Form 10-K
Table of Contents

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, 2015

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 $12,670,985,551 (based on the June 30, 2015, closing price of KeyCorp common shares of $15.02 as reported on the New York Stock Exchange). As of February 22, 2016, there were 835,606,185 common shares outstanding.

Certain specifically designated portions of KeyCorp’s definitive Proxy Statement for its 2016 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 SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others.

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

 

  ¿   deterioration of commercial real estate market fundamentals;

 

  ¿   defaults by our loan counterparties or clients;

 

  ¿   adverse changes in credit quality trends;

 

  ¿   declining asset prices;

 

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

 

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

 

  ¿   changes in accounting policies, standards, and interpretations;

 

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

 

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

 

  ¿   negative outcomes from claims or litigation;

 

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

 

  ¿   increasing capital and liquidity standards under applicable regulatory rules;

 

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

 

  ¿   our ability to receive dividends from our subsidiary, KeyBank;

 

  ¿   downgrades in our credit ratings or those of KeyBank;

 

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

 

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

 

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

 

  ¿   the soundness of other financial institutions;

 

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

 

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

 

  ¿   increased competitive pressure due to industry consolidation;

 

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

 

  ¿   our ability to complete the acquisition of First Niagara and to realize the anticipated benefits of the merger; and

 

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

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

2015 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

     30   
2   

Properties

     31   
3   

Legal Proceedings

     31   
4   

Mine Safety Disclosures

     31   
   PART II   
5   

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

     32   
6   

Selected Financial Data

     33   
7   

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

     34   
7A   

Quantitative and Qualitative Disclosures About Market Risk

     109   
8   

Financial Statements and Supplementary Data

     110   
  

Management’s Annual Report on Internal Control over Financial Reporting

     111   
  

Reports of Independent Registered Public Accounting Firm

     112   
  

Consolidated Financial Statements and Related Notes

     114   
  

Consolidated Balance Sheets

     114   
  

Consolidated Statements of Income

     115   
  

Consolidated Statements of Comprehensive Income

     116   
  

Consolidated Statements of Changes in Equity

     117   
  

Consolidated Statements of Cash Flows

     118   
  

Notes to Consolidated Financial Statements

     119   
9   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     224   
9A   

Controls and Procedures

     224   
9B   

Other Information

     224   
   PART III   
10   

Directors, Executive Officers and Corporate Governance

     225   
11   

Executive Compensation

     225   
12   

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

     225   
13   

Certain Relationships and Related Transactions, and Director Independence

     225   
14   

Principal Accountant Fees and Services

     225   
   PART IV   
15   

Exhibits and Financial Statement Schedules

     226   
  

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

  
  

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

  
  

(a) (3) Exhibits

  
  

Signatures

     229   
  

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 BHC under the BHCA and one of the nation’s largest bank-based financial services companies, with consolidated total assets of approximately $95.1 billion at December 31, 2015. 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, 2015, these services were provided across the country through KeyBank’s 966 full-service retail banking branches and a network of 1,256 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 13,483 full-time equivalent employees for 2015.

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. In addition, some of these product capabilities are delivered by Key Corporate Bank to clients of Key Community Bank.

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, 2015
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

  $   11,981        $   5,262        $   2,368        $   4,477        $   9,514        $   4,915        $   7,739        $   2,889        $   2,019        $   51,164     

Percent of total

    23.4        %        10.3        %        4.6        %        8.8        %        18.6        %        9.6        %        15.1        %        5.7        %        3.9        %        100.0        %   

Average commercial loans

  $ 3,525        $ 1,734        $ 851        $ 1,155        $ 2,334        $ 622        $ 1,855        $ 820        $ 3,164        $ 16,060     

Percent of total

    21.9        %        10.8        %        5.3        %        7.2        %        14.5        %        3.9        %        11.6        %        5.1        %        19.7        %        100.0        %   

Average home equity loans

  $ 3,263        $ 1,563        $ 496        $ 835        $ 1,263        $ 831        $ 1,276        $ 658        $ 81        $ 10,266     

Percent of total

    31.8        %        15.2        %        4.8        %        8.2        %        12.3        %        8.1        %        12.4        %        6.4        %        .8        %        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 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

     36   

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

     46   

Components of Net Interest Income Changes from Continuing Operations

     48   

Composition of Loans

     58   

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

     67   

Securities Available for Sale

     68   

Held-to-Maturity Securities

     69   

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

     70   

Allocation of the Allowance for Loan and Lease Losses

     92   

Summary of Loan and Lease Loss Experience from Continuing Operations

     94   

Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

     95   

Exit Loan Portfolio from Continuing Operations

     96   

Summary of Changes in Nonperforming Loans from Continuing Operations

     96   

Short-Term Borrowings

     207   

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 NYSE, 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 Disclosures and Filings” 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 and our quarterly regulatory capital disclosures under the third pillar of Basel III.

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) 689-4221; or by sending an e-mail to investor_relations@keybank.com.

 

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Acquisitions and Divestitures

On October 30, 2015, we announced that KeyCorp entered into a definitive agreement and plan of merger pursuant to which KeyCorp will acquire all of the outstanding capital stock of First Niagara. The merger is currently expected to be completed during the third quarter of 2016 and is subject to customary closing conditions, including the approval of regulators and the shareholders of both KeyCorp and First Niagara. For more information on the First Niagara acquisition and other acquisitions and divestitures by Key, see Note 13 (“Acquisitions and Discontinued Operations”), which 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 BHCs, 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 has become more competitive as technology advances have lowered barriers to entry, enabling 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 product and service 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. All executive officers are subject to annual election at the annual organizational meeting of the Board held each May.

Set forth below are the names and ages of the executive officers of KeyCorp as of December 31, 2015, 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, 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 (49) — 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 (55) — 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 (59) — 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 (44) — 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 (51) — Ms. Evans has been the Director of Corporate Center for KeyCorp since August 2012, partnering with Key’s executive leadership team and Board 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 (54) — 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 (55) — 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 (57) — Mr. Harris has been the General Counsel and Secretary of KeyCorp since 2003 and an executive officer of KeyCorp since 2004.

William L. Hartmann (62) — Mr. Hartmann has been the Chief Risk Officer of KeyCorp since July 2012. Mr. Hartmann joined KeyCorp in 2010 as its Chief Credit Officer. Mr. Hartmann has been an executive officer of KeyCorp since 2012.

Donald R. Kimble (55) — 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 (60) — 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.

Douglas M. Schosser (45) — Mr. Schosser has been the Chief Accounting Officer and an executive officer of KeyCorp since May 2015. Prior to becoming the Chief Accounting Officer, Mr. Schosser served as an Integration Manager at KeyCorp. From 2010 to 2014, he served as the Chief Financial Officer of Key Corporate Bank.

 

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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, 2015, 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 July 2015, the Federal Reserve adopted a final rule to implement the common equity surcharge on U.S. G-SIBS. The final rule was effective December 1, 2015, although the surcharge, which will be added to the capital conservation buffer under the Regulatory Capital Rules, will be phased in during the January 1, 2016, through January 1, 2019, period. This final rule applies to advanced approaches banking organizations, not “standardized approach” banking organizations like Key.

 

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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 Committee published final Basel III NSFR disclosure standards in June 2015.

The Basel III LCR, calculated as the ratio of the stock of high-quality liquid assets 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, is required to meet the minimum capital and leverage ratios set forth in the following table. At December 31, 2015, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.85% under the fully phased-in Regulatory Capital Rules. Also at December 31, 2015, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios, after adjustment for market risk, would be as set forth in the following table.

