows the remaining contractual amount of each class of commitment related to extending credit or funding principal investments as of December 31, 2014, and December 31, 2013. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the outstanding loan.

 

December 31,

 

in millions

   2014      2013       

Loan commitments:

        

Commercial and other

   $ 25,979      $ 23,611     

Commercial real estate and construction

     1,965        2,104     

Home equity

     7,164        7,193     

Credit cards

     3,762        3,457     

Total loan commitments

     38,870        36,365     

When-issued and to be announced securities commitments

     102        140     

Commercial letters of credit

     121        119     

Purchase card commitments

     63        34     

Principal investing commitments

     60        75     

Liabilities of certain limited partnerships and other commitments

     1        2     

Total loan and other commitments

   $ 39,217      $ 36,735     
  

 

 

    

 

 

    
                      

Legal Proceedings

Metyk Litigation .     Two putative class actions were filed in September 2010 in the United States District Court for the Northern District of Ohio (the “Northern District”). The plaintiffs in these cases sought to represent a

 

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class of all participants in the KeyCorp 401(k) Savings Plan and alleged that the defendants in the lawsuit breached fiduciary duties owed to them under ERISA. These two putative class action lawsuits were substantively consolidated with each other in a proceeding styled Thomas Metyk, et al. v. KeyCorp, et al. (“Metyk”). In January 2013, the Northern District of Ohio entered an order granting the defendants’ motion to dismiss the plaintiffs’ consolidated complaint for failure to state a claim and entered its final judgment terminating the Metyk proceeding. 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. Subsequently, plaintiffs filed a Petition for Writ of Certiorari with the Supreme Court of the United States, which the Supreme Court denied on November 17, 2014.

Checking Account Overdraft Litigation.     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. In August 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. In June 2013, KeyBank filed with the District Court its renewed motion to compel arbitration and stay or dismiss litigation. 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 February 3, 2015, the District Court denied KeyBank’s Second Renewed Motion to Compel Arbitration and Dismiss the Complaint. KeyBank expects to file an appeal.

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.

 

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Guarantees

We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at December 31, 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.”

 

December 31, 2014

in millions

 

  

Maximum Potential
Undiscounted
Future Payments

 

    

Liability
Recorded

 

 

Financial guarantees:

     

Standby letters of credit

   $         11,566      $         65   

Recourse agreement with FNMA

     1,432         

Return guarantee agreement with LIHTC investors

     4         

Written put options (a)

     2,263        149   

Total

   $ 15,265      $ 222   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(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 December 31, 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 December 31, 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 12 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 December 31, 2014, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.5 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $4.7 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 December 31, 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.

 

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As shown in the previous table, KAHC maintained a reserve in the amount of $4 million at December 31, 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 11 (“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 December 31, 2014, our written put options had an average life of 2.1 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 8 (“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 8.

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 December 31, 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.

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.

 

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21. Accumulated Other Comprehensive Income

Our changes in AOCI for the years ended December 31, 2014, and December 31, 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, 2012

   $ 229     $ 18     $ 55     $ (426   $ (124

Other comprehensive income before reclassification, net of income taxes

     (291     6       (9     78       (216

Amounts reclassified from accumulated other comprehensive income, net of income taxes (a)

     (1     (35     (4     28       (12

Net current-period other comprehensive income, net of income taxes

     (292     (29     (13     106       (228

Balance at December 31, 2013

   $ (63   $ (11   $ 42     $ (320   $ (352

Other comprehensive income before reclassification, net of income taxes

     59       43       (17     (69     16  

Amounts reclassified from accumulated other comprehensive income, net of income taxes (a)

     —         (40     (3     23       (20

Net current-period other comprehensive income, net of income taxes

     59       3       (20     (46     (4

Balance at December 31, 2014

   $ (4   $ (8   $ 22     $ (366   $ (356
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Our reclassifications out of AOCI for the years ended December 31, 2014, and December 31, 2013, are as follows:

 

Year ended December 31, 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

   $ 67     Interest income — Loans

Interest rate

     (4   Interest expense — Long term debt
              
     63     Income (loss) from continuing operations before income taxes
     23     Income taxes
              
   $ 40     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

   $ (15   Personnel expense

Settlement loss

     (23   Personnel expense

Amortization of prior service credit

     1     Personnel expense
              
     (37   Income (loss) from continuing operations before income taxes
     (14   Income taxes
              
   $ (23   Income (loss) from continuing operations
  

 

 

   
    

 

 

     

 

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Year ended December 31, 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 available for sale securities

    

Realized gains

   $ 1     Other income
              
     1     Income (loss) from continuing operations before income taxes
     —       Income taxes
              
   $ 1     Income (loss) from continuing operations
  

 

 

   

Unrealized gains (losses) on derivative financial instruments

    

Interest rate

   $ 67     Interest income — Loans

Interest rate

     (8   Interest expense — Long term debt

Foreign exchange contracts

     (3   Other income
              
     56     Income (loss) from continuing operations before income taxes
     21     Income taxes
              
   $ 35     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

   $ (19   Personnel expense

Settlement loss

     (27   Personnel expense

Amortization of prior service credit

     1     Personnel expense
              
     (45   Income (loss) from continuing operations before income taxes
     (17   Income taxes
              
   $ (28   Income (loss) from continuing operations
  

 

 

   
    

 

 

     

22. 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 began in the second quarter of 2014 and are expected to be executed through the first quarter of 2015. During 2014, we completed $355 million of common share repurchases under our 2014 capital plan authorization. In addition, we completed $141 million of common share repurchases in the first quarter of 2014 under our 2013 capital plan for a total of $496 million of open market common share repurchases during 2014.

The Board declared a quarterly dividend of $.055 per common share for the first quarter of 2014. Consistent with our 2014 capital plan, the Board declared a quarterly dividend of $.065 per common share for the second, third, and fourth quarters of 2014, which brought our annual dividend to $.25 per common share for 2014.

Capital Adequacy

KeyCorp and KeyBank must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that

 

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restrict dividend payments, require the adoption of remedial measures to increase capital, terminate FDIC deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a “well capitalized” status affects how regulators evaluate applications for certain endeavors, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could make clients and potential investors less confident. As of December 31, 2014, KeyCorp and KeyBank met all regulatory capital requirements.

As previously indicated in the “Supervision and Regulation” section in Item 1 of this report under the heading “Revised prompt corrective action capital category ratios,” KeyBank qualified for the “well capitalized” prompt corrective action capital category at December 31, 2014, because KeyBank’s capital and leverage ratios exceeded the prescribed threshold ratios for that capital category and KeyBank was not subject to any written agreement, order, or directive to meet and maintain a specific capital level for any capital measure. Since that date, we believe there has been no change in condition or event that has occurred that would cause KeyBank’s capital category to change.

As previously indicated in the “Supervision and Regulation” section in Item 1 of this report under the heading “Revised prompt corrective action capital category ratios,” BHCs are not assigned to any of the five prompt corrective action capital categories applicable to insured depository institutions. If, however, those categories applied to BHCs, we believe that KeyCorp would satisfy the criteria for a “well capitalized” institution at December 31, 2014, and since that date, we believe there has been no change in condition or event that has occurred that would cause such capital category to change.

Because the regulatory capital categories under the prompt corrective action regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyBank or KeyCorp.

For additional information on capital adequacy, see “Supervision and Regulation” in Item 1 of this report.

At December 31, 2014, Key and KeyBank (consolidated) had regulatory capital in excess of all current minimum risk-based capital (including all adjustments for market risk) and leverage ratio requirements as shown in the following table.

 

     Actual     To Meet Minimum
Capital Adequacy
Requirements
    To Qualify as Well Capitalized
Under Federal Deposit
Insurance Act
 
dollars in millions    Amount      Ratio     Amount      Ratio             Amount              Ratio  

December 31, 2014

               

TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $         11,824                13.89   $         6,808                    8.00     N/A         N/A   

KeyBank (consolidated)

     10,833        13.49       6,425        8.00     $         8,031                10.00

TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $ 10,124        11.90   $ 3,404        4.00     N/A         N/A   

KeyBank (consolidated)

     9,151        11.39       3,213        4.00     $ 4,819        6.00

TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS

               

Key

   $ 10,124        11.26   $ 2,698        3.00     N/A         N/A   

KeyBank (consolidated)

     9,151        10.38       3,526        4.00     $ 4,407        5.00

 

 

December 31, 2013

               

TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $ 11,941        14.33   $ 6,666        8.00     N/A         N/A   

KeyBank (consolidated)

     10,451        13.33       6,273        8.00     $ 7,841        10.00

TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $ 9,968        11.96   $ 3,333        4.00     N/A         N/A   

KeyBank (consolidated)

     8,496        10.83       3,136        4.00     $ 4,705        6.00

TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS

               

Key

   $ 9,968        11.11   $ 2,691        3.00     N/A         N/A   

KeyBank (consolidated)

     8,496        9.69       3,507        4.00     $ 4,384        5.00

 

 

 

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23. 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.

 

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The table on the following pages shows selected financial data for our major business segments for the years ended December 31, 2014, 2013, and 2012.

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

The selected financial data is 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.”

 

  ¿  

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.

 

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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.

 

Year ended December 31,    Key Community Bank     Key Corporate Bank  
dollars in millions    2014     2013     2012     2014     2013     2012  

SUMMARY OF OPERATIONS

            

Net interest income (TE)

   $ 1,448     $ 1,532     $ 1,537     $ 830     $ 785     $ 781  

Noninterest income

     769       784       771       800       751       718  

Total revenue (TE) (a)

     2,217       2,316       2,308       1,630       1,536       1,499  

Provision (credit) for loan and lease losses

     74       155       150       (2     (3     30  

Depreciation and amortization expense

     65       76       55       31       28       35  

Other noninterest expense

     1,705       1,759       1,845       817       771       758  

Income (loss) from continuing operations before income taxes (TE)

     373       326       258       784       740       676  

Allocated income taxes (benefit) and TE adjustments

     139       121       96       285       265       248  

Income (loss) from continuing operations

     234       205       162       499       475       428  

Income (loss) from discontinued operations, net of taxes

     —         —         —         —         —         —    

Net income (loss)

     234       205       162       499       475       428  

Less: Net income (loss) attributable to noncontrolling interests

     —         —         —         2       —         3  

Net income (loss) attributable to Key

   $ 234     $ 205     $ 162     $ 497     $ 475     $ 425  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AVERAGE BALANCES (b)

                                                

Loans and leases

   $         30,105     $         29,311     $         27,202     $         22,452     $         19,822     $         18,328  

Total assets (a)

     32,231       31,634       29,622       26,312       23,628       22,252  

Deposits

     50,325       49,804       48,708       16,793       15,696       12,572  

OTHER FINANCIAL DATA

            

Expenditures for additions to long-lived assets (a), (b)

   $ 8     $ 6     $ 318     $ 9     $ 9     $ 10  

Net loan charge-offs (b)

     117       147       195       (19     3       63  

Return on average allocated equity (b)

     8.60     6.98     5.63     32.42     30.55     25.79

Return on average allocated equity

     8.60       6.98       5.63       32.42       30.55       25.79  

Average full-time equivalent employees (c)

     7,563       8,243       8,828       1,923       1,839       1,856  

 

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

 

(b) From continuing operations.

 

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

 

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Other Segments     Total Segments     Reconciling Items          Key  
2014     2013     2012     2014     2013     2012     2014     2013     2012            2014     2013     2012  
                        
$             34     $ 30       $             (38   $ 2,312     $ 2,347     $ 2,280     $ 5       1       $           8        $ 2,317     $ 2,348     $ 2,288  
  237       233       391       1,806       1,768       1,880       (9   $ (2     (24          1,797       1,766       1,856  
  271       263       353       4,118       4,115       4,160       (4     (1     (16        4,114       4,114       4,144  
  (14     (24     50       58       128       230       1       2       (1        59       130       229  
  12       15       19       108       119       109       152       141       141          260       260       250  
  73       87       117       2,595       2,617       2,720       (96     (57     (152          2,499       2,560       2,568  
  200       185       167       1,357       1,251       1,101       (61     (87     (4        1,296       1,164       1,097  
  (31     (35     (41     393       351       303       (43     (57     (48          350       294       255  
  231       220       208       964       900       798       (18     (30     44          946       870       842  
  —         —         —         —         —         —         (39     40       23            (39     40       23  
  231       220       208       964       900       798       (57     10       67          907       910       865  
  5       —         4       7       —         7       —         —         —              7       —         7  
$           226     $ 220     $ 204     $ 957     $ 900     $ 791     $ (57   $ 10     $ 67        $ 900     $ 910     $ 858  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 
                                                                                                  
$ 3,053     $ 3,865     $       4,783     $     55,610     $       52,998     $     50,313     $ 69     $ 56     $ 49        $ 55,679     $ 53,054     $ 50,362  
  27,883       28,403       28,354       86,426       83,665       80,228       653       512       614          87,079       84,177       80,842  
  871       731       705       67,989       66,231       61,985       (124     (354     (150          67,865       65,877       61,835  
                        
  —         —         —       $ 17     $ 15     $ 328     $ 118     $ 73     $ 76        $ 135     $ 88     $ 404  
$             15     $ 18     $ 87       113       168       345       —         —         —            113       168       345  
  38.83     31.84     24.91     19.79     17.36     14.80     (.32 )%      (.59 )%      .92        8.97     8.47     8.23
  38.83       31.84       24.91       19.79       17.36       14.80       (1.01     .20       1.40          8.60       8.86       8.46  
  95       122       126       9,581       10,204       10,810             4,272             4,579           4,779                13,853           14,783           15,589  

 

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24. Condensed Financial Information of the Parent Company

CONDENSED BALANCE SHEETS

 

December 31,

in millions

   2014      2013  

ASSETS

     

Cash and due from banks

   $       2,207      $       2,418  

Short-term investments

     31        35  

Securities available for sale

     22        20  

Other investments

     15        15  

Loans to:

     

Banks

     90        90  

Nonbank subsidiaries

     211        468  

Total loans

     301        558  

Investment in subsidiaries:

     

Banks

     9,998        9,342  

Nonbank subsidiaries

     632        579  

Total investment in subsidiaries

     10,630        9,921  

Goodwill

     244        167  

Other intangible assets

     11        —    

Corporate owned life insurance

     212        204  

Derivative assets

     11        6  

Accrued income and other assets

     356        333  

Total assets

   $ 14,040      $ 13,677  
  

 

 

    

 

 

 

LIABILITIES

     

Accrued expense and other liabilities

   $ 511      $ 413  

Derivative liabilities

     2        10  

Long-term debt due to:

     

Subsidiaries

     422        398  

Unaffiliated companies

     2,575        2,553  

Total long-term debt

     2,997        2,951  

Total liabilities

     3,510        3,374  

SHAREHOLDERS’ EQUITY (a)

     10,530        10,303  

Total liabilities and shareholders’ equity

   $ 14,040      $ 13,677  
  

 

 

    

 

 

 
                   

 

(a) See Key’s Consolidated Statements of Changes in Equity.

CONDENSED STATEMENTS OF INCOME

Year ended December 31,

 

in millions    2014      2013      2012  

INCOME

        

Dividends from subsidiaries:

        

Bank subsidiaries

   $       300      $       600      $       1,775  

Nonbank subsidiaries

     —          —          —    

Interest income from subsidiaries

     16        26        36  

Other income

     15        15        66  

Total income

     331        641        1,877  

EXPENSE

        

Interest on long-term debt with subsidiary trusts

     10        14        29  

Interest on other borrowed funds

     53        59        86  

Personnel and other expense

     40        65        68  

Total expense

     103        138        183  

Income (loss) before income taxes and equity in net income (loss) less dividends from subsidiaries

     228        503        1,694  

Income tax (expense) benefit

     45        33        48  

Income (loss) before equity in net income (loss) less dividends from subsidiaries

     273        536        1,742  

Equity in net income (loss) less dividends from subsidiaries (a)

     634        374        (877

NET INCOME (LOSS)

     907        910        865  

Less: Net income attributable to noncontrolling interests

     7        —          7  

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 900      $ 910      $ 858  
  

 

 

    

 

 

    

 

 

 
                            

 

(a) Includes results of discontinued operations described in Note 13 (“Acquisitions and Discontinued Operations”).

 

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CONDENSED STATEMENTS OF CASH FLOWS

Year ended December 31,

 

in millions    2014     2013     2012  

OPERATING ACTIVITIES

      

Net income (loss) attributable to Key

   $       900     $       910       $      858  

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

      

Deferred income taxes (benefit)

     (8     37       32  

Stock-based compensation expense

     14       11       17  

Equity in net (income) loss less dividends from subsidiaries (a)

     (634     (374     877  

Net (increase) decrease in other assets

     (53     612       (72

Net increase (decrease) in other liabilities

     98       (154     16  

Other operating activities, net

     24       (151     (50

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     341       891       1,678  

INVESTING ACTIVITIES

      

Net (increase) decrease in short-term investments

     4       2,096       (2,048

Purchases of securities available for sale

     (2     (14     (34

Cash used in acquisitions

     (114     —         —    

Proceeds from sales, prepayments and maturities of securities available for sale

     —         39       1  

Net (increase) decrease in loans to subsidiaries

     257       (4     36  

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     145       2,117       (2,045

FINANCING ACTIVITIES

      

Net proceeds from issuance of long-term debt

     —         750       —    

Payments on long-term debt

     —         (750     (1,149

Repurchase of Treasury Shares

     (484     (474     (251

Net proceeds from the issuance of common shares and preferred stock

     27       26       2  

Cash dividends paid

     (240     (217     (191

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (697     (665     (1,589

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     (211     2,343       (1,956

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR

     2,418       75       2,031  

CASH AND DUE FROM BANKS AT END OF YEAR

   $ 2,207     $ 2,418     $ 75  
  

 

 

   

 

 

   

 

 

 
                          

 

(a) Includes results of discontinued operations described in Note 13 (“Acquisitions and Discontinued Operations”).

KeyCorp paid interest on borrowed funds totaling $64 million in 2014, $76 million in 2013, and $118 million in 2012.

KeyCorp’s condensed Balance Sheet, Statements of Income, and Statements of Cash Flows were adjusted to reflect the push down of stock-based compensation expense, net of income taxes, to its subsidiaries for the years ended December 31, 2013, and December 31, 2012. Previously, the stock-based compensation expense and related tax impact were retained at the parent company level. Net income for the years ended December 31, 2013, and December 31, 2012, was not impacted by the restatement. There was no adjustment to beginning shareholders’ equity for the year ended December 31, 2013, to account for the stock-based compensation expense that would have been pushed down to KeyCorp’s subsidiaries in periods not presented.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 for 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.

Changes in Internal Control over Financial Reporting

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.

Reports Regarding Internal Controls

Management’s Annual Report on Internal Control over Financial Reporting, the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, and the Report of Independent Registered Public Accounting Firm are included in Item 8 on pages 106, 107, and 108, respectively.

ITEM 9B. OTHER INFORMATION

Not applicable.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The names of our executive officers, and biographical information for each, is set forth in Item 1. Business, of this report.

The other information required by this item will be set forth in the following sections of KeyCorp’s Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders to be held May 21, 2015 (the “2015 Proxy Statement”) and these sections are incorporated herein by reference:

 

   

“Proposal One: Election of Directors”

 

   

“Ownership of KeyCorp Equity Securities — Section 16(a) Beneficial Ownership Reporting Compliance”

 

   

“Corporate Governance Documents — Code of Ethics”

 

   

“Audit Matters — Audit Committee Independence and Financial Experts”

KeyCorp expects to file the 2015 Proxy Statement with the SEC on or about April 7, 2015. Any amendment to, or waiver from a provision of, the Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, or any other executive officer or director, will be promptly disclosed on its website (www.key.com/ir) as required by laws, rules and regulations of the SEC.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth in the following sections of the 2015 Proxy Statement and these sections are incorporated herein by reference:

 

   

“Compensation Discussion and Analysis”

 

   

“Compensation of Executive Officers and Directors”

 

   

“Compensation and Organization Committee Report”

 

   

“The Board of Directors and Its Committees — Oversight of Compensation Related Risks”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth in the section captioned “Ownership of KeyCorp Equity Securities” contained in the 2015 Proxy Statement, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be set forth in the following sections of the 2015 Proxy Statement and these sections are incorporated herein by reference:

 

   

“The Board of Directors and Its Committees — Director Independence”

 

   

“The Board of Directors and Its Committees — Related Party Transactions”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be set forth in the sections captioned “Audit Matters — Ernst & Young’s Fees” contained in the 2015 Proxy Statement, and is incorporated herein by reference.

 

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PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENTS

(a) (1) Financial Statements

The following financial statements of KeyCorp and its subsidiaries, and the auditor’s report thereon are filed as part of this report under Item 8. Financial Statements and Supplementary Data:

 

  Page  

Report of Independent Registered Public Accounting Firm

  108   

Consolidated Financial Statements

  109   

Consolidated Balance Sheets at December 31, 2014, and 2013

  109   

Consolidated Statements of Income for the Years Ended December 31, 2014, 2013, and 2012

  110   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013,
and 2012

  111   

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2014, 2013, and 2012

  112   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012

  113   

Notes to Consolidated Financial Statements

  114   

(a) (2) Financial Statement Schedules

All financial statement schedules for KeyCorp and its subsidiaries have been included in this Form 10-K in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required.

(a) (3) Exhibits*

 

    3.1 Amended and Restated Articles of Incorporation of KeyCorp (effective August 12, 2009).
    3.2 Amended and Restated Regulations of KeyCorp, effective May 19, 2011, filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2011. *
  10.1 Form of Award of Non-Qualified Stock Options (effective June 12, 2009).
  10.2 Form of Award of KeyCorp Executive Officer Grants (Award of Cash Performance Shares and Above-Target Performance Shares) (2012-2014), filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 2011. *
  10.3 Form of Award of KeyCorp Executive Officer Grants (Award of Cash Performance Shares and Above-Target Performance Shares) (2013-2015), filed as Exhibit 10.6 to Form 10-K for the year ended December 31, 2012. *
  10.4 Form of Performance Shares Award Agreement (2014-2016), filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2013.*
  10.5 Form of Performance Shares Award Agreement (2015-2017).
  10.6 Form of Award of KeyCorp Executive Officer Grants (Award of Restricted Stock Units) (effective March 1, 2013) filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 2012. *
  10.7 Form of Award of KeyCorp Executive Officer Grants (Award of Stock Options) (effective March 1, 2013), filed as Exhibit 10.8 to Form 10-K for the year ended December 31, 2012. *
  10.8 Form of Restricted Stock Unit Award Agreement under KeyCorp 2013 Equity Compensation Plan, filed as Exhibit 10.1 to Form 10-Q for the second quarter ended June 30, 2013. *
  10.9 Offer Letter for Donald R. Kimble, dated May 19, 2013, filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2013. *
  10.10

Letter Agreement between KeyBank National Association and Jeffrey B. Weeden, dated as of

June 30, 2013, filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2013. *

  10.11

Letter Agreement between KeyBank National Association and William R. Koehler, dated as of

April 17, 2014, filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30. 2014. *

 

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  10.12 Amendment to April 17, 2014 Letter Agreement between KeyBank National Association and William R. Koehler, dated as of May 6, 2014, filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2014. *
  10.13 Form of Change of Control Agreement (Tier I) between KeyCorp and Certain Executive Officers of KeyCorp, dated as of March 8, 2012, filed as Exhibit 10.1 to Form 8-K filed March 8, 2012. *
  10.14 Form of Change of Control Agreement (Tier II Executives) between KeyCorp and Certain Executive Officers of KeyCorp, dated as of April 15, 2012, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012. *
  10.15 KeyCorp Annual Incentive Plan (January 1, 2011 Restatement), filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 2011. *
  10.16 KeyCorp 2011 Annual Performance Plan, filed as Appendix A to Schedule 14A filed on April 5, 2011. *
  10.17 KeyCorp 2004 Equity Compensation Plan (effective March 18, 2004).
  10.18 KeyCorp 2010 Equity Compensation Plan (effective March 11, 2010), filed as Appendix A to Schedule 14A filed on April 2, 2010. *
  10.19 Director Deferred Compensation Plan (May 18, 2000 Amendment and Restatement), filed as Exhibit 10.21 to Form 10-K for the year ended December 31, 2013.*
  10.20 Amendment to the Director Deferred Compensation Plan (effective December 31, 2004).
  10.21

KeyCorp Amended and Restated Second Director Deferred Compensation Plan (effective

September 18, 2013), filed as Exhibit 10.23 to Form 10-K for the year ended December 31, 2013.*

  10.22 KeyCorp Directors’ Deferred Share Sub-Plan (effective September 18, 2013), filed as Exhibit 10.25 to Form 10-K for the year ended December 31, 2013.*
  10.23 KeyCorp Excess Cash Balance Pension Plan (effective January 1, 1998), filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 2013.*
  10.24 First Amendment to the KeyCorp Excess Cash Balance Pension Plan (effective July 1, 1999), filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 2013.*
  10.25 Second Amendment to the KeyCorp Excess Cash Balance Pension Plan (effective January 1, 2003), filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 2013.*
  10.26 Restated Amendment to KeyCorp Excess Cash Balance Pension Plan (effective December 31, 2004).
  10.27 Disability Amendment to KeyCorp Excess Cash Balance Pension Plan (effective December 31,2007), filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 2012. *
  10.28 KeyCorp Second Excess Cash Balance Pension Plan (effective February 8, 2010).
  10.29 Trust Agreement for certain amounts that may become payable to certain executives and directors of KeyCorp, dated April 1, 1997, and amended as of August 25, 2003, filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 2013.*
  10.30 KeyCorp 2013 Equity Compensation Plan (effective March 13, 2014), filed as Appendix A to Schedule 14A filed on March 29, 2013. *
  10.31 KeyCorp Deferred Savings Plan (effective January 1, 2015).
  10.32 KeyCorp Deferred Equity Allocation Plan (effective May 22, 2003).
  12 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
  21 Subsidiaries of the Registrant.
  23 Consent of Independent Registered Public Accounting Firm.
  24 Power of Attorney.
  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.

 

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  32.2    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Label Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase.
101.DEF    XBRL Taxonomy Definition Linkbase.

 

* Incorporated by reference. Copies of these Exhibits have been filed with the SEC. Exhibits that are not incorporated by reference are filed with this report. Shareholders may obtain a copy of any exhibit, upon payment of reproduction costs, by writing KeyCorp Investor Relations, 127 Public Square, Mail Code OH-01-27-0737, Cleveland, OH 44114-1306.

KeyCorp hereby agrees to furnish the SEC upon request, copies of instruments, including indentures, which define the rights of long-term debt security holders. All documents listed as Exhibits 10.1 through 10.32 constitute management contracts or compensatory plans or arrangements.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
/s/ Donald R. Kimble
Donald R. Kimble
Chief Financial Officer (Principal Financial Officer)
March 2, 2015
/s/ Robert L. Morris
Robert L. Morris
Chief Accounting Officer (Principal Accounting Officer)
March 2, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Signature    Title

*Beth E. Mooney

  

Chairman, Chief Executive Officer

(Principal Executive Officer), President and Director

*Donald R. Kimble

   Chief Financial Officer (Principal Financial Officer)

*Robert L. Morris

   Chief Accounting Officer (Principal Accounting Officer)

*Joseph A. Carrabba

   Director

*Charles P. Cooley

   Director

*Alexander M. Cutler

   Director

*H. James Dallas

   Director

*Elizabeth R. Gile

   Director

*Ruth Ann M. Gillis

   Director

*William G. Gisel, Jr.

   Director

*Richard J. Hipple

   Director

*Kristen L. Manos

   Director

*Demos Parneros

   Director

*Barbara R. Snyder

   Director

*David K. Wilson

   Director

 

/s/ Paul N. Harris
* By Paul N. Harris, attorney-in-fact
March 2, 2015

 

223

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

KEYCORP

ARTICLE I

Name

The name of the corporation (hereinafter called the “Corporation”) is “KeyCorp”.

ARTICLE II

Principal Office

The principal office and headquarters of the Corporation shall be located in the City of Cleveland, County of Cuyahoga, State of Ohio.

ARTICLE III

Purposes

The purposes of the Corporation are:

 

(a) to organize, acquire, invest in, own, or control shares and other securities of banks, other depository institutions, and other companies which a bank holding company is permitted to own or control by the provisions of the Bank Holding Company Act of 1956, as now in effect or hereafter amended, and to carry on the business of a bank holding company in conformity with the Bank Holding Company Act of 1956, as now in effect or hereafter amended;

 

(b) to do whatever is deemed necessary, incidental, or conducive to carrying out any of the purposes of the Corporation; and

 

(c) to engage in any lawful act or activity for which corporations may be formed under the Ohio General Corporation Law.

ARTICLE IV

Authorized Shares of Capital Stock

The authorized number of shares of the Corporation is 1,425,000,000, of which 25,000,000 shall be shares of preferred stock, with a par value of $1 each, as described in Part A of this Article IV (hereinafter called “Preferred Stock”), and 1,400,000,000 shall be Common Shares, with a par value of $1 each, as described in Part B of this Article IV (hereinafter called “Common Shares”).

The express terms of each class are as follows:

PART A

EXPRESS TERMS OF THE PREFERRED STOCK

Section 1 . Series .

The Preferred Stock may be issued from time to time in series. All shares of Preferred Stock shall be of equal rank and the express terms thereof shall be identical, except in respect of the terms that may be fixed by the Board of Directors as hereinafter provided, and each share of each series shall be identical with all other shares of


such series, except that in the case of series on which dividends are cumulative the dates from which dividends are cumulative may vary to reflect differences in the dates of issue. Subject to the provisions of Sections 2 through 4, inclusive, of this Part A, which shall apply to all Preferred Stock, the Board of Directors is hereby authorized to cause shares of Preferred Stock to be issued in one or more series and with respect to each such series to fix:

 

  (a) The designation of the series, which may be by distinguishing number, letter, or title.

 

  (b) The authorized number of shares of the series, which number the Board of Directors may, except to the extent otherwise provided in the creation of the series, from time to time, increase or decrease, but not below the number of shares thereof then outstanding.

 

  (c) The dividend rate or rates (which may be fixed or adjustable) of the shares of the series.

 

  (d) The dates on which dividends, if declared, shall be payable and, in the case of series on which dividends are cumulative, the dates from which dividends shall be cumulative.

 

  (e) The redemption rights and price or prices, if any, for shares of the series.

 

  (f) The amount, terms, conditions, and manner of operation of any retirement or sinking fund to be provided for the purchase or redemption of shares of the series.

 

  (g) The amounts payable on shares of the series in the event of any liquidation, dissolution, or winding up of the affairs of the Corporation.

 

  (h) Whether the shares of the series shall be convertible into Common Shares or shares of any other series or class, and, if so, the specification of such other class or series, the conversion price or prices or rate or rates, any adjustment thereof, and all other terms and conditions upon which such conversion may be made.

 

  (i) The restrictions, if any, upon the issue of any additional shares of the same series or of any other class or series.

The Board of Directors is authorized to adopt from time to time amendments to these articles of incorporation fixing, with respect to each series, the matters described in Clauses (a) through (i), inclusive, of this Section 1.

Section 2 . Voting Rights .

 

  (a) The holders of Preferred Stock shall not be entitled to vote upon matters presented to the shareholders, except as provided in this Section 2 or as required by law.

 

  (b)

If the Corporation shall fail to pay full dividends on any series of Preferred Stock for six quarterly dividend payment periods, whether or not consecutive, the number of directors will be increased by two, and the holders of all outstanding series of Preferred Stock, voting as a single class without regard to series, will be entitled to elect such additional two directors until full cumulative dividends for all past dividend payment periods on all series of Preferred Stock have been paid or declared and set apart for payment and non-cumulative dividends have been paid regularly for at least one full year. Such right to vote separately as a class to elect directors shall, when vested, be subject, always, to the same provisions for the vesting of such right to elect directors separately as a class in the case of future dividend defaults. At any time when such right to elect directors separately as a class shall have so vested, the Corporation may, and upon the written request of the holders of record of not less than twenty percent of the total number of shares of the Preferred Stock of the Corporation then outstanding shall, call a special meeting of shareholders for the election of such directors. In the case of such a written request, such special meeting shall be held within ninety days after the delivery of such request and, in either case, at the place and upon the notice provided by law and in the Regulations of the Corporation, provided that the Corporation shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual meeting of shareholders of the Corporation. Directors elected as aforesaid shall serve until the next annual meeting


  of shareholders of the Corporation or until their respective successors shall be elected and qualify. If, prior to the end of the term of any director elected as aforesaid, a vacancy in the office of such director shall occur during the continuance of a default in dividends on any series of Preferred Stock by reason of death, resignation or disability, such vacancy shall be filled for the unexpired term by the appointment by the remaining director or directors elected as aforesaid of a new director for the unexpired term of such former director.