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

Regulatory Capital Rules

 

Ratios (including Capital conservation buffer)   

Key

December 31, 2015

Estimated

           

Minimum

January 1,
2015

           

Phase-in

Period

  

Minimum

January 1,
2019

        

Common Equity Tier 1 (a)

     10.84        %         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

     11.15           6.0         None      6.0     

Tier 1 Capital + Capital conservation buffer

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

Total Capital

     12.85           8.0         None      8.0     

Total Capital + Capital conservation buffer

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

Leverage (c)

     10.59                 4.0               None      4.0           

 

(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.

 

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(c) As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, 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 the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank effective January 1, 2015. The Revised Prompt Corrective Action Rules table below identifies the capital category threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the Regulatory Capital Rules.

“Well Capitalized” and “Adequately Capitalized” Capital Category Ratios under

Revised Prompt Corrective Action Rules

 

Prompt Corrective Action

   Capital Category  
Ratio    Well Capitalized (a)      Adequately Capitalized  

Common Equity Tier 1 Risk-Based

     6.5         %         4.5         %   

Tier 1 Risk-Based

     8.0            6.0      

Total Risk-Based

     10.0            8.0      

Tier 1 Leverage (b)

     5.0                  4.0            

 

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

 

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

We believe that, as of December 31, 2015, KeyBank (consolidated) met all revised “well capitalized” prompt corrective action capital and leverage ratio requirements under the Regulatory Capital Rules. 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 LCR for certain internationally active bank and nonbank financial companies (excluding KeyCorp) and a modified version of the LCR (“Modified LCR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp).

KeyBank will not be subject to the LCR or the Modified LCR under the Liquidity Coverage Rules unless the OCC affirmatively determines that application to KeyBank is appropriate in light of KeyBank’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. 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 is required to maintain its ratio of high-quality liquid assets to its total net cash outflow amount, determined by prescribed assumptions in a

 

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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. At December 31, 2015, Key’s estimated Modified LCR was above 100%. In the future, Key may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position. 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. On December 1, 2015, the Federal Reserve published an NPR requesting public comment on a proposed rule that would implement quarterly quantitative and qualitative public disclosure requirements regarding the LCR. The proposed rule would require compliance with these requirements beginning on January 1, 2018, for Modified LCR BHCs like KeyCorp. Comments on the NPR were due by February 2, 2016.

The federal banking regulators have not yet issued any proposal to implement either the final Basel III NSFR or the final Basel III NSFR disclosure standards.

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 on a pro forma basis under expected and stressful conditions throughout the planning horizon. KeyCorp is also subject to the Federal Reserve’s supervisory expectations for capital planning and capital positions as a large, noncomplex BHC. These expectations are set forth in the Federal Reserve’s guidance issued on December 18, 2015 (“SR Letter 15-19”). Under SR Letter 15-19, the Federal Reserve identifies its core capital planning expectations regarding governance, risk management, internal controls, capital policy, capital positions, incorporating stressful conditions and events, and estimating impact on capital positions for large and noncomplex firms building upon the capital planning requirements under its capital plan and stress test rules. SR Letter 15-19 also provides detailed supervisory expectations on such a firm’s capital planning processes.

The Federal Reserve’s annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S. BHCs and of the practices these BHCs use to assess their capital needs. The Federal Reserve expects BHCs subject to CCAR to have sufficient capital to withstand a severely 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.

KeyCorp filed its 2015 CCAR capital plan on January 5, 2015. KeyCorp is required to submit its 2016 CCAR capital plan by April 6, 2016. The Federal Reserve has indicated that it will announce the results of its supervisory stress tests by June 30, 2016, with the exact date to be announced before then.

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 and regulatory capital ratios 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. The 2015 CCAR results, which included the annual supervisory stress test methodology and certain firm-specific results for the participating covered companies (including KeyCorp), were publicly released by the Federal Reserve in March 2015.

In December 2015, the Federal Reserve published amendments to its capital plan and stress test rules. Under the amendments, for a standardized approach BHC like KeyCorp, the Federal Reserve has removed the Tier 1 common capital ratio requirement as well as modified certain mandatory capital action assumptions. The modifications to the mandatory capital action assumptions include the requirement for the BHC to assume in its

 

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stress tests that: (i) it issues capital associated with funding a planned acquisition or merger to the extent the merger or acquisition is reflected in the BHC’s pro forma balance sheet estimates, and (ii) it pays planned dividends on any issuance of stock related to expensed employee compensation. The modifications also incorporate the deduction from Tier 1 capital of a BHC’s investment in certain hedge funds and private equity funds that are covered by section 619 of the Dodd-Frank Act, known as the “Volcker Rule.”

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 KeyCorp-defined baseline scenario and at least one KeyCorp-defined 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. KeyCorp is required to report the results of its mid-cycle stress test to the Federal Reserve. KeyCorp and KeyBank published the results of their company-run annual stress test on March 5, 2015. KeyCorp published the results of its company-run mid-cycle stress test on July 28, 2015. 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 each depositor’s deposits is $250,000 per depository.

The FDIC must assess the premium based on an insured depository institution’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.

In November 2015, the FDIC published an NPR and request for comments proposing to impose a surcharge, as required by the Dodd-Frank Act, on the quarterly deposit insurance assessments of insured depository institutions having total consolidated assets of at least $10 billion (like KeyBank). Such surcharge would begin the calendar quarter after the DIF reserve ratio first reaches or exceeds 1.15% and would continue through the quarter that it

 

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first reaches or exceeds 1.35%. At September 30, 2015, the DIF reserve ratio was 1.09%. The surcharge would equal an annual rate of 0.00045% applied to the institution’s assessment base (with certain adjustments). The FDIC expects that these surcharges will commence in 2016 and that they should be sufficient to raise the DIF reserve ratio to 1.35% in approximately eight quarters (i.e., before the end of 2018). If, contrary to the FDIC’s expectations, the DIF reserve ratio does not reach 1.35% by December 31, 2018 (provided it is at least 1.15%), the FDIC would impose a shortfall assessment on insured depository institutions with total consolidated assets of at least $10 billion (like KeyBank) on March 31, 2019. The comment period for the NPR expired in early January 2016.

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.

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

 

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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 2015, these resolution plans, the third required from KeyCorp and KeyBank, were submitted on December 1, 2015. Annually, in January, the Federal Reserve and FDIC make available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, that submitted plans in the prior December. The public section of the resolution plans of KeyCorp and KeyBank is available at http://www.federalreserve.gov/bankinforeg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/.

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.

 

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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, to carry out 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.

Volcker Rule

The Volcker Rule implements Section 619 of the Dodd-Frank Act. The Volcker Rule prohibits “banking entities,” 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 Volcker 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 Volcker Rule.

Although the Volcker 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 Volcker 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.

 

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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.

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. 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 that 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, KBCM, 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.

 

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

 

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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.

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, 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 strong recovery in commercial real estate, in particular the multifamily property sector, has contributed to a surge in investment and development activity. As a result, property values are elevated and oversupply is a concern in certain markets. Substantial deterioration in property market fundamentals could have an impact on our portfolio, with a large portion of our clients active in real estate and specifically multifamily real estate. A correction in the real estate markets could impact the ability of 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 property market fundamentals deteriorate sharply, the execution of new leases could slow, compromising the borrower’s ability to cover the debt service payments.

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 indicate the need for 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 necessitate 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. Although the recovery has been in place for some time, a further recession would likely reverse recent positive trends in asset prices.

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

As of December 31, 2015, approximately 74% 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.

 

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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.

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

The FASB 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/or interpret the financial accounting and reporting 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

We are subject to a variety of operational risks.

In addition to the other risks discussed in this section, 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 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,

 

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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 parties are subject to similar risks as Key relating to cybersecurity, breakdowns or failures of their own systems or employees. One or more of these third parties 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 such third party. Certain of these third parties may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. Financial or operational difficulties of a third party could also impair our operations if those difficulties interfere with such third party’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 third party is unable to meet our needs in a timely manner or if the services or products provided by such third party 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 our business. Additionally, regulatory guidance adopted by federal banking regulators related to how banks select, engage and manage their third parties affects 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, estimable, and 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.

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

 

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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.

Climate change, 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 due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or 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.  Liquidity Risk

Capital and liquidity requirements imposed by the Dodd-Frank Act require banks and BHCs to maintain more and higher quality capital and more and higher quality 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. Capital securities usually are the most expensive form of funding, and increasing capital levels could adversely impact Key’s profitability.

In addition, the new liquidity standards will require us to increase our holdings of higher-quality liquid assets, may require us to change our mix of investment alternatives, and may impact business relationships with certain customers. Additionally, support of the new liquidity standards may be satisfied through the use of term wholesale borrowings, which tend to have a higher cost of funds than that of traditional core deposits.

Further, 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 the section titled “Regulatory capital and liquidity” under the heading “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

 

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agencies may no longer support such initiatives. The discontinuation of such initiatives may have unanticipated or unintended impacts, perhaps severe, on the financial markets. These effects could include a sudden move to higher debt yields, which could have an unfavorable effect on the quantity and cost of borrowed funds. 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 the 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 funding from dividends by our subsidiaries. Dividends by our subsidiaries are the principal source of funds for the dividends we pay on our common and preferred stock 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 common or preferred stock. Such a situation could result in Key losing access to alternative wholesale funding sources. 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 our access to or the 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 maintain a liquid asset portfolio and 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 reducing our capacity of 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 borrowing arrangements, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs.

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. Following Key’s announced acquisition of First Niagara in October 2015, S&P and Fitch affirmed Key’s ratings but changed the outlook to negative. Moody’s placed Key’s ratings under review for downgrade. The Moody’s review could be outstanding beyond the targeted merger completion date. A rating downgrade of the securities of KeyCorp or KeyBank could

 

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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:

 

  ¿   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;

 

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

 

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

 

  ¿   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;

 

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

 

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

 

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

 

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

 

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

 

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

 

  ¿   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

 

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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.

Additionally, a significant portion of our business activities are concentrated within the real estate, healthcare, 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.

 

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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.

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, while maintaining our high ethical standards and assets safe and sound; our ability to attract, retain, and develop a strong employee workforce; and industry and general economic trends. Increased

 

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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.

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.

On October 30, 2015, we entered into an Agreement and Plan of Merger with First Niagara, pursuant to which First Niagara will merge with and into KeyCorp with KeyCorp continuing as the surviving company. 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, such as the First Niagara merger, 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

 

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could occur in connection with any future transaction. Additionally, if an acquisition, including the First Niagara merger, 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.

We may not be able to complete the acquisition of First Niagara.

Before the transactions contemplated in the merger agreement with First Niagara can be completed, various approvals must be obtained from the bank regulatory and other governmental authorities. In deciding whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider a variety of factors, including the regulatory standing of each of the parties and the effect of the merger on competition within their relevant jurisdiction. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain one or more of the required regulatory approvals or delay their receipt. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs, or place restrictions on the conduct of the combined company’s business or require branch divestitures. The level of divestitures required by the relevant governmental entities might be unacceptable to the parties, or could delay the closing of the merger or diminish the anticipated benefits of the merger. If required by regulatory authorities, we will divest branches in certain areas in a manner sufficient to eliminate such regulatory authorities’ competitive concerns. Despite the parties’ commitments to use their reasonable best efforts to comply with conditions imposed by regulatory entities, under the terms of the merger agreement, KeyCorp and First Niagara will not be required to take actions that would be more-likely-than-not to have a material and adverse effect on KeyCorp and its subsidiaries, taken as a whole, giving effect to the merger (measured on a scale relative to First Niagara and its subsidiaries, taken as a whole). There can be no assurance that regulators will not impose conditions, terms, obligations, or restrictions and that such conditions, terms, obligations, or restrictions will not have the effect of delaying the completion of the merger, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, we cannot provide assurance that any such conditions, terms, obligations, or restrictions will not result in the delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions, or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of the merger.

In addition to the various regulatory approvals, the merger agreement is subject to a number of other conditions that must be fulfilled in order to complete the merger. Those conditions include, but are not limited to: approval of the merger agreement by First Niagara and KeyCorp shareholders, as well as approval of the amendment to KeyCorp’s articles by KeyCorp’s shareholders, absence of orders prohibiting completion of the merger, effectiveness of the registration statement filed in connection with the transaction, and approval of the KeyCorp common shares and the new KeyCorp preferred stock to be issued to First Niagara common and preferred stockholders, as applicable, for listing on the NYSE. The conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may not be completed. In addition, the parties can mutually decide to terminate the merger agreement at any time, before or after shareholder approval, or KeyCorp or First Niagara may elect to terminate the merger agreement in certain other circumstances.

Several putative class action lawsuits have been filed by purported First Niagara stockholders alleging claims against First Niagara, the members of First Niagara’s Board of Directors, and KeyCorp. Among other remedies, the purported plaintiffs seek to enjoin the merger. The outcome of any such litigation is uncertain. If the cases or any additional cases filed in connection with the merger are not resolved, these lawsuits could prevent or delay the completion of the merger and result in significant costs to First Niagara and/or KeyCorp, including any costs associated with the indemnification of directors and officers.

We may fail to realize the anticipated benefits of the merger with First Niagara.

KeyCorp and First Niagara have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend on, among

 

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other things, our ability to combine the businesses of KeyCorp and First Niagara in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and that does not materially disrupt the existing customer relationships of KeyCorp or First Niagara nor result in decreased revenues due to loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the surviving corporation’s business, financial condition, operating results, and prospects. In addition, it is possible that the integration process could result in the disruption of our ongoing businesses or cause inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger.

We will incur transaction and integration costs in connection with the First Niagara merger.

We have incurred and expect to incur significant, nonrecurring costs in connection with consummating the First Niagara merger. In addition, we will incur integration costs following the completion of the merger as we integrate our business and First Niagara’s business, including facilities and systems consolidation costs and employment-related costs. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset these transaction and integration costs over time. We may also incur additional costs to maintain employee morale and to retain key employees. We will also incur significant legal, financial advisor, accounting, banking and consulting fees, fees relating to regulatory filings and notices, SEC filing fees, printing and mailing fees, and other costs associated with the merger. Some of these costs are payable regardless of whether the merger is completed.