 

  (c) The affirmative vote or consent of the holders of at least two-thirds of the then outstanding shares of Preferred Stock, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Preferred Stock shall vote separately as a class, shall be necessary to effect any amendment, alteration, or repeal of any of the provisions of these articles of incorporation or the regulations of the Corporation which would be substantially prejudicial to the voting powers, rights, or preferences of the holders of Preferred Stock (but so far as the holders of Preferred Stock are concerned, such action may be effected with such vote or consent); provided, however, that neither the amendment of these articles of incorporation to authorize or to increase the authorized or outstanding number of shares of any class ranking junior to or on a parity with the Preferred Stock, nor the amendment of the regulations so as to change the number of directors of the Corporation, shall be deemed to be substantially prejudicial to the voting powers, rights, or preferences of the holders of Preferred Stock (and any such amendment referred to in this proviso may be made without the vote or consent of the holders of the Preferred Stock); and provided further that if such amendment, alteration, or repeal would be substantially prejudicial to the rights or preferences of one or more but not all then outstanding series of Preferred Stock, the affirmative vote or consent of the holders of at least two-thirds of the then outstanding shares of the series so affected shall also be required.

 

  (d) The affirmative vote or consent of the holders of at least two-thirds of the then outstanding shares of Preferred Stock, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Preferred Stock shall vote as a single class shall be necessary to effect any one or more of the following:

 

  (i) The authorization of, or the increase in the authorized number of, any shares of any class ranking prior to the Preferred Stock; or

 

  (ii) The purchase or redemption for sinking fund purposes or otherwise of less than all of the then outstanding Preferred Stock except in accordance with a purchase offer made to all holders of record of Preferred Stock, unless all dividends on all Preferred Stock then outstanding for all previous dividend periods shall have been declared and paid or funds therefor set apart and all accrued sinking fund obligations applicable thereto shall have been complied with.


Section 3 . Preemptive Rights .

No holder of Preferred Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any issue of shares of the Corporation, of any class whatsoever, or any part of any issue of securities convertible into shares of the Corporation, of any class whatsoever, and whether issued for cash, property, services or otherwise.

Section 4 . Definitions .

For the purposes of this Part A:

 

  (a) Whenever reference is made to shares “ranking prior to the Preferred Stock,” such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof either as to the payment of dividends or as to distribution in the event of a liquidation, dissolution or winding up of the Corporation are given preference over the rights of the holders of Preferred Stock.

 

  (b) Whenever reference is made to shares “on a parity with the Preferred Stock,” such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a liquidation, dissolution or winding up of the Corporation rank on an equality or parity with the rights of the holders of Preferred Stock.

 

  (c) Whenever reference is made to shares “ranking junior to the Preferred Stock,” such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a liquidation, dissolution or winding up of the Corporation are junior or subordinate to the rights of the holders of Preferred Stock.

PART B

EXPRESS TERMS OF COMMON SHARES

Section 1 . General .

The holders of Common Shares shall be entitled to one vote for each Common Share held by them, respectively, on each matter properly submitted to shareholders for their vote, consent, waiver, release or other action.

Section 2 . Preemptive Rights .

No holder of Common Shares shall be entitled as such as a matter of right to subscribe for or purchase any part of any issue of shares of the Corporation of any class whatsoever, or any part of any issue of securities convertible into shares of the Corporation, of any class whatsoever, and whether issued for cash, property, services or otherwise.

PART C

CUMULATIVE VOTING

No holder of shares of any class of the Corporation may cumulate his voting power.


PART D

EXPRESS TERMS OF THE 7.750% NON-CUMULATIVE PERPETUAL CONVERTIBLE PREFERRED STOCK, SERIES A

Section 1. Designation . The designation of the series of Preferred Stock created by this Part D of Article IV shall be 7.750% Non-Cumulative Perpetual Convertible Preferred Stock, Series A, $1.00 par value, with a liquidation preference of $100 per share, and $747,500,000 in the aggregate (hereinafter referred to as the “ Series A Preferred Stock ”). Each share of Series A Preferred Stock shall be identical in all respects to every other share of Series A Preferred Stock. Series A Preferred Stock will rank equally with Parity Stock, if any, and will rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2. Number of Shares . The number of authorized shares of Series A Preferred Stock shall be 7,475,000. Such number may from time to time be increased (but not in excess of the total number of authorized shares of Preferred Stock) or decreased (but not below the number of shares of Series A Preferred Stock then outstanding) by further amendment to the articles duly adopted by the Board of Directors. Shares of Series A Preferred Stock that are converted in accordance with the terms hereof, purchased or otherwise acquired by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series, and available for subsequent issuance. The Corporation shall have the authority to issue fractional shares of Series A Preferred Stock.

Section 3 . Definitions . As used herein with respect to the Series A Preferred Stock:

Applicable Conversion Price ” at any given time means, for each share of Series A Preferred Stock, the price equal to $100 divided by the Applicable Conversion Rate in effect at such time.

Applicable Conversion Rate ” means the Conversion Rate in effect at any given time.

Base Price ” has the meaning set forth in Section 13(d)(i) hereof.

Business Day ” means each Monday, Tuesday, Wednesday, Thursday or Friday on which the Corporation is not authorized or obligated by law, regulation or executive order to close.

Capital Stock ” of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock, excluding any debt securities convertible into such equity.

Closing Price ” of the Common Shares on any date of determination means the closing sale price or, if no closing sale price is reported, the last reported sale price of the Common Shares on the New York Stock Exchange on that date. If the Common Shares are not traded on the New York Stock Exchange on any date of determination, the Closing Price of the Common Shares on such date of determination means the closing sale price as reported in the composite transactions for the principal U.S. national or regional securities exchange or securities exchange in the European Economic Area on which the Common Shares are so listed or quoted, or, if no closing sale price is reported, the last reported sale price on the principal U.S. national or regional securities exchange or securities exchange in the European Economic Area on which the Common Shares are so listed or quoted, or if the Common Shares are not so listed or quoted on a U.S. national or regional securities exchange or securities exchange in the European Economic Area, the last quoted bid price for the Common Shares in the over-the-counter market as reported by Pink Sheets LLC or a similar organization, or, if that bid price is not available, the market price of the Common Shares on that date as determined by a nationally recognized independent investment banking firm (unaffiliated with the Corporation) retained by the Corporation for this purpose. The “Closing Price” for any other share of Capital Stock shall be determined on a comparable basis, mutatis mutandis.


For purposes of this Part D of this Article IV, all references herein to the “Closing Price” and “last reported sale price” of the Common Shares on the New York Stock Exchange shall be such closing sale price and last reported sale price as reflected on the website of the New York Stock Exchange (http://www.nyse.com) and as reported by Bloomberg Professional Service; provided that in the event that there is a discrepancy between the closing sale price or last reported sale price as reflected on the website of the New York Stock Exchange and as reported by Bloomberg Professional Service, the closing sale price and last reported sale price on the website of the New York Stock Exchange will govern.

For purposes of calculating the Closing Price, if a Reorganization Event has occurred and (1) the Exchange Property consists only of shares of common securities, the Closing Price shall be based on the Closing Price of such common securities; (2) the Exchange Property consists only of cash, the Closing Price shall be the cash amount paid per share; and (3) the Exchange Property consists of securities, cash and/or other property, the Closing Price shall be based on the sum, as applicable, of (x) the Closing Price of such common securities, (y) the cash amount paid per Common Share and (z) the value (as determined by the board of directors from time-to-time) of any other securities or property paid to holders of Common Shares in connection with the Reorganization Event.

Common Shares ” means the common shares, $1.00 par value per share, of the Corporation.

Conversion Agent ” means Computershare Investor Services LLC, acting in its capacity as conversion agent for the Series A Preferred Stock, and its successors and assigns or any other conversion agent appointed by the Corporation.

Conversion Date ” has the meaning set forth in Section 13(a)(iv)(B) hereof.

Conversion Rate ” means for each share of Series A Preferred Stock, 7.0922 Common Shares, plus cash in lieu of fractional shares, subject to adjustment as set forth herein.

Current Market Price ” per Common Share on any date of determination means the average of the VWAP per Common Share on each of the 10 consecutive VWAP Trading Days ending on the earlier of the day in question and the day before the Ex-Date or other specified date with respect to the issuance or distribution requiring such computation, appropriately adjusted to take into account the occurrence during such period of any event described in Section 14(a)(i) through (v) hereof.

Depositary ” means DTC or its nominee or any successor depositary appointed by the Corporation.

Dividend Payment Date ” shall have the meaning set forth in Section 4(a) hereof.

Dividend Period ” shall have the meaning set forth in Section 4(a) hereof.

Dividend Threshold Amount ” has the meaning set forth in Section 14(a)(iv) hereof.

DTC ” means The Depository Trust Company, together with its successors and assigns.

Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Exchange Property ” has the meaning set forth in Section 15(a) hereof.

Ex-Date ” when used with respect to any issuance or distribution, means the first date on which such Common Shares or other securities trade without the right to receive an issuance or distribution with respect thereto.

Expiration Time ” has the meaning set forth in Section 14(a)(v) hereof.


Expiration Date ” has the meaning set forth in Section 14(a)(v) hereof.

Fiscal Quarter ” means, with respect to the Corporation, the fiscal quarter publicly disclosed by the Corporation.

Fundamental Change ” has the meaning set forth in Section 13(d)(i) hereof.

Holder ” means the Person in whose name the shares of Series A Preferred Stock are registered, which may be treated by the Corporation, Transfer Agent, Registrar, paying agent and Conversion Agent as the absolute owner of the shares of Series A Preferred Stock for the purpose of making payment and settling conversions and for all other purposes.

Junior Stock ” means the Common Shares and any other class or series of stock of the Corporation hereafter authorized over which Series A Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

Make-Whole Acquisition ” means the occurrence, prior to any Conversion Date, of one of the following:

(a) a “person” or “group” within the meaning of Section 13(d) of the Exchange Act files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of common equity of the Corporation representing more than 50% of the voting power of the Common Shares; or

(b) consummation of any consolidation or merger of the Corporation or similar transaction or any sale, lease or other transfer in one transaction or a series of related transactions of all or substantially all of the consolidated assets of the Corporation and its subsidiaries, taken as a whole, to any Person other than one of the Corporation’s subsidiaries, in each case, pursuant to which the Common Shares will be converted into cash, securities, or other property, other than pursuant to a transaction in which the Persons that “beneficially owned” (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, Voting Shares immediately prior to such transaction beneficially own, directly or indirectly, Voting Shares representing a majority of the total voting power of all outstanding classes of Voting Shares of the continuing or surviving Person immediately after the transaction;

provided, however that a Make-Whole Acquisition will not be deemed to have occurred if at least 90% of the consideration received by holders of the Common Shares in the transaction or transactions (as determined by the board of directors) consists of shares of common securities of a Person or American Depositary Receipts in respect of such common securities that are traded on a U.S. national securities exchange or a securities exchange in the European Economic Area or that will be traded on a U.S. national securities exchange or a securities exchange in the European Economic Area when issued or exchanged in connection with a Make-Whole Acquisition.

Make-Whole Acquisition Conversion ” has the meaning set forth in Section 13(c)(i) hereof.

Make-Whole Acquisition Conversion Period ” has the meaning set forth in Section 13(c)(i) hereof.

Make-Whole Acquisition Effective Date ” has the meaning set forth in Section 13(c)(i) hereof.

Make-Whole Acquisition Share Price ” means the price paid per Common Share in the event of a Make-Whole Acquisition. If the holders of Common Shares receive only cash in the Make-Whole Acquisition in a single per-share amount, other than with respect to appraisal and similar rights, the Make-Whole Acquisition Share Price shall be the cash amount paid per Common Share. For purposes of the preceding sentence as applied to a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-Whole Acquisition, a single price per Common Share shall be deemed to have been paid only if the transaction or transactions that caused the Make-Whole Acquisition to occur was a tender offer for more than 50% of the then-outstanding Common Shares. Otherwise, the Make-Whole Acquisition Share Price shall be the average of the Closing Price per Common Share on the ten Trading Days up to, but not including, the Make-Whole Acquisition Effective Date.


Make-Whole Shares ” has the meaning set forth in Section 13(c)(i) hereof.

Mandatory Conversion Date ” has the meaning set forth in Section 13(b)(iii) hereof.

Market Disruption Event ” means any of the following events that has occurred:

(a) any suspension of, or limitation imposed on, trading by any exchange or quotation system on which the VWAP is determined pursuant to the definition of the VWAP Trading Day (a “ Relevant Exchange ”) during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per Common Share any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) and whether by reason of movements in price exceeding limits permitted by the Relevant Exchange, or otherwise relating to Common Shares or in futures or options contracts relating to the Common Shares on the Relevant Exchange;

(b) any event (other than an event described in clause (c)) that disrupts or impairs (as determined by the Corporation in its reasonable discretion) the ability of market participants during the one-hour period prior to the close of trading for the regular trading session on the Relevant Exchange (or for purposes of determining the VWAP per Common Share any period or periods aggregating one half-hour or longer during the regular trading session on the relevant day) in general to effect transactions in, or obtain market values for, the Common Shares on the Relevant Exchange or to effect transactions in, or obtain market values for, futures or options contracts relating to the Common Shares on the Relevant Exchange; or

(c) the failure to open of the Relevant Exchange on which futures or options contracts relating to the Common Shares, are traded or the closure of such Relevant Exchange prior to its respective scheduled closing time for the regular trading session on such day (without regard to after hours or any other trading outside of the regular trading session hours) unless such earlier closing time is announced by such Relevant Exchange at least one hour prior to the earlier of the actual closing time for the regular trading session on such day and the submission deadline for orders to be entered into such Relevant Exchange for execution at the actual closing time on such day.

Notice of Mandatory Conversion ” has the meaning set forth in Section 13(b)(iii) hereof.

Parity Stock ” means any other class or series of stock of the Corporation that ranks on a parity with Series A Preferred Stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

Person ” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company or trust.

Purchased Shares ” has the meaning set forth in Section 14(a)(v) hereof.

Record Date ” has the meaning, for purposes of Section 14 hereof, as set forth in Section 14(d) hereof.

Reference Price ” means the applicable Make-Whole Acquisition Share Price.

Registrar ” means Computershare Investor Services LLC, in its capacity as registrar for the Series A Preferred Stock, and its successors and assigns or any other registrar appointed by the Corporation.

Relevant Exchange ” has the meaning set forth above in the definition of Market Disruption Event.

Reorganization Event ” has the meaning set forth in Section 15(a) hereof.

Series A Preferred Stock ” shall have the meaning set forth in Section 1 hereof.


Trading Day ” means a day on which the Common Shares:

(a) are not suspended from trading on any national or regional securities exchange or association or in the over-the-counter market at the close of business; and

(b) have traded at least once on the national or regional securities exchange or association or in the over-the-counter market that is the primary market for the trading of the Common Shares.

Transfer Agent ” shall mean Computershare Investor Services LLC, acting in its capacity as transfer agent for the Series A Preferred Stock, and its successors and assigns or any other transfer agent appointed by the Corporation.

Voting Parity Stock ” means any Parity Stock having similar voting rights as the Series A Preferred Stock.

Voting Shares ” of a Person means shares of all classes of Capital Stock of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of the board of directors of such Person.

VWAP ” per Common Share on any VWAP Trading Day means the per share volume-weighted average price as displayed under the heading Bloomberg VWAP on Bloomberg page KEY<equity>AQR (or its equivalent successor if such page is not available) in respect of the period from the open of trading on the relevant VWAP Trading Day until the close of trading on the relevant VWAP Trading Day (or if such volume-weighted average price is unavailable, the market price of one Common Share on such VWAP Trading Day determined, using a volume-weighted average method, by a nationally recognized investment banking firm (unaffiliated with the Corporation) retained for this purpose by the Corporation). The VWAP for any other share of Capital Stock shall be determined on a comparable basis, mutatis mutandis.

VWAP Trading Day ” means, for purposes of determining a VWAP per Common Share, a Business Day on which the Relevant Exchange (as defined in the definition of Market Disruption Event) is scheduled to be open for business and on which there has not occurred or does not exist a Market Disruption Event.

Section 4 . Dividends .

(a) Rate . Holders of Series A Preferred Stock shall be entitled to receive, if, as and when declared by the Board of Directors, but only out of assets legally available therefor, non-cumulative cash dividends on the liquidation preference of $100 per share of Series A Preferred Stock, and no more, payable quarterly in arrears on each March 15, June 15, September 15 and December 15, commencing on September 15, 2008 (each a “ Dividend Payment Date ”); provided , however , if any such day is not a Business Day, then payment of any dividend otherwise payable on that date will be made on the next succeeding day that is a Business Day (without any adjustment in respect of such delay to the amount of the dividends paid on such date). The period from and including the date of issuance of the Series A Preferred Stock or any Dividend Payment Date to but excluding the next Dividend Payment Date is a “ Dividend Period .” In the event that additional shares of Series A Preferred Stock are issued after the original issue date, dividends on such shares shall accrue from (i) if the original issue date of such additional shares is a Dividend Payment Date, from such date, or (ii) if the original issue date is a date other than a Dividend Payment Date, from the immediately preceding Dividend Payment Date or, if no Dividend Payment Date has yet occurred, from the issue date of the Series A Preferred Stock. Dividends on each share of Series A Preferred Stock will accrue on the liquidation preference of $100 per share at a rate per annum equal to 7.750%. The record date for payment of dividends on the Series A Preferred Stock shall be the last Business Day of the calendar month immediately preceding the month during which the Dividend Payment Date falls. The amount of dividends payable shall be computed on the basis of a 360-day year and the actual number of days elapsed.

(b) Non-Cumulative Dividends . Dividends on shares of Series A Preferred Stock shall be non-cumulative. To the extent that any dividends payable on the shares of Series A Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid


dividends shall not cumulate and shall cease to accrue and be payable and the Corporation shall have no obligation to pay, and the Holders shall have no right to receive, dividends accrued for such Dividend Period after the Dividend Payment Date for such Dividend Period or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Series A Preferred Stock, Parity Stock, Junior Stock or any other class or series of authorized Preferred Stock of the Corporation.

(c) Priority of Dividends . So long as any share of Series A Preferred Stock remains outstanding, on any day during a Dividend Period (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any Junior Stock, other than a dividend payable solely in Junior Stock, (ii) no shares of Junior Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Junior Stock for or into Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by the Corporation, and (iii) no shares of Parity Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series A Preferred Stock and such Parity Stock except by conversion into or exchange for Junior Stock, in each case unless full dividends on all outstanding shares of Series A Preferred Stock for the immediately preceding Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside. When dividends are not paid in full upon the shares of Series A Preferred Stock and any Parity Stock, all dividends declared upon shares of Series A Preferred Stock and any Parity Stock will be declared on a proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current dividend period per share on Series A Preferred Stock and any Parity Stock, plus accrued and unpaid dividends from prior periods in the case of any Parity Stock that bears cumulative dividends, bear to each other. No interest will be payable in respect of any dividend payment on shares of Series A Preferred Stock that may be in arrears. If the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide, or cause to be provided, written notice to the holders of the Series A Preferred Stock prior to such date. Subject to the foregoing, and not otherwise, dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on any Junior Stock from time to time out of any assets legally available therefor, and the shares of Series A Preferred Stock or Parity Stock shall not be entitled to participate in any such dividend.

Section 5. Liquidation Rights .

(a) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, Holders shall be entitled, out of assets legally available therefor, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Series A Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidating distribution in the amount of the liquidation preference of $100 per share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. The Holder shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 5.

(b) Partial Payment. If the assets of the Corporation are not sufficient to pay in full the liquidation preference plus any authorized, declared and unpaid dividends to all Holders and all holders of any Parity Stock, the amounts paid to the Holders and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preferences plus any authorized, declared and unpaid dividends of Series A Preferred Stock and all such Parity Stock.

(c) Residual Distributions. If the liquidation preference plus any authorized, declared and unpaid dividends has been paid in full to all Holders and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.


(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 5, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.

Section 6. Redemption . The Series A Preferred Stock will not be redeemable at any time.

Section 7. Voting Rights . The Holders will have no voting rights on any matter, except as expressly provided in these Amended and Restated Articles of Incorporation, including Section 2 of Part A of this Article IV, and except as shall be affirmatively provided in the Ohio General Corporation Law.

Section 8. [Intentionally Omitted]

Section 9 . Repurchase . Subject to the limitations imposed herein, the Corporation may purchase and sell Series A Preferred Stock from time to time to such extent, in such manner, and upon such terms as the Board of Directors of the Corporation may determine; provided , however , that the Corporation shall not use any of its funds for any such purchase when there are reasonable grounds to believe that the Corporation is, or by such purchase would be, rendered insolvent.

Section 10. Unissued or Reacquired Shares . Shares of Series A Preferred Stock not issued or which have been issued and converted, redeemed or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series.

Section 11. No Sinking Fund . Shares of Series A Preferred Stock are not subject to the operation of a sinking fund.

Section 12. Right to Convert. Each Holder shall have the right, at such Holder’s option, at any time, to convert all or any portion of such Holder’s Series A Preferred Stock into Common Shares at the Applicable Conversion Rate (subject to the conversion procedures set forth in Section 13 herein) plus cash in lieu of fractional shares.

Section 13. Conversion .

(a) Conversion Procedures .

(i) Effective immediately prior to the close of business on the Mandatory Conversion Date or any applicable Conversion Date, dividends shall no longer be declared on any converted shares of Series A Preferred Stock and such shares of Series A Preferred Stock shall cease to be outstanding, in each case, subject to the right of Holders to receive any declared and unpaid dividends on such shares and any other payments to which they are otherwise entitled pursuant to Section 12, Section 13(b), Section 13(c), Section 13(d), Section 15 or Section 16, as applicable.

(ii) Prior to the close of business on the Mandatory Conversion Date or any applicable Conversion Date, Common Shares issuable upon conversion of, or other securities issuable upon conversion of, any shares of Series A Preferred Stock shall not be deemed outstanding for any purpose, and Holders shall have no rights with respect to the Common Shares or other securities issuable upon conversion (including voting rights, rights to respond to tender offers for the Common Shares and rights to receive any dividends or other distributions on the Common Shares and/or other securities issuable upon conversion), by virtue of holding shares of Series A Preferred Stock.

(iii) The Person or Persons entitled to receive the Common Shares and/or other securities issuable upon conversion of Series A Preferred Stock shall be treated for all purposes as the record holder(s) of


such Common Shares and/or such other securities as of the close of business on the Mandatory Conversion Date or any applicable Conversion Date except to the extent that all or a portion of such Common Shares is subject to the limitations set forth in Section 18. In the event that a Holder shall not by written notice designate the name in which Common Shares and/or cash, other securities or other property (including payments of cash in lieu of fractional shares) to be issued or paid upon conversion of shares of Series A Preferred Stock should be registered or paid or the manner in which such shares should be delivered, the Corporation shall be entitled to register and deliver such shares, and make such payment, in the name of the Holder and in the manner shown on the records of the Corporation through book-entry transfer through the Depositary.

(iv) Conversion into Common Shares will occur on the Mandatory Conversion Date or any applicable Conversion Date as follows:

(A) On the Mandatory Conversion Date or applicable Conversion Date, certificates or evidence of shares in book-entry form representing Common Shares shall be issued and delivered to Holders or their designee upon presentation and surrender of the certificate evidencing the Series A Preferred Stock to the Conversion Agent if shares of the Series A Preferred Stock are held in certificated form, and, if required, the furnishing of appropriate endorsements and transfer documents and the payment of all transfer and similar taxes. If a Holder’s interest is a beneficial interest in a global certificate representing Series A Preferred Stock, a book-entry transfer through the Depositary will be made by the Conversion Agent upon compliance with the Depositary’s procedures for converting a beneficial interest in a global security.

(B) On the date of any conversion at the option of Holders pursuant to Section 12, Section 13(c) or Section 13(d), if a Holder’s interest is in certificated form, a Holder must do each of the following in order to convert:

(1) complete and manually sign the conversion notice provided by the Conversion Agent, or a facsimile of the conversion notice, and deliver this irrevocable notice to the Conversion Agent;

(2) surrender the shares of Series A Preferred Stock to the Conversion Agent;

(3) if required, furnish appropriate endorsements and transfer documents;

(4) if required, pay all transfer or similar taxes; and

(5) if required, pay funds equal to any declared and unpaid dividend payable on the next Dividend Payment Date.

If a Holder’s interest is a beneficial interest in a global certificate representing Series A Preferred Stock, in order to convert a Holder must comply with clauses (3) through (5) listed above and comply with the Depositary’s procedures for converting a beneficial interest in a global security.

The date on which a Holder complies with the procedures in this clause (iv) is the “ Conversion Date .”

(C) The Conversion Agent shall, on a Holder’s behalf, convert the Series A Preferred Stock into Common Shares and/or cash, other securities or other property (involving payments of cash in lieu of fractional shares), in accordance with the terms of the notice delivered by such Holder described in clause (B) above. If a Conversion Date on which a Holder elects to convert Series A Preferred Stock is prior to the record date relating to any declared dividend for the Dividend Period, such Holder will not have the right to receive any declared dividends for that Dividend Period. If a Conversion Date on which a Holder elects to convert Series A Preferred Stock or the Mandatory Conversion Date is after the record date for any declared dividend and prior to the Dividend Payment Date, such Holder shall receive that dividend on the relevant Dividend Payment Date if such Holder was the Holder of record on the record date for that dividend. Notwithstanding the preceding sentence, if the Conversion Date is after the record date relating to any declared dividend for the Dividend Period and prior to the Dividend Payment Date, whether or not such Holder was the Holder of record on the record date relating to any declared dividend for the Dividend Period, the Holder must pay to the Conversion Agent upon conversion of the shares of Series A Preferred


Stock an amount in cash equal to the full dividend actually paid on the Dividend Payment Date for the then-current Dividend Period on the shares of Series A Preferred Stock being converted, unless the Holder’s shares of Series A Preferred Stock are being converted pursuant to Section 13(b), Section 13(c) or Section 13(d).

(b) Mandatory Conversion at the Corporation’s Option .

(i) On or after June 15, 2013, the Corporation may, at its option, at any time or from time to time, cause some or all of the Series A Preferred Stock to be converted into Common Shares at the Applicable Conversion Rate if, for 20 Trading Days during any period of 30 consecutive Trading Days, including the last Trading Day of such period, the Closing Price of the Common Shares exceeds 130% of the Applicable Conversion Price of the Series A Preferred Stock. The Corporation will provide Notice of Mandatory Conversion as set forth in Section 13(b)(iii) within three Trading Days after the end of the 30 consecutive Trading Day period.

(ii) If the Corporation elects to cause less than all of the Series A Preferred Stock to be converted under clause (i) above, the Conversion Agent will select the Series A Preferred Stock to be converted by lot, or on a pro rata basis or by another method the Conversion Agent considers fair and appropriate, including any method required by the Depositary (so long as such method is not prohibited by the rules of any stock exchange or quotation association on which the Series A Preferred Stock is then traded or quoted). If the Conversion Agent selects a portion of a Holder’s Series A Preferred Stock for partial conversion at the Corporation’s option and such Holder converts a portion of its shares of Series A Preferred Stock at the same time, the portion converted at such Holder’s option will reduce the portion selected for conversion at the Corporation’s option under this Section 13(b).

(iii) If the Corporation exercises the optional conversion right described in this Section 13(b), the Corporation shall give notice (such notice a “ Notice of Mandatory Conversion ”) by (1) providing a notice of such conversion by first class mail to each Holder of record for the shares of Series A Preferred Stock to be converted or (2) issuing a press release and making this information available on its website. The Conversion Date shall be a date selected by the Corporation (the “ Mandatory Conversion Date ”), not less than 10 days, and not more than 20 days, after the date on which the Corporation provides the Notice of Mandatory Conversion. In addition to any information required by applicable law or regulation, the Notice of Mandatory Conversion shall state, as appropriate:

(A) the Mandatory Conversion Date;

(B) the number of Common Shares to be issued upon conversion of each share of Series A Preferred Stock; and

(C) the aggregate number of shares of Series A Preferred Stock to be converted.

(c) Conversion upon Make-Whole Acquisition .

(i) In the event of a Make-Whole Acquisition occurring prior to a Mandatory Conversion Date or Conversion Date, each Holder shall have the option to convert its shares of Series A Preferred Stock (a “ Make-Whole Acquisition Conversion ”) during the period (the “ Make-Whole Acquisition Conversion Period ”) beginning on the effective date of the Make-Whole Acquisition (the “ Make-Whole Acquisition Effective Date ”) and ending on the date that is 30 days after the Make-Whole Acquisition Effective Date and receive an additional number of Common Shares (the “ Make-Whole Shares ”) as set forth in clause (ii) below.


(ii) The number of Make-Whole Shares per share of Series A Preferred Stock shall be determined by reference to the following table for the applicable Make-Whole Acquisition Effective Date and the applicable Make-Whole Acquisition Share Price:

 

    Make-Whole Acquisition Share Price  

Effective Date

  $11.75     $12.00     $13.00     $14.00     $15.00     $16.00     $17.00     $18.00     $20.00     $25.00     $30.00     $50.00     $100.00  

June 18, 2008

    1.4184        1.4184        1.2987        1.1200        0.9749        0.8556        0.7566        0.6734        0.5429        0.3431        0.2352        0.0771        0.0000   

June 15, 2009

    1.4184        1.4184        1.2833        1.1057        0.9615        0.8369        0.7030        0.6162        0.4816        0.2823        0.1807        0.0466        0.0000   

June 15, 2010

    1.4184        1.4184        1.2603        1.0914        0.9451        0.8074        0.6939        0.5999        0.4558        0.2494        0.1508        0.0350        0.0000   

June 15, 2011

    1.4184        1.4184        1.2295        1.0771        0.9295        0.7774        0.6527        0.5502        0.3957        0.1874        0.0993        0.0172        0.0000   

June 15, 2012

    1.4184        1.4055        1.1910        1.0628        0.8811        0.7057        0.5629        0.4467        0.2782        0.0803        0.0211        0.0000        0.0000   

June 15, 2013

    1.4184        1.3639        1.1526        1.0485        0.8517        0.6105        0.4377        0.2884        0.0688        0.0000        0.0000        0.0000        0.0000   

June 15, 2014

    1.4184        1.3805        1.1757        1.0771        0.8784        0.6292        0.4494        0.2940        0.0000        0.0000        0.0000        0.0000        0.0000   

June 15, 2015

    1.4184        1.3972        1.1987        1.1057        0.9050        0.6480        0.4612        0.2996        0.0000        0.0000        0.0000        0.0000        0.0000   

June 15, 2016

    1.4184        1.4139        1.2218        1.1342        0.9317        0.6667        0.4730        0.3051        0.0000        0.0000        0.0000        0.0000        0.0000   

June 15, 2017

    1.4184        1.4184        1.2449        1.1628        0.9584        0.6855        0.4847        0.3107        0.0000        0.0000        0.0000        0.0000        0.0000   

June 15, 2018

    1.4184        1.4184        1.2680        1.1914        0.9850        0.7042        0.4965        0.3162        0.0000        0.0000        0.0000        0.0000        0.0000   

Thereafter

    0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000        0.0000   

(A) The exact Make-Whole Acquisition Share Prices and Make-Whole Acquisition Effective Dates may not be set forth in the table, in which case:

(1) if the Make-Whole Acquisition Share Price is between two Make-Whole Acquisition Share Price amounts in the table or the Make-Whole Acquisition Effective Date is between two dates in the table, the number of Make-Whole Shares will be determined by straight-line interpolation between the number of Make-Whole Shares set forth for the higher and lower Make-Whole Acquisition Share Price amounts and the two Make-Whole Acquisition Effective Dates, as applicable, based on a 365-day year;

(2) if the Make-Whole Acquisition Share Price is in excess of $100 per share (subject to adjustment pursuant to Section 14), no Make-Whole Shares will be issued upon conversion of the Series A Preferred Stock; and

(3) if the Make-Whole Acquisition Share Price is less than $11.75 per share (subject to adjustment pursuant to Section 14), no Make-Whole Shares will be issued upon conversion of the Series A Preferred Stock.

(B) The Make-Whole Acquisition Share Prices set forth in the table above are subject to adjustment pursuant to Section 14 hereof and shall be adjusted as of any date the Conversion Rate is adjusted. The adjusted Make-Whole Acquisition Share Prices will equal the Make-Whole Acquisition Share Prices applicable immediately prior to such adjustment multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Make-Whole Acquisition Share Prices adjustment and the denominator of which is the Conversion Rate as so adjusted. Each of the number of Make-Whole Shares in the table shall also be subject to adjustment in the same manner as the Conversion Rate pursuant to Section 14.

(iii) On or before the 20th day prior to the date the Corporation anticipates being the effective date for the Make-Whole Acquisition or within two business days of becoming aware of a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-Whole Acquisition, a written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A) the anticipated effective date or effective date of the Make-Whole Acquisition; and

(B) the date, which shall be 30 days after the Make-Whole Acquisition Effective Date, by which a Make-Whole Acquisition Conversion must be exercised.

(iv) On the Make-Whole Acquisition Effective Date or as soon as practicable thereafter, another written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A) the date that shall be 30 days after the Make-Whole Acquisition Effective Date;


(B) the number of Make-Whole Shares;

(C) the amount of cash, securities and other consideration receivable by a Holder upon conversion; and

(D) the instructions a Holder must follow to exercise its conversion option in connection with such Make-Whole Acquisition.

(v) To exercise a Make-Whole Acquisition Conversion option, a Holder must, no later than 5:00 p.m., Cleveland, Ohio time on or before the date by which the Make-Whole Acquisition Conversion option must be exercised as specified in the notice delivered under clause (iv) above, comply with the procedures set forth in Section 13(a)(iv)(B).

(vi) If a Holder does not elect to exercise the Make-Whole Acquisition Conversion option in accordance with the provisions specified in this Section 13(c), the shares of Series A Preferred Stock or successor security held by it shall remain outstanding (unless otherwise converted as provided herein), and the Holder will not be eligible to receive Make-Whole Shares.

(vii) Upon a Make-Whole Acquisition Conversion, the Conversion Agent shall, except as otherwise provided in the instructions provided by the Holder thereof in the written notice provided to the Corporation or its successor as set forth in Section 13(a)(iv) above, deliver to the Holder such cash, securities or other property as are issuable with respect to Make-Whole Shares in the Make-Whole Acquisition.

(viii) In the event that a Make-Whole Acquisition Conversion is effected with respect to shares of Series A Preferred Stock or a successor security representing less than all the shares of Series A Preferred Stock or a successor security held by a Holder, upon such Make-Whole Acquisition Conversion the Corporation or its successor shall execute and the Conversion Agent shall, unless otherwise instructed in writing, countersign and deliver to the Holder thereof, at the expense of the Corporation or its successors, a certificate evidencing the shares of Series A Preferred Stock or such successor security held by the Holder as to which a Make-Whole Acquisition Conversion was not effected.

(d) Conversion Upon Fundamental Change .

(i) If the Reference Price in connection with a Make-Whole Acquisition is less than $11.75 (a “ Fundamental Change ”), a Holder may elect to convert each share of Series A Preferred Stock during the period beginning on the effective date of the Fundamental Change and ending on the date that is 30 days after the effective date of such Fundamental Change at an adjusted conversion price equal to the greater of (1) the Reference Price and (2) $5.875, subject to adjustment as described in clause (ii) below (the “ Base Price ”). If the Reference Price is less than the Base Price, Holders will receive a maximum of 17.0213 Common Shares per share of Series A Preferred Stock converted, subject to adjustment as a result of any adjustment to the Base Price described in clause (ii) below.

(ii) The Base Price shall be adjusted as of any date the Conversion Rate of the Series A Preferred Stock is adjusted pursuant to Section 14. The adjusted Base Price shall equal the Base Price applicable immediately prior to such adjustment multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the Conversion Rate adjustment and the denominator of which is the Conversion Rate as so adjusted.

(iii) In lieu of issuing Common Shares upon conversion in the event of a Fundamental Change, the Corporation may at its option, and if it obtains any necessary regulatory approval, pay an amount in cash (computed to the nearest cent) equal to the Reference Price for each Common Share otherwise issuable upon conversion.

(iv) On or before the 20th day prior to the date the Corporation anticipates being the effective date for the Fundamental Change or within two business days of becoming aware of the Fundamental Change if it is a Make-Whole Acquisition of the type set forth in clause (a) of the definition Make-


Whole Acquisition, a written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A) the anticipated effective date of the Fundamental Change; and

(B) the date, which shall be 30 days after the anticipated effective date of a Fundamental Change, by which a Fundamental Change conversion must be exercised.

(v) On the effective date of a Fundamental Change or as soon as practicable thereafter, another written notice shall be sent by or on behalf of the Corporation, by first-class mail, postage prepaid, to the Holders as they appear in the records of the Corporation. Such notice shall contain:

(A) the date that shall be 30 days after the effective date of the Fundamental Change;

(B) the Applicable Conversion Price following the Fundamental Change;

(C) the amount of cash, securities and other consideration received by a Holder upon conversion; and

(D) the instructions a Holder must follow to exercise its conversion option in connection with such Fundamental Change.

(vi) To exercise its conversion option upon a Fundamental Change, a Holder must, no later than 5:00 p.m., Cleveland, Ohio time on or before the date by which the conversion option upon the Fundamental Change must be exercised as specified in the notice delivered under clause (v) above, comply with the procedures set forth in Section 13(a)(iv)(B) and indicate that it is exercising the Fundamental Change conversion option.

(vii) If a Holder does not elect to exercise its conversion option upon a Fundamental Change in accordance with the provisions specified in this Section 13(d), the shares of Series A Preferred Stock or successor security held by it shall remain outstanding (unless otherwise converted as provided herein) and the Holder will not be eligible to convert its shares pursuant to this Section 13(d).

(viii) Upon a conversion upon a Fundamental Change, the Conversion Agent shall, except as otherwise provided in the instructions provided by the Holder thereof in the written notice provided to the Corporation or its successor as set forth in Section 13(a)(iv), deliver to the Holder such cash, securities or other property as are issuable with respect to the adjusted conversion price following the Fundamental Change.

(ix) In the event that a conversion upon a Fundamental Change is effected with respect to shares of Series A Preferred Stock or a successor security representing less than all the shares of Series A Preferred Stock or a successor security held by a Holder, upon such conversion the Corporation or its successor shall execute and the Conversion Agent shall, unless otherwise instructed in writing, countersign and deliver to the Holder thereof, at the expense of the Corporation, a certificate evidencing the shares of Series A Preferred Stock or such successor security held by the Holder as to which a conversion upon a Fundamental Change was not effected.


Section 14. Anti-Dilution Adjustments .

(a) Adjustments . The Conversion Rate will be subject to adjustment, without duplication, under the following circumstances:

(i) The issuance of Common Shares as a dividend or distribution to all holders of Common Shares or a subdivision or combination of Common Shares (other than in connection with a Reorganization Event), in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x (OS 1 / OS 0 )

where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Record Date
CR 1    =    the Conversion Rate in effect immediately after the Record Date
OS 0    =    the number of Common Shares outstanding at the close of business on the Record Date prior to giving effect to such event
OS 1    =    the number of Common Shares that would be outstanding immediately after, and solely as a result of, such event

Notwithstanding the foregoing, (1) no adjustment will be made for the issuance of Common Shares as a dividend or distribution to all holders of Common Shares that is made in lieu of a quarterly or annual cash dividend or distribution to such holders, to the extent such dividend or distribution does not exceed the applicable Dividend Threshold Amount (with the amount of any such dividend or distribution equaling the number of such shares being issued multiplied by the average of the VWAP of the Common Shares over each of the five consecutive VWAP Trading Days prior to the Ex-Date for such dividend or distribution) and (2) in the event any dividend, distribution, subdivision or combination that is the subject of this Section 14(a)(i) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors publicly announces its decision not to pay or make such dividend or distribution or effect such subdivision or combination, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared or such subdivision or combination had not been announced.

(ii) The issuance to all holders of Common Shares of certain rights or warrants (other than rights issued pursuant to a shareholder rights plan or rights or warrants issued in connection with a Reorganization Event) entitling them for a period expiring 60 days or less from the date of issuance of such rights or warrants to purchase Common Shares (or securities convertible into Common Shares) at less than (or having a conversion price per share less than) the Current Market Price as of the Record Date, in which event each Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [(OS 0 + X) / (OS 0 + Y)]

where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Record Date
CR 1    =    the Conversion Rate in effect immediately after the Record Date
OS 0    =    the number of Common Shares outstanding at the close of business on the Record Date
X    =    the total number of Common Shares issuable pursuant to such rights or warrants (or upon conversion of such securities)
Y    =    the number of shares equal to the quotient of the aggregate price payable to exercise such rights or warrants (or the conversion price for such securities paid upon conversion) divided by the average of the VWAP of the Common Shares over each of the ten consecutive VWAP Trading Days prior to the Business Day immediately preceding the announcement of the issuance of such rights or warrants


Notwithstanding the foregoing, (1) in the event that such rights or warrants described in this Section 14(a)(ii) are not so issued, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors publicly announces its decision not to issue such rights or warrants, to the Conversion Rate that would then be in effect if such issuance had not been declared and (2) to the extent that such rights or warrants are not exercised prior to their expiration or Common Shares are otherwise not delivered pursuant to such rights or warrants upon the exercise of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered.

In determining the aggregate price payable for such Common Shares, there shall be taken into account any consideration received by the Corporation for such rights or warrants and the value of such consideration (if other than cash, to be determined by the Board of Directors). If an adjustment to the Conversion Rate may be required pursuant to this Section 14(a)(ii), delivery of any additional Common Shares that may be deliverable upon conversion as a result of an adjustment required pursuant to this Section 14(a)(ii) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(ii).

(iii) The dividend or other distribution to all holders of Common Shares of shares of Capital Stock of the Corporation (other than the Common Shares) or evidences of its indebtedness or its assets (excluding any dividend, distribution or issuance covered by clauses (a)(i) or (a)(ii) above or (a)(iv) below, any dividend or distribution in connection with a Reorganization Event or any spin-off to which the provisions set forth below in this clause (a)(iii) apply) in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [SP 0 / (SP 0 – FMV)]

where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Record Date
CR 1    =    the Conversion Rate in effect immediately after the Record Date
SP 0    =    the Current Market Price as of the Record Date
FMV    =    the fair market value (as determined by the Board of Directors) on the Record Date of the shares of Capital Stock of the Corporation, evidences of indebtedness or assets so distributed, applicable to one Common Share

However, if the transaction that gives rise to an adjustment pursuant to this clause (iii) is one pursuant to which the payment of a dividend or other distribution on Common Shares consists of shares of Capital Stock of, or similar equity interests in, a subsidiary or other business unit of the Corporation (i.e., a spin-off) that are, or, when issued, will be, traded on the New York Stock Exchange, the Nasdaq Stock Market or any other national or regional securities exchange or market, then the Conversion Rate will instead be adjusted based on the following formula:

CR 1 = CR 0 x [(FMV 0 + MP 0 ) / MP 0 ]

where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Record Date
CR 1    =    the Conversion Rate in effect immediately after the Record Date
FMV 0    =    the average of the VWAP of the Capital Stock distributed to holders of Common Shares applicable to one Common Share over each of the 10 consecutive VWAP Trading Days commencing on and including the third VWAP Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the New York Stock Exchange or such other national or regional exchange or association or over-the-counter market, or, if not so traded or quoted, the fair market value of the Capital Stock or similar equity interests distributed to holders of Common Shares applicable to one Common Share as determined by the Board of Directors


MP 0    =    the average of the VWAP of the Common Shares over each of the 10 consecutive VWAP Trading Days commencing on and including the third VWAP Trading Day after the date on which “ex-distribution trading” commences for such dividend or distribution on the New York Stock Exchange or such other national or regional exchange or association or in the over-the-counter market on which Common Shares is then traded or quoted

Notwithstanding the foregoing, (1) if any dividend or distribution of the type described in this Section 14(a)(iii) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors publicly announces its decision not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. If an adjustment to the Conversion Rate may be required under this Section 14(a)(iii), delivery of any additional Common Shares that may be deliverable upon conversion as a result of an adjustment required under this Section 14(a)(iii) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(iii).

(iv) The Corporation makes a distribution consisting exclusively of cash to all holders of Common Shares, excluding (a) any regular cash dividend on Common Shares to the extent that the aggregate cash dividend per Common Share does not exceed $0.1875 in any fiscal quarter (the “ Dividend Threshold Amount ”) and (b) any consideration payable in connection with a tender or exchange offer made by the Corporation or any its subsidiaries referred to in clause (v) below, in which event, the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [SP 0 / (SP 0 – C)]

where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Record Date
CR 1    =    the Conversion Rate in effect immediately after the Record Date
SP 0    =    the Current Market Price as of the Record Date
C    =    the amount in cash per share equal to (1) in the case of a regular quarterly dividend, the amount the Corporation distributes to holders or pays, less the Dividend Threshold Amount or (2) in any other case, the amount the Corporation distributes to holders or pays

The Dividend Threshold Amount is subject to adjustment on an inversely proportional basis whenever the Conversion Rate is adjusted; provided that no adjustment will be made to the Dividend Threshold Amount for any adjustment made to the Conversion Rate pursuant to this clause (iv).

Notwithstanding the foregoing, if any dividend or distribution of the type described in this Section 14(a)(iv) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors publicly announces its decision not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(v) The Corporation or one or more of its subsidiaries make purchases of Common Shares pursuant to a tender offer or exchange offer by the Corporation or a subsidiary of the Corporation for Common Shares to the extent that the cash and value (as determined by the Board of Directors) of any other consideration included in the payment per Common Share validly tendered or exchanged exceeds the VWAP per Common Share on the VWAP Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer (the “ Expiration Date ”), in which event the Conversion Rate will be adjusted based on the following formula:

CR 1 = CR 0 x [(FMV + (SP 1 x OS 1 ) / (SP 1 x OS 0 )]


where,

 

CR 0    =    the Conversion Rate in effect at the close of business on the Expiration Date
CR 1    =    the Conversion Rate in effect immediately after the Expiration Date
FMV    =    the fair market value (as determined by the Board of Directors), on the Expiration Date, of the aggregate value of all cash and any other consideration paid or payable for shares validly tendered or exchanged and not withdrawn as of the Expiration Date (the “ Purchased Shares ”)
OS 1    =    the number of Common Shares outstanding as of the last time tenders or exchanges may be made pursuant to such tender or exchange offer (the “ Expiration Time ”) less any Purchased Shares
OS 0    =    the number of Common Shares outstanding at the Expiration Time, including any Purchased Shares
SP 1    =    the average of the VWAP of the Common Shares over each of the ten consecutive VWAP Trading Days commencing with the VWAP Trading Day immediately after the Expiration Date.

Notwithstanding the foregoing, if the Corporation, or one of its subsidiaries, is obligated to purchase Common Shares pursuant to any such tender or exchange offer, but the Corporation or such subsidiary is permanently prevented by applicable law from effecting any such purchases, or all such purchases are rescinded, then the Conversion Rate shall be readjusted to be the Conversion Rate that would then be in effect if such tender or exchange offer had not been made. If an adjustment to the Conversion Rate may be required under this Section 14(a)(v), delivery of any additional Common Shares that may be deliverable upon conversion as a result of an adjustment required under this Section 14(a)(v) shall be delayed to the extent necessary in order to complete the calculations provided for in this Section 14(a)(v).

(b) Calculation of Adjustments . All adjustments to the Conversion Rate shall be calculated by the Corporation to the nearest 1/10,000th of one Common Share (or if there is not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a share). No adjustment to the Conversion Rate will be required unless such adjustment would require an increase or decrease of at least one percent; provided, however , that any such minor adjustments that are not required to be made will be carried forward and taken into account in any subsequent adjustment, and provided further that any such adjustment of less than one percent that has not been made will be made prior to any conversion pursuant to Section 13(b), Section 13(c) or Section 13(d).

(c) When No Adjustment Required .

(i) Except as otherwise provided in this Section 14, the Conversion Rate will not be adjusted for the issuance of Common Shares or any securities convertible into or exchangeable for Common Shares or carrying the right to purchase any of the foregoing or for the repurchase of Common Shares.

(ii) Rights Plans . To the extent that the Corporation has a stockholders’ rights plan in effect upon conversion of the Series A Preferred Stock into Common Shares, Holders will receive, in addition to any of the Common Shares deliverable and in lieu of any adjustment to the Conversion Rate, the rights under the stockholders’ rights plan, unless prior to any conversion, the rights have separated from Common Shares, in which case the Conversion Rate will be adjusted at the time of separation as if we distributed to all holders of Common Shares, shares of the Corporation’s Capital Stock, evidences of indebtedness or assets as described in Section 14(a)(iii). A further adjustment will occur as described in Section 14(a)(iii), if such rights become exercisable to purchase different securities, evidences of indebtedness or assets, subject to readjustment in the event of the expiration, termination or redemption of such rights.

(iii) No adjustment to the Conversion Rate need be made:

(A) upon the issuance of any Common Shares pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in Common Shares under any plan;

(B) upon the issuance of any Common Shares or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Corporation or any of its subsidiaries; or


(C) upon the issuance of any Common Shares pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security outstanding as of the date the Series A Preferred Stock was first issued.

(iv) No adjustment to the Conversion Rate need be made for a transaction referred to in Section 14(a)(i) through (v) if Holders may participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Shares participate in the transaction.

(v) No adjustment to the Conversion Rate need be made for a change in the par value of the Common Shares.

(vi) No adjustment to the Conversion Rate will be made to the extent that such adjustment would result in the Conversion Price being less than the par value of the Common Shares.

(d) Record Date . For purposes of this Section 14, “ Record Date ” means, with respect to any dividend, distribution or other transaction or event in which the holders of the Common Shares have the right to receive any cash, securities or other property or in which the Common Shares (or other applicable security) are exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of holders of the Common Shares entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

(e) Successive Adjustments . After an adjustment to the Conversion Rate under this Section 14, any subsequent event requiring an adjustment under this Section 14 shall cause an adjustment to such Conversion Rate as so adjusted.

(f) Multiple Adjustments . For the avoidance of doubt, if an event occurs that would trigger an adjustment to the Conversion Rate pursuant to this Section 14 under more than one subsection hereof, such event, to the extent fully taken into account in a single adjustment, shall not result in multiple adjustments hereunder.

(g) Other Adjustments . The Corporation may (but is not required to) make such increases in the Conversion Rate, in addition to those required by Section 14(a)(i) through (v), as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Shares resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

In addition to the foregoing, to the extent permitted by applicable law and subject to the applicable rules of the New York Stock Exchange, the Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least 20 business days, the increase is irrevocable during the period and the Board of Directors shall have made a determination that such increase would be in the best interests of the Corporation, which determination shall be conclusive.

(h) Notice of Adjustments . Whenever a Conversion Rate is adjusted as provided under Section 14, the Corporation shall within 10 Business Days following the occurrence of an event that requires such adjustment (or if the Corporation is not aware of such occurrence, as soon as reasonably practicable after becoming so aware) or within 15 calendar days of the date the Corporation makes an adjustment pursuant to Section 14(g):

(i) compute the adjusted applicable Conversion Rate in accordance with Section 14 and prepare and transmit to the Conversion Agent an Officers’ Certificate setting forth the applicable Conversion Rate, as the case may be, the method of calculation thereof in reasonable detail, and the facts requiring such adjustment and upon which such adjustment is based; and

(ii) provide a written notice to the Holders of the occurrence of such event and a statement in reasonable detail setting forth the method by which the adjustment to the applicable Conversion Rate was determined and setting forth the adjusted applicable Conversion Rate.


(i) Conversion Agent . The Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist that may require any adjustment of the applicable Conversion Rate or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed in making the same. The Conversion Agent shall be fully authorized and protected in relying on any Officers’ Certificate delivered pursuant to Section 14(h) and any adjustment contained therein and the Conversion Agent shall not be deemed to have knowledge of any adjustment unless and until it has received such certificate. The Conversion Agent shall not be accountable with respect to the validity or value (or the kind or amount) of any Common Shares, or of any securities or property, that may at the time be issued or delivered with respect to any of the Series A Preferred Stock; and the Conversion Agent makes no representation with respect thereto. The Conversion Agent shall not be responsible for any failure of the Corporation to issue, transfer or deliver any Common Shares pursuant to a the conversion of the Series A Preferred Stock or to comply with any of the duties, responsibilities or covenants of the Corporation contained in this Section 14.

Section 15. Reorganization Events .

(a) In the event of (any such event specified in this Section 15(a), a “ Reorganization Event ”):

(i) any consolidation or merger of the Corporation with or into another Person, in each case pursuant to which the Common Shares will be converted into cash, securities, or other property of the Corporation or another Person;

(ii) any sale, transfer, lease, or conveyance to another Person of all or substantially all of the consolidated assets of the Corporation and its subsidiaries, taken as a whole, in each case pursuant to which the Common Shares will be converted into cash, securities, or other property; or

(iii) any reclassification of the Common Shares into securities, including securities other than the Common Shares; or

(iv) any statutory exchange of the Corporation’s securities with another Person (other than in connection with a merger or acquisition);

each share of Series A Preferred Stock outstanding immediately prior to such Reorganization Event shall, without the consent of Holders, become convertible into the types and amounts of securities, cash, and other property that is or was receivable in such Reorganization Event by a holder of Common Shares that was not the counterparty to the Reorganization Event or an affiliate of such other party in exchange for such Common Shares (such securities, cash, and other property, the “ Exchange Property ”).

(b) In the event that holders of Common Shares have the opportunity to elect the form of consideration to be received in such transaction, the consideration that the Holders are entitled to receive upon conversion shall be deemed to be the types and amounts of consideration received by the majority of the holders of Common Shares that affirmatively make an election (or of all such holders if none make an election). On each Conversion Date following a Reorganization Event, the Conversion Rate then in effect will be applied to the value on such Conversion Date of the securities, cash, or other property received per Common Share, determined as set forth above. The amount of Exchange Property receivable upon conversion of any Series A Preferred Stock in accordance with Section 12, Section 13(b), Section 13(c) or Section 13(d) hereof shall be determined based upon the then Applicable Conversion Rate.

(c) The above provisions of this Section 15 shall similarly apply to successive Reorganization Events and the provisions of Section 14 shall apply to any shares of Capital Stock of the Corporation (or any successor) received by the holders of the Common Shares in any such Reorganization Event.

(d) The Corporation (or any successor) shall, within 20 days of the occurrence of any Reorganization Event, provide written notice to the Holders of such occurrence of such event and of the type and amount of the cash, securities or other property that constitutes the Exchange Property. Failure to deliver such notice shall not affect the operation of this Section 15.


Section 16. Fractional Shares .

(a) No fractional Common Shares will be issued as a result of any conversion of shares of Series A Preferred Stock.

(b) In lieu of any fractional Common Share otherwise issuable in respect of any conversion at the Corporation’s option pursuant to Section 13(b) hereof or any conversion at the option of the Holder pursuant to Section 12, Section 13(c) or Section 13(d) hereof, the Corporation shall pay an amount in cash (computed to the nearest cent) equal to the same fraction of the Closing Price of the Common Shares determined as of the second Trading Day immediately preceding the effective date of conversion.

(c) If more than one share of the Series A Preferred Stock is surrendered for conversion at one time by or for the same Holder, the number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of the Series A Preferred Stock so surrendered.

Section 17. Reservation of Common Shares .

(a) The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Shares, solely for issuance upon the conversion of shares of Series A Preferred Stock as provided in these Articles of Amendment, free from any preemptive or other similar rights, such number of Common Shares as shall from time to time be issuable upon the conversion of all the shares of Series A Preferred Stock then outstanding, calculated assuming the Applicable Conversion Price equals the Base Price, subject to adjustment as described under Section 14. For purposes of this Section 17(a), the number of Common Shares that shall be deliverable upon the conversion of all outstanding shares of Series A Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single Holder.

(b) All Common Shares delivered upon conversion of the Series A Preferred Stock shall be duly authorized, validly issued, fully paid and non-assessable, free and clear of all liens, claims, security interests and other encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).

(c) Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Series A Preferred Stock, the Corporation shall use its reasonable best efforts to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

(d) The Corporation hereby covenants and agrees that, so long as the Common Shares shall be listed on the New York Stock Exchange or any other national securities exchange or automated quotation system, the Corporation will, if permitted by the rules of such exchange or automated quotation system, list and keep listed all the Common Shares issuable upon conversion of the Series A Preferred Stock; provided, however, that if the rules of such exchange or automated quotation system permit the Corporation to defer the listing of such Common Shares until the first conversion of Series A Preferred Stock into Common Shares in accordance with the provisions hereof, the Corporation covenants to list such Common Shares issuable upon conversion of the Series A Preferred Stock in accordance with the requirements of such exchange or automated quotation system at such time.

Section 18 . Limitations on Beneficial Ownership . Notwithstanding anything to the contrary contained herein, and subject to the last sentence of this Section 18, no Holder will be entitled to receive Common Shares upon conversion pursuant to Section 12 and Section 13 hereof to the extent, but only to the extent, that such receipt would cause such converting holder to become, directly or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of more than 9.9% of the Common Shares outstanding at such time. Any delivery of Common Shares upon a purported conversion of Series A Preferred Stock shall be void and have no effect and such shares shall for all purposes continue to represent outstanding shares of Series A Preferred Stock to the extent (but only to the extent) that such delivery would result in the converting holder becoming the beneficial owner of more than 9.9% of the


Common Shares outstanding at such time. If any delivery of Common Shares owed to a holder upon conversion of Series A Preferred Stock is not made, in whole or in part, as a result of this limitation, the Corporation’s obligation to make such delivery shall not be extinguished and the Corporation shall deliver such shares as promptly as practicable after any such converting holder gives notice to the Corporation that such delivery would not result in it being the beneficial owner of more than 9.9% of the Common Shares outstanding at such time. Notwithstanding anything in this paragraph to the contrary, these limitations on beneficial ownership shall not be applicable to or limit the number of shares of Series A Preferred Stock to be converted as a result of a mandatory conversion by the Corporation pursuant to Section 13(b).

Section 19 . Preemptive or Subscription Rights . The Holders of Series A Preferred Stock shall not have any preemptive or subscription rights.

PART E

EXPRESS TERMS OF FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES B

Part 1. Designation and Number of Shares . There is hereby created out of the authorized and unissued shares of preferred stock of the Corporation a series of preferred stock designated as the “Fixed Rate Cumulative Perpetual Preferred Stock, Series B” (the “ Designated Preferred Stock ”). The authorized number of shares of Designated Preferred Stock shall be 25,000.

Part 2. Standard Provisions . The Standard Provisions contained in Annex A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part hereof to the same extent as if such provisions had been set forth in full herein.

Part 3. Definitions . The following terms are used in this Part E (including the Standard Provisions in Annex A hereto) as defined below:

(a) “ Common Stock ” means the common stock, par value $1.00 per share, of the Corporation.

(b) “ Dividend Payment Date ” means February 15, May 15, August 15 and November 15 of each year.

(c) “ Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation.

(d) “ Liquidation Amount ” means $100,000 per share of Designated Preferred Stock.

(e) “ Minimum Amount ” means $625,000,000.

(f) “ Parity Stock ” means any class or series of stock of the Corporation (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation (in each case without regard to whether dividends accrue cumulatively or non-cumulatively). Without limiting the foregoing, Parity Stock shall include the Corporation’s 7.750% Non-Cumulative Perpetual Convertible Preferred Stock, Series A.

(g) “ Signing Date ” means the Original Issue Date.

Part 4. Certain Voting Matters . Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent, as provided for in the Ohio General Corporation Law.


Part 5. No Senior Stock . For so long as any shares of Designated Preferred Stock are outstanding, the Corporation shall not authorize, or create or increase the authorized amount of, or issue, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Corporation ranking senior or prior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

[Remainder of Page Intentionally Left Blank]

STANDARD PROVISIONS

Section 1. General Matters . Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Corporation.

Section 2. Standard Definitions . As used herein with respect to Designated Preferred Stock:

(a) “ Applicable Dividend Rate ” means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.

(b) “ Appropriate Federal Banking Agency ” means the “appropriate Federal banking agency” with respect to the Corporation as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

(c) “ Business Combination ” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Corporation’s stockholders.

(d) “ Business Day ” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

(e) “ Certificate of Designations ” means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

(f) “ Charter ” means the Corporation’s certificate or articles of incorporation, articles of association, or similar organizational document.

(g) “ Dividend Period ” has the meaning set forth in Section 3(a).

(h) “ Dividend Record Date ” has the meaning set forth in Section 3(a).

(i) “ Liquidation Preference ” has the meaning set forth in Section 4(a).

(j) “ Original Issue Date ” means the date on which shares of Designated Preferred Stock are first issued.

(k) “ Preferred Director ” has the meaning set forth in Section 7(b).

(l) “ Preferred Stock ” means any and all series of preferred stock of the Corporation, including the Designated Preferred Stock.


(m) “ Qualified Equity Offering ” means the sale and issuance for cash by the Corporation to persons other than the Corporation or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital guidelines of the Corporation’s Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to October 13, 2008).

(n) “ Regulations ” means the amended and restated regulations of the Corporation, as they may be amended from time to time.

(o) “ Share Dilution Amount ” has the meaning set forth in Section 3(b).

(p) “ Standard Provisions ” mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

(q) “ Successor Preferred Stock ” has the meaning set forth in Section 5(a).

(r) “ Voting Parity Stock ” means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Section 3. Dividends .

(a) Rate . Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date ( i.e ., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a “ Dividend Period ”, provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.

Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.

Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Corporation on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a “ Dividend Record Date ”). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.


Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

(b) Priority of Dividends . So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Corporation or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business (including purchases to offset the Share Dilution Amount (as defined below) pursuant to a publicly announced repurchase plan) and consistent with past practice, provided that any purchases to offset the Share Dilution Amount shall in no event exceed the Share Dilution Amount; (ii) purchases or other acquisitions by a broker-dealer subsidiary of the Corporation solely for the purpose of market-making, stabilization or customer facilitation transactions in Junior Stock or Parity Stock in the ordinary course of its business; (iii) purchases by a brokerdealer subsidiary of the Corporation of capital stock of the Corporation for resale pursuant to an offering by the Corporation of such capital stock underwritten by such broker-dealer subsidiary; (iv) any dividends or distributions of rights or Junior Stock in connection with a stockholders’ rights plan or any redemption or repurchase of rights pursuant to any stockholders’ rights plan; (v) the acquisition by the Corporation or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Corporation or any of its subsidiaries), including as trustees or custodians; and (vi) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock. “ Share Dilution Amount ” means the increase in the number of diluted shares outstanding (determined in accordance with generally accepted accounting principles in the United States, and as measured from the date of the Corporation’s consolidated financial statements most recently filed with the Securities and Exchange Commission prior to the Original Issue Date) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.


Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

Section 4. Liquidation Rights .

(a) Voluntary or Involuntary Liquidation . In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Corporation or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Corporation, subject to the rights of any creditors of the Corporation, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Corporation ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the “ Liquidation Preference ”).

(b) Partial Payment . If in any distribution described in Section 4(a) above the assets of the Corporation or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

(c) Residual Distributions . If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Corporation shall be entitled to receive all remaining assets of the Corporation (or proceeds thereof) according to their respective rights and preferences.

(d) Merger, Consolidation and Sale of Assets Not Liquidation . For purposes of this Section 4, the merger or consolidation of the Corporation with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Corporation, shall not constitute a liquidation, dissolution or winding up of the Corporation.

Section 5. Redemption .

(a) Optional Redemption . Except as provided below, the Designated Preferred Stock may not be redeemed prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption.

(b) Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of


Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Corporation (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the “Minimum Amount” as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the “ Successor Preferred Stock ”) in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Corporation (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).

(c) The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

(d) No Sinking Fund . The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

(e) Notice of Redemption . Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

(f) Partial Redemption . In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

(g) Effectiveness of Redemption . If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Corporation, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so


called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

(h) Status of Redeemed Shares . Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Corporation shall revert to authorized but unissued shares of Preferred Stock ( provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Section 6. Conversion . Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Section 7. Voting Rights . The holders of Designated Preferred Stock shall not have any voting rights except as expressly provided in the Amended and Restated Articles of Incorporation of the Corporation, including Section 2 of Part A of Article IV, and except as shall be affirmatively provided in the Ohio General Corporation Law.

Section 8. Record Holders . To the fullest extent permitted by applicable law, the Corporation and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor such transfer agent shall be affected by any notice to the contrary.

Section 9. Notices . All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Regulations or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

Section 10. No Preemptive Rights . No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Corporation, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Section 11. Replacement Certificates . The Corporation shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Corporation. The Corporation shall replace certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Corporation of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Corporation.