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, 2015, Key leased approximately 477,781 square feet of the complex, encompassing the first 12 floors and the 54th through 56th floors of the 57-story Key Tower. In addition, Key owned two buildings in Brooklyn, Ohio, with office space that it operated from and leased out totaling approximately 563,466 square feet at December 31, 2015. As of the same date, KeyBank owned 434 branches and leased 532 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

     246         126         61         98         148         80         144         63         966   

ATMs

     290         158         68         121         251         110         180         78         1,256   

ITEM 3.  LEGAL PROCEEDINGS

The information presented 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”

     71       

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

     36, 71, 100       

Discussion of dividend restrictions in the sections captioned “Supervision and Regulation — Regulatory capital and liquidity — Dividend restrictions” and “Liquidity risk management — Liquidity for KeyCorp,” Note 3 (“Restrictions on Cash, Dividends and Lending Activities”), and Note 22 (“Shareholders’ Equity”)

     14, 88, 136, 216       

KeyCorp common share price performance (2011-2015) graph

     72       

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 and pursuant to our 2015 capital plan submitted to and not objected to by the Federal Reserve, we have authority to repurchase up to $725 million of our common shares in the open market or through privately negotiated transactions. Share repurchases under the 2015 capital plan began in the second quarter of 2015 and included repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under our 2015 capital plan were suspended in the fourth quarter of 2015 due to the pending merger with First Niagara.

The following table summarizes our repurchases of our common shares for the three months ended December 31, 2015. Common shares deemed surrendered by employees in connection with our stock compensation and benefit plans comprise the entire amount of share repurchases as disclosed in the table.

 

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

                                 2,720            $ 13.10                                                              —                                                      38,051,953     

November 1 — 30

     69                                     13.32           —           36,049,148     

December 1 — 31

     6,484               12.99           —           35,824,117     

Total

     9,273           $ 13.02           —          
  

 

 

              
    

 

 

                                  

 

(a) Includes common shares deemed surrendered by employees in connection with our stock compensation and benefit plans to satisfy tax obligations. There were no common shares repurchased in the open market during the fourth quarter of 2015.

 

(b) Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp common shares as follows: on October 31, 2015, at $12.42; on November 30, 2015, at $13.11; and on December 31, 2015, at $13.19.

 

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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 36 is incorporated herein by reference.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

     Page Number  

Introduction

     35                       

Terminology

     35                       

Selected financial data

     36                       

Economic overview

     37                       

Long-term financial goals

     38                       

Corporate strategy

     38                       

Strategic developments

     39                       

Highlights of Our 2015 Performance

     40                       

Financial performance

     40                       

Results of Operations

     44                       

Net interest income

     44                       

Noninterest income

     48                       

Noninterest expense

     51                       

Income taxes

     52                       

Line of Business Results

     53                       

Key Community Bank summary of operations

     53                       

Key Corporate Bank summary of operations

     55                       

Other Segments

     57                       

Financial Condition

     58                       

Loans and loans held for sale

     58                       

Securities

     67                       

Other investments

     69                       

Deposits and other sources of funds

     70                       

Capital

     70                       

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

     76                       

Off-balance sheet arrangements

     76                       

Contractual obligations

     77                       

Guarantees

     78                       

Risk Management

     78                       

Overview

     78                       

Market risk management

     79                       

Liquidity risk management

     85                       

Credit risk management

     89                       

Operational and compliance risk management

     97                       

Fourth Quarter Results

     98                       

Earnings

     98                       

Net interest income

     98                       

Noninterest income

     98                       

Noninterest expense

     99                       

Provision for loan and lease losses

     99                       

Income taxes

     99                       

Critical Accounting Policies and Estimates

     103                       

Allowance for loan and lease losses

     103                       

Valuation methodologies

     104                       

Derivatives and hedging

     106                       

Contingent liabilities, guarantees and income taxes

     106                       

European Sovereign and Non-Sovereign Debt Exposure

     108                       

Throughout the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”), we use certain acronyms and abbreviations. These terms are defined in Note 1 (“Summary of Significant Accounting Policies”), which begins on page 119.

 

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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 evaluated a component of Tier 1 capital, known as Tier 1 common equity, using the definitions of Tier 1 capital and total risk-weighted assets that were in effect in 2014, as well as a transition plan for full implementation of the Regulatory Capital Rules. The section entitled “Capital — Capital adequacy” in this MD&A provides more information on total capital, Tier 1 capital, Tier 1 common equity, and the Regulatory Capital Rules, including Common Equity Tier 1, 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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Figure 1. Selected Financial Data

 

dollars in millions, except per share amounts   2015     2014     2013     2012     2011    

Compound
Annual
Rate
of Change

(2011-2015)

 

YEAR ENDED DECEMBER 31,

           

Interest income

  $ 2,622      $ 2,554      $ 2,620      $ 2,705      $ 2,889        (1.9 )% 

Interest expense

    274        261        295        441        622        (15.1

Net interest income

    2,348        2,293        2,325        2,264        2,267        .7   

Provision for credit losses

    166        57        138        213        (88     N/M   

Noninterest income

    1,880        1,797        1,766        1,856        1,688        2.2   

Noninterest expense

    2,840        2,761        2,812        2,834        2,712        .9   

Income (loss) from continuing operations before income taxes

    1,222        1,272        1,141        1,073        1,331        (1.7

Income (loss) from continuing operations attributable to Key

    915        939        870        835        955        (.9

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

    1        (39     40        23        (35     N/M   

Net income (loss) attributable to Key

    916        900        910        858        920        (.1

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

    892        917        847        813        848        1.0   

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

    1        (39     40        23        (35     N/M   

Net income (loss) attributable to Key common shareholders

    893        878        887        836        813        1.9   

PER COMMON SHARE

           

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

  $ 1.06      $ 1.05      $ .93      $ .87      $ .91        3.1

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

    —          (.04     .04        .02        (.04     N/M   

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

    1.06        1.01        .98        .89        .87        4.0   

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

  $ 1.05      $ 1.04      $ .93      $ .86      $ .91        2.9

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

    —          (.04     .04        .02        (.04     N/M   

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

    1.05        .99        .97        .89        .87        3.8   

Cash dividends paid

    .29        .25        .215        .18        .10        23.7

Book value at year end

    12.51        11.91        11.25        10.78        10.09        4.4   

Tangible book value at year end

    11.22        10.65        10.11        9.67        9.11        4.3   

Market price at year end

    13.19        13.90        13.42        8.42        7.69        11.4   

Dividend payout ratio

    27.4     24.8     21.9     20.2     11.49     N/A   

Weighted-average common shares outstanding (000)

    836,846        871,464        906,524        938,941        931,934        (2.1

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

    844,489        878,199        912,571        943,259        935,801        (2.0

AT DECEMBER 31.