Section 12. Other Rights . The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

ARTICLE V

Purchase of Shares

Subject to the provisions of Article IV hereof, the Corporation, by action of its directors, and without action by its shareholders, may, from time to time, purchase its own shares of any class in accordance with the provisions of the Ohio General Corporation Law; and such purchase may be made either in the open market, or at public or private sales, in such manner and amounts, from such holder or holders of outstanding shares of the Corporation and at such price as the directors shall, from time to time, determine.


ARTICLE VI

Voting

Any proposal which, under applicable law, requires the approval of holders of shares of the Corporation:

 

  (1) to adopt an amendment to these articles of incorporation (which term includes amended articles of incorporation),

 

  (2) to sell, exchange, transfer, or otherwise dispose of all, or substantially all, the assets of the Corporation,

 

  (3) to effect a merger or consolidation involving the Corporation,

 

  (4) to effect a combination or majority share acquisition (as such terms are defined by the laws of the State of Ohio), or

 

  (5) to dissolve, liquidate, or wind up the affairs of the Corporation,

may be authorized and approved by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation on such proposal and, if a proposal upon which holders of shares of a particular class or classes are required to vote separately as a class by other provisions of these articles of incorporation or law, by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of such class or classes, except as otherwise provided in Section 2 of Part A of Article IV with respect to the Preferred Stock of the Corporation. Notwithstanding the foregoing, the provisions of this Article VI shall not reduce the vote of shareholders required to approve a transaction which requires shareholder approval under Chapter 1704 of the Ohio Revised Code.

ARTICLE VII

Election of Directors

In order for a nominee to be elected a director of the Corporation in an uncontested election, the nominee must receive a greater number of votes cast “for” his or her election than “against” his or her election. Neither abstentions nor broker non-votes will be deemed to be votes “for” or “against” a nominee’s election. In a contested election, the nominee receiving the greatest number of votes shall be elected. An election shall be considered contested if, as of the record date for the meeting, there are more nominees properly nominated and not withdrawn for election than director positions to be filled in that election.

ARTICLE VIII

Opt-Out of Control Share Acquisitions Statute

Section 1701.831 of the Ohio Revised Code shall not apply to control share acquisitions of shares of the Corporation.

ARTICLE IX

Amended and Restated Articles

These Amended and Restated Articles of Incorporation of KeyCorp supersede the Amended and Restated Articles of Incorporation of KeyCorp filed with the Secretary of State of Ohio on July 23, 2008, as amended.

Exhibit 10.1

KEYCORP

Executive Officer Grants

(Nonqualified Stock Options)

«Name»

By action of the Compensation and Organization Committee (the “Committee”) of the Board of Directors of KeyCorp, taken pursuant to the KeyCorp 2004 Equity Compensation Plan (the “Plan”), and subject to the terms and conditions of the Plan, you have been awarded                      nonqualified stock options.

 

1. The options are being awarded in conformity with the provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”). The options shall be null and void and immediately canceled if the award is found to be contrary to the provisions of EESA by the Committee, the Special Master for TARP Executive Compensation under EESA or otherwise. If the Committee determines at any time while the options are outstanding that the options may encourage you or the management of KeyCorp to take unnecessary and excessive risks that threaten the value of KeyCorp, the Committee may declare the options null and void and immediately canceled.

 

2. The effective date of this option grant shall be June 12, 2009 (the “date of grant”) on which date the options become fully vested and exercisable, subject, however, to your agreeing to the terms of paragraph 4 hereof.

 

3. The options shall be subject to a holding period (during which the options shall be retained by you and may not be exercised, transferred, or otherwise disposed of) until such time as any KeyCorp obligation under the Troubled Asset Relief Program obligation (other than warrants) no longer remains outstanding (the “Holding Period”).

 

4. By executing this Agreement, you agree to retain (i.e. not exercise) the options until the later of (i) for one-third of the options, one year from the date of grant; for an additional one-third of the options, two years from the date of grant; and for the remaining one-third of the options, until three years from the date of grant or (ii) the conclusion of the Holding Period.

 

5. By executing this Agreement, you agree as follows:

 

  (a) Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, hire or solicit or entice for employment any Key employee without the written consent of Key, which consent it may grant or withhold in its discretion.

 

  (b)

Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, call upon, solicit, or do business with (other than for a business which does not compete with any business or business activity conducted by Key) any Key customer or potential customer I interacted with, became acquainted with, or learned of through access to information while I performed services for Key during my employment with Key, without the written consent of Key, which consent it may grant or withhold in its discretion. In the event that my employment is terminated with Key as a result of a Termination Under Limited Circumstances as defined below, the restrictions in this paragraph 5(b) shall become inapplicable to me; however, the restrictions in paragraph 5(a) of this Agreement shall remain in full force and effect nevertheless. I understand that a “Termination Under Limited Circumstances” shall mean the termination of my employment with Key (i) under circumstances in which I am entitled to receive severance benefits or salary continuation benefits under the terms and conditions of the KeyCorp Separation Plan in effect at the time of such termination, or (ii) under circumstances in which I am entitled to receive severance benefits, salary continuation benefits, or similar benefits under the


  terms and conditions of an agreement with Key, including, without limitation, a change of control agreement or employment or letter agreement, or (iii) as otherwise expressly approved by the Compensation and Organization Committee of KeyCorp in its sole discretion.

 

6. The terms and conditions of this award may not be modified, amended or waived except by an instrument in writing signed by a duly authorized executive officer of KeyCorp.

June 12, 2009             

 
Thomas E. Helfrich
Executive Vice President

 

AGREED TO AND ACCEPTED:

 

Dated: June 12, 2009

EXHIBIT 10.5

PERFORMANCE SHARES AWARD AGREEMENT

KeyCorp grants to the Participant named below, in accordance with the terms, and subject to the conditions, of the KeyCorp 2013 Equity Compensation Plan (the “ Plan ”), this Performance Shares Award Agreement (the “ Award Agreement ”) and the attached Acceptance Agreement, an award of the target number of performance shares (“ Performance Shares ” or “ Award ”), on the Date of Grant, each as set forth below. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.

Each Performance Share represents the contingent right to receive one Common Share, subject to the terms and conditions set forth in the Plan, this Award Agreement and the Acceptance Agreement. The Participant’s right to receive payment of all, a portion, or a multiple of the Performance Shares shall be contingent upon the level of achievement of the Performance Goals and the Participant’s continued employment, each as provided herein, in all cases subject to the other terms and conditions of this Award Agreement, the Plan and the Acceptance Agreement, including, if the Participant is a 162(m) Covered Employee (as defined in Appendix A ) the additional terms and conditions set forth in Appendix A .

 

Name of Participant:

[ ]

 

Target Number of Performance Shares:

[ ]

 

Date of Grant:

February 16, 2015

 

Vesting Date:

February 17, 2018, subject to approval of the Compensation and Organization Committee of the Board of Directors, and subject to your continued employment on this date and the achievement of the Performance Goals set forth below (except as otherwise provided in this Award Agreement)

 

Performance Period:

January 1, 2015 through December 31, 2017

 

Performance Goals:

The Participant may vest in between 0% and 150% of the target number of Performance Shares subject to this Award based on the weighted level of achievement of the following “Performance Goals” during the Performance Period:

 

Performance Goals

  

Other Factors

(Vesting Reduction Only)

Performance Metric

  Weight   Threshold   Target   Maximum   
    50%
Weighted
Vesting
  100%
Weighted
Vesting
  150%
Weighted
Vesting
  

Total Shareholder Return vs. Peers

  25%   25% ile   50% ile   75% ile    ERM Dashboard

Return on Assets vs. Peers

  25%   25% ile   50% ile   75% ile    Execution of Strategic Priorities

Cumulative Earnings Per Share

  50%   75% of
EPS at
Plan*
  100% of
EPS at
Plan*
  125% of
EPS at
Plan*
   Other factors, as appropriate

Straight line interpolation applies for performance between Threshold and Maximum levels.

The Committee shall determine the level of achievement of the Performance Goals within two and one-half months after the end of the Performance Period in accordance with the provisions of this Award Agreement, the Plan and the Acceptance Agreement. Notwithstanding any other provision of the Award Agreement, the Committee may reduce the number of Performance Shares otherwise vesting based on the Other Factors set forth above, as determined by the Committee in its sole discretion.


For purposes of this Award Agreement:

 

*EPS at Plan:

The Cumulative Earnings Per Share as set forth in the KeyCorp 2015-2017 Long Term Incentive Compensation Plan, which excludes any impact to Cumulative Earnings Per Share based on changes to interest rates. EPS at Plan may be adjusted by KeyCorp, in its discretion, to correspond to changes in interest rates.

 

Total Shareholder Return vs. Peers:

KeyCorp’s percentile ranking among the companies in the Peer Group (as defined below) for total shareholder return for the Performance Period, calculated based on the average closing share price over the last 20 trading days in 2014 compared to the average closing share price over the last 20 days in 2017 plus investment of dividends paid during the Performance Period.

 

Return on Assets vs. Peers:

KeyCorp’s percentile ranking among the companies in the Peer Group (as defined below) for average annual return on assets during the three fiscal years of (or ending during) the Performance Period, with return on assets calculated as net income from continuing operations divided by average assets from continuing operations.

 

Cumulative Earnings Per Share:

The sum of KeyCorp’s annual earnings per share for the three fiscal years in the Performance Period, as reported in the Form 10-Ks filed by KeyCorp for such fiscal years.

 

Peer Group:

The companies in the S&P Banks Index on the Date of Grant, excluding Wells Fargo & Company and Hudson City Bancorp, with such adjustments to the composition of the Peer Group as may be determined by the Committee, in its sole discretion. The Committee reviews the companies in the Peer Group annually.

The Participant must accept the Award online in accordance with the procedures established by KeyCorp and the Award administrator or this Award Agreement may be cancelled by KeyCorp, in its sole discretion. By accepting the Award in accordance with these procedures, the Participant acknowledges that:

 

    This Award is subject to the KeyCorp Incentive Compensation Program and Policy, as amended from time to time. The Participant understands and agrees that the Award is subject to risk adjustment in accordance with the procedures set forth in the Incentive Compensation Program and Policy. These procedures permit Key, in its sole discretion, to decrease, forfeit, or initiate a clawback, of all or any part of the Award under certain circumstances, including in the event that the Participant receives a “Does Not Meet” risk rating as part of his or her annual performance review, and/or in the event that the Participant’s business unit experiences negative pre-provision net revenue (before allocated costs) or significant credit, market or operational losses. If a significant risk event occurs, whether at the individual or business level, a root cause analysis may be conducted, which may result in a risk adjustment of the Award.

 

    The Participant understands that as a condition to receiving the Award, the Participant must agree to be bound by and comply with the terms and conditions of the Plan, the Award Agreement and related Acceptance Agreement. As soon as the Participant accepts the Award, the terms and conditions of the Award Agreement and Acceptance Agreement will constitute a legal contract that will bind both the Participant and KeyCorp.

Additional Terms

1. Effect of Termination .

(a) In General . The Award shall be forfeited automatically without further action or notice if the Participant ceases to be continuously employed by Key prior to the Vesting Date, except as otherwise provided in this


Section 1. For purposes of this Section 1, the continuous employment of the Participant shall not be deemed to have been interrupted, and the Participant shall not be deemed to have ceased to be an employee of Key, by reason of the transfer of employment among KeyCorp and its affiliates.

(b) Certain Terminations . Notwithstanding Section 1(a), if, prior to the Vesting Date, the Participant’s continuous employment is terminated as a result of the Participant’s death, Disability, Termination Under Limited Circumstances or Retirement, the Participant will vest in a pro rata portion of the Performance Shares.

The pro rata vesting provided for under this Section 1(b) shall be determined by multiplying the target number of Performance Shares granted under this Agreement by a fraction, the numerator of which shall be the number of full months of Participant’s continuous employment from the Date of Grant through the date of termination and the denominator of which shall be 36, and adjusting this number at the end of the Performance Period based on the level of achievement of the Performance Goals (and the satisfaction of the other terms and conditions of this Award Agreement, the Plan and the Acceptance Agreement, including, as applicable, the additional terms and conditions of Appendix A ).

For purposes of this Award Agreement, a Participant’s “ Retirement ” shall mean the Participant’s Voluntary Resignation on or after attaining age 55 and completion of at least 5 years of service (inclusive of termination after attaining age 60 and completion of at least 10 years of service).

(c) Certain Terminations Within Two Years After a Change of Control . Notwithstanding the foregoing provisions of Section 1, if, prior to the Vesting Date, the Participant’s continuous employment with Key is terminated within two years following the date of a Change of Control for any reason other than a Voluntary Resignation (excluding a Voluntary Resignation constituting a Retirement, as defined above) or a Termination for Cause, the target number of Performance Shares (or if such Change of Control and termination of employment occurs after the end of the Performance Period, the number of Performance Shares earned under this Award Agreement based upon achievement of the Performance Goals) shall become immediately vested (without pro ration).

2. Payment of Vested Performance Shares . Except as otherwise provided in Sections 1(b) or 1(c), any Performance Shares earned pursuant to this Award Agreement shall become vested only if the Participant remains continuously employed by Key from the Date of Grant through the Vesting Date. Payment of any earned and vested Performance Shares shall be made in the form of whole Common Shares, rounded down to the nearest Common Share, for each vested Performance Share. Payment shall occur as soon as practicable following the vesting of the Performance Shares but in no event later than two and one-half months after the Vesting Date.

3. Dividend Equivalents . Dividend equivalents shall be credited on the target number of Performance Shares which shall be deemed reinvested and be subject to the same terms and restrictions otherwise applicable to the Performance Shares (including but not limited to vesting requirements) under this Award Agreement, the Plan and the Acceptance Agreement.

4. Harmful Activity . Notwithstanding any other provision of this Award Agreement to the contrary, if the Participant engages in any Harmful Activity prior to or within twelve months after the Participant’s termination of employment with Key, then the Performance Shares shall be immediately forfeited without further action or notice, and any Common Shares delivered in payment of the Award within one year prior to the Participant’s termination of employment, and any Profits realized by the Participant from the sale of such Common Shares, shall become immediately due and payable to KeyCorp on KeyCorp’s demand. This Section 4 shall survive the termination of Participant’s employment.

5. KeyCorp’s Reservation of Rights . As a condition of receiving this Award, the Participant acknowledges and agrees that Key intends to comply with the requirements of (a) the Dodd-Frank Wall Street Reform and Consumer Protection Act (including clawback provisions), as the same may be amended from time to time; (b) the banking regulatory agencies’ Guidance on Sound Incentive Compensation Policies ; and (c) KeyCorp’s risk requirements and policies. As a condition of receiving this Award, the Participant understands and agrees that KeyCorp may, in its sole discretion, (x) decrease or cause the forfeiture of all or any part of this Award,


(y) initiate a clawback of all or any part of this Award, and/or (z) demand the Participant’s repayment to KeyCorp of any Common Shares paid to the Participant under this Award, or the Profits realized from the sale of such Common Shares, if KeyCorp determines that such action is necessary or desirable.

6. Relation to Other Benefits . Any economic or other benefit to the Participant under this Award Agreement shall not be taken into account in determining any benefits to which the Participant may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by Key and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of Key.

7. KeyCorp Stock Ownership Guidelines . If the Participant is subject to and has not met the KeyCorp Stock Ownership Guidelines, the Participant may not sell or otherwise transfer the Common Shares provided upon vesting of the Award (if any) until and unless the Participant meets the Stock Ownership Guidelines or terminates employment with Key; provided, however, that notwithstanding the foregoing, the Participant may sell the number of Common Shares necessary to satisfy any withholding tax obligation that may arise in connection with the vesting of this Award even the Participant has not met the Stock Ownership Guidelines.

8. Taxes and Withholding . To the extent that Key is required to withhold any federal, state, local or other taxes in connection with the delivery of Common Shares under this Award Agreement, then Key shall retain a number of Common Shares otherwise deliverable hereunder with a value equal to the required withholding (based on the Fair Market Value of the Common Shares on the date of delivery); provided that in no event shall the value of the Common Shares retained exceed the minimum amount of taxes required to be withheld or such other amount that will not result in a negative accounting impact. To the extent that Key is required to withhold any federal, state, local or other taxes at any time other than upon delivery of Common Shares under this Award Agreement, then Key shall have the right in its sole discretion to (a) require the Participant to pay or provide for payment of the required tax withholding, or (b) deduct the required tax withholding from any other compensation payable in cash to the Participant.

9. Entire Agreement; Amendments . This Award Agreement, along with the Plan and the related Acceptance Agreement, contains the entire agreement and understanding of the parties with respect to the subject matter contained therein, and supersedes all prior written or oral communications, representations and negotiations in respect thereto. KeyCorp may modify or amend this Award Agreement at any time upon written notice to the Participant, provided that KeyCorp may not amend this Award Agreement in a manner adverse to the interests of the Participant without the Participant’s consent. Notwithstanding any other provision of this Award Agreement, if the Committee determines that a change in the business, operations, corporate structure or capital structure of KeyCorp, the manner in which it conducts business or other events or circumstances render the Performance Goals to be unsuitable, the Committee may modify the Performance Goals and/or the related threshold, target and maximum levels of achievement, in whole or in part, as the Committee deems appropriate. In the event of any inconsistency between the provisions of this Award Agreement or the related Acceptance Agreement, on the one hand, and the Plan, on the other, the Plan shall govern.

10. Administration . KeyCorp shall have the right, in accordance with the Plan, to determine any questions which arise in connection with the Award. All such determinations and decisions shall be final, conclusive and binding on all persons, including Key, the Participant and the Participant’s estate and beneficiaries.

11. Successors and Assigns . Without limiting Section 14.1 of the Plan, the provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of the Participant, and the successors and assigns of KeyCorp.

12. Compliance with Section 409A of the Internal Revenue Code . To the extent applicable, it is intended that this Award comply with the provisions of Section 409A of the Code (“ Section 409A ”). The Award shall accordingly be administered in a manner consistent with this intent, and any provision that would cause the Award to fail to satisfy Section 409A shall have no force and effect until amended to comply with Section 409A. In particular, to the extent that the Participant’s right to receive payment under the Award becomes vested and the event triggering the Participant’s right to payment is the Participant’s termination of employment, then


notwithstanding anything herein to the contrary, payment will be made to the Participant, to the extent necessary to comply with Section 409A, on the earlier of (a) the Participant’s “separation from service” (determined in accordance with Section 409A); provided, however, that if the Participant is a “specified employee” (determined in accordance with KeyCorp’s policies), the date of payment shall not occur until the first business day of the seventh month following the date of the Participant’s separation from service with Key, or (b) the Participant’s death. Further, to the extent necessary to comply with Section 409A, a transaction shall be considered a Change of Control only if it also qualifies as a “change in the ownership” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of KeyCorp within the meaning of Section 409A.


APPENDIX A

ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO 162(m) COVERED EMPLOYEES

This Appendix A sets forth certain additional terms and conditions which shall apply to the Participant’s Award if and only if the Participant is a “162(m) Covered Employee” (as defined in Section A, below). This Appendix A is intended to provide for the qualification of a 162(m) Covered Employee’s Award as “performance-based compensation” within the meaning of Section 162(m)(4)(C) of the Code, and this Appendix A shall be interpreted and administered in accordance with such intent.

A. Notwithstanding any other provision of the Award Agreement, if the Participant is a 162(m) Covered Employee, then the Award shall be forfeited automatically without further action or notice if the Initial Performance Objective (as defined below) is not achieved, except as otherwise provided in Section 1(c) of the Award Agreement. For purposes of the Award Agreement, a “162(m) Covered Employee” means an individual who is a “covered employee” as defined in Section 162(m)(3) of the Code (and applicable Treasury Department regulations and other guidance published thereunder) for the taxable year in which KeyCorp would be entitled to deduct the payment of the Performance Shares for federal income tax purposes (disregarding any limitations on deductibility under Sections 162(m) or 280G of the Code).

B. For purposes of this Award Agreement, the “Initial Performance Objective” shall be achieved if and only if the ratio of KeyCorp’s average Pre-Provision Net Revenue for the three fiscal years in the Performance Period to KeyCorp’s Average Assets for the three fiscal years that preceded the Performance Period equals or exceeds seventy-five percent (75%) of the same ratio for the three fiscal years that preceded the Performance Period. For purposes of this Award Agreement, Pre-Provision Net Revenue shall mean KeyCorp’s pre-provision net revenue from continuing operations for the relevant fiscal years, and Average Assets shall mean KeyCorp’s average assets of continuing operations for the relevant fiscal years, each as reported in the Form 10-Ks filed by KeyCorp for the relevant fiscal years. If the Participant is a 162(m) Covered Employee, KeyCorp’s achievement of the Initial Performance Objective shall be certified by the Committee in writing within two and one-half months after the end of the Performance Period and prior to the payment of any Performance Shares under the Award Agreement.

C. Notwithstanding any other provision of the Award Agreement, if the Participant is a 162(m) Covered Employee, then subject to potential reduction by the Committee pursuant to paragraph D below, if the Initial Performance Objective is achieved, then KeyCorp shall credit to the Participant’s account a number of Performance Shares equal to 150% of the target number of Performance Shares, or such lesser number of Performance Shares as may be determined by the Committee, in its discretion, in accordance with paragraph D below.

D. Notwithstanding paragraph C above, if the Participant is a 162(m) Covered Employee, the actual number of Performance Shares credited to the Participant’s account pursuant to the Award Agreement may be reduced by the Committee in its discretion below the number of Performance Shares, if any, earned based upon achievement of the Initial Performance Objective (including a reduction to zero). It is the current intention of the Committee that any such reduction shall be made based on the level of achievement of the performance goals described in the Award Agreement, as determined by the Committee.


ACCEPTANCE AGREEMENT

I acknowledge receipt of the attached Award and in consideration thereof, I accept such Award subject to the terms and conditions of the Plan, the Award Agreement, and the restrictions that are set forth in this Acceptance Agreement.

I also understand and agree that the restrictions set forth in this Acceptance Agreement are (i) in addition to, and do not in any way limit or vary the restrictions that are contained in any other agreement, plan, policy, or practice that are applicable to me as an employee of Key, and (ii) binding upon me regardless of whether I vest, sell, transfer, pledge, hypothecate, or otherwise dispose of the Award or any of the Common Shares to be paid to me pursuant to the Award.

1. I recognize the importance of preserving the confidentiality of Non-Public Information of Key, and I acknowledge and agree that: (a) during my employment with Key, I will acquire, reproduce, and use such Non-Public Information only to the extent reasonably necessary for the proper performance of my duties; (b) both during and after my employment with Key, I will not use, publish, sell, trade or otherwise disclose such Non-Public Information; and (c) upon the termination of my employment with Key, I will immediately return to Key all documents, data, and things in my possession or to which I have access that involve such Non-Public Information. I also agree to enter into and to execute nondisclosure agreements in favor of Key and others doing business with Key with whom Key has a confidential relationship.

2. I acknowledge and agree that the duties of my position at Key may include the development of Intellectual Property, and that any Intellectual Property which I create with any of Key’s resources or assistance, or which pertains to the business of Key is the property of Key. I hereby agree and I hereby assign to Key all right, title, and interest in and absolute title to such Intellectual Property, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property and I agree that I will execute all patent applications and assignments thereof on Key’s behalf without additional compensation.

3. Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, hire or solicit or entice for employment any Key Employee, without the written consent of Key (which consent Key may grant or withhold in its discretion). “ Key Employees ” shall include (i) all current Key employees, and (ii) all persons who were employed by Key at any time during the six (6) month period prior to my termination from Key.

4. (a) Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, call upon, solicit, or do business with any Key customer or potential customer with whom I interacted, became acquainted, or learned of through access to information while employed at Key, without the written consent of Key (which consent Key may grant or withhold in its discretion).

(b) In the event that my employment with Key is terminated as a result of a Termination Under Limited Circumstances, the restrictions in paragraph 4(a) of this Acceptance Agreement shall become inapplicable to me; however, the restrictions in paragraphs 1, 2, and 3 of this Acceptance Agreement shall remain in full force and effect.

5. The aforementioned restrictions in paragraphs 1, 2, 3 and 4(a) shall not apply in the event that, within the 2-year period commencing on a Change of Control: (i) my employment with Key is terminated as a result of a Termination Under Limited Circumstances, or (ii) I terminate employment with Key after a relocation of my principal place of employment more than 35 miles from my principal place of employment immediately prior to the Change of Control, or after a reduction in my base salary after a Change of Control.

6. I agree that the Plan, the Award Agreement and this Acceptance Agreement will be governed by Ohio law without regard to conflicts of laws principles, and that if any term, condition, clause or provision of the Plan, the Award Agreement or this Acceptance Agreement is determined by a Court of competent jurisdiction to be void


or invalid at law, then only that term, condition, clause or provision determined to be void or invalid shall be stricken, and the remainder of the Plan, the Award Agreement and this Acceptance Agreement shall remain in full force and effect in all other aspects.

I also understand and agree that if I engage in any activity that is in violation of the Plan, the Award Agreement or this Acceptance Agreement, such conduct may cause serious damage and irreparable injury to Key, and Key at its election may terminate my employment (if I am still employed), seek monetary damages and attorney fees, and injunctive relief without the necessity of posting bond, as well as any and all other equitable relief to which it may be entitled under the law, the Plan, the Award Agreement and this Acceptance Agreement.

* * * * *

Exhibit 10.17

2004 EQUITY COMPENSATION PLAN

1. Purpose. The KeyCorp 2004 Equity Compensation Plan is intended to promote the interests of the Corporation and its shareholders by providing equity-based incentives for effective service and high levels of performance to Employees selected by the Committee. To achieve these purposes, the Corporation may grant Awards of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units to selected Employees, all in accordance with the terms and conditions hereinafter set forth.

2. Definitions.

2.1 1934 Act. The term “1934 Act” shall mean the Securities Exchange Act of 1934, as amended.

2.2 Acquisition Price. The term “Acquisition Price” with respect to Restricted Stock and Restricted Stock Units shall mean such amount, if any, required by applicable law or as may be otherwise specified by the Committee in the Award Instrument with respect to the Restricted Stock or Restricted Stock Units as the consideration to be paid by the Employee for the Restricted Stock or Restricted Stock Units.

2.3 Award. The term “Award” shall mean an award granted under the Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, or Performance Units.

2.4 Award Instrument. The term “Award Instrument” shall mean a written instrument evidencing an Award in such form and with such provisions as the Committee may prescribe, including, without limitation, an agreement to be executed by the Employee and the Corporation, a certificate issued by the Corporation, or a letter executed by the Committee or its designee. An Award Instrument may also be in an electronic medium. Acceptance of the Award Instrument by an Employee constitutes agreement to the terms of the Award evidenced thereby.

2.5 Base Price. The term “Base Price” with respect to a Free-Standing SAR shall mean the price specified in an Award of Free-Standing SARs to be used as the basis for determining the amount to which a holder of a Free-Standing SAR is entitled upon the exercise of a Free-Standing SAR.

2.6 Change of Control. A “Change of Control” shall be deemed to have occurred if, at any time after the date of the grant of the relevant Award, there is a Change of Control under any of clauses (a), (b), (c), or (d) below. For these purposes, the Corporation will be deemed to have become a subsidiary of another corporation if any other corporation (which term shall include, in addition to a corporation, a limited liability company, partnership, trust, or other organization) owns, directly or indirectly, 50 percent or more of the total combined outstanding voting power of all classes of stock of the Corporation or any successor to the Corporation.

 

  (a) A Change of Control will have occurred under this clause (a) if the Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and either

 

  (i) immediately after giving effect to that transaction, less than 65% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to the transaction, or

 

  (ii) immediately after giving effect to that transaction, individuals who were directors of the Corporation on the day before the first public announcement of (A) the pendency of the transaction or (B) the intention of any person or entity to cause the transaction to occur, cease for any reason to constitute at least 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation.


  (b) A Change of Control will have occurred under this clause (b) if a tender or exchange offer shall be made and consummated for 35% or more of the outstanding voting stock of the Corporation or any person (as the term “person” is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 35% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule TO (or any successor schedule, form or report), each as adopted under the 1934 Act, disclosing the acquisition of 35% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this clause (b)).

 

  (c) A Change of Control will have occurred under this clause (c) if either

 

  (i) without the prior approval, solicitation, invitation, or recommendation of the Corporation’s Board of Directors any person or entity makes a public announcement of a bona fide intention (A) to engage in a transaction with the Corporation that, if consummated, would result in a Change Event (as defined below in this clause (c)), or (B) to “solicit” (as defined in Rule 14a-1 under the 1934 Act) proxies in connection with a proposal that is not approved or recommended by the Corporation’s Board of Directors, or

 

  (ii) any person or entity publicly announces a bona fide intention to engage in an election contest relating to the election of directors of the Corporation (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act),

and, at any time within the 24 month period immediately following the date of the announcement of that intention, individuals who, on the day before that announcement, constituted the directors of the Corporation (the “Incumbent Directors”) cease for any reason to constitute at least a majority thereof unless both (A) the election, or the nomination for election by the Corporation’s shareholders, of each new director was approved by a vote of at least two-thirds of the Incumbent Directors in office at the time of the election or nomination for election of such new director, and (B) prior to the time that the Incumbent Directors no longer constitute a majority of the Board of Directors, the Incumbent Directors then in office, by a vote of at least 75% of their number, reasonably determine in good faith that the change in Board membership that has occurred before the date of that determination and that is anticipated to thereafter occur within the balance of the 24 month period to cause the Incumbent Directors to no longer be a majority of the Board of Directors was not caused by or attributable to, in whole or in any significant part, directly or indirectly, proximately or remotely, any event under subclause (i) or (ii) of this clause (c).

For purposes of this clause (c), the term “Change Event” shall mean any of the events described in the following subclauses (x), (y), or (z) of this clause (c):

 

  (x) A tender or exchange offer shall be made for 25% or more of the outstanding voting stock of the Corporation or any person (as the term “person” is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 25% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule TO (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this subclause (x)).

 

  (y) The Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, after giving effect to such transaction, less than 50% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to such transaction or less than 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation were directors of the Corporation immediately prior to such transaction.

 

  (z) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation.


  (d) A Change of Control will have occurred under this clause (d) if there is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation.

2.7 Committee. The term “Committee” shall mean the Compensation Committee of the Board of Directors of the Corporation or such other committee or subcommittee as may be designated by the Board of Directors of the Corporation from time to time.

2.8 Common Shares. The term “Common Shares” shall mean common shares of the Corporation, with a par value of $1 each.

2.9 Corporation. The term “Corporation” shall mean KeyCorp and its successors, including the surviving or resulting corporation of any merger of KeyCorp with or into, or any consolidation of KeyCorp with, any other corporation or corporations.

2.10 Covered Employee. The term “Covered Employee” shall mean an Employee who is, or is determined by the Committee to be likely to become, a “covered employee” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

2.11 Disability. The term “Disability” with respect to an Employee shall mean physical or mental impairment which entitles the Employee to receive disability payments under any long-term disability plan maintained by the Corporation.

2.12 Effective Date. The term “Effective Date” shall mean March 18, 2004, the date the Plan is approved and adopted by the Board of Directors of the Corporation.

2.13 Employee. The term “Employee” shall mean any individual employed by the Corporation or by any Subsidiary and shall include officers as well as all other employees of the Corporation or of any Subsidiary (including employees who are members of the Board of Directors of the Corporation or any Subsidiary).

2.14 Employment Termination Date. The term “Employment Termination Date” with respect to an Employee shall mean the first date on which the Employee is no longer employed by the Corporation or any Subsidiary.

2.15 Exercise Price. The term “Exercise Price” with respect to an Option shall mean the price specified in the Option at which the Common Shares subject to the Option may be purchased by the holder of the Option.

2.16 Fair Market Value. Except as otherwise determined by the Committee at the time of the grant of an Award, the term “Fair Market Value” with respect to Common Shares shall mean: (a) if the Common Shares are traded on a national exchange, the mean between the high and low sales price per Common Share on that national exchange on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares, or (b) if the Common Shares are not traded on a national exchange, the mean between the high and low sales price per Common Share in the over-the-counter market, National Market System, as reported by the National Quotations Bureau, Inc. and NASDAQ on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares.

2.17 Free-Standing Stock Appreciation Right. The term “Free-Standing Stock Appreciation Right” or “Free-Standing SAR” shall mean an Award granted to an Employee that is not granted in tandem with an Option that entitles the holder thereof to receive from the Corporation, upon exercise of the Free-Standing SAR or any portion of the Free-Standing SAR, an amount equal to 100% or such lesser percentage as the Committee may determine at the time of grant of the Award, of the excess, if any, measured at the time of the exercise of the Free-Standing SAR, of (a) the Fair Market Value of the Common Shares underlying the Free-Standing SARs being exercised over (b) the aggregate Base Price of those Common Shares underlying the Free-Standing SARs being exercised.


2.18 Incentive Stock Option. The term “Incentive Stock Option” shall mean an Option intended by the Committee to qualify as an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

2.19 Limited Stock Appreciation Right. The term “Limited Stock Appreciation Right” or “Limited SAR” shall mean an Award granted to an Employee with respect to all or any part of any Option, that entitles the holder thereof to receive from the Corporation, upon exercise of the Limited SAR and surrender of the related Option, or any portion of the Limited SAR and the related Option, an amount equal to (unless the Committee specifies a lesser amount at the time of the grant of the Award):

 

  (a) in the case of a Limited SAR granted with respect to an Incentive Stock Option, 100% of the excess, if any, measured at the time of the exercise of the Limited SAR, of (i) the Fair Market Value of the Common Shares subject to the Incentive Stock Option with respect to which the Limited SAR is exercised over (ii) the Exercise Price of those Common Shares under the Incentive Stock Option, or

 

  (b) in the case of a Limited SAR granted with respect to a Nonqualified Option, 100% of the highest of:

 

  (i) the excess, measured at the time of the exercise of the Limited SAR, of (A) the Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option,

 

  (ii) the excess of (A) the highest gross price (before brokerage commissions and soliciting dealers’ fees) paid or to be paid for a Common Share (whether in cash or in property and whether by way of exchange, conversion, distribution upon liquidation, or otherwise) in connection with any Change of Control multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option, or

 

  (iii) the excess of (A) the highest Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised on any one day during the period beginning on the sixtieth day prior to the date on which the Limited SAR is exercised multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option.

2.20 Nonqualified Option. The term “Nonqualified Option” shall mean an Option intended by the Committee not to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended.

2.21 Option. The term “Option,” shall mean an Award entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time.

2.22 Option Expiration Date. The term “Option Expiration Date” with respect to any Option shall mean the date selected by the Committee after which, except as provided in Section 11.4 in the case of the death of the Employee to whom the option was granted, the Option may not be exercised.

2.23 Performance Goal. The term “Performance Goal” shall mean a performance goal specified by the Committee in connection with the potential grant of Performance Shares or Performance Units, or when so determined by the Committee, Options, SARs, Restricted Stock, and dividend credits pursuant to this Plan. Performance Goals may be described in terms of objectives that are related to the performance by the Corporation, by any Subsidiary, or by any Employee or group of Employees in connection with services performed by that Employee or those Employees for the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary. The Performance Goals may be made relative to the performance of other corporations. The Performance Goals applicable to any award to a Covered Employee will be based on, and described in terms of specified levels of, growth in, or ratios involving, one or more of the following criteria:

 

  (a) earnings per share;

 

  (b) total revenue;


  (c) net interest income

 

  (d) noninterest income;

 

  (e) net income;

 

  (f) net income before tax;

 

  (g) noninterest expense

 

  (h) efficiency ratio;

 

  (i) return on equity;

 

  (j) return on assets;

 

  (k) economic profit added;

 

  (l) loans;

 

  (m) deposits;

 

  (n) tangible equity;

 

  (o) assets

 

  (p) net charge-offs; and

 

  (q) nonperforming assets

If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Corporation, or the manner in which it conducts its business, or other events or circumstances render the Performance Goals unsuitable, the Committee may in its discretion modify such Performance Goals or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case of a Covered Employee where such action would result in the loss of the otherwise available exemption of the Award under Section 162(m) of the Internal Revenue Code of 1986, as amended. In such case, the Committee will not make any modification of the Performance Goals or minimum acceptable level of achievement.

2.24 Performance Period. The term “Performance Period” shall mean such one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be relevant in connection with one or more Awards of Performance Shares or Performance Units.

2.25 Performance Shares. The term “Performance Shares” shall mean an Award denominated in Common Shares and contingent upon attainment of one or more Performance Goals by the Corporation or a Subsidiary or any subunit of the Corporation or of any Subsidiary over a Performance Period.

2.26 Performance Units. The term “Performance Units” shall mean a bookkeeping entry that records a unit equal to $1.00 awarded pursuant to Section 10 of this Plan, which are contingent upon attainment of one or more Performance Goals by the Corporation or a Subsidiary or any subunit of the Corporation or of any Subsidiary over a Performance Period.

2.27 Plan. The term “Plan” shall mean this KeyCorp 2004 Equity Compensation Plan as from time to time hereafter amended in accordance with Section 21.1.

2.28 Restricted Stock. The term “Restricted Stock” shall mean Common Shares of the Corporation delivered to an Employee pursuant to an Award subject to such restrictions, conditions and contingencies as the Committee may provide in the relevant Award Instrument, including (a) the restriction that the Employee not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate the Restricted Stock during the applicable Restriction Period, (b) the requirement that the Restriction Period will terminate or terminate early upon


achievement of specified Performance Goals, (c) the requirement that, subject to the provisions of Section 11, if the Employee’s employment terminates so that the Employee is no longer employed by the Corporation or any Subsidiary before the end of the applicable Restriction Period, the Employee will offer to sell to the Corporation at the Acquisition Price each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (d) such other restrictions, conditions, and contingencies, if any, as the Committee may provide in the Award Instrument with respect to that Restricted Stock.

2.29 Restricted Stock Units. The term “Restricted Stock Units” shall mean an Award pursuant to Section 9 of this Plan, whereby an Employee receives the right to receive Common Shares or the cash equivalent thereof at a specified time in the future in consideration of the performance of services, but subject to such restrictions, conditions and contingencies as the Committee may provide in the relevant Award Instrument.

2.30 Restriction Period. The term “Restriction Period” with respect to an Award of Restricted Stock shall mean the period selected by the Committee and specified in the Award Instrument with respect to that Restricted Stock during which the Employee may not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate that Restricted Stock.

2.31 Stock Appreciation Right. The term “Stock Appreciation Right” or “SAR” shall mean a right granted pursuant to Section 7 of this Plan, and will include Tandem Stock Appreciation Rights, Limited Stock Appreciation Rights and Free-Standing Stock Appreciation Rights.

2.32 Subsidiary. The term “Subsidiary” shall mean any corporation, partnership, joint venture, or other business entity in which the Corporation owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock (in the case of a corporation) or other ownership interest (in the case of any entity other than a corporation).

2.33 Tandem Stock Appreciation Right. The term “Tandem Stock Appreciation Right “or “Tandem SAR” shall mean an Award granted to an Employee with respect to all or any part of any Option that entitles the holder thereof to receive from the Corporation, upon exercise of the Tandem SAR and surrender of the related Option, or any portion of the Tandem SAR and the related Option, an amount equal to 100%, or such lesser percentage as the Committee may determine at the time of the grant of the Award, of the excess, if any, measured at the time of the exercise of the Tandem SAR, of (a) the Fair Market Value of the Common Shares subject to the Option with respect to which the Tandem SAR is exercised over (b) the Exercise Price of those Common Shares under the Option.

2.34 Transferee. The term “Transferee” shall mean, with respect to Nonqualified Options only, any person or entity to which an Employee is permitted by the Committee to transfer or assign all or part of his or her Options.

3. Administration. The Plan shall be administered by the Committee. No Award may be made under the Plan to any member or alternate member of the Committee. The Committee shall have authority, subject to the terms of the Plan, (a) to determine the Employees who are eligible to participate in the Plan, the type, size, and terms of Awards to be granted to any Employee, the time or times at which Awards shall be exercisable or at which restrictions, conditions, and contingencies shall lapse, and the terms and provisions of the instruments by which Awards shall be evidenced, (b) to establish any other restrictions, conditions, and contingencies on Awards in addition to those prescribed by the Plan, (c) to interpret the Plan, and (d) to make all determinations necessary for the administration of the Plan.

The construction and interpretation by the Committee of any provision of the Plan or any Award Instrument delivered pursuant to the Plan and any determination by the Committee pursuant to any provision of the Plan or any Award Instrument shall be final and conclusive. No member or alternate member of the Committee shall be liable for any such action or determination made in good faith.


The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of their number or any officer of the Corporation to execute and deliver documents on behalf of the Committee and the Committee may delegate to one or more employees, agents, or officers of the Corporation, or to one or more third party consultants, accountants, lawyers, or other advisors, such ministerial duties related to the operation of the Plan as it may deem appropriate.

4. Eligibility. Awards may be granted to Employees of the Corporation or any Subsidiary selected by the Committee in its sole discretion. The granting of any Award to an Employee shall not entitle that Employee to, nor disqualify the Employee from, participation in any other grant of an Award.

5. Stock Subject to the Plan.

5.1 Type of Stock. The stock that may be issued and distributed to Employees in connection with Awards granted under the Plan shall be Common Shares and may be authorized and unissued Common Shares, treasury Common Shares, or Common Shares acquired on the open market specifically for distribution under the Plan, as the Board of Directors may from time to time determine.

5.2 Number of Shares Available. Subject to adjustment as provided in Section 5.3 and Section 14 of this Plan, the number of Common Shares that may be issued or transferred (a) upon the exercise of Options or Stock Appreciation Rights, (b) as Restricted Stock and released from a substantial risk of forfeiture thereof, (c) in payment of Restricted Stock Units, (d) in payment of Performance Shares or Performance Units that have been earned, (e) in payment of dividend equivalents paid with respect to Awards made under the Plan or (f) in payment of any other award pursuant to this Plan, following the Effective Date, shall not exceed in the aggregate 70,000,000 Common Shares, plus any shares described in Section 5.3.

5.3 Adjustments. The number of shares available in Section 5.2 above shall be adjusted to account for shares relating to any awards that expire or are forfeited or that are transferred, surrendered or relinquished upon the payment of any exercise price by the transfer to the Corporation of Common Shares or upon satisfaction of any withholding amount, regardless of whether such expiration, forfeiture, transfer, surrender or relinquishment relates to awards that were granted under this Plan or any other plan of the Corporation, or before or after the Effective Date. Upon payment in cash of the benefit provided by any award granted under this Plan or under any other plan of the Corporation, at any time before or after the Effective Date, any shares that were covered by that award shall again be available for issue or transfer hereunder.

5.4 Limits. Notwithstanding anything in this Section 5, or elsewhere in this Plan to the contrary and subject to adjustment as provided in Section 14 of this Plan:

 

  (a) the aggregate number of Common Shares actually issued or transferred by the Corporation upon the exercise of Incentive Stock Options shall not exceed 15,000,000 Common Shares;

 

  (b) no Employee shall be granted Options or Stock Appreciation Rights, in the aggregate, for more than 1,000,000 Common Shares during any one calendar year;

 

  (c) the number of Common Shares that may be issued as Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units, shall not in the aggregate exceed 14,000,000 Common Shares; and

 

  (d) in no event shall any Employee in any calendar year receive Awards of Performance Shares, Performance Units and Restricted Stock with Performance Goals having an aggregate maximum value as of their respective dates of grant in excess of $7,500,000.


6. Stock Options.

6.1 Type and Date of Grant of Options.

 

  (a) The Award Instrument pursuant to which any Incentive Stock Option is granted shall specify that the Option granted thereby shall be treated as an Incentive Stock Option. The Award Instrument pursuant to which any Nonqualified Option is granted shall specify that the Option granted thereby shall not be treated as an Incentive Stock Option.

 

  (b) The day on which the Committee authorizes the grant of an Incentive Stock Option shall be the date on which that Option is granted.

 

  (c) The day on which the Committee authorizes the grant of a Nonqualified Option shall be considered the date on which that Option is granted, unless the Committee specifies a later date.

 

  (d) The Committee reserves the discretion after the date of grant of an Option to provide for (i) the payment of a cash bonus at the time of exercise; (ii) the availability of a loan at exercise; or (iii) the right to tender in satisfaction of the Exercise Price nonforfeitable, unrestricted Common Shares, which are already owned by the Employee and have a value at the time of exercise that is equal to the Exercise Price.

6.2 Exercise Price. The Exercise Price under any Option shall be not less than the Fair Market Value of the Common Shares subject to the Option on the date the Option is granted.

6.3 Option Expiration Date. The Option Expiration Date under any Option shall be not later than ten years from the date on which the Option is granted.

6.4 Exercise of Options.

 

  (a) Except as otherwise provided in Section 11, an Option may be exercised only while the Employee to whom the Option was granted is in the employ of the Corporation or of a Subsidiary. Subject to this requirement, each Option shall become exercisable in one or more installments at the time or times provided in the Award Instrument evidencing the Option. Once any portion of an Option becomes exercisable, that portion shall remain exercisable until expiration or termination of the Option. An Employee to whom an Option is granted or, with respect to Nonqualified Options, the Employee’s Transferee may exercise the Option from time to time, in whole or in part, up to the total number of Common Shares with respect to which the Option is then exercisable, except that no fraction of a Common Share may be purchased upon the exercise of any Option.

 

  (b) The Award Instrument may provide that specified Performance Goals must be achieved as a condition to the exercise of any Option.

 

  (c) An Employee or, with respect to Nonqualified Options, any Transferee electing to exercise an Option shall deliver to the Corporation (i) the Exercise Price payable in accordance with Section 6.5 and (ii) written notice of the election that states the number of whole Common Shares with respect to which the Employee is exercising the Option.

 

  (d) The exercise of an Option will result in the cancellation on a share-by-share basis of any Tandem SAR and Limited SAR authorized under Section 7 of this Plan.

6.5 Payment For Common Shares. Upon exercise of an Option by an Employee or, with respect to Nonqualified Options, any Transferee, the Exercise Price shall be payable by the Employee or Transferee in cash or in such other form of consideration as the Committee determines may be accepted, including without limitation, securities or other property, or any combination of cash, securities or other property or, to the extent permitted by applicable law, by delivery by the Employee or Transferee (with the written notice of election to exercise) of irrevocable instructions to a broker registered under the 1934 Act promptly to deliver to the Corporation the amount of sale or loan proceeds to pay the Exercise Price. The Committee, in its sole discretion, may grant to an Employee or, with respect to Nonqualified Options, any Transferee the right to transfer Common Shares acquired upon the exercise of a part of an Option in payment of the Exercise Price payable upon immediate exercise of a further part of the Option.


6.6 Conversion of Incentive Stock Options. The Committee may at any time in its sole discretion take such actions as may be necessary to convert any outstanding Incentive Stock Option (or any installments or portions of installments thereof) into a Nonqualified Option with or without the consent of the Employee to whom that Incentive Stock Option was granted and whether or not that Employee is an Employee at the time of the conversion.

6.7 Dividend Equivalents. The Committee may, at or after the date on which an Option is granted, provide for the payment of dividend equivalents to the holder of the Option on either a current or deferred or contingent basis or may provide that such equivalents will be credited against the Exercise Price.

7. Stock Appreciation Rights.

7.1 Grant of SARs.

 

  (a) The Committee may authorize the granting (i) to any holder of an Option, of Tandem SARs and Limited SARs in respect of Options granted hereunder, and (ii) to any Employee, of Free-Standing SARs. A Tandem SAR may be granted only in connection with an Option. A Tandem SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. A Tandem SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion. Similarly, a Limited SAR may be granted only in connection with an Option. A Limited SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. A Limited SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion. A Free-Standing SAR is not granted in tandem with an Option.

7.2 Exercise of SARs.

 

  (a) An Employee electing to exercise an SAR shall deliver written notice to the Corporation of the election identifying the SAR and, with respect to Tandem SARs and Limited SARs, the related Option with respect to which the Tandem SAR or Limited SAR was granted to the Employee, and specifying the number of whole Common Shares with respect to which the Employee is exercising the SAR. Upon exercise of a Tandem SAR or Limited SAR, the related Option shall be deemed to be surrendered to the extent that the Tandem SAR or Limited SAR is exercised.

 

  (b) The Committee may specify in the Award Instrument pursuant to which SARs are granted that the amount payable on exercise of an SAR may not exceed a maximum specified by the Committee in the Award Instrument.

 

  (c) No SAR granted under this Plan may be exercised more than ten years from the date on which the SAR is granted.

 

  (d) The Committee may provide in the Award Instrument to which SARs are granted for the payment to the holder of the SAR of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis.

 

  (e) SARs may be exercised only (i) on a date when the SAR is “in the money” (i.e., when there would be positive consideration received upon exercise of the SAR), (ii) with respect to Tandem SARs and Limited SARs, at a time and to the same extent as the related Option is exercisable, (iii) with respect to Tandem SARs and Limited SARs, unless otherwise provided in the relevant Award Instrument, by surrender to the Corporation, unexercised, of the related Option or any applicable portion thereof, and (iv) in compliance with all restrictions set forth in or specified by the Committee.

 

  (f) The Committee may specify in the Award Instrument pursuant to which any SAR is granted waiting periods and restrictions on permissible exercise periods in addition to the restrictions on exercise set forth in this Section 7.


  (g) The Committee may specify in the Award Instrument pursuant to which SARs are granted Performance Goals that must be achieved as a condition of the exercise of such SARs.

 

  (h) Each Award Instrument pursuant to which Free-Standing SARs are granted shall specify in respect of each Free-Standing SAR, a Base Price, which shall be equal to or greater than the Fair Market Value of the Common Shares subject to each Free-Standing SAR on the date the Free-Standing SAR is granted.

7.3 Payment for SARs. The amount payable upon exercise of an SAR may be paid by the Corporation in cash or in whole Common Shares (taken at their Fair Market Value at the time of exercise of the SAR) or in a combination of cash and whole Common Shares and may either grant to the Employee or retain in the Committee the right to elect among those alternatives; provided, however, that in no event shall the total number of Common Shares that may be paid to an Employee pursuant to the exercise of a Tandem SAR or Limited SAR exceed the total number of Common Shares subject to the related Option.

7.4 Termination, Amendment, or Suspension of SARs. SARs shall terminate and may no longer by exercised upon the first to occur of (a) with respect to Tandem SARs and Limited SARs, the exercise or termination of the related Option, (b) any termination date specified by the Committee at the time of grant of the SAR, or (c) with respect to Tandem SARs and Limited SARs, the transfer by the Employee of the related Option. In addition, the Committee may in its sole discretion at any time before the occurrence of a Change of Control amend, suspend, or terminate any SAR theretofore granted under the Plan without the holder’s consent; provided that, in the case of amendment, no provision of the SAR, as amended, shall be in conflict with any provision of the Plan.

8. Restricted Stock.

8.1 Conditions on Restricted Stock.

 

  (a) In addition to the restrictions on disposition of Restricted Stock during the Restriction Period and the requirement to offer Restricted Stock to the Corporation if the Employee’s employment terminates during the Restriction Period, the Committee may provide in the Award Instrument with respect to any Award of Restricted Stock other restrictions, conditions, and contingencies, which other restrictions, conditions, and contingencies, if any, may relate to, in addition to such other matters as the Committee may deem appropriate, the achievement of Performance Goals, the Employee’s personal performance, corporate performance, or the performance of any subunit of the Corporation or any Subsidiary, in each case measured in such manner as may be specified by the Committee. The Committee may impose different restrictions, conditions, and contingencies on separate Awards of Restricted Stock granted to different Employees, whether at the same or different times, and on separate Awards of Restricted Stock granted to the same Employee, whether at the same or different times. The Committee may specify a single Restriction Period for all of the Restricted Stock subject to any particular Award Instrument or may specify multiple Restriction Periods so that the restrictions with respect to the Restricted Stock subject to the Award will expire in stages according to a schedule specified by the Committee and set forth in the Award Instrument.

 

  (b) The Committee may specify in the Award Instrument pursuant to which the Restricted Stock is granted, that any or all dividends or other distributions paid on Restricted Stock during the Restriction Period be automatically deferred and reinvested in additional shares of Restricted Stock, which may be subject to the same restrictions as the underlying Award.

 

  (c) If so directed by the Committee, all certificates representing Restricted Stock may be held in custody by the Corporation until all restrictions thereon shall have lapsed, together with a stock power or powers executed by the Employee in whose name such certificates are registered, endorsed in blank and covering such Common Shares.

8.2 Payment for Restricted Stock. Each Employee to whom an Award of Restricted Stock is made shall pay the Acquisition Price, if any, with respect to that Restricted Stock to the Corporation not later than 30 days after the delivery to the Employee of the Award Instrument with respect to that Restricted Stock. If any Employee fails to pay any Acquisition Price with respect to an Award of Restricted Stock within that 30 day period, the Employee’s right under that Award shall be forfeited.


8.3 Rights as a Shareholder. Upon payment by an Employee in full of the Acquisition Price for Restricted Stock under an Award, the Employee shall have all of the rights of a shareholder with respect to the Restricted Stock, including voting and dividend rights, subject only to such restrictions and requirements referred to in Section 8.1 as may be incorporated in the Award Instrument with respect to that Restricted Stock.

9. Restricted Stock Units.

9.1 Grant of Restricted Stock Units.

 

  (a) Each grant or sale of Restricted Stock Units shall provide that the Restricted Stock Units shall be subject to deferral and a risk of forfeiture, as determined by the Committee on the date the Restricted Stock Units are granted, and may provide for the earlier lapse or other modification of such period in the event of a Change in Control.

 

  (b) Each Employee to whom an Award of Restricted Stock Units is made shall pay the Acquisition Price, if any, with respect to those Restricted Stock Units to the Corporation not later than 30 days after delivery to the Employee of the Award Instrument with respect to the Restricted Stock Units being granted. If any Employee fails to pay any Acquisition Price with respect to an Award of Restricted Stock Units within that 30 day period, the Employee’s right under that Award shall be forfeited.

9.2 Payment for Restricted Stock Units. The Corporation shall pay each Employee who is entitled to payment for Restricted Stock Units an amount for those Restricted Stock Units (a) in cash, (b) in Common Shares, or (c) any combination of the foregoing, and may either grant to the Employee or retain in the Committee the right to elect among those alternatives.

9.3 Rights as a Shareholder. During any time that the Restricted Stock Units are outstanding, the Employee shall have no right to transfer any rights under his or her Award, shall have no rights of ownership in the Common Shares deliverable upon payment of the Restricted Stock Units and shall have no right to vote them, but the Committee may, at or after the date on which the Restricted Stock Units are granted, authorize the payment of dividend equivalents on such Common Shares underlying the Restricted Stock Units on either a current or deferred or contingent basis, either in cash or in additional Common Shares.

10. Performance Shares and Performance Units.

10.1 Discretion of Committee with Respect to Performance Shares and Performance Units. The Committee shall have full discretion to select the Employees to whom Awards of Performance Shares and Performance Units are made, the number of Performance Shares or Performance Units to be granted to any Employee so selected, the kind and level of the Performance Goals and whether those Performance Goals are to apply to the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary, and the dates on which each Performance Period shall begin and end, and to determine the form and provisions of the Award Instrument to be used in connection with any Award of Performance Shares or Performance Units.

10.2 Conditions to Payment for Performance Shares and Performance Units.

 

  (a) Unless otherwise provided in the relevant Award Instrument, an Employee must be employed by the Corporation or a Subsidiary on the last day of a Performance Period to be entitled to payment for any Performance Shares or Performance Units.

 

  (b) The Committee may establish, from time to time, one or more formulas to be applied against the Performance Goals to determine whether all, some portion but less than all, or none of the Performance Shares or Performance Units granted with respect to a Performance Period are treated as earned pursuant to any Award. An Employee will be entitled to receive payments with respect to any Performance Shares and Performance Units only to the extent that those Performance Shares or Performance Units, as the case may be, are treated as earned under one or more such formulas.


10.3 Payment for Performance Shares and Performance Units. The Corporation shall pay each Employee who is entitled to payment for Performance Shares or Performance Units earned with respect to any Performance Period an amount for those Performance Shares or Performance Units, as the case may be, (a) in cash, (b) in Common Shares, (c) in Restricted Stock, or (d) any combination of the foregoing, and may either grant to the Employee or retain in the Committee the right to elect among those alternatives. Restricted Stock issued by the Corporation in payment of Performance Shares or Performance Units shall be subject to all the provisions of Section 8.

11. Termination of Employment. After an Employee’s Employment Termination Date, the rules set forth in this Section 11 shall apply. All factual determinations with respect to the termination of an Employee’s employment that may be relevant under this Section 11 shall be made by the Committee in its sole discretion.

11.1 Termination Other Than Upon Death, Disability, or Certain Retirements. Upon any termination of an Employee’s employment for any reason other than the Employee’s retirement (under any retirement plan of the Corporation or of a Subsidiary) as provided in Section 11.2, disability as provided on Section 11.3, or death as provided in Section 11.4:

 

  (a) Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) during the period ending six months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Nonqualified Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options, Tandem SARs and Limited SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, (ii) during the period ending three months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Incentive Stock Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and Tandem SARs and Limited SARs were exercisable by the Employee on the Employment Termination Date, and (iii) during the period ending six months after the Employment Termination Date, but not later than the date any Free-Standing SAR expires, to exercise any Free-Standing SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Free-Standing SARs were exercisable by the Employee on the Employment Termination Date. Notwithstanding the preceding sentence, if within two years after a Change of Control an Employee’s Employment Termination Date occurs other than as a result of a Voluntary Resignation, unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right, during the Extended Period, but not later than the Option Expiration Date or the date of expiration of Free-Standing SARs, as the case may be, to exercise any Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date (even though, in the case of Incentive Stock Options, exercise of those Options more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended). As used in the immediately preceding sentence, the term “Extended Period” means the longer of the period that the Option or SAR would otherwise be exercisable in the absence of the immediately preceding sentence or the period ending with the second anniversary date of the Change of Control and the term “Voluntary Resignation” means that the Employee shall have terminated his or her employment with the Corporation and its Subsidiaries by voluntarily resigning at his or her own instance without having been requested to so resign by the Corporation or its Subsidiaries except that any resignation by the Employee will not be deemed to be a Voluntary Resignation if, after the Change of Control, the Employee’s base salary was reduced or the Employee was required to relocate his or her principal place of employment more than 35 miles;

 

  (b) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price, if any, to the Corporation each Common Share of Restricted Stock and each Restricted Stock Unit held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed; and


  (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

11.2 Termination Due To Certain Retirements. Upon any termination of an Employee’s employment with the Corporation or any Subsidiary under circumstances entitling the Employee to immediate payment of normal retirement or early retirement benefits under any retirement plan of the Corporation or of a Subsidiary (whether the Employee elects to commence or defer receipt of such payment):

 

  (a) Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options, Tandem SARs and Limited SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, (ii) to exercise, from time to time during the period ending three years after the Employment Termination Date, but no later than the Option Expiration Date, any Incentive Stock Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options, Tandem SARs and Limited SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended) and (iii) to exercise, from time to time during the period ending three years after the Employment Termination Date, but not later than the date any Free-Standing SAR expires, any Free-Standing SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Free-Standing SARs were exercisable by the Employee on the Employment Termination Date;

 

  (b) The relevant Award Instrument may provide that the Employee or, with respect to Nonqualified Options, any Transferee will have the right to exercise, from time to time until not later than the expiration of the relevant Award, Nonqualified Stock Options, Incentive Stock Options and SARs to the extent such Options and SARs become exercisable by their terms prior to the expiration of the relevant Award (or such earlier date as specified in the relevant Award Instrument), notwithstanding the fact that such Options and SARs were not exercisable in whole or in part (whether because a condition to exercise had not yet occurred or a specified time period had not yet elapsed or otherwise) on the Employment Termination Date;

 

  (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price, if any, to the Corporation each Common Share of Restricted Stock and each Restricted Stock Unit held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed; and

 

  (d) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

11.3 Termination Due To Disability. Upon any termination of an Employee’s employment due to disability:

 

  (a)

Unless otherwise provided in the relevant Award Instrument, the Employee, the Employee’s attorney in fact or legal guardian or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent those Options, Tandem SARs and Limited SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, (ii) to exercise, from time to time during the period ending three years after the Employment Termination Date, but no later than the


  Option Expiration Date, any Incentive Stock Options and related Tandem SARs and Limited SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and Tandem SARs and Limited SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than one year after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended), and (iii) to exercise, from time to time during the period ending three years after the Employment Termination Date, but not later than the date any Free-Standing SAR expires, any Free-Standing SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Free-Standing SARs were exercisable by the Employee on the Employment Termination Date;

 

  (b) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price, if any, to the Corporation each Common Share of Restricted Stock and each Restricted Stock Unit held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed; and

 

  (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

11.4 Death of an Employee. Upon the death of an Employee while employed by the Corporation or any Subsidiary or within any of the periods referred to in any Section 11.1, 11.2, or 11.3 during which any particular Option or SAR remains potentially exercisable:

 

  (a) Unless otherwise provided in the relevant Award Instrument, if the Option Expiration Date of any Nonqualified Option that had not expired before the Employee’s death would otherwise expire before the first anniversary of the Employee’s death, that Option Expiration Date shall automatically be extended to the first anniversary of the Employee’s death or such other date as provided in the relevant Award Instrument provided that the Option Expiration Date shall not be extended beyond the date that is ten years from the date on which the Option was granted;

 

  (b) Unless otherwise provided in the relevant Award Instrument, the Employee’s executor or administrator, the person or persons to whom the Employee’s rights under any Option or SAR are transferred by will or the laws of descent and distribution or, with respect to Nonqualified Options, any Transferee shall have the right to exercise, from time to time during the period ending three years after the date of the Employee’s death, but not later than the expiration of the relevant Award, any Options and SARs that were outstanding on the date of the Employee’s death, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the date of the Employee’s death;

 

  (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price, if any, to the Corporation each Common Share of Restricted Stock and each Restricted Stock Unit held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed; and

 

  (d) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

12. Acceleration Upon Change of Control. Unless otherwise specified in the relevant Award Instrument, upon the occurrence of a Change of Control of the Corporation, each Award theretofore granted to any Employee that then remains outstanding shall be automatically treated as follows: (a) any outstanding Option shall become immediately exercisable in full, (b) Tandem SARs and Limited SARs related to any such Options shall also become immediately exercisable in full, (c) any outstanding Free-Standing SAR shall become exercisable in full, (d) the Restriction Period with respect to all outstanding Awards of Restricted Stock shall immediately terminate, (e) the restrictions, conditions or contingencies on any Restricted Stock Units shall immediately terminate, and (f) the restrictions, conditions, or contingencies on any Performance Shares and Performance Units shall be


modified in such manner as the Committee may specify to give the Employee the benefit of those Performance Shares or Performance Units through the date of Change of Control.

13. Restrictions.

13.1 Assignment and Transfer. Nonqualified Options may not be assigned or transferred (other than by will or by the laws of descent and distribution) unless the Committee, in its sole discretion, determines to allow such assignment or transfer and, if the Committee determines to allow any such assignment or transfer, the Transferee shall have the power to exercise such Nonqualified Option in accordance with the terms of the Award and the provisions of this Plan. No Incentive Stock Option, SAR, Restricted Stock during the Restriction Period, Restricted Stock Unit or Performance Share may be transferred other than by will or by the laws of descent and distribution. During an Employee’s lifetime, only the Employee (or in the case of incapacity of an Employee, the Employee’s attorney in fact or legal guardian) may exercise any Incentive Stock Option or SAR.

13.2 Further Restrictions. The Committee may specify at the date of grant of any Award that part or all of the Common Shares that are (i) to be issued or transferred by the Corporation upon the exercise of Options or SARs, upon the termination of any period of deferral applicable to Restrict Stock Units or upon payment under any grant of Performance Shares or Performance Units or (ii) no longer subject to the Restriction Period, will be subject to further restrictions on transfer.

14. Adjustment Upon Changes in Common Shares. Automatically and without Committee action, in the event of any stock dividend, stock split, or share combination of the Common Shares, or by appropriate Committee action in the event of any reclassification, recapitalization, merger, consolidation, other form of business combination, liquidation, or dissolution involving the Corporation or any spin-off or other distribution to shareholders of the Corporation (other than normal cash dividends), appropriate adjustments to (a) the maximum number of Common Shares that may be issued under the Plan pursuant to Section 5, the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options as provided in Section 5, the maximum number of Common Shares that may be issued under the Plan as Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units, and the maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year or calendar years as provided in Section 5, and (b) the number and kind of shares subject to, the price per share under, and the terms and conditions of each then outstanding Award shall be made to the extent necessary and in such manner that the benefits of Employees under all then outstanding Awards shall be maintained substantially as before the occurrence of such event. Any such adjustment shall be conclusive and binding for all purposes of the Plan and shall be effective, in the event of any stock dividend, stock split, or share combination, as of the date of such stock dividend, stock split, or share combination, and in all other cases, as of such date as the Committee may determine. In the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for any or all outstanding Awards under this Plan, such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all Awards so replaced.