           

Loans

  $ 59,876      $ 57,381      $ 54,457      $ 52,822      $ 49,575        3.8

Earning assets

    83,780        82,269        79,467        75,055        73,729        2.6   

Total assets

    95,133        93,821        92,934        89,236        88,785        1.4   

Deposits

    71,046        71,998        69,262        65,993        61,956        2.8   

Long-term debt

    10,186        7,875        7,650        6,847        9,520        1.4   

Key common shareholders’ equity

    10,456        10,239        10,012        9,980        9,614        1.7   

Key shareholders’ equity

    10,746        10,530        10,303        10,271        9,905        1.6   

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS

           

Return on average total assets

    .99     1.08     1.03     1.03     1.16     N/A   

Return on average common equity

    8.63        9.01        8.48        8.25        9.17        N/A   

Return on average tangible common equity (d)

    9.64        10.04        9.45        9.16        10.20        N/A   

Net interest margin (TE)

    2.88        2.97        3.12        3.21        3.16        N/A   

Cash efficiency ratio (d)

    65.9        66.2        67.3        67.8        68.0        N/A   

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS

           

Return on average total assets

    .97     .99     1.02     .99     1.04     N/A   

Return on average common equity

    8.64        8.63        8.88        8.48        8.79        N/A   

Return on average tangible common equity (d)

    9.65        9.61        9.90        9.42        9.78        N/A   

Net interest margin (TE)

    2.85        2.94        3.02        3.13        3.09        N/A   

Loan to deposit (e)

    87.8        84.6        83.8        85.8        87.0        N/A   

CAPITAL RATIOS AT DECEMBER 31,

           

Key shareholders’ equity to assets

    11.30     11.22     11.09     11.51     11.16     N/A   

Key common shareholders’ equity to assets

    10.99        10.91        10.78        11.18        10.83        N/A   

Tangible common equity to tangible assets (d)

    9.98        9.88        9.80        10.15        9.88        N/A   

Common Equity Tier 1 (d)

    10.94        N/A        N/A        N/A        N/A        N/A   

Tier 1 common equity (d)

    N/A        11.17        11.22        11.36        11.26        N/A   

Tier 1 risk-based capital

    11.35        11.90        11.96        12.15        12.99        N/A   

Total risk-based capital

    12.97        13.89        14.33        15.13        16.51        N/A   

Leverage

    10.72        11.26        11.11        11.41        11.79        N/A   

TRUST AND BROKERAGE ASSETS

           

Assets under management

  $ 33,983      $ 39,157      $ 36,905      $ 34,744      $ 34,255        N/A   

Nonmanaged and brokerage assets

    47,681        49,147        47,418        35,550        30,639        N/A   

OTHER DATA

           

Average full-time-equivalent employees

    13,483        13,853        14,783        15,589        15,381        (2.6 )% 

Branches

    966        994        1,028        1,088        1,058        (1.8

 

(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.

 

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

 

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(d) See Figure 4 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity,” “Common Equity Tier 1” (compliance date of January 1, 2015, under the Regulatory Capital Rules), “Tier 1 common equity” (prior to January 1, 2015), 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 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).

Economic overview

The economy continued its modest recovery in 2015, with overall GDP of 2.4% unchanged from the prior year. 2015 was a volatile year, with the first quarter starting at a slow pace, then growth picking up over the next six months before decelerating again in the fourth quarter. Throughout 2015, slowing emerging market growth, a strengthening U.S. dollar, and falling demand for U.S. exports were all significant factors that held back growth. Additionally, oil prices dropped 32% over the year, giving consumers a boost in discretionary income but resulting in a sharp decline in energy-related investments. The stock market disappointed in 2015, with the S&P 500 equity index dropping 1%, compared to an 11% increase in 2014, largely due to uncertainty around Chinese equity markets and oil and commodity prices. Globally, the economic recovery slowed; the European Central Bank maintained an easy money policy as their recovery stalled and the risk of deflation rose, while emerging markets struggled in the face of low commodity prices and a weakening Chinese economy.

For 2015, 2.7 million new jobs were added in the U.S. The unemployment rate fell further, from 5.6% at December 31, 2014, to 5.0% at December 31, 2015. While weak labor force participation was a factor, solid employment gains also drove the decline. Slack remains, however, reflected in underwhelming wage growth for much of the year. Consumers preferred to solidify their balance sheets in 2015, as the savings rate rose to 5.5% in December 2015 while consumer spending, although still solid, declined to 2.6%. By December 2015, headline inflation remained at .7%, mainly due to a further decline in energy prices. Core inflation also remained low throughout the year, ending 2015 at 2.1%, up from 1.6% at the end of 2014.

As the economy expanded further and the labor market continued to strengthen, the housing market gained traction, with slight improvement across nearly all metrics in 2015. While household formation is normalizing, a declining home ownership rate continues to weigh on sales growth. Existing home sales finished 2015 at a seasonally adjusted annual rate of 5.46 million, up 7.7% from December 2014. New home sales ended the year on a solid note, reaching a seasonally adjusted annual rate of 544,000 in December 2015, up 9.9% from 2014. Price appreciation picked up modestly, with the median price for existing homes up 6.3% year-over-year in December 2015, compared to 4.6% in 2014. Housing starts accelerated further, up 6.4% from December 2014, driven by gains in both single and multi-family construction of 6.1% and 7.0%, respectively.

The Federal Reserve remained active and accommodative for most of 2015. The Federal Open Market Committee (“FOMC”) decided to maintain the existing policy of reinvesting principal payments to help accommodate financial conditions throughout the year. In addition, the FOMC kept the federal funds target rate near zero until December 2015, lifting the target rate by 25 basis points, citing an improving labor market and the expectation that inflation would return to its 2% objective over the medium term. The 10-year U.S. Treasury yield began the year at 2.2%, and dipped to as low as 1.7% for the first quarter of 2015, driven by disappointing weather-related economic data. In the third quarter of 2015, with rising speculation around higher interest rates, the 10-year U.S. Treasury yield began to increase, reaching 2.4%, and ended the year at 2.3%, as interest rates eased (even after the FOMC raised rates) due to concerns of slower global growth, lower energy prices, and equity market volatility.

 

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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-offs to average loans ratio and provision for credit losses to average loans ratio in the range of .40% to .60%;

 

¿ Grow high quality and diverse revenue streams by targeting a net interest margin in the range of 3.00% to 3.25% 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

 

¿ Maintain disciplined capital management 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 months and year ended December 31, 2015.

Figure 2. Evaluation of Our Long-Term Financial Goals

 

KEY Business Model

  Key Metrics (a)     4Q15       

 

Year ended

December 31, 2015

  

  

    Targets   

Balance sheet efficiency

  Loan-to-deposit ratio (b)     88 %        88 %        90 - 100 %   

Moderate risk profile

  Net loan charge-offs to average loans     .25 %        .24 %        .40 - .60 %   
  Provision for credit losses to average loans     .30 %        .28 %     

High quality, diverse

revenue streams

  Net interest margin     2.87 %        2.88 %        3.00 - 3.25 %   
  Noninterest income to total revenue     44 %        44 %        > 40 %   

Positive operating leverage

  Cash efficiency ratio (c)     66.4 %        65.9 %        < 60 %   

Financial Returns

  Return on average assets     .97 %        .99 %        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 measure: 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 2015-2016 strategic focus is to grow by building enduring relationships through client-focused solutions and service. We intend to pursue this strategy by growing profitably; acquiring and expanding targeted client relationships; effectively managing risk and rewards; maintaining financial strength; and engaging, retaining, and inspiring our diverse and high-performing workforce. These strategic priorities for enhancing long-term shareholder value are described in more detail below.

 

¿ Grow profitably — We will continue to focus on generating positive operating leverage by 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.

 

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¿ Acquire and expand targeted client 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.

 

¿ 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 and regulators to manage capital to support our clients’ needs and drive long-term 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 2015 to support our corporate strategy:

 

¿ We continue to focus on growing our businesses and remain committed to improving productivity and efficiency. During 2015, we generated positive operating leverage, with pre-provision net revenue up 4.7% from 2014. Net interest income benefited from solid loan growth, driven by a 12% increase in average commercial, financial and agricultural loans. Noninterest income benefited from increases in several of our core fee-based businesses: investment banking and debt placement fees, which had record high fees in 2015 due to stronger financial advisory fees and loan syndications, trust and investment services income, corporate services income, and cards and payments income. Although noninterest expense increased from prior year, this increase was primarily due to the ongoing investments we have made in our businesses to drive revenue growth, including the addition of client-facing personnel across our franchise.