15. Purchase For Investment. Each person acquiring Common Shares pursuant to any Award may be required by the Corporation to furnish a representation that he or she is acquiring the Common Shares so acquired as an investment and not with a view to distribution thereof if the Corporation, in its sole discretion, determines that such representation is required to insure that a resale or other disposition of the Common Shares would not involve a violation of the Securities Act of 1933, as amended, or of applicable blue sky laws. Any investment representation so furnished shall no longer be applicable at any time such representation is no longer necessary for such purposes.

16. Withholding of Taxes. The Corporation will withhold from any payments of cash made pursuant to the Plan such amount as is necessary to satisfy all applicable Federal, state, and local withholding tax obligations. The Committee may, in its discretion and subject to such rules as the Committee may adopt from time to time, permit or require an Employee (or other person exercising an Option with respect to withholding taxes upon exercise of such Option) to satisfy, in whole or in part, any withholding tax obligation that may arise in


connection with the grant of an Award, the lapse of any restrictions with respect to an Award, the acquisition of Common Shares pursuant to any Award, or the disposition of any Common Shares received pursuant to any Award by having the Corporation hold back some portion of the Common Shares that would otherwise be delivered pursuant to the Award or by delivering to the Corporation an amount equal to the withholding tax obligation arising with respect to such grant, lapse, acquisition, or disposition in (a) cash, (b) Common Shares, or (c) such combination of cash and Common Shares as the Committee may determine. The Fair Market Value of the Common Shares to be so held back by the Company or delivered by the Employee shall be determined as of the date on which the obligation to withhold first arose.

17. Harmful Activity. If an Employee shall engage in any “harmful activity” prior to or within six months after termination of employment with Key, then (a) any shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units held by the Employee that have vested, (b) any Profits realized upon the exercise of any Covered Option or SAR and (c) any Profits realized upon the sale of any vested shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, on or after one year prior to the termination of employment with Key shall inure to the Corporation. The aforementioned restriction shall not apply in the event that employment with Key terminates within two years after a Change of Control of the Corporation if any of the following have occurred: a relocation of an Employee’s principal place of employment more than 35 miles from an Employee’s principal place of employment immediately prior to the Change of Control, a reduction in an Employee’s base salary after a Change of Control, or termination of employment under circumstances in which an Employee is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement, employment agreement, or severance or separation pay plan. If any vested shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units or any Profits realized upon the exercise of any Covered Option or SAR or upon the sale of any vested shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units inure to the benefit of the Corporation in accordance with the first sentence of this paragraph, an Employee shall provide all such forfeited Awards and pay all such Profits to the Corporation within 30 days after first engaging in any harmful activity and all Awards that have not yet vested and all unexercised Covered Options or SARs shall immediately be forfeited and canceled. Consistent with the provisions of Section 3 of the Plan, the determination by the Committee as to whether an Employee engaged in “harmful activity” prior to or within six months after termination of employment with Key shall be final and conclusive. Unless otherwise provided in the relevant Award Instrument, the provisions of Section 17 shall apply to all Awards made under the Plan.

A “harmful activity” shall have occurred if an Employee shall do any one or more of the following:

 

  (a) Use, publish, sell, trade or otherwise disclose Non-Public Information of Key unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to Key.

 

  (b) After notice from the Corporation, fail to return to Key any document, data, or thing in an Employee’s possession or to which an Employee has access that may involve Non-Public Information of Key.

 

  (c) After notice from the Corporation, fail to assign to Key all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property.

 

  (d) After notice from the Corporation, fail to agree to do any acts and sign any document reasonably requested by Key to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, the signing of patent applications and assignments thereof.

 

  (e) Upon an Employee’s own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, solicit or entice for employment or hire any Employee of Key.

 

  (f)

Upon an Employee’s own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, call upon, solicit, or do business with (other than business which does not compete with any business conducted by Key) any customer of Key an Employee called upon, solicited,


  interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while employed at Key unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom an Employee should have reasonably known was a customer of Key.

 

  (g) Upon an Employee’s own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, engage in any business activity in competition with Key in the same or a closely related activity that an Employee was engaged in for Key during the one year period prior to the termination of employment.

For purposes of this Section 17:

“Covered Option or SAR” means any Option or SAR granted under this Plan unless the granting resolution expressly excludes the Option or SAR from the provisions of this Section 17.

“Intellectual Property” shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing.

“Key” shall mean the Corporation and its Subsidiaries collectively.

“Non-Public Information” shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as Key, and that of its customers or suppliers, and that are not generally known by the public.

“Profit” shall mean, (1) with respect to any Covered Option or SAR, the spread between the Fair Market Value of a Common Share on the date of exercise and the exercise price or the Base Price, as the case may be, multiplied by the number of shares exercised under the Covered Option or SAR; and (2) with respect to any shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, any profit realized upon the sale of any Common Shares that were acquired upon the vesting of such Awards.

18. Awards in Substitution for Awards Granted by Other Companies. Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, may be granted under the Plan in substitution for awards held by employees of a company who become Employees of the Corporation or a Subsidiary as a result of the merger or consolidation of the employer company with the Corporation or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of the assets of the employer company, or the acquisition by the Corporation or a Subsidiary of stock of the employer company as a result of which it becomes a Subsidiary. The terms, provisions, and benefits of the substitute Awards so granted may vary from the terms, provisions and benefits set forth in or authorized by the Plan to such extent as the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the terms, provisions, and benefits of the awards in substitution for which they are granted.

19. Legal Requirements. No Awards shall be granted and the Corporation shall have no obligation to make any payment under the Plan, whether in Common Shares, cash, or any combination thereof, unless such payment is, without further action by the Committee, in compliance with all applicable Federal and state laws and regulations, including, without limitation, the United States Internal Revenue Code and Federal and state securities laws.

20. Duration and Termination of the Plan. The Plan shall become effective and shall be deemed to have been adopted on the Effective Date; provided, however, that if the Plan is not approved by the affirmative vote of the holders of the requisite number of outstanding Common Shares on or prior to December 31, 2004, the Plan shall be void and of no further effect. The Plan shall remain in effect until the date that is 10 years from the Effective Date. All grants made on or prior to such date of termination will continue in effect thereafter subject to the terms thereof and of this Plan.


21. Miscellaneous.

21.1 Amendments. The Board of Directors, or a duly authorized committee thereof, may alter or amend the Plan from time to time prior to its termination in any manner the Board of Directors, or such duly authorized committee, may deem to be in the best interests of the Corporation and its shareholders, except that no amendment may be made without shareholder approval if shareholder approval is required by any applicable securities law or tax law, or is required by the rules of any exchange on which the Common Shares of the Corporation are traded or, if the Common Shares are not listed on an exchange, by the rules of the registered national securities association through whose inter-dealer quotation system the Common Shares are quoted. The Committee shall have the authority to amend these terms and conditions applicable to outstanding Awards (a) in any case where expressly permitted by the terms of the Plan or of the relevant Award Instrument or (b) in any other case with the consent of the Employee to whom the Award was granted. Except as expressly provided in the Plan or in the Award Instrument evidencing the Award, the Committee may not, without the consent of the holder of an Award granted under the Plan, amend the terms and conditions applicable to that Award in a manner adverse to the interests of the Employee.

21.2 Deferral. The Committee also may permit Employees to elect to defer the issuance of Common Shares or the settlement of Awards in cash under the Plan pursuant to such rules, procedures or programs as it may establish for purposes of this Plan. The Committee also may provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferral amounts.

21.3 Conditions. The Committee may condition the grant of any Award or combination of Awards authorized under this Plan on the surrender or deferral by the Employee of his or her right to receive a cash bonus or other compensation otherwise payable by the Corporation or a Subsidiary to the Employee.

21.4 Acceleration. In case of termination of employment by reason of death, disability or normal or early retirement, or in the case of hardship or other special circumstances, of an Employee who holds an Option or SAR not immediately exercisable in full, or any Restricted Stock as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any Restricted Stock Units as to which the any period of deferral has not been completed, or any Performance Shares or Performance Units which have not been fully earned, or who holds Common Shares subject to any transfer restriction imposed pursuant to Section 13(b) of this Plan, the Committee may, in its sole discretion, accelerate the time at which such Option or SAR may be exercised or the time at which such substantial risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such period of deferral will end or the time at which such Performance Shares or Performance Units will be deemed to have been fully earned or the time when such transfer restriction will terminate or may waive any other limitation or requirement under any such Award.

22. Plan Noncontractual. Nothing herein contained shall be construed as a commitment to or agreement with any person employed by the Corporation or a Subsidiary to continue such person’s employment with the Corporation or the Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the employment or the annual rate of compensation of any such person for any period. All Employees shall remain subject to discharge to the same extent as if the Plan had never been put into effect.

23. Interest of Employees. Any obligation of the Corporation under the Plan to make any payment at any future date merely constitutes the unsecured promise of the Corporation to make such payment from its general assets in accordance with the Plan, and no Employee shall have any interest in, or lien or prior claim upon, any property of the Corporation or any Subsidiary by reason of that obligation.

24. Fractional Shares. The Corporation will not be required to issue any fractional Common Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash.


25. Foreign Employees. In order to facilitate the making of any grant or combination of grants under this Plan, the Committee may provide for such special terms for awards to Employees who are foreign nationals or who are employed by the Corporation or any Subsidiary outside of the United States of America as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to or amendments, restatements or alternative versions of this Plan as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for any other purpose, and the Secretary or other appropriate officer of the Corporation may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements, amendments or restatements, however, will include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Corporation.

26. Claims of Other Persons. The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable right against the Corporation or any Subsidiary, their officers, employees, agents, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.

27. Absence of Liability. No member of the Board of Directors of the Corporation or a Subsidiary, of the Committee, of any other committee of the Board of Directors, or any officer or Employee of the Corporation or a Subsidiary shall be liable for any act or action under the Plan, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, or except in circumstances involving his bad faith or willful misconduct, for anything done or omitted to be done by himself.

28. Severability. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.

29. Governing Law. The provisions of the Plan shall be governed and construed in accordance with the internal substantive laws of the State of Ohio.

Exhibit 10.20

AMENDMENT

TO THE KEYCORP

DIRECTOR DEFERRED

COMPENSATION PLAN

WHEREAS , KeyCorp has established the KeyCorp Director Deferred Compensation Plan (the “Plan”), a nonqualified plan of deferred compensation for Directors of KeyCorp, and

WHEREAS , the Board of Directors of KeyCorp has authorized amendments to the Plan, and

WHEREAS , in conjunction with the enactment of the American Jobs Creation Act of 2004, the Board of Directors of KeyCorp has determined it desirable to preserve Plan participants’ earned and vested Plan benefits in accordance with the law in effect prior to the enactment of the American Jobs Creation Act of 2004 and accordingly has authorized the freezing of the Plan to preserve such benefits as of December 31, 2004. The Board of Directors of KeyCorp has accordingly directed the execution of this Amendment to effectuate the expressed intent of the Board.

NOW, THEREFORE , pursuant to such action of the Board, the Plan is hereby frozen with regard to any additional accruals, deferrals, and contributions to the Plan after December 31, 2004 as follows:

 

  1. A new Article VI has been added to the Plan to provide the following:

ARTICLE VI

AMENDMENT TO FREEZE

6.1 No New Plan Deferrals . As of January 1, 2005 the Plan shall be frozen with regard to all new accruals, deferrals, and contributions to the Plan after December 31, 2004 and all Participants’ Plan benefits that are earned and vested as of December 31, 2004 shall be administered in accordance with the terms of the Plan as frozen and with the requirements of the law in effect prior to the enactment of Section 409A of the Code.”

 

  2. The amendment set forth in Paragraphs 1 shall be effective as of December 31, 2004.

 

  3. Except as otherwise amended herein, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF , KeyCorp has caused this Amendment to the Plan to be executed by its duly authorized officer as of this 28 th day of December 2004.

 

KEYCORP
By:  

/s/ Thomas E. Helfrich

Title:   Executive Vice President

Exhibit 10.26

RESTATED AMENDMENT

TO THE KEYCORP

EXCESS CASH BALANCE PENSION PLAN

WHEREAS , KeyCorp has established the KeyCorp Excess Cash Balance Pension Plan (the “Plan”), a nonqualified plan of deferred compensation for a certain select group of KeyCorp employees, and

WHEREAS , the Board of Directors of KeyCorp has authorized its Compensation Committee to permit amendments to the Plan, and

WHEREAS , in conjunction with the enactment of the American Jobs Creation Act of 2004, the Compensation Committee of the Board of Directors of KeyCorp determined it desirable to preserve those earned and vested Plan benefits of December 31, 2004 in accordance with the law in effect prior to the enactment of the American Jobs Creation Act of 2004, and accordingly, has authorized the freezing of the Plan to preserve such vested Plan benefits as of December 31, 2004, and

WHEREAS , to effectuate a simplified administration of those December 31, 2004 vested and frozen Plan benefits in accordance with the laws in effect prior to the enactment of the Act, as well as to comply with the requirements of the Act with regard to those participant Plan benefits that have not vested as of December 31, 2004, the Compensation Committee has accordingly directed the establishment of a KeyCorp Second Excess Cash Balance Pension Plan.

NOW, THEREFORE , pursuant to such action of the Compensation Committee, the Amendment to the Plan is hereby restated to clarify that in conjunction with the freezing of the Plan, participants’ not vested Plan benefits as of December 31, 2004 shall be transferred to the KeyCorp Second Excess Cash Balance Pension Plan effective January 1, 2005, as follows:

 

  1. A new Article XI has been added to the Plan to provide the following:

“ARTICLE XI

AMENDMENT TO FREEZE

11.1 No New Accruals, Deferrals, and Contributions Under the Plan . As of January 1, 2005 the Plan shall be frozen with regard to all new accruals, deferrals, and contributions to the Plan after December 31, 2004 and all Participants’ Plan benefits that are earned and vested as of December 31, 2004 shall be administered in accordance with the terms of the Plan as frozen and with the requirements of the law in effect prior to the enactment of Section 409A of the Code. In conjunction with the foregoing, all Participants’ not vested Plan benefits as of December 31, 2004 shall be transferred to the KeyCorp Second Excess Cash Balance Pension Plan effective January 1, 2005 and shall be administered in accordance with the requirements of the KeyCorp Second Excess Cash Balance Pension Plan.

 

  2. The amendment set forth in Paragraphs 1 shall be effective as of December 31, 2004.

 

  3. Except as otherwise amended herein, the Plan shall remain in full force and effect.

IN WITNESS WHEREOF , KeyCorp has caused this Restated Amendment to the Plan to be executed by its duly authorized officer on January 20, 2005, to be effective as of December 28, 2004.

 

KEYCORP
By:  

/s/ Thomas E. Helfrich

Title:   Executive Vice President

Exhibit 10.28

KEYCORP

SECOND EXCESS CASH BALANCE PENSION PLAN

ARTICLE I

THE PLAN

The KeyCorp Second Excess Cash Balance Pension Plan (“Plan”), as originally established December 28, 2004 to be effective January 1, 2005, and thereafter amended and restated as of December 31, 2007 and December 31, 2008, is hereby restated to reflect the December 31, 2009 Plan amendment to freeze all new additional accruals under the Plan. The Plan, as structured, is designed to provide certain select employees of KeyCorp with a Plan benefit that is generally equal to the benefit that the employee would have been eligible to receive under the KeyCorp Cash Balance Pension Plan but for the compensation and accrual limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code of 1986, as amended, when combined with any vested benefit provided to the employee under the KeyCorp Excess Cash Balance Pension Plan. It is the intention of the Plan and it is the understanding of those employees covered under the Plan that the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. It is also the understanding of those employees covered under the Plan that the Plan will be administered in accordance with the requirements of Section 409A of the Code.

ARTICLE II

DEFINITIONS

2.1 Meanings of Definitions. As used herein, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context:

 

  (a) “Beneficiary” shall mean the person, persons or entity entitled to receive the Participant’s Plan benefits, if any, that are payable after a Participant’s death.

 

  (b) “Credited Service” shall be calculated by measuring the period of service commencing on the Participant’s Employment Commencement Date and Re-Employment Commencement Date, if applicable, and ending on the Participant’s Severance from Service Date. Credited Service shall be computed based on each full month that the Employee is employed by an Employer.

 

  (c) “Compensation” of a Participant for any Plan Year or any partial Plan Year in which the Participant incurs a Severance From Service Date shall mean the entire amount of compensation paid to such Participant during such period by reason of his employment as an Employee, as reported for federal income tax purposes, or which would have been paid except for (1) the timing of an Employer’s payroll processing operations, (2) the Participant’s written election to defer the receipt of compensation during the Plan Year, (3) the provisions of the KeyCorp 401(k) Savings Plan, or (4) the provisions of the KeyCorp Flexible Benefits Plan and/or any transportation reimbursement plan for the applicable Plan year provided, however, the term shall not include:

 

  (i) any amount attributable to the Participant’s exercise of stock appreciation rights, restricted stock and stock units and the amount of any gain to the Participant upon the exercise of stock options;

 

  (ii) any amount attributable to the Participant’s receipt of non-cash remuneration whether or not it is included in the Participant’s income for federal income tax purposes;

 

  (iii) any amount attributable to the Participant’s receipt of moving expenses and any relocation bonus paid to the Participant during the Plan Year;

 

  (iv) any amount attributable to any severance paid by an Employer or the Corporation to the Participant;

 

  (v) any amount attributable to fringe benefits (cash and non-cash);


  (vi) any amount attributable to any bonus or payment made as an inducement for the Participant to accept employment with an Employer;

 

  (vii) any amount attributable to salary deferrals paid to the Participant during the Plan Year, which have been previously included as Compensation under the Plan during the Plan Year or any prior Plan Year;

 

  (viii) any amount paid to the Participant during the Plan Year which is attributable to interest earned on Compensation deferred under a plan of an Employer or the Corporation; and

 

  (ix) any amount paid for any period after the Participant’s Termination or Retirement date.

 

  (x) any amount attributable to deferred cash award payments to the Participant.

For Plan Years beginning on and after January 1, 2006, only that Compensation which is in excess of the compensation limits mandated under Section 401(a)(17) of the Code shall be utilized in determining the Participant’s Excess Pension Benefit under the provisions of Section 3.2 of the Plan. Notwithstanding the foregoing, however, if the Participant is in a benefits designator 85 or below, then only that Compensation which is in excess of the compensation limits mandated under Section 401(a)(17) of the Code up to a Plan Compensation maximum of $500,000 shall be utilized in determining the Participant’s Excess Pension Benefit under the provisions of Section 3.2 hereof.

(d) “Corporation” shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated.

(e) “Disability” shall mean (1) a physical or mental disability which prevents a Participant from performing the duties the Participant was employed to perform for his or her Employer when such disability commenced, (2) has resulted in the Participant’s absence from work for 180 qualifying days, and (3) application has been made for the Participant’s disability coverage under the KeyCorp Long Term Disability Plan, and which constitutes a separation from service under the requirements of Section 409A of the Code.

(f) “Employee” shall mean a common law employee who is employed by an Employer; provided, however, that the term “Employee” shall not include any person who at the time services are performed is not classified as a common law employee by the Employer even though such person may for federal income tax purposes, federal employment tax purposes, or any other purpose be reclassified by the Employer as a common law employee retroactive to when such services were performed by reason of administrative, judicial, regulatory or other governmental action.

(g) “Employer” shall mean KeyCorp and all of its subsidiaries or affiliates unless specifically excluded as an Employer for Plan purposes by written action by an officer of the Corporation. An Employer’s participation shall be subject to any and all conditions and requirements made by the Corporation as the Plan Administrator, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan.

(h) “Excess Pension Benefit” shall mean the vested pension benefit payable pursuant to the terms of this Plan to a Participant meeting the eligibility requirements of Section 3.1 of the Plan.

(i) “Excess Pension Program Benefit” shall mean the Participant’s collective nonqualified pension benefit accrued under the KeyCorp Excess Cash Balance Pension Plan and KeyCorp Second Excess Cash Balance Pension Plan, subject to the terms and conditions of each respective Plan.

(j) “Executive Supplemental Pension Program Benefit” shall mean the Participants’ collective nonqualified pension benefit accrued under the KeyCorp Executive Supplemental Pension Plan and KeyCorp Second Executive Supplemental Pension Plan, subject to the terms and conditions of each respective Plan.

(k) “Interest Credit” shall mean the rate at which a Participant’s Opening Account Balance, as provided for under Section 3.3 of the Plan, is periodically increased on a bookkeeping basis. The Interest Credit rate to be allocated to a Participant’s Opening Account Balance shall mirror the Pension Plan’s Interest Credit rate for each applicable Plan Year.


(l) “Participant” shall mean an Employee who is a participant in the Pension Plan and who is a job grade 86 or above, and is selected by the Corporation to become a Participant in the Plan, and whose participation in the Plan has not been terminated by the Corporation.

(m) “Pension Plan” shall mean the KeyCorp Cash Balance Pension Plan, as the same shall be in effect on the date of a Participant’s Retirement, death, Disability or other termination of employment.

(n) “Retirement” shall mean the termination of employment of a Participant under circumstances in which entitle the Participant to receive an Early Retirement or Normal Retirement Date benefit under the KeyCorp Cash Balance Pension Plan, and which constitutes a separation from service as required under Section 409A of the Code.

(o) “Supplemental Retirement Plan” shall mean the KeyCorp Second Supplemental Retirement Plan (formerly known as the Society Corporation Supplemental Retirement Plan), the KeyCorp Excess Pension Benefit Plan, and the KeyCorp Excess Pension Benefit Plan for Key Executives, with all amendments made thereto.

(p) “Termination” shall mean the voluntary or involuntary and permanent termination of a Participant’s employment from his or her Employer and any other Employer, whether by resignation or otherwise, and which constitutes a separation from service as required under Section 409A of the Code.

All other capitalized and undefined terms used herein shall have the meanings given them in the Pension Plan, unless a different meaning is plainly required by the context.

The masculine gender includes the feminine, and singular references include the plural, unless the context clearly requires otherwise.

ARTICLE III

EXCESS PENSION BENEFIT

3.1 Eligibility . A Participant selected by the Corporation to participate in the Plan shall be eligible for an Excess Pension Benefit hereunder if the Participant (i) terminates employment with an Employer on or after age 55 with five or more years of Credited Service, (ii) is terminated from employment with an Employer in conjunction with his or her Disability, or (iii) dies after completing five years of Credited Service and has a Beneficiary who is eligible for a benefit under the Pension Plan.

A Participant shall also be eligible for an Excess Pension Benefit if the Participant becomes involuntarily terminated from his or her employment with an Employer for reasons other than the Participant’s Discharge for Cause, and (i) as of the Participant’s termination date the Participant has a minimum of twenty-five (25) or more years of Credited Service, (ii) the Participant enters into a written non-solicitation and non-compete agreement with the Employer under terms that are satisfactory to the Employer.

For purposes of this Section 3.1, hereof, the term “Discharge for Cause” shall mean a Participant’s employment termination that is the result of the Participant’s violation of the Employer’s policies, practices or procedures, violation of city, state, or federal law, or failure to perform his or her assigned job duties in a satisfactory manner. The Employer shall determine whether a Participant has had a Discharge for Cause.

Notwithstanding any of the forgoing provisions of this Section 3.1, however, a Participant’s eligibility for an Excess Pension Benefit shall be subject to the requirements of Article V of the Plan.

3.2 Amount of Excess Pension Benefit . The Excess Pension Benefit payable to a Participant shall be in such amount as is required, when added to the excess pension benefit payable in lump sum form to the Participant under the KeyCorp Excess Cash Balance Pension Plan (if any) and the Accrued Benefit payable in lump sum form to the Participant under the Pension Plan as of the Participant’s Retirement or Termination date


to produce a lump sum cash aggregate benefit equal to the benefit which would have been payable under the Pension Plan formula in lump sum form to the Participant if the limitations of Section 401(a)(17) of the Code and the limitations of Section 415 of the Code had not been in effect. For purposes of this Section 3.2 hereof, the term “Pension Plan formula” means the method of calculating a Participant’s pension benefit as reflected in Article IV of the Pension Plan and shall not include any Predecessor Plan Grandfathered Benefits formula.

3.3 Opening Account Balance . Effective January 1, 2005, Participants in the frozen KeyCorp Excess Cash Balance Pension Plan who as of December 31, 2004 were not vested in their Excess Cash Balance Pension Plan benefit shall have their accrued but not vested benefit transferred to this Plan and reflected in a bookkeeping opening account balance (“Opening Account Balance”) established for the Participant. Such Opening Account Balance shall be credited with Interest Credit as of the last day of each calendar quarter, based on the value of the Participant’s Opening Account Balance as of the first day of the applicable quarter. A Participant’s entitlement to this Opening Account Balance shall be governed by the eligibility provisions of Section 3.1 of this Plan, and the value of the Opening Account Balance shall be added to and become a part of such Participant’s Excess Pension Benefit, if any, which shall be payable in accordance with the terms of this Plan. The establishment of the Participant’s Plan Opening Account Balance shall terminate the Participant’s entitlement to any benefit under the frozen KeyCorp Excess Cash Balance Pension Plan.

ARTICLE IV

PAYMENT OF EXCESS PENSION BENEFIT

4.1 Immediate Payment Upon Termination or Retirement of the Participant. Subject to the provisions of Section 4.2, Section 4.4, and Section 4.5 hereof, a Participant shall receive an immediate distribution of his or her Excess Pension Benefit which shall be made within 90 days following the Participant’s (1) attainment of age 55, and (2) upon the Participant’s Termination or Retirement. Such Excess Pension Benefit shall be paid in the form of a single life annuity, unless the Participant elects in writing, a minimum of sixty days prior to the Participant’s distribution date to receive his or her distribution under a different form of payment that is actuarially equivalent to the Participant’s Excess Pension Benefit when paid as a single life annuity payment. The forms of payment from which a Participant may elect shall be identical to those forms of payment provided under the Pension Plan, provided however, that the lump sum payment option available under the Pension Plan shall not be a form of distribution available under this Plan. Such payment method, once elected by the Participant, shall be irrevocable.

In calculating the Participant’s actuarially equivalent form of distribution the Corporation shall rely upon calculations made by independent actuaries for the Pension Plan, who shall apply the actuarial assumptions and interest rate then in use under the Pension Plan for converting to the form of payment elected by the Participant.

4.2 Forfeiture of Plan Benefits . Notwithstanding the any other provision of this Article VI, however, if the Participant engages in any Harmful Activity prior to or within twelve months of his or her Termination or Retirement date, then by operation of this Section 4.2 hereof and without any further notice to the Participant all further Excess Pension Benefits shall be immediately forfeited. In the event that a Participant has received a distribution of his or her Excess Pension Benefit, and the Participant engages in any Harmful Activity prior to or within twelve months of his or her Termination or Retirement, then in such event the Participant shall repay to the Corporation the full amount of such distributed Plan benefits within 60 days following the Participant’s receipt of the Corporation’s notice of such Harmful Activity.

The foregoing restrictions shall not apply in the event that the Participant’s employment with an Employer terminates within two years after a Change of Control if any of the following have occurred: a relocation of the Participant’s principal place of employment more than 35 miles from the Participant’s principal place of employment immediately prior to the Change of Control, a reduction in the Participant’s base salary after a Change of Control, or termination of employment under circumstances in which the Participant is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement, employment agreement, or severance or separation pay plan.


The determination by the Corporation as to whether a Participant has engaged in a “Harmful Activity” prior to or within twelve months after the Participant’s Termination or Retirement shall be final and conclusive upon the Participant and upon all other Persons .

For purposes of this Section 4.2, a “Harmful Activity” shall have occurred if the Participant shall do any one or more of the following:

ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp.

(iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property.

(iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof.

(v) Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee.

(vi) Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp.

(vii) Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participant’s employment.

For purposes of this Section 4.2 the term:

“Intellectual Property” shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses.

“Non-Public Information” shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public.

“KeyCorp” shall include KeyCorp, its subsidiaries, and its affiliates.

4.3 Payment Upon Death of the Participant .

(a) Upon the death of a Participant who has met the service requirement of Section 3.1, but who has not yet commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participant’s Beneficiary


the Excess Pension Benefit that the Participant would have been entitled to receive had the Participant retired on his or her date of death and commenced distribution of his or her Excess Pension Benefit. Such Excess Pension Benefit shall be paid in the form of a single life annuity within 90 days following such date of death.

(b) In the event of a Participant’s death after the Participant has commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participant’s Beneficiary only those survivor benefits provided under the form of benefit payment elected by the Participant.

4.4 Distribution of Small Accounts . Notwithstanding any Plan provision other than Section 4.5 hereof, if the value of a Participant’s vested Excess Pension Benefit as of the Participant’s distribution date is under $50,000, such balance shall be distributed to the Participant as a single lump sum distribution as soon as reasonably practicable but in no event later than 90 days following the Participant’s Termination, Disability, Retirement or date of death (provided the Participant has attained age 55).

4.5 Payment Limitation for Key Employees . Notwithstanding any other provision of the Plan to the contrary, in the event that the Participant constitutes a “key” employee of the Corporation, (as that term is defined in accordance with Section 416(i) of the Code without regard to paragraph (5) thereof), the distribution of the Participant’s Plan benefit shall not begin before the first day of the seventh month following the Participant’s date of separation from service (or, if earlier, the date of the Participant’s death). To the extent that an amount is deferred under the requirements of this Section 4.5 until the first business day of the seventh month following the Participant’s separation from service date, the payments to which the Participant would otherwise have been entitled during the first six months following the Participant’s separation from service date shall be accumulated and paid to the Executive on the first business day of the seventh month. The term “key employee” and the term “separation from service” shall be defined for Plan purposes in accordance with the requirements of Section 409A of the Code and applicable regulations issued thereunder.

ARTICLE V

DISTRIBUTION OF LARGEST PLAN BENEFIT

5.1 Distribution of the Largest Plan Benefit . Unless otherwise previously elected by the Participant, a Participant who meets the eligibility requirements for an Excess Pension Program Benefit and who also meets the eligibility requirements for an Executive Supplemental Pension Program Benefit, shall automatically be provided the larger of the two Program benefits (i.e. the greater of the Participant’s Excess Pension Program Benefit or the Participant’s Executive Supplemental Pension Program Benefit).

In making the determination required under this Section 5.1 hereof, the Corporation shall rely upon calculations made by independent actuaries for the Pension Plan, who shall apply the actuarial assumptions and interest rate then in use under the Pension Plan for converting the Participant’s Excess Pension Program Benefit to a single life annuity form of payment. The Participant automatically shall receive the Program Benefit that provides the Participant with the largest monthly single life annuity benefit.

5.2 Beneficiary Distribution of the Largest Plan Benefit .

 

  (a) Upon the death of a Participant meeting eligibility requirements for an Excess Pension Program Benefit and the eligibility requirements for an Executive Supplemental Pension Program Benefit there shall be paid to the Participant’s Beneficiary the larger of the two Programs’ death benefit. Such death benefit shall be paid to the Beneficiary in the form of a single life annuity.

 

  (b) In the event of a Participant’s death after the Participant has commenced distribution of his or her Plan benefit, there shall be paid to the Participant’s Beneficiary only those survivor benefits provided under the form of benefit payment elected by the Participant.


ARTICLE VI

ADMINISTRATION

6.1 Administration . The Corporation, which shall be the “Administrator” of the Plan for purposes of ERISA and the “Plan Administrator” for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretation, and (d) to take such further action as the Corporation deems necessary or advisable in the administration of the Plan. All findings, decisions and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Plan Administrator may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Plan Administrator hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 6.2. The Plan Year, for purposes of Plan administration, shall be the calendar year.

6.2 Claims Review Procedure . Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under the Plan filed by any person (herein referred to as the “Claimant”), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which the Claimant receives such notice, Claimant may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or Claimant’s authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefore, which request shall contain the following information:

 

  (i) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (i);

 

  (ii) the specific portions of the denial of the Claimant’s claim which the Claimant requests the Plan Administrator to review;

 

  (iii) a statement by the Claimant setting forth the basis upon which Claimant believes the Plan Administrator should reverse its previous denial of the Claimant’s claim and accept the Claimant’s claim as made; and

 

  (iv) any written material which the Claimant desires the Plan Administrator to examine in its consideration of the Claimant’s position as stated pursuant to paragraph (iii) above.

In accordance with this Section, if the Claimant requests a review of the Plan Administrator’s decision, such review shall be made by the Plan Administrator, which shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the Claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan.


ARTICLE VII

CORPORATE ASSETS

All benefits paid under the Plan shall be payable solely out of the general assets of the Corporation. The Corporation shall have no obligation to establish a trust to fund its obligation to pay benefits under the Plan or to insure any benefits under the Plan and nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and the Participant that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. The Corporation may, in its sole discretion, combine the payment due and owing under the Plan with one or more other payments owing to the Participant or the Participant’s Beneficiary under any other plan, contract, or otherwise (other than any payment due under the Pension Plan) in one check, direct deposit, wire transfer, or other means of payment.

ARTICLE VIII

AMENDMENT AND TERMINATION

8.1 Termination or Amendment . The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, or any duly authorized Committee thereof; provided, however, that no such action shall adversely affect the accrued benefit of any Participant who has met the age and service requirements of Section 3.1 or any Participant or Participant’s Beneficiary who is receiving or who is eligible to receive an Excess Pension Benefit hereunder. No amendment or termination will result in an acceleration of Excess Pension Benefits in violation of Section 409A of the Code.

8.2 Effect of Plan Termination . Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan shall terminate the liability of the Corporation and all Employers to provide for future benefits under the Plan.

ARTICLE IX

MISCELLANEOUS

9.1 Interest of Participant . The obligation of the Employer and of the Corporation to provide a Participant or the Participant’s Beneficiary with an Excess Pension Benefit under the Plan merely constitutes the unsecured promise of the Employer and the Corporation to make payments as provided herein and no person shall have any interest in, or a lien or prior claim on any property of the Employer or Corporation.

9.2 Benefits . Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participant and the Participant’s Beneficiary who may become entitled to an Excess Pension Benefit under the Plan.

9.3 No Present Interest . Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant’s Plan benefit shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant’s Plan Account shall be void. No right, interest, or benefit under the Plan or the Participant’s Plan benefit shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or his or her Beneficiary. If the Participant or the Participant’s Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or the Participant’s Plan benefit, such attempt shall be void and unenforceable.

9.4 Unfunded Plan . This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly-compensated employees” within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA.


9.5 No Commitment as to Employment . Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect.

9.6 Absence of Liability . No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct for anything done or omitted to be done.

9.7 Expenses . The Corporation will pay all Plan expenses.

9.8 Precedent . Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances.

9.9 Withholding . The Corporation shall withhold any tax which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law.

9.10 Validity of Plan . The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of ERISA, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof.

9.11 Parties Bound . The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them.

9.12 Headings . All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan.

9.13 Duty to Furnish Information . The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law.

9.14 Trust Fund . At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporation’s general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Employer.

9.15 Notice . Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation’s address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Employer’s records

9.16 Successors . The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer.


ARTICLE X

CHANGE OF CONTROL

Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, a Participant’s interest in his or her Excess Pension Benefit shall vest, and the Participant shall be entitled to receive an immediate distribution of his or her Excess Pension Benefit, if on and after a Change of Control (i) the Participant’s employment is terminated by his or her Employer and any other Employer without cause, or (ii) the Participant resigns within two years following a Change of Control as a result of the Participant’s mandatory relocation, reduction in the Participant’s base salary, reduction in the Participant’s average annual incentive compensation (unless such reduction is attributable to the overall corporate or business unit performance) or the Participant’s exclusion from stock option programs as compared to comparably situated Employees.

For purposes of this Article X hereof, “Change of Control” shall be deemed to have occurred if under a rabbi trust arrangement established by KeyCorp (“Trust”), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust because a “Change of Control”, as defined in the Trust, has occurred.

ARTICLE XI

COMPLIANCE WITH

SECTION 409A CODE

The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed and administered in a manner that is consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Corporation to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on and after January 1, 2005. Notwithstanding any provision of the Plan to the contrary, no otherwise permissible election, deferral, accrual, or distribution shall be made or given effect under the Plan that would result in a violation, early taxation or assessment of penalties, or interest of any amount under Section 409A of the Code.

ARTICLE XII

AMENDMENT TO FREEZE

12.1. Amendment to Freeze all new Plan Eligibility. Notwithstanding the provisions of Section 3.1 of the Plan, as of December 31, 2009, the Plan shall be frozen to all new Participants and the Corporation shall not, on and after that date, select additional new Participants to participate in the Plan. All other provisions of Section 3.1 of the Plan shall remain in full force and effect.

12.2 Amendment to Freeze Pay Credits and Transition Credits under the Plan. As of January 1, 2010 the Plan shall be frozen with regard to the accrual of new Pay Credits and Transition Credits (as those terms are defined under the KeyCorp Cash Balance Pension Plan) under the Plan, and all accruals of Pay Credits and Transition Credits under the Plan shall cease as of December 31, 2009. In conjunction with the freezing of all new accruals of Pay Credits and Transition Credits under the Plan, all Participants’ Plan benefits accrued up through December 31, 2009 shall be calculated under the requirements of Section 3.2 of the Plan as of December 31, 2009, (the Participants’ “Accrued Benefit”), and each Participant’s Accrued Benefit under the Plan shall be reflected in a Plan Account established in the Participants name. As of January 1, 2010, the provisions of Section 3.2 of the Plan will thereafter have no further effect.

12.3 Continued Accrual of Interest Credit on Participants’ Plan Accounts . Effective January 1, 2010, each Participants’ Plan Accounts shall be increased with Interest Credits (as that term is defined and determined annually under the KeyCorp Cash Balance Pension Plan), as of the last day of each calendar quarter based on the value of the Participant’s Plan Account balance as of the preceding quarter-end Valuation Date. The Interest


Credit rate to be allocated to Participants’ Plan Accounts shall mirror the Pension Plan’s Interest Credit rate for each applicable Plan Year. No Interest Credits shall be allocated to a Participant’s Plan Account for any period following the Participant’s benefit commencement date.”

IN WITNESS WHEREOF , KeyCorp has caused this KeyCorp Second Excess Cash Balance Pension Plan to be executed by its duly authorized officer this 8th day of February 2010, to be effective as of that date.

 

KEYCORP

By:

 

/s/ Steven N. Bulloch

Title: Assistant Secretary

Exhibit 10.31

KEYCORP

DEFERRED SAVINGS PLAN

(January 2015)

ARTICLE I

The KeyCorp Deferred Savings Plan (the “Plan”), as originally established effective December 30, 2006, and amended and restated in 2008, January 31, 2010, and January 1, 2012, is hereby amended and restated, to be effective January 1, 2015, to reflect a change in participant eligibility, a cap on compensation that is eligible for an employer match, and the removal of the discretionary profit sharing feature. As structured, the Plan is intended to provide KeyCorp with an employment retention vehicle to ensure that Plan participants continue in their employment with Key, while providing Plan participants with an opportunity to save for their retirement on a tax deferred basis. It is the intention of KeyCorp and it is the understanding of those employees covered under the Plan, that the Plan constitutes a nonqualified plan of deferred compensation for a select group of KeyCorp employees, and as such, it is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). It is also the understanding of employees covered under the Plan that the Plan is subject to the requirements of Section 409A of the Code, and that it will be administered in accordance with the requirements of Section 409A.

ARTICLE II

DEFINITIONS

2.1 Meaning of Definitions . For the purposes of this Plan, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context:

 

  (a) Beneficiary ” shall mean the person, persons or entity entitled under Article VIII to receive any Plan benefits payable after a Participant’s death.

 

  (b) Board ” shall mean the Board of Directors of KeyCorp, the Board’s Compensation & Organization Committee, or any other committee designated by the Board or subcommittee designated by the Board’s Compensation Committee.

 

  (c) Change of Control ” shall be deemed to have occurred if under a rabbi trust arrangement established by KeyCorp (“Trust”), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust because a “Change of Control”, as defined in the Trust, has occurred.

 

  (d) Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time, together with all regulations promulgated thereunder. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section.

 

  (e) Common Stock Account ” shall mean the investment account established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Participant Deferrals credited. Participant Deferrals and Corporate Contributions invested in the Common Stock Account shall be credited based on a bookkeeping allocation of KeyCorp Common Shares (both whole and fractional rounded to the nearest one-hundredth of a share), which shall be equal to the amount of Participant Deferrals and Corporate Contributions invested in the Common Stock Account. The Common Stock Account shall also reflect on a bookkeeping basis all dividends, gains, and losses attributable to such Common Shares. All Corporate Contributions and all Participant Deferrals credited to the Common Stock Account shall be based on the New York Stock Exchange’s closing price for such Common Shares as of the day such Participant Deferrals are credited to the Participants’ Plan Accounts.

 

  (f)

The “ Compensation ” of a Participant for any Plan Year or any partial Plan Year shall mean that portion of compensation that is paid to the Participant during such period by reason of his or her


  employment with an Employer, as reported for federal income tax purposes, which exceeds the compensation limits reflected in Section 401(a)(17) of the Code, as may be indexed from time to time. In determining whether the Participant has exceeded the compensation limits of Section 401(a)(17) of the Code, the compensation which would have been paid to the Participant but for (1) the timing of an Employer’s payroll processing operations, (2) the Participant’s deferral of compensation under the provisions of the KeyCorp Flexible Benefits Plan and transportation reimbursement plan, and (3) the Participant’s written deferral of his or her compensation to the KeyCorp 401(k) Savings Plan shall be included, provided, however, that the following compensation shall specifically not be included:

 

  (i) any amount attributable to the Employee’s receipt of stock appreciation rights, restricted stock awards, and stock units, and the amount of any gain to the Employee upon the exercise of a stock option;

 

  (ii) any amount attributable to the Employee’s receipt of non-cash remuneration which is included in the Employee’s income for federal income tax purposes;

 

  (iii) any amount attributable to the Employee’s receipt of moving expenses and any relocation bonus paid to the Employee during the Plan Year;

 

  (iv) any amount attributable to any severance paid by an Employer or the Corporation to the Employee;

 

  (v) any amount attributable to fringe benefits (cash and non-cash), regardless of whether any or all such items are includible in such Participant’s gross income for federal tax purposes;

 

  (vi) any amount attributable to any bonus or payment made as an inducement for the Employee to accept employment with an Employer;

 

  (vii) any amount attributable to compensation of any type including bonus or incentive compensation payments paid on or after the Employee’s Severance From Service Date;

 

  (viii) any other amounts attributable to compensation deferred by the Participant; and

 

  (ix) any amounts attributable to deferred cash award payments to the Participant.

 

  (g) Corporate Contributions ” shall mean the amount that an Employer has agreed to contribute on a bookkeeping basis to the Participant’s Plan Account in accordance with the provisions of Article V of the Plan.

 

  (h) Corporation ” shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated.

 

  (i) Deferral Period ” shall mean each Plan Year, provided however, that a Participant’s initial Deferral Period shall be from his or her first day of participation in the Plan through the last day of the applicable Plan Year.

 

  (j) Determination Date ” shall mean the last day of each calendar month.

 

  (k) Disability ” shall mean (1) a physical or mental disability which prevents a Participant from performing the duties the Participant was employed to perform for his or her Employer when such disability commenced, (2) has resulted in the Participant’s absence from work for 180 qualifying days, and (3) application has been made for the Participant’s disability coverage under the KeyCorp Long Term Disability Plan, and such Disability results in the Participant’s Separation from Service.

 

  (l) Early Retirement ” shall mean the Participant’s retirement from employment with an Employer on or after the Participant’s attainment of age 55 and completion of a minimum of five years of Vesting Service, but prior to the Participant’s Normal Retirement Date.

 

  (m) Eligible Employee ” shall mean an Employee who has been identified by the Corporation as eligible for participation in the Plan pursuant to the provisions of Section 3.1(a) herein.

 

  (n) Employee ” shall mean a common law employee who is employed by an Employer.


  (o) Employer ” shall mean the Corporation and any of its subsidiaries, unless specifically excluded as an Employer for Plan purposes by written action of an officer of the Corporation. An Employer’s participation shall be subject to all conditions and requirements made by the Corporation, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan as long as it continues as an Employer.

 

  (p) Unforeseeable Emergency ” shall mean a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant, the Participant’s spouse, or the Participant’s dependent (as defined in Section 152(a) of the Code), the loss of the Participant’s property due to casualty, or such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The determination of an “unforeseeable emergency” and the ability of the Corporation to accelerate the Participant’s distribution of Participant Deferrals and Corporate contributions shall be determined in accordance with the requirements of Section 409A of the Code and applicable regulations issued thereunder.

 

  (q) Incentive Compensation Award ” shall mean the discretionary single annual incentive compensation award granted to a Participant under an Incentive Compensation Plan.

 

  (r) Incentive Compensation Deferral ” shall mean a percentage amount of the Participant’s annual Incentive Compensation Award that otherwise would be payable to the Participant during the applicable Plan Year, but for the Participant’s election to defer such Incentive Compensation Award under the Plan.

 

  (s) Incentive Compensation Plan ” shall mean a line of business or management incentive compensation plan that is sponsored by KeyCorp or an affiliate of KeyCorp that the Corporation has determined constitutes an Incentive Compensation Plan for purposes of the Plan.

 

  (t) Interest Bearing Account ” shall mean the investment account established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Participant Deferrals credited. Participant Deferrals invested for bookkeeping purposes in the Interest Bearing Account shall be credited with earnings as of each month equal to 120% of the applicable long term federal rate as published by the Internal Revenue Service for that month, compounded monthly, and divided by 12.

 

  (u) Investment Accounts ” shall collectively mean those investment accounts established under the Plan for bookkeeping purposes in which the Participant’s Participant Deferrals will be credited. Investment Accounts shall include the Plan’s (1) Interest Bearing Account, (2) Common Stock Account, and (3) Investment Funds.

 

  (v) Investment Funds ” shall mean those Investment Accounts established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Participant Deferrals credited and which mirror the investment funds established under the KeyCorp 401(k) Savings Plan (“Savings Plan”), as may be modified from time to time, provided, however, that the Savings Plan’s Corporation Stock Fund, for Plan purposes, shall be excluded from the definition of Investment Funds. Participant Deferrals invested for bookkeeping purposes in the Investment Funds shall be credited on a bookkeeping basis with all earnings, gains, and losses experienced by the applicable Investment Fund.

 

  (w) Normal Retirement ” shall mean the Participant’s retirement under the KeyCorp Cash Balance Pension Plan on or after the Participant’s Normal Retirement Date.

 

  (x) Participant ” shall mean an Employee who meets the eligibility requirements set forth in Section 3.1(a) and who becomes a Plan Participant pursuant to Section 3.1(b) or Section 3.1(c) of the Plan.

 

  (y)

Participation Agreement ” shall mean the agreement submitted by the Participant to the Corporation, which contains, in pertinent part, the Participant’s deferral commitment for the applicable Deferral Period, as well as investment and distribution instructions with regard to the form of distribution for such Deferrals. The Participants’ Participation Agreement for Salary Deferrals shall be provided to the Corporation by no later than the close of the calendar year prior to the year in which the deferred salary is to be earned by the Participant. The Participants’ Participation Agreement for Incentive


  Compensation Deferrals shall be provided to the Corporation by no later than the close of the calendar year prior to the year in which such Incentive Compensation is to be earned by the Participant or as otherwise expressly permitted under the provisions of Section 409A of the Code.

 

  (z) Participant Deferrals ” shall mean the Incentive Compensation Deferrals and Salary Deferrals the Participant has elected to defer under the Plan for each applicable Deferral Period.

 

  (aa) Plan ” shall mean the KeyCorp Deferred Savings Plan with all amendments hereafter made.

 

  (bb) Plan Account ” shall mean those bookkeeping accounts established by the Corporation for each Plan Participant, which shall reflect all Corporate Contributions and Participant Deferrals, and if applicable, any Predecessor Plan Participant Deferrals, Predecessor Plan Corporate Contributions, and Rollover Contributions invested for bookkeeping purposes in the Plan’s Investment Accounts with all earnings, dividends, gains, and losses thereon. Plan Accounts shall not constitute separate Plan funds or separate Plan assets. Neither the maintenance of, nor the crediting of amounts to such Plan Accounts shall be treated (i) as the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Accounts, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. Benefits under the Plan shall be paid from the general assets of the Corporation.

 

  (cc) Plan Year ” shall mean the calendar year.

 

  (dd) Retirement ” shall mean the termination of a Participant’s employment under circumstances in which the Participant begins to receive Early Retirement or Normal Retirement Date benefit under the KeyCorp Cash Balance Pension Plan, or the Participant has attained age 55 with five full years of vesting service with Key provided, however, that such retirement also constitutes a Separation from Service. For purposes of this Section 2.1(cc), the term “vested service” shall be calculated from the Participant’s employment commencement date through the Participant’s Termination, or Retirement date (whichever shall first occur), and shall be based on consecutive twelve-month periods during which time the Participant is employed with an Employer.

 

  (ee) Salary Deferrals ” shall mean the amount of the Participant’s Compensation (other than Incentive Compensation) that the Participant has elected to defer to the Plan for the applicable Plan year

 

  (ff) Separation from Service ” shall have the meaning as a “separation from service” under Section 409A(c)(2)(A)(i) of the Code and 26 CFR Section 1.409A-3(a)(1).

 

  (gg) Termination ” shall mean the voluntary or involuntary and permanent termination of a Participant’s employment from his or her Employer and any other Employer, whether by resignation or otherwise, provided such termination also constitutes a Separation from Service, but shall not include the Participant’s Retirement or Termination under Limited Circumstances or as a result of the Participant’s death or Disability.

 

  (hh) Termination Under Limited Circumstances ” shall mean a Participant’s termination of employment from the Employer (i) within two years after a Change of Control under circumstances in which the Participant becomes entitled to severance benefits or salary continuation or similar benefits under a Change of Control agreement, employment agreement, or severance or separation pay plan, (ii) under circumstances in which the Participant is entitled to receive salary continuation benefits under the KeyCorp Separation Pay Plan, or (iii) as otherwise expressly approved by an officer of the Corporation, provided such termination also constitutes a Separation from Service.

 

  (ii)

Total Cash Compensation ” shall mean the sum of (i) the employee’s annualized salary as of September 30 th of the year immediately preceding the applicable Plan Year plus (ii) the employee’s Incentive Compensation Award paid on or about March 15 th preceding the applicable Plan Year. Non-discretionary incentive compensation, such as commissions and production payments, shall not be included in Total Cash Compensation. In the event that the employee was not paid an Incentive Compensation Award in the year immediately preceding the applicable Plan Year because the employee was not eligible for such Award, the Corporation may substitute the employee’s guaranteed (if any) or target Incentive Compensation Award for the Plan Year. Total Cash Compensation shall be determined by the Corporation in its sole discretion.


2.2 Additional Reference . All other words and phrases used herein shall have the meaning given them in the KeyCorp Cash Balance Pension Plan, unless a different meaning is clearly required by the context.

2.3 Pronouns . The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural.

ARTICLE III

ELIGIBILITY AND PARTICIPATION

3.1 Eligibility and Participation .

 

  (a) Eligibility . An Employee shall be eligible to participate in the Plan as of the first day of a Plan Year if his or her Total Cash Compensation exceeds the compensation limits of Section 401(a)(17) of the Internal Revenue Code. Notwithstanding the foregoing provisions of this Section 3.1(a), however, the Compensation and Organization Committee of the Board (or its delegate, which includes the Compensation & Benefits Oversight Committee by Resolution dated July 11, 2014) shall have the authority to include or exclude any Employee from participation in the Plan.

 

  (b) Identification of Eligible Employees . Eligible Employees will be identified on an annual basis by the Corporation prior to the start of each Plan Year.

 

  (c) Participation . An Eligible Employee may elect to participate in the Plan by submitting a Participation Agreement to the Corporation prior to the beginning of the applicable Deferral Period.

 

  (c) Loss of Plan Eligibility . In the event that a Participant voluntarily fails to make Participant Deferrals to the Plan, then in such event, the Participant’s continued Plan eligibility for the Plan Year will end and the Participant shall not be eligible to make Participant Deferrals to the Plan.

3.2 Deferral Limitations . The following Participant Deferral limitations shall apply for each Deferral Period:

 

  (a) Salary Deferrals . A Participant may defer no more than 50% of the Participant’s Compensation (other than Incentive Compensation Award) during the applicable Deferral Period.

 

  (b) Incentive Compensation Deferrals . A Participant may defer up to 100% of the Participant’s annual Incentive Compensation Award payable to the Participant during the applicable Deferral Period.

3.3 Commitment Limited by Termination, Retirement, Disability or Death . As of the Participant’s Termination date, Retirement date, Termination Under Limited Circumstances date, date of Disability or date of death, all Participant Deferrals under the Plan shall cease.

3.4 Modification of Deferral Commitment . A Participant’s deferral commitment as evidenced by his or her Participation Agreement for the applicable Deferral Period shall be irrevocable.

3.5 Evergreen Deferral Election . A Participant’s initial deferral commitment as evidenced by the Participant’s initial Participation Agreement will continue to be effective from Plan Year to Plan Year and for each successive Deferral Periods until otherwise modified by the Participant. The Participant’s revised Participation Agreement for Salary Deferrals shall be provided to the Corporation by no later than the close of the calendar year prior to the year in which the salary is to be earned by the Participant, and the Participant’s revised Participation Agreement for Incentive Compensation Deferrals shall be provided to the Corporation by no later than the close of the calendar year prior to the year in which such Incentive Compensation is to be earned by the Participant. Such revised Participation Agreement thereafter will continue to be effective for each successive Deferral Periods until modified by the Participant.

3.6 A Change in Employment Status . If the Corporation determines that a Participant’s performance is no longer at a level that deserves to be rewarded through participation in the Plan, but does not terminate the


Participant’s employment with his or her Employer, the Participant’s existing Participation Agreement shall terminate at the end of the Deferral Period, and no new Participation Agreement may be made by the Participant until the Plan year following the year in which the Corporation advises the Employee that he or she may resume Plan participation.

3.7 Rollovers . At the Corporation’s direction, the Plan may accept on behalf of a Participant, a rollover of the Participant’s bookkeeping account balance from such other deferred compensation plans of the Employer in which the Participant also participates, provided, that such plan permits rollovers. The bookkeeping account balance so rolled shall be known as rollover contributions (“Rollover Contributions”). The Participant’s Rollover Contributions shall be credited to the Participant’s Plan Account on a bookkeeping basis in such a manner as the Corporation shall be able to separately identify such Plan Rollover Contributions and determine all net gains or losses attributable thereto. Such Plan Rollover Contributions shall, at all times, be invested in the Plan’s Common Stock Account and shall not be subject to the Participant’s investment direction or diversification. Effective January 1, 2012, however, all Participant Plan Rollover Contributions made on and after that date shall be invested in accordance with the Participant investment instructions and shall be subject to Participant investment diversification. Plan Rollover Contributions shall be fully vested under the Plan and shall be subject to the distribution requirements contained within the Participant’s Rollover Election Form, provided, however, that the Participant’s Rollover Contributions will be required to be deferred under the Plan for a minimum of five (5) full years from the date of the rollover regardless of the Participant’s Termination date, Retirement date, or the distribution instructions contained in the Participant’s Rollover Election Form, and provided further, that the rollover election and the timing of the rollover election conforms with subsequent deferral election requirements mandated under Section 409A of the Code including the Participant’s irrevocable election to make a rollover contribution to the Plan a minimum of twelve full months prior to the date on which the Participant’s bookkeeping account balance from such other deferred compensation plan of the Employer vests and becomes available to be distributed to the Participant.

ARTICLE IV

PARTICIPANT DEFERRALS

4.1 Plan Account . All Participant Deferrals and Corporate Contributions shall be credited on a bookkeeping basis to a Plan Account established in the Participant’s name. Separate sub-accounts may be established to reflect the Participant’s investment elections, which shall reflect all earnings, gains or losses attributable to such investment elections.

4.2 Investment of Participant Deferrals . Subject to the provisions of Section 4.3 hereof, each Participant shall direct the manner in which his or her Participant Deferrals are to be invested for bookkeeping purposes under the Plan. All Participant Deferrals may be invested for bookkeeping purposes in any one or more of the Plan’s Investment Accounts in such amounts as the Participant shall select. Subject to the provisions of Section 4.4 hereof, Participants may modify their investment elections at such times and in such manner as permitted by the Corporation.

4.3 Compliance with Corporation’s Stock Ownership Guidelines . Participant Deferrals to the Common Stock Fund shall be considered for purposes of the Participant meeting his or her obligations under the KeyCorp Stock Ownership Guidelines.

4.4 Investment of Participant Deferrals Invested in the Common Stock Account . The Participant’s election to have his or her Participant Deferrals invested on a bookkeeping basis in the Plan’s Common Stock Account shall be irrevocable; Participant Deferrals invested in the Common Stock Account shall not be subject to investment direction by the Participant. On and after January 1, 2012, Participants shall not be permitted to defer new Participant Deferrals to the Common Stock Fund.

4.5 Crediting of Participant Deferrals; Withholding . Participant Salary Deferrals shall be credited to the Participant’s Plan Account as of the date that such Compensation would have been payable to the Participant but


for the Participant’s election to defer such Compensation to the Plan. Participant Incentive Compensation Deferrals shall be credited to the Participant’s Plan Account as of the date such Incentive Compensation would have been payable to the Participant but for the Participant’s election to defer such Incentive Compensation to the Plan. The withholding of taxes with respect to Participant Deferrals as required by state, federal or local law will be withheld from the Participant’s Compensation to the maximum extent possible.

ARTICLE V

CORPORATE CONTRIBUTIONS

5.1 Crediting of Corporation Contributions . Corporate Contributions shall be credited on a bookkeeping basis to the Participant’s Plan Account in proportion to the respective amount of the Participant’s Participant Deferrals made to the Plan during the applicable Deferral Period. Corporate Contributions shall equal up 100% of the Participant’s first 6% of Participant Deferrals credited to the Plan for the applicable pay period. Notwithstanding the foregoing provisions of this Section 5.1, in no event may the Corporate Contributions credited to any Participant’s Plan Account for any Plan Year exceed 6% of the lesser of (a) $500,000 or (b) the Participant’s Compensation for the Plan Year.

5.2 Investment of Corporate Contributions . All Corporate Contributions credited to the Participant’s Plan Account prior to January 1, 2012 shall be invested for bookkeeping purposes in the Plan’s Common Stock Account, and shall not be subject to Participant investment directions. On and after January 1, 2012, all Corporate Contributions credited to the Participant’s Plan Account shall be subject to the same investment direction as provided by the Participant with regard to his or her investment, on a bookkeeping basis, of Participant Deferrals.

5.3 Vesting in Corporate Contributions . Subject to the provisions of Section 7.4 of the Plan, a Participant shall become vested in those Corporate Contributions credited on a bookkeeping basis to the Participant’s Plan Account upon the Participant’s (1) completion of three years of vested service, (2) Disability, (3) death, or (4) Termination under Limited Circumstances. For purposes of this Section 5.3 hereof, the term “vested service” shall be calculated from the Participant’s employment commencement date through the Participant’s Termination, or Retirement date (whichever shall first occur), and shall be based on consecutive twelve-month periods during which time the Participant is employed with an Employer.

5.4 Forfeiture of Corporate Contributions . In the event of the Participant’s Termination or Retirement, all not vested Corporate Contributions and any not vested Participant Predecessor Plan corporate contributions shall be forfeited as of the Participant’s last day of employment.

5.5 Determination of Amount . The Plan Administrator shall verify the amount of Participant Deferrals, Corporate Contributions, and if applicable, Participant Predecessor Plan Participant Deferrals, Participant Predecessor Plan Corporate Contributions, and Rollover Contributions with all earnings, gains and losses, if any, to be credited to each Participant’s Plan Accounts in accordance with the provisions of the Plan. The reasonable and equitable decision of the Plan Administrator as to the value of each Investment Account shall be conclusive and binding upon all Participants and the Beneficiary of each deceased Participant having any interest, direct or indirect in the Participant’s Plan Account. The value of an Investment Account on any day not a Determination Date shall be the value on the last preceding Determination Date. As soon as reasonably practicable after the close of the Plan Year, the Corporation shall send to each Participant an itemized accounting statement which shall reflect the Participant’s Plan Account balance.

5.6 Corporate Assets . All Participant Deferrals, Corporate Contributions, and if applicable, Participant Predecessor Plan Participant Deferrals, Participant Predecessor Plan Corporate Contributions, and Rollover Contributions with all dividends, earnings and any other gains and losses credited to a Participant’s Plan Account remain the assets and property of the Corporation, which shall be subject to distribution to the Participant only in accordance with Article VII, of the Plan. Payments made under the Plan shall be in the form of cash and common shares of the Corporation and shall be made from the general assets of the Corporation, and Participants and


Beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in the Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and the Participant that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended, and Section 409A of the Code.

5.7 No Present Interest . Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant’s Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant’s Plan Account shall be void. No right, interest, or benefit under the Plan or Participant’s Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary, including any domestic relations proceedings. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participant’s Plan Account, such attempt shall be void and unenforceable.

5.8 Effect of Plan Termination . Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan shall terminate the liability of the Corporation and all Employers to make further Corporate Contributions to the Plan.

ARTICLE VI

MERGER OF PREDECESSOR PLANS

6.1 Merger of Predecessor Plans . Effective December 31, 2006, the KeyCorp Deferred Compensation Plan, the KeyCorp Second Deferred Compensation Plan, the KeyCorp Excess 401(k) Savings Plan, and the KeyCorp Second 401(k) Excess Savings Plan shall be merged into the Plan, and participants in such Predecessor Plan will automatically participate in the Plan. Hereinafter the KeyCorp Deferred Compensation Plan, the KeyCorp Second Deferred Compensation Plan, the KeyCorp Excess 401(k) Savings Plan, and the KeyCorp Second 401(k) Excess Savings Plan shall be referred to as the “Predecessor Plan”.

6.2 Opening Account Balances . All Predecessor Plan participants shall have their Predecessor Plan benefits reflected, on a bookkeeping basis, as a single Predecessor Plan Opening Account Balance (“Opening Account Balance”). Such Opening Account Balance shall separately reflect Predecessor Plan (1) participant deferrals, (2) corporate contributions, and (3) any participant rollover balances, with all earnings, gains and losses thereon. All Predecessor Plan participant deferral elections made prior to December 31, 2006 shall be deferred to the Plan when paid, and shall be reflected as part of the Participant’s Predecessor Plan Opening Account Balance. Predecessor Plan benefits, as reflected in the Participant’s Opening Account Balance, will be subject to the distribution provisions of Section 6.4, Section 6.5 and Section 6.6 hereof, as well as the requirements of Article VII of the Plan.

6.3 Investment of Predecessor Plan Benefits .

 

  (a) Participant Deferrals Subject to Investment Direction . Predecessor Plan participants on or prior to December 31, 2006 shall be required make an election to direct the investment of those participant deferrals that are subject to investment diversification under the Predecessor Plan. The Participant’s election to invest his or her Predecessor Plan participant deferrals in the Plan’s Common Stock Account will constitute an irrevocable election, and such participant deferrals thereafter will not be subject to investment diversification by the participant.

 

  (b) Participant Deferrals, Rollover Contributions, and Corporate Contributions Not Subject to Investment Direction . Predecessor Plan participant deferrals not subject to investment diversification, Predecessor Plan rollover contributions, and Predecessor Plan corporate contributions shall automatically be invested in the Plan’s Common Stock Account, and will not be subject to investment diversification by the participant.


6.4 Vesting of Predecessor Plan Corporate Contributions . All Predecessor Plan corporate contributions that have not vested as of December 31, 2006 shall continue to vest under the vesting provisions of Section 5.3 hereof, and when vested, shall become a part of the Participant’s Plan benefit. Notwithstanding the foregoing provisions of this Section 6.4, however, in the event that the Participant elected to irrevocably invest his or her participant deferrals under the KeyCorp Deferred Compensation Plan and/or the KeyCorp Second Deferred Compensation Plan into the common stock account of those plans, and in exchange for this irrevocable investment election the Participant received an additional 4% corporate contribution amount on such participant deferrals, then in such event, this additional 4% corporate contribution amount, with all earnings and gains thereon, shall be forfeited in the event of the Participant’s Termination prior to his or her (a) Normal Retirement, or (b) Disability and termination of employment.

6.5 Distribution Election for Predecessor Plan Benefits . Predecessor Plan participants shall make a single, irrevocable election prior to December 31, 2006 to have all Predecessor Plan benefits distributed under the following distribution payment options:

 

  (a) a single lump sum distribution, and/or

 

  (b) a series of monthly installment distributions over a period of 60, 120, or 180 months.