 

¿ Our strong risk management practices and a more favorable credit environment resulted in another year of solid credit quality trends. For 2015, net loan charge-offs were .24% of average loans and the provision for credit losses was .28% of average loans, both well below our targeted range.

 

¿ We also made progress on other strategic initiatives. On October 30, 2015, we announced that KeyCorp entered into a definitive agreement and plan of merger to acquire all of the outstanding capital stock of First Niagara. The merger is currently expected to be completed during the third quarter of 2016 and is subject to customary closing conditions including the approval of regulators and the shareholders of both KeyCorp and First Niagara. This merger is expected to accelerate our transformation into a high-performing regional bank, generate attractive financial returns, provide significant revenue opportunities, and create a complementary business mix and a more balanced franchise.

 

¿ Capital management remained a priority in 2015. On March 11, 2015, the Federal Reserve announced that it did not object to our 2015 capital plan submitted as part of the annual CCAR process. The 2015 capital plan included a common share repurchase program of up to $725 million, including repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2015 capital plan began in the second quarter of 2015. During the second and third quarters of 2015, we completed $252 million of common share repurchases under this authorization. In addition, we completed $208 million of common share repurchases in the first quarter of 2015 under our 2014 capital plan for a total of $460 million of open market common share repurchases during 2015. We suspended our existing share repurchase program in the fourth quarter of 2015 due to the pending merger with First Niagara. We plan to include share repurchases in the upcoming 2016 CCAR submission.

 

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¿ The Board declared a quarterly dividend of $.065 per common share for the first quarter of 2015. Our 2015 capital plan proposed a 15% increase in our quarterly common share dividend to $.075 per share, which was approved by our Board in May 2015. Consistent with our 2015 capital plan, we made a dividend payment of $.075 per common share for each of the second, third, and fourth quarters of 2015, which brought our annual dividend to $.29 per common share for 2015. The Board will consider an additional potential increase in our quarterly common share dividend, up to $.085 per share, in 2016 for the fifth quarter of the 2015 capital plan.

Highlights of Our 2015 Performance

Financial performance

For 2015, we announced net income from continuing operations attributable to Key common shareholders of $892 million, or $1.05 per common share. These results compare to net income from continuing operations attributable to Key common shareholders of $917 million, or $1.04 per common share, for 2014.

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

     2015           2014           2013     

SUMMARY OF OPERATIONS

        

Income (loss) from continuing operations attributable to Key

       $         915             $         939             $         870     

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

     1           (39)           40     

 

 

Net income (loss) attributable to Key

       $ 916             $ 900             $ 910     
  

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations attributable to Key

       $ 915             $ 939             $ 870     

Less:        Dividends on Series A Preferred Stock

     23           22           23     

 

 

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

     892           917           847     

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

     1           (39)           40     

 

 

Net income (loss) attributable to Key common shareholders

       $ 893             $ 878             $ 887     
  

 

 

    

 

 

    

 

 

 

PER COMMON SHARE — ASSUMING DILUTION

        

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

       $ 1.05             $ 1.04             $ .93     

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

     —           (.04)           .04     

 

 

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

       $ 1.05             $ .99             $ .97     
  

 

 

    

 

 

    

 

 

 
                            

 

(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 2016 expectations, as disclosed below, do not include the effect of the pending First Niagara merger, which is expected to be completed in the third quarter of 2016.

Our 2015 full-year results reflect success in executing our strategy by generating positive operating leverage and maintaining strong risk management and disciplined capital management.

Our taxable-equivalent net interest income for 2015 was $2.376 billion, and the net interest margin was 2.88%. These results compare to taxable-equivalent net interest income of $2.317 billion and a net interest margin of 2.97% for the prior year. The increase in net interest income reflects higher earning asset balances, partially offset by lower earning asset yields, which also drove the decline in the net interest margin. In 2016, we expect low-single-digit (less than 5%) growth in net interest income without the benefit of higher interest rates or mid-single-digit (4% to 6%) growth with the benefit of higher interest rates compared to the prior year.

 

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Our noninterest income was $1.9 billion, up $83 million, or 4.6%, from 2014. Investment banking and debt placement fees benefited from our business model and had a record high year, increasing $48 million from 2014. Trust and investment services income increased $30 million, primarily due to the full-year 2015 impact of the September 2014 acquisition of Pacific Crest Securities. Noninterest income for 2015 also included increases of $20 million in corporate services income due to higher loan commitment fees and $17 million in cards and payments income due to higher merchant services, purchase card, and ATM debit card fees driven by increased volume. Other income also increased $10 million. These increases were partially offset by declines of $27 million in net gains from principal investing and $23 million in operating lease income and other leasing gains. In 2016, we expect mid-single-digit (4% to 6%) growth in noninterest income compared to 2015.

Our noninterest expense was $2.8 billion, an increase of $79 million, or 2.9%, from 2014. We recognized $61 million of merger-, efficiency-, and pension-related charges in 2015 compared to $80 million of efficiency- and pension-related charges in 2014. Personnel expense increased $61 million, driven by higher incentive and stock-based compensation, employee benefits, and salaries, partially offset by lower technology contract labor and severance. Nonpersonnel expense increased $18 million, primarily due to increases in marketing of $8 million and computer processing of $6 million. In 2016, we expect noninterest expense to be relatively stable (plus or minus 2%) with 2015.

Average loans totaled $58.6 billion for 2015, compared to $55.7 billion in 2014. Commercial, financial and agricultural loan growth of $3.3 billion was broad-based across our commercial lines of business. Consumer loans were slightly down, as modest increases across our core consumer loan portfolio, primarily direct term loans and credit cards, were offset by run-off in our designated consumer exit portfolio. For 2016, we anticipate average loan growth in the mid-single-digit (4% to 6%) range.

Average deposits, excluding deposits in foreign office, totaled $70.1 billion for 2015, an increase of $2.9 billion compared to 2014. NOW and money market deposit accounts and demand deposits increased $2 billion and $1.9 billion, respectively, reflecting growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by run-off in certificates of deposit and other time deposits. Our consolidated loan to deposit ratio was 87.8% at December 31, 2015, compared to 84.6% at December 31, 2014.

We maintained credit discipline in 2015, and our asset quality ratios remained strong. The provision for credit losses was $166 million for 2015 compared to $57 million for 2014. The increase in our provision is due to the growth in our loan portfolio over the past twelve months as well as lower recoveries in 2015 compared to 2014. Net loan charge-offs were $142 million, or .24%, of average loan balances for 2015, compared to $113 million, or .20%, for 2014. Our nonperforming loans declined to $387 million, or .65%, of period-end loans at December 31, 2015, compared to $418 million, or .73%, at December 31, 2014. Our ALLL was $796 million, or 1.33% of period-end loans, compared to $794 million, or 1.38%, at December 31, 2014, and represented 206% and 190% coverage of nonperforming loans at December 31, 2015, and December 31, 2014, respectively. In 2016, 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 ALLL, as a percentage of period-end loans, to remain relatively stable (plus or minus 2%, which would approximate a three basis point change) with 2015.

Our capital ratios remain strong. Our tangible common equity and Tier 1 risk-based capital ratios were 9.98% and 11.35%, respectively, at December 31, 2015, compared to 9.88% and 11.90%, respectively, at December 31, 2014. In addition, our Common Equity Tier 1 was 10.94% at December 31, 2015. 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.