If a Predecessor Plan participant fails to make a distribution election for his or her Predecessor Plan benefits, as provided for under this Section 6.4 hereof, the participant’s Predecessor Plan benefit with all earnings, gains and losses thereon shall be distributed to the participant as an installment distribution over a period of 120 months. The distribution of Predecessor Plan benefits shall be subject to all requirements of Article VII of the Plan.

6.6 Constructive Receipt Limitation . Notwithstanding the foregoing provisions of Section 6.5 hereof, Participants’ Predecessor Plan distribution elections shall remain in effect and shall control all Participant Plan distributions occurring prior to July 1, 2007.

6.7 Predecessor Plan Benefits in a Pay Status . All Predecessor Plan benefits in a pay status as of December 31, 2006 shall continue to be paid in accordance with the distribution elections in effect and in accordance with the terms of the Predecessor Plan.

ARTICLE VII

DISTRIBUTION OF PLAN BENEFITS

7.1 Distribution of Plan Benefits . Subject to the provisions of Section 7.4 and Section 7.7 hereof, a Participant shall commence the distribution of his or her vested Plan Account balance and vested Opening Account Balance at the Participant’s Termination, Retirement, Disability, death or Termination under Limited Circumstances (whichever shall first occur), but in no event later than 90 days following the date of the Participant’s Termination, Retirement, Disability, Termination under Limited Circumstances, or death.

7.2 Unforeseeable Emergency . Upon a finding that the Participant has suffered an Unforseeable Emergency, the Corporation shall permit the Participant to obtain an Emergency Withdrawal from his or her vested Plan Account. The amount of such Emergency Withdrawal shall be limited to the amount reasonably necessary to meet the Participant’s immediate emergency needs resulting from the Unforeseeable Emergency, as defined under Section 409A of the Code. Distributions made to a Participant pursuant to this Section 7.2 hereof shall be paid in a lump sum amount as soon as administratively practicable but in no event later than 60 days following the Participant’s Unforeseeable Emergency request date.

7.3 Distribution Options . Subject to the provisions of Section 7.4 and Section 7.5 hereof, a Participant shall elect, as reflected in the Participant’s Participation Agreement, to receive a distribution of his or her Participant Deferrals and Corporate Contributions for the applicable Deferral Period under the following payment options:

 

  (a) a single lump sum distribution, or

 

  (b) a series of monthly installment distributions over a period of 60, 120, or 180 months.


Distribution of Participant Deferrals, Predecessor Plan participant deferrals, and Corporate Contributions allocated to Participant Plan Accounts on and after January 1, 2012 and invested on a bookkeeping basis in the Plan’s Investment Funds or Interest Bearing Account shall be made in cash. Distributions of Participant Deferrals, Rollover Contributions, Corporate Contributions, and Predecessor Plan participant deferrals, corporate contributions, and rollover contributions that were invested on a bookkeeping basis in the Plan’s Common Stock Fund up through December 31, 2011 shall be made in KeyCorp common shares.

7.4 Forfeiture of Plan Benefits . Notwithstanding any other provision of the Plan to the contrary, if the Participant engages in any Harmful Activity prior to or within twelve months following the Participant’s Termination or Retirement, then by operation of this Section 7.4 hereof, and without any further notice to the Participant, (a) (i) all Corporate Contributions and Predecessor Plan corporate contributions, and (ii) all earnings, dividends, and gains allocated to the Participant’s Plan Account with regard to both Participant Deferrals and Corporate Contributions as well as Predecessor Plan participant deferrals and corporate contributions shall become immediately forfeited (the Participant’s Participant Deferrals and Predecessor Plan participant deferrals shall be continue to be distributed to the Participant in accordance with the distribution instructions contained within the Participant’s Participation Agreements), and (b) all distributed Corporate Contributions and Predecessor Plan corporate contributions and all distributed earnings, gains and dividends on the Participant’s Participant Deferrals and Corporate Contributions and Predecessor Plan participant deferrals and corporate contributions that have been distributed to the Participant within one year of the Participant’s Termination or Retirement date shall be fully repaid by the Participant to the Corporation within 60 days following the Participant’s receipt of the Corporation’s notice of such Harmful Activity.

(i) The foregoing restrictions shall not apply in the event that the Participant’s employment with an Employer terminates within two years after a Change of Control if any of the following have occurred: a relocation of the Participant’s principal place of employment more than 35 miles from the Participant’s principal place of employment immediately prior to the Change of Control, a reduction in the Participant’s base salary after a Change of Control, or termination of employment under circumstances in which the Participant is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement, employment agreement, or severance or separation pay plan. The determination by the Corporation as to whether a Participant has engaged in a “Harmful Activity” prior to or within twelve months after the Participant’s Termination or Retirement shall be final and conclusive upon the Participant and upon all other Persons .

For purposes of this Section 7.4, a “Harmful Activity” shall have occurred if the Participant shall do any one or more of the following:

 

  (i) Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp.

 

  (ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp.

 

  (iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property.

 

  (iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof.

 

  (v) Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee.

 

  (vi)

Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not


  compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp.

 

  (vii) Upon the Participant’s own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participant’s employment.

For purposes of this Section 7.4, the term:

Intellectual Property ” shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses.

Non-Public Information ” shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public.

KeyCorp ” shall include KeyCorp, its subsidiaries, and its affiliates.

7.5 Distribution of Account Balances . The Participant’s vested Plan Account and vested Opening Account Balance shall be valued as of the Determination Date immediately following his or her Termination, Retirement, Termination Under Limited Circumstances, or death (the “valuation date”).

 

  (a) Lump Sum Distributions . If a Participant has elected to receive a lump sum distribution of all or any portion of his or her vested Plan Account and/or vested Opening Account Balance, such lump sum distribution shall be made as soon as administratively practicable but in no event later than 90 days following the Participant’s Termination, Retirement, Disability, Termination Under Limited Circumstances, or death.

 

  (b) Installment Distributions . If a Participant has elected to receive an installment distribution of all or any portion of his or her vested Plan Account and/or vested Opening Account Balance, such installment distribution shall commence as soon as administratively practicable but in no event later than 90 days following the Participant’s Termination, Retirement, Disability, Termination Under Limited Circumstances, or death.

 

  (i) The Participant’s vested unpaid Plan Account balances invested for bookkeeping purposes in the Plan’s Investment Funds and/or Interest Bearing Account shall be reflected in a distribution sub-account, which shall be credited monthly with interest based on the average of the Interest Bearing Account’s rate of return for the 36 month period immediately preceding the Participant’s Termination, Retirement, or death during the Participant’s installment distribution period. Distributions shall be made in substantially equal monthly installments over the Participant’s elected installment distribution period.

 

  (ii) The Participant’s vested unpaid Plan Account balance invested for bookkeeping purposes in the Plan’s Common Stock Account shall be reflected as a number of whole and fractional Common Shares in a distribution sub-account and shall be credited with dividends on a bookkeeping basis which shall be reinvested in the Plan’s Common Stock Account throughout the installment distribution period; all such reinvested dividends shall be paid to the Participant in Common Shares in conjunction with the Participant’s final installment payment under the Plan. Distributions shall be made in substantially equal annual installments over the Participant’s elected installment distribution period.


7.6 Distribution of Small Accounts . Notwithstanding the provisions of Sections 7.2, 7.3, and 7.5, hereof, if the value of a Participant’s vested Account balance(s) as of the Determination Date immediately following the Participant’s Termination, Retirement, death, or Termination Under Limited Circumstances date is under $50,000, the Participant’s Account balance(s) shall be distributed to the Participant as a single lump sum distribution no later than 90 days following the Participant’s Termination, Retirement, Disability, Termination Under Limited Circumstances, or death.

7.7 Payment Limitation for Key Employees . Notwithstanding any other provision of the Plan to the contrary, including the provisions contained within this Article VII hereof, in the event that the Participant is determined by KeyCorp to be a “specified employee” within the meaning of Section 409A of the Code, then in no event may distributions under this Article VII commence prior to the first business day of the seventh month following Participant’s Separation from Service date (or his date of death, if earlier). To the extent an amount is deferred under this Section 7.7 until the first business day of the seventh month following the Participant’s separation from service date, then in such event, the payment to which the Participant would otherwise have been entitled to during the first six months shall be accumulated and paid to the Participant on the first business day of the seventh month with all Plan earnings thereon. Distribution of the Participant’s Account shall commence on the first day of the seventh month following the Participant’s Separation from Service date, with such distribution being made in accordance with the distribution instructions provided in the Participant’s Participation Agreement(s).

7.8 Facility of Payment . If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefore shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his or her financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant’s Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his or her financial affairs, and shall be a complete discharge of any liability therefore under the Plan.

ARTICLE VIII

BENEFICIARY DESIGNATION

8.1 Beneficiary Designation . Subject to Section 8.3 hereof, each Participant shall be requested to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant’s death prior to complete distribution of the Participant’s Plan Account. Each Beneficiary designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Participant’s lifetime.

8.2 Changing Beneficiary . Subject to Section 8.3, any Beneficiary designation may be changed by a Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Corporation. The filing of a new designation shall cancel all designations previously filed.

8.3 No Beneficiary Designation . If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary (including all contingent Beneficiaries) designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:

 

  (a) The Participant’s spouse;

 

  (b) The Participant’s children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take, by right of representation the share the parent would have taken if living; and

 

  (c) The Participant’s estate.

8.4 Distribution Upon Death . If a Participant dies after the distribution of his or her interest under the Plan has commenced, the remaining portion of the Participant’s entire interest under the Plan, if any, shall be


distributed to the Participant’s Beneficiary in a single lump sum benefit. If the Participant dies before the distribution of the Participant’s Plan Account has commenced, the Participant’s entire interest under the Plan shall be valued as of the Determination Date immediately following the Participant’s date of death, and shall be distributed to his or her Beneficiary in a lump sum payment within 90 days following the Participant’s date of death in accordance with the distributions provisions contained in Article VII.

ARTICLE IX

ADMINISTRATION

9.1 Administration . The Plan Administrator shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Plan Administrator shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretation, and (d) to take such further action as the Plan Administrator shall deem necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Plan Administrator may employ such attorneys, investment counsel, agents, and accountants, as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Plan Administrator hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 9.2. The Plan Year, for purposes of Plan administration, shall be the calendar year.

9.2 Claims Review Procedure . Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the “Claimant”), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his or her authorized representative may request that the claim denial be reviewed by filing with the Plan’s Claims Review Committee a written request therefore, which request shall contain the following information:

 

  (a) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan’s Claims Review Committee shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a);

 

  (b) the specific portions of the denial of his or her claim, which the Claimant requests the Plan’s Claims Review Committee to review;

 

  (c) a statement by the Claimant setting forth the basis upon which he or she believes the Plan’s Claims Review Committee should reverse its previous denial of the claim and accept the claim as made; and

 

  (d) any written material, which the Claimant desires the Plan’s Claims Review Committee to examine in its consideration of his or her position as stated pursuant to paragraph (b) above.

In accordance with this Section, if the Claimant requests a review of the Plan Administrator’s decision, such review shall be made by the Plan’s Claims Review Committee, who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan’s Claims Review Committee shall not be modified unless the Plan’s Claims Review Committee has acted in an arbitrary and capricious manner. Subject to the requirements of law,


the Plan’s Claims Review Committee shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan’s Claims Review Committee shall be binding on the claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan’s Claims Review Committee at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan.

ARTICLE X

AMENDMENT AND TERMINATION OF PLAN

10.1 Reservation of Rights . The Corporation reserves the right to amend or terminate the Plan at any time by action of the Board of Directors of the Corporation, or any duly authorized committee thereof, and to modify or amend the Plan, in whole or in part, at any time and for any reason. No amendment or termination will result in an acceleration of distributions under the Plan in violation of Section 409A of the Code.

 

  (a) Preservation of Account Balance . No termination, amendment, or modification of the Plan shall reduce (i) the amount of Plan Rollover Contributions, Predecessor Plan benefits, Participant Deferrals and Corporate Contributions, and (ii) all earnings and gains on such Plan Rollover Contributions, Predecessor Plan benefits, Participant Deferrals, and Corporate Contributions that have accrued up to the effective date of the termination, amendment, or modification.

 

  (b) Changes in Earnings Rate . No amendment or modification of the Plan shall reduce the rate of earnings to be credited on all Plan Rollover Contributions, Predecessor Plan benefits, Participant Deferrals, and Corporate Contributions and all earnings accrued thereon until the close of the applicable Deferral Period in which such amendment or modification is made.

10.2 Effect of Plan Termination . The Corporation may terminate the Plan by instructing the Plan Administrator to not accept any additional Participation Agreements. If such a termination occurs, the Plan shall continue to operate and be effective with regard to Participation Agreements entered into prior to the effective date of such termination.

ARTICLE XI

CHANGE OF CONTROL

11.1 Change of Control . Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control as defined in accordance with Section 2.2 of the Plan, no amendment or modification of the Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participant’s Pre-Change of Control Account Balance, (2) to reduce or modify the choice of Investment Funds or method of crediting such earnings to a Participant’s Pre-Change of Control Account Balances, (3) to reduce or modify the Common Stock Accounts’ method of calculating all earnings, gains, and/or losses on a Participant’s Pre-Change of Control Account Balance, or (4) to reduce or modify the Participant’s Participant Deferrals and/or Corporate Contributions to be credited to a Participant’s Plan Account for the applicable Deferral Period. For purposes of this Section 11.1, the term “Pre-Change of Control Account Balance” shall mean, with regard to any Plan Participant, the aggregate amount of such Participant’s Plan Rollover Contributions, Predecessor Plan benefits, Participant Deferrals, and Corporate Contributions with all earnings, gains, and losses thereon which are credited to the Participant’s Plan Account and Opening Account Balance through the close of the calendar year in which such Change of Control occurs.

11.2 Common Stock Conversion . In the event of a Change of Control in which the common shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Stock Account to reflect on a bookkeeping basis the securities, cash and other property that would have been received in such reorganization, reclassification, consolidation, merger or sale on an equivalent amount of common shares equal to the balance in the Common Stock Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the


Common Stock Account shall reflect on a bookkeeping basis all dividends, interest, earnings and losses attributable to such securities, cash, and other property (with any cash earning interest at the rate applicable to the Interest Earning Account).

11.3 Change of Control Provisions . Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, and (i) the Participant’s employment is terminated by his or her Employer and any other Employer without cause, or (ii) the Participant resigns within two years following a Change of Control as a result of the Participant’s mandatory relocation, reduction in the Participant’s base salary, reduction in the Participant’s average annual incentive compensation (unless such reduction is attributable to the overall corporate or business unit performance), or the Participant’s exclusion from stock option programs as compared to comparably situated Employees, the provisions of Section 6.4 of the Plan which limit a Participant’s ability to provide services to a financial services organization, business, or company upon the Participant’s Termination or Retirement, shall become null and void.

11.4 Amendment in the Event of a Change of Control . On or after a Change of Control, the provisions of Article II, Article III, Article IV, Article V, Article VI, Article VII, Article VIII, Article IX, Article X, and Article XI may not be amended or modified as such Sections and Articles apply with regard to the Participants’ Pre-Change of Control Account Balances.

ARTICLE XII

MISCELLANEOUS PROVISIONS

12.1 Unfunded Plan . This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly-compensated employees” within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA.

12.2 No Commitment as to Employment . Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect.

12.3 Benefits . Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries.

12.4 Absence of Liability . No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done.

12.5 Expenses . The expenses of administration of the Plan shall be paid by the Corporation.

12.6 Precedent . Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances.

12.7 Withholding . The Corporation shall withhold any tax, which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law.

12.8 Validity of Plan . The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of ERISA, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof.


12.9 Parties Bound . The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them.

12.10 Headings . All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan.

12.11 Duty to Furnish Information . The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law.

12.12 Trust Fund . At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporation’s general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Employer.

12.13 Validity . In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

12.14 Notice . Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation’s address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Employer’s records

12.15 Successors . The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity, which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer.

ARTICLE XIII

COMPLIANCE WITH

(ii) SECTION 409A CODE

13.1 Compliance With Section 409A . The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed and administered in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Corporation to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred. Notwithstanding any provision of the Plan to the contrary, no otherwise permissible election, deferral, accrual, or distribution shall be made or given effect under the Plan that would result in a violation, early taxation, or assessment of penalties or interest of any amount under Section 409A of the Code.

WITNESS WHEREOF , KeyCorp has caused this KeyCorp Deferred Savings Plan to be executed by its duly authorized officer to be effective as of January 1, 2015.

 

KEYCORP

By:

 

/s/ Michelle L. Potter

Title: Assistant Secretary

Exhibit 10.32

KeyCorp

Deferred Equity Allocation Plan

ARTICLE I

Purpose

The purpose of the Plan is to establish limits on the crediting of Common Shares pursuant to the Corporation’s Deferred Compensation Plans as in effect from time to time, and to provide the shareholders of the Corporation with the opportunity to approve such limits.

ARTICLE II

Definitions

For the purposes of this Plan, the following words shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context:

 

  (a) “Board” shall mean the Board of Directors of the Corporation, and to the extent of any delegation by the Board to a committee (or subcommittee thereof) pursuant to Section 5.1 of this Plan, such committee (or subcommittee).

 

  (b) “Common Shares” shall mean the common shares, par value $1.00 per share, of the Corporation or any security into which such Common Shares may be changed by reason of any transaction or event of the type referred to in Article IV of this Plan.

 

  (c) “Common Stock Account” shall mean the bookkeeping account established by the Corporation for each Participant under a Deferred Compensation Plan, in which a Participant may elect to have his or her Participant Deferrals credited in the form of Common Shares, and which shall reflect all Participant Deferrals, Corporate Contributions and dividends and other distributions, gains and losses credited in the form of Common Shares, in accordance with the terms of the applicable Deferred Compensation Plan.

 

  (d) “Corporate Contributions” shall mean the contribution amounts that an Employer has agreed, under the terms of the applicable Deferred Compensation Plan, to contribute on a bookkeeping basis to a Participant’s Common Stock Account.

 

  (e) “Corporation” shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated.

 

  (f) “Deferred Compensation Plans” shall mean the Existing Plans and any other plan, agreement or program of the Corporation that is now or hereafter intended to provide Employees or Directors of the Corporation with the opportunity or obligation to make Participant Deferrals, but only if and to the extent that such plan (i) has been determined by the Board to be covered by this Plan as a Deferred Compensation Plan, (ii) has not been separately approved by the Corporation’s shareholders, and (iii) is not a plan that is qualified under Section 401(a) of the Internal Revenue Code. Notwithstanding the foregoing, no plan other than an Existing Plan shall be considered a Deferred Compensation Plan if (A) it provides for Corporate Contributions to Directors or Officers in excess of 25% of their Participant Deferrals, unless such plan is an Excess Plan, or (B) it provides for Corporate Contributions in excess of 100% of any Participant Deferrals.

 

  (g) “Director” shall mean a member of the Board of Directors of the Corporation.

 

  (h) “Effective Date” shall mean the date on which this Plan becomes effective, which shall be the date the Plan is approved by the Corporation’s shareholders.


  (i) “Employee” shall mean a common law employee who is employed by the Corporation.

 

  (j) “Excess Plan” shall mean a supplemental employee benefit plan that is operated in conjunction with a plan that is intended to be qualified under Section 401(a) of the Internal Revenue Code.

 

  (k) “Employer” shall mean the Corporation and any of its subsidiaries that participate in a Deferred Compensation Plan.

 

  (l) “Existing Plans” shall mean the following plans, as in effect on the Effective Date, as the same may be amended thereafter from time to time: the KeyCorp Commissioned Deferred Compensation Plan, the KeyCorp Deferred Compensation Plan, the Amended and Restated Director Deferred Compensation Plan, the KeyCorp Automatic Deferral Plan, the KeyCorp Signing Bonus Plan, the McDonald Financial Group Deferral Plan and the KeyCorp Excess 401(k) Plan.

 

  (m) “Independent Director” shall mean a Director who is not an employee of the Corporation or a subsidiary of the Corporation and otherwise satisfies the applicable independence requirements set forth in the rules of the New York Stock Exchange.

 

  (n) “Officer” shall have the meaning set forth in Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended.

 

  (o) “Participant” shall mean (i) any Employee and any Director who meets the eligibility requirements of any of the Existing Plans and who has elected or is required to participate in such Existing Plan and (ii) any Employee and any Director who will, in the future, meet the eligibility requirements of any other Deferred Compensation Plan of the Corporation and who elects or is required to participate in such Deferred Compensation Plan.

 

  (p) “Participant Deferrals” shall mean the amount of a Participant’s salary, bonuses (including signing and retention bonuses), retainers, commissions, fees, property, securities and other compensation earned by or awarded to the Participant, the time of payment or delivery of which the Participant has elected or been required to defer pursuant to a Deferred Compensation Plan. Notwithstanding anything to the contrary contained herein, Participant Deferrals shall be credited as Common Shares to a Participant’s Common Stock Account based on a price not less than the fair market value of the Common Shares on the date of the crediting of such Participant Deferrals to the Common Stock Account. The determination of fair market value shall be as provided in the applicable Deferred Compensation Plan.

 

  (q) “Plan” shall mean this KeyCorp Deferred Equity Allocation Plan, as the same may be amended from time to time.

ARTICLE III

Share Limitations

Section 3.1 Shares Available Under the Plan . Subject to adjustment as provided in Section 3.4 and Article IV of this Plan, the number of Common Shares credited to Participants’ Common Stock Accounts as Participant Deferrals and Corporate Contributions pursuant to the Deferred Compensation Plans shall not in the aggregate exceed the aggregate number of shares credited to Participants’ Common Stock Accounts as of the Effective Date plus 15,000,000 Common Shares. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. Any shares delivered to Participants by a trust that is treated as a “grantor trust” within the meaning of Sections 671-679 of the Internal Revenue Code of 1986, as amended, shall be treated as delivered by the Corporation under this Plan.

Section 3.2 Shares Available for Corporate Contributions . Subject to adjustment as provided in Section 3.4 and Article IV of this Plan, the number of Common Shares credited to Participants’ Common Stock Accounts as Corporate Contributions after the Effective Date shall not exceed 7,000,000 Common Shares.

Section 3.3 Shares Available for Dividends . Common Shares that may be credited and thereafter distributed as dividend equivalents shall not be subject to the limits set forth in Sections 3.1 and 3.2, except that if any shares are so allocated at a rate in excess of the actual dividend rates on the Common Shares, such excess shall be subject to the limits set forth in Sections 3.1 and 3.2 hereof, as applicable.


Section 3.4 Forfeitures, Etc.; Payment in Cash . The number of shares available in Sections 3.1 and 3.2 above shall be adjusted to account for shares credited to the Common Stock Accounts of Participants that are forfeited, surrendered or relinquished to the Corporation, to provide for the payment of taxes or otherwise, paid or distributed to such Participants in the form of cash, or that are not distributed in the form of Common Shares for any other reason, as provided under the terms of the particular Deferred Compensation Plan. Upon forfeiture, surrender or relinquishment, or upon payment or distribution in cash, of Common Shares credited to a Common Stock Account, or upon any other distribution or settlement of Common Stock Accounts other than in the form of Common Shares, such Common Shares shall again be available to be credited to a Common Stock Account under any of the Deferred Compensation Plans and Sections 3.1 and 3.2 of this Plan, as applicable.

ARTICLE IV

Adjustments

The Board may make or provide for such adjustments in the number of Common Shares specified in Sections 3.1 and 3.2 hereof, and in the kind of shares covered by this Plan, as the Board, in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of rights that would otherwise result from (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Corporation, or (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing.

ARTICLE V

Administration

Section 5.1 Administration of the Plan . This Plan shall be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to a committee of the Board (or a subcommittee thereof) consisting of not less than three Independent Directors appointed by the Board. A majority of the committee (or subcommittee) shall constitute a quorum, and the action of the members of the committee (or subcommittee) present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of the committee (or subcommittee). To the extent of any such delegation, references in this Plan to the Board shall be deemed to be references to any such committee or subcommittee. As of the Effective Date, the Board delegates all of its authority under this Plan to its Compensation Committee.

Section 5.2 Interpretation; Construction . The interpretation and construction by the Board of any provision of this Plan and any determination by the Board pursuant to any provision of this Plan shall be final and conclusive. No member of the Board shall be liable for any such action or determination made in good faith.

ARTICLE VI

Amendments, Etc.

Section 6.1 Amendments . The Board may at any time and from time to time amend this Plan in whole or in part; provided , however , that any amendment that must be approved by the shareholders of the Corporation in order to comply with applicable law or the rules of the New York Stock Exchange or, if the Common Shares are not traded on the New York Stock Exchange, the principal national securities exchange upon which the Common Shares are traded or quoted, shall not be effective unless and until such approval has been obtained. Presentation of this Plan or any amendment hereof for shareholder approval shall not be construed to limit the Corporation’s authority to offer similar or dissimilar benefits under other plans without shareholder approval consistent with the rules of the New York Stock Exchange.


Section 6.2 No Employment Rights . This Plan shall not confer upon any Participant any right with respect to continuation of employment or other service with the Corporation, nor shall it interfere in any way with any right the Corporation would otherwise have to terminate such Participant’s employment or other service at any time. Notwithstanding this Plan, the provisions of the applicable Deferred Compensation Plan, including, without limitation, the terms relating to eligibility, participation, Participant Deferrals and deferral limits, Corporate Contributions, vesting and distribution, shall continue to apply to the Participants in such Deferred Compensation Plan.

Section 6.3 Unfunded Plan . All Common Shares, dividends, earnings and any other gains and losses allocated to Participants’ Common Stock Accounts remain the assets and property of the Corporation, which shall be subject to distribution to the Participant only in accordance with the terms of each respective Deferred Compensation Plan. Payments made under each respective Deferred Compensation Plan in accordance with the provisions of this Plan shall be made from the general assets of the Corporation, and Participants and their beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in this Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and the Participants that all Deferred Compensation Plans covered by this Plan be unfunded for tax purposes and for purposes of Title I of Employee Retirement Income Security Act of 1974, as amended.

Section 6.4 Governing Law . The Plan shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio.

Section 6.5 Expenses . The expenses of administration of this Plan shall be paid by the Corporation.

EXHIBIT 12

KEYCORP

COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO

COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

(dollars in millions)

(unaudited)

 

     Year ended December 31,  
     2014     2013      2012      2011     2010  (a)  

Computation of Earnings

            

Net income (loss) attributable to Key

   $ 900     $ 910      $ 858      $ 920     $ 554  

Add: Provision for income taxes

     326       271        231        364       186  

Less: Income (loss) from discontinued operations, net of taxes

     (39     40        23        (35     (23
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes and cumulative effect of accounting change

     1,265       1,141        1,066        1,319       763  

Fixed charges, excluding interest on deposits

     160       154        200        248       244  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total earnings for computation, excluding interest on deposits

     1,425       1,295        1,266        1,567       1,007  

Interest on deposits

     117       158        257        390       671  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total earnings for computation, including interest on deposits

   $ 1,542     $ 1,453      $ 1,523      $ 1,957     $ 1,678  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Computation of Fixed Charges

            

Net rental expense

   $ 104     $ 111      $ 109      $ 106     $ 120  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Portion of net rental expense deemed representative of interest

   $ 16     $ 17      $ 16      $ 16     $ 18  

Interest on short-term borrowed funds

     11       10        11        16       20  

Interest on long-term debt

     133       127        173        216       206  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed charges, excluding interest on deposits

     160       154        200        248       244  

Interest on deposits

     117       158        257        390       671  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed charges, including interest on deposits

   $ 277     $ 312      $ 457      $ 638     $ 915  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Combined Fixed Charges and Preferred Stock Dividends

            

Preferred stock dividend requirement on a pre-tax basis

   $ 22     $ 23      $ 22      $ 107     $ 164  

Total fixed charges, excluding interest on deposits

     160       154        200        248       244  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Combined fixed charges and preferred stock dividends, excluding interest on deposits

     182       177        222        355       408  

Interest on deposits

     117       158        257        390       671  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Combined fixed charges and preferred stock dividends, including interest on deposits

   $ 299     $ 335      $ 479      $ 745     $ 1,079  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ratio of Earnings to Fixed Charges

            

Excluding deposit interest

     8.91       8.41        6.33        6.32       4.13  

Including deposit interest

     5.57       4.66        3.33        3.07       1.83  

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

            

Excluding deposit interest

     7.83       7.32        5.70        4.41       2.47  

Including deposit interest

     5.16       4.34        3.18        2.63       1.56  

 

(a) Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation.

EXHIBIT 21

KEYCORP

SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2014

 

Subsidiaries (a)

  

Jurisdiction

of Incorporation
or Organization

  

Parent Company

KeyBank National Association

   United States    KeyCorp

 

(a) Subsidiaries of KeyCorp other than KeyBank National Association are not listed above since, in the aggregate, they would not constitute a significant subsidiary. KeyBank National Association is 100% owned by KeyCorp.

EXHIBIT 23

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements of KeyCorp:

Form S-3 No. 333-55959

Form S-3 No. 333-59175

Form S-3 No. 333-64601

Form S-3 No. 333-76619

Form S-3 No. 333-151608

Form S-3 No. 333-174865

Form S-3 No. 333-196641

Form S-4 No. 333-146456

Form S-8 No. 333-49609

Form S-8 No. 333-49633

Form S-8 No. 333-70669

Form S-8 No. 333-70703

Form S-8 No. 333-70775

Form S-8 No. 333-72189

Form S-8 No. 333-92881

Form S-8 No. 333-45320

Form S-8 No. 333-45322

Form S-8 No. 333-99493

Form S-8 No. 333-107074

Form S-8 No. 333-107075

Form S-8 No. 333-107076

Form S-8 No. 333-109273

Form S-8 No. 333-112225

Form S-8 No. 333-116120

Form S-8 No. 333-167093

Form S-8 No. 333-188703

of our reports dated March 2, 2015, with respect to the consolidated financial statements of KeyCorp and the effectiveness of internal control over financial reporting of KeyCorp included in this Annual Report (Form 10-K) of KeyCorp for the year ended December 31, 2014.

 

LOGO

/s/ Ernst & Young LLP

Cleveland, Ohio

March 2, 2015

EXHIBIT 24

KEYCORP

POWER OF ATTORNEY

Each of the undersigned, an officer, a director, or both of KeyCorp, an Ohio corporation, hereby constitutes and appoints Paul N. Harris and Michelle L. Potter, and each of them, as his or her true and lawful attorney-in fact with full power of substitution and resubstitution, to sign in his or her name, place, and stead and to file with the United States Securities and Exchange Commission in accordance with Securities Exchange Act of 1934, as amended, KeyCorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and all exhibits, amendments and supplements thereto, with full power and authority to take such actions that the attorney-in-fact deems necessary in connection with the execution and filing of such Annual Report on Form 10-K.

This Power of Attorney may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

* * * * *

IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 2, 2015.

 

  /s/ Beth E. Mooney   /s/ Donald R. Kimble

  Beth E. Mooney

  Chairman and Chief Executive Officer, and Director

  Donald R. Kimble

  Chief Financial Officer

  (Principal Executive Officer)

  /s/ Robert L. Morris   /s/ Joseph A. Carrabba

  Robert L. Morris

  Chief Accounting Officer

  (Principal Accounting Officer)

  Joseph A. Carrabba, Director
  /s/ Charles P. Cooley   /s/ Alexander M. Cutler
  Charles P. Cooley, Director   Alexander M. Cutler, Director
  /s/ H. James Dallas   /s/ Elizabeth R. Gile
  H. James Dallas, Director   Elizabeth R. Gile, Director
  /s/ Ruth Ann M. Gillis   /s/ William G. Gisel, Jr.
  Ruth Ann M. Gillis, Director   William G. Gisel, Jr., Director
  /s/ Richard J. Hipple   /s/ Kristen L. Manos
  Richard J. Hipple, Director   Kristen L. Manos, Director
  /s/ Demos Parneros   /s/ Barbara R. Snyder
  Demos Parneros, Director   Barbara R. Snyder, Director
  /s/ David K. Wilson

 

  David K. Wilson, Director

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Beth E. Mooney, certify that:

 

  1. I have reviewed this annual report on Form 10-K of KeyCorp;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2015

LOGO

 

Beth E. Mooney

Chairman, Chief Executive Officer and President

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Donald R. Kimble, certify that:

 

  1. I have reviewed this annual report on Form 10-K of KeyCorp;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2015

LOGO

 

Donald R. Kimble
Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 2, 2015

LOGO

 

Beth E. Mooney

Chairman, Chief Executive Officer and President

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 2, 2015

LOGO

 

Donald R. Kimble

Chief Financial Officer

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.