 

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Our capital management remains focused on creating value. During 2015, our full-year dividend per common share increased 16% from the prior year, and we repurchased $460 million of common shares.

Figure 4 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible common equity,” “Common Equity Tier 1,” “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. Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of Tier 1 capital known as Common Equity Tier 1. Because the Federal Reserve has long indicated that voting common shareholders’ equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Common Equity Tier 1 is consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail under the section “Supervision and Regulation” in Item 1 of this report, also make Common Equity Tier 1 a priority. The Regulatory Capital Rules change the regulatory capital standards that apply to BHCs by, among other changes, phasing out the treatment of trust preferred securities and cumulative preferred securities as Tier 1 eligible capital. Starting in 2016, our trust preferred securities will only be included in Tier 2 capital. Since analysts and banking regulators may assess our capital adequacy using tangible common equity and Common Equity Tier 1, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 4 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

Figure 4 also shows the computation for and reconciliation of pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for credit 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   2015            2014            2013            2012            2011        
                                                                                          

Tangible common equity to tangible assets at period end

                       

Key shareholders’ equity (GAAP)

  $ 10,746         $ 10,530         $ 10,303         $ 10,271         $ 9,905     

Less:

  

Intangible assets (a)

    1,080           1,090           1,014           1,027           934     
  

Series B Preferred Stock

    —             —             —             —             —       
  

Series A Preferred Stock (b)

    281           282           282           291           291     
                                                                                          
  

Tangible common equity (non-GAAP)

  $ 9,385         $ 9,158         $ 9,007         $ 8,953         $ 8,680     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Total assets (GAAP)

  $ 95,133         $ 93,821         $ 92,934         $ 89,236         $ 88,785     

Less:

  

Intangible assets (a)

    1,080           1,090           1,014           1,027           934     
                                                                                          
  

Tangible assets (non-GAAP)

  $ 94,053         $ 92,731         $ 91,920         $ 88,209         $ 87,851     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

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

    9.98        %         9.88        %         9.80        %         10.15        %         9.88        %   

Common Equity Tier 1 at period end

                       

Key shareholders’ equity (GAAP)

  $ 10,746           —             —             —             —       

Less:

  

Series A Preferred Stock (b)

    281           —             —             —             —       
                                                                                          
  

Common Equity Tier 1 capital before adjustments and deductions

    10,465           —             —             —             —       

Less:

  

Goodwill, net of deferred taxes

    1,034           —             —             —             —       
  

Intangible assets, net of deferred taxes

    26           —             —             —             —       
  

Deferred tax assets

    1           —             —             —             —       
  

Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes

    (58        —             —             —             —       
  

Accumulated gains (losses) on cash flow hedges, net of deferred taxes

    (20        —             —             —             —       
  

Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes

    (365        —             —             —             —       
                                                                                          
  

Total Common Equity Tier 1 capital

  $ 9,847                         
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Net risk-weighted assets (regulatory)

  $ 89,980           —             —             —             —       

Common Equity Tier 1 ratio (non-GAAP)

    10.94        %         —             —             —             —       

Tier 1 common equity at period end

                       

Key shareholders’ equity (GAAP)

    —           $ 10,530         $ 10,303         $ 10,271         $ 9,905     

Qualifying capital securities

    —             339           339           339           1,046     

Less:

  

Goodwill

    —             1,057           979           979           917     
  

Accumulated other comprehensive income (loss) (c)

    —             (395        (394        (172        (72  
  

Other assets (d)

    —             83           89           114           72     
                                                                                          
  

Total Tier 1 capital (regulatory)

    —             10,124           9,968           9,689           10,034     

Less:

  

Qualifying capital securities

    —             339           339           339           1,046     
  

Series A Preferred Stock (b)

    —             282           282           291           291     
                                                                                          
  

Total Tier 1 common equity (non-GAAP)

    —           $ 9,503         $ 9,347         $ 9,059         $ 8,697     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Net risk-weighted assets (regulatory)

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

Tier 1 common equity ratio (non-GAAP)

    —             11.17        %         11.22        %         11.36        %         11.26        %   

Pre-provision net revenue

                       

Net interest income (GAAP)

  $ 2,348         $ 2,293         $ 2,325         $ 2,264         $ 2,267     

Plus:

  

Taxable-equivalent adjustment

    28           24           23           24           25     
  

Noninterest income (GAAP)

    1,880           1,797           1,766           1,856           1,688     

Less:

  

Noninterest expense (GAAP)

    2,840           2,761           2,812           2,834           2,712     
                                                                                          

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

  $ 1,416         $ 1,353         $ 1,302         $ 1,310         $ 1,268     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Average tangible common equity

                       

Average Key shareholders’ equity (GAAP)

  $ 10,626         $ 10,467         $ 10,276         $ 10,144         $ 10,133     

Less:

  

Intangible assets (average) (e)

    1,085           1,039           1,021           978           935     
  

Series B Preferred Stock (average)

    —             —             —             —             590     
  

Series A Preferred Stock (average)

    290           291           291           291           291     
                                                                                          
  

Average tangible common equity (non-GAAP)

  $ 9,251         $ 9,137         $ 8,964         $ 8,875         $ 8,317     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Return on average tangible common equity from continuing operations

                       

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

  $ 892         $ 917         $ 847         $ 813         $ 848     

Average tangible common equity (non-GAAP)

    9,251           9,137           8,964           8,875           8,317     

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

    9.64        %         10.04        %         9.45        %         9.16        %         10.20        %   

Return on average tangible common equity consolidated

                       

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

  $ 893         $ 878         $ 887         $ 836         $ 813     

Average tangible common equity (non-GAAP)

    9,251           9,137           8,964           8,875           8,317     

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

    9.65        %         9.61        %         9.90        %         9.42        %         9.78        %   

Cash efficiency ratio

                       

Noninterest expense (GAAP)

  $ 2,840         $ 2,761         $ 2,812         $ 2,834         $ 2,712     

Less:

  

Intangible asset amortization (GAAP)

    36           39           44           23           4     
                                                                                          
  

Adjusted noninterest expense (non-GAAP)

  $     2,804         $     2,722         $     2,768         $     2,811         $     2,708     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Net interest income (GAAP)

  $ 2,348         $ 2,293         $ 2,325         $ 2,264         $ 2,267     

Plus:

  

Taxable-equivalent adjustment

    28           24           23           24           25     
  

Noninterest income (GAAP)

    1,880           1,797           1,766           1,856           1,688     
                                                                                          
  

Total taxable-equivalent revenue (non-GAAP)

  $ 4,256         $ 4,114         $ 4,114         $ 4,144         $ 3,980     
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Cash efficiency ratio (non-GAAP)

    65.9        %         66.2        %         67.3        %         67.8        %         68.0        %   
                                                                                          

 

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(a) For the years ended December 31, 2015, December 31, 2014, December 31, 2013, and December 31, 2012, intangible assets exclude $45 million, $68 million, $92 million, and $123 million, respectively, of period-end purchased credit card receivables.

 

(b) Net of capital surplus for the years ended December 31, 2015, December 31, 2014, and December 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.

 

(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 December 31, 2014, December 31, 2013, December 31, 2012, and December 31, 2011.

 

(e) For the years ended December 31, 2015, December 31, 2014, December 31, 2013, and December 31, 2012, average intangible assets exclude $55 million, $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    2015        
                      

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

    

Common Equity Tier 1 under current Regulatory Capital Rules

   $ 9,847     

Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:

    

Deferred tax assets and other intangible assets (f)

     (40  
                      
 

Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules (g)

   $ 9,807     
    

 

 

   

Net risk-weighted assets under current Regulatory Capital Rules

   $         89,980     

Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:

    

Mortgage servicing assets (h)

     482     

All other assets (i)

     3     
                      
 

Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules (g)

   $ 90,465     
    

 

 

   

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

     10.84        %   
                      

 

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

 

(g) The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies’ Regulatory Capital Rules (as fully phased-in on January 1, 2019); we are subject to the Regulatory Capital Rules under the “standardized approach.”

 

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

 

(i) Includes the phase-in of deferred tax assets arising from temporary differences at 250% risk-weight. Additionally, under the fully implemented rule, certain deferred tax assets and intangible assets subject to the transition provision are no longer required to be risk-weighted because they are deducted directly from capital.

Results of Operations

Net interest income

One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

 

¿ the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities;

 

¿ the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;

 

¿ the use of derivative instruments to manage interest rate risk;

 

¿ interest rate fluctuations and competitive conditions within the marketplace; and

 

¿ asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “taxable-equivalent basis” (i.e.,

 

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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 2015 was $2.376 billion, and the net interest margin was 2.88%. These results compare to taxable-equivalent net interest income of $2.317 billion and a net interest margin of 2.97% for the prior year. The $59 million increase in net interest income reflects higher earning asset balances, partially offset by lower earning asset yields, which also drove the decline in the net interest margin.

Taxable-equivalent net interest income for 2014 decreased $31 million compared to 2013, and the net interest margin declined 15 basis points. The decreases in net interest income and the net interest margin were attributable to lower earning asset yields. Loan growth, the maturity of higher-rate certificates of deposit, and a more favorable mix of lower-cost deposits and wholesale borrowings partially offset the impact of lower earning asset yields.

Average earning assets totaled $82.5 billion for 2015, compared to $78.1 billion in 2014. Contributing to the 2015 increase in average earning assets was average loan growth of $2.9 billion driven by commercial, financial and agricultural loans, which increased $3.3 billion and was broad-based across our commercial lines of business. In addition, our average securities available for sale portfolio increased $1.5 billion compared to 2014 due to higher levels of liquidity, driven by deposit growth and long-term debt issuances, which benefited KeyBank’s LCR and credit ratings profile.

Average deposits, excluding deposits in foreign office, totaled $70.1 billion for 2015, an increase of $2.9 billion compared to 2014. NOW and money market deposit accounts increased $2 billion, and demand deposits increased $1.9 billion, reflecting growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by run-off in certificates of deposit and other time deposits.

 

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

 

     2015             2014       

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

   $ 29,658        (d )    $ 953            3.21         %       $     26,375        (d )    $ 866            3.28       %

Real estate — commercial mortgage

     8,020          295            3.68            7,999          303            3.79      

Real estate — construction

     1,143          43            3.73            1,061          43            4.07      

Commercial lease financing

     3,976          143            3.60            4,239          156            3.67      
 

Total commercial loans

     42,797          1,434            3.35            39,674          1,368            3.45      

Real estate — residential mortgage

     2,244          95            4.21            2,201          96            4.37      

Home equity:

                               

Key Community Bank

     10,266          399            3.89            10,340          405            3.91      

Other

     237          19            7.85            299          23            7.80      
 

Total home equity loans

     10,503          418            3.98            10,639          428            4.02      

Consumer other — Key Community Bank

     1,580          103            6.54            1,501          104            6.92      

Credit cards

     752          81            10.76            712          78            10.95      

Consumer other:

                               

Marine

     675          43            6.36            894          56            6.22      

Other

     43          3            7.56            58          4            7.70      
 

Total consumer other

     718          46            6.43            952          60            6.31      
 

Total consumer loans

     15,797          743            4.70            16,005          766            4.79      
 

Total loans

     58,594          2,177            3.71            55,679          2,134            3.83      

Loans held for sale

     959          37            3.85            570          21            3.76      

Securities available for sale (b), (e)

     13,720          293            2.14            12,210          277            2.27      

Held-to-maturity securities (b)

     4,936          96            1.95            4,949          93            1.88      

Trading account assets

     761          21            2.80            932          25            2.70      

Short-term investments

     2,843          8            .27            2,886          6            .21      

Other investments (e)

     706          18            2.63            865          22            2.53      
 

Total earning assets

     82,519          2,650            3.21            78,091          2,578            3.30      

Allowance for loan and lease losses

     (791                   (818             

Accrued income and other assets

     10,300                      9,806                

Discontinued assets

     2,132                      3,828                
 

Total assets

   $ 94,160                    $ 90,907                
  

 

 

                 

 

 

              

LIABILITIES

                               

NOW and money market deposit accounts

   $ 36,258          56            .15          $ 34,283          48            .14      

Savings deposits

     2,372          —              .02            2,446          1            .02      

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

     2,041          26            1.28            2,616          35            1.35      

Other time deposits

     3,115          22            .71            3,495          32            .91      

Deposits in foreign office

     489          1            .23            615          1            .23      
 

Total interest-bearing deposits

     44,275          105            .24            43,455          117            .27      

Federal funds purchased and securities sold under repurchase agreements

     632          —              .04            1,182          2            .16      

Bank notes and other short-term borrowings

     572          9            1.52            597          9            1.49      

Long-term debt (f), (g)

     7,334          160            2.24            5,161          133            2.68      
 

Total interest-bearing liabilities

     52,813          274            .52            50,395          261            .52      

Noninterest-bearing deposits

     26,355                      24,410                

Accrued expense and other liabilities

     2,222                      1,791                

Discontinued liabilities (g)

     2,132                      3,828                
 

Total liabilities

     83,522                      80,424                

EQUITY

                               

Key shareholders’ equity

     10,626                      10,467                

Noncontrolling interests

     12                      16                
 

Total equity

     10,638                      10,483                
 

Total liabilities and equity

   $     94,160                    $ 90,907                
  

 

 

                 

 

 

              

Interest rate spread (TE)

               2.69         %                   2.78       %
 

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

         2,376            2.88         %             2,317            2.97       %
            

 

 

                 

 

 

    

TE adjustment (b)

         28                      24            
 

Net interest income, GAAP basis

       $     2,348                    $     2,293            
      

 

 

                 

 

 

          
                                                                                             

 

(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 $88 million, $93 million, $95 million, and $36 million of assets from commercial credit cards for the years ended December 31, 2015, 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)

 

2013      2012             2011             Compound Annual Rate of
Change (2011-2015)
       
Average
Balance
           Interest      (a)    Yield/
Rate
     (a)      Average
Balance
           Interest      (a)    Yield/
Rate
     (a)      Average
Balance
          Interest      (a)    Yield/
Rate
     (a)      Average
Balance
                Interest         
                                                       
                                                       
$     23,723        (d )    $ 855            3.60         %       $     21,141        (d )    $ 810            3.83         %       $     17,507         $ 705            4.03         %         11.1        %         6.2        %   
  7,591          312            4.11            7,656          339            4.43            8,437           380            4.50            (1.0        (4.9  
  1,058          45            4.25            1,171          56            4.74            1,677           73            4.36            (7.4        (10.0  
  4,683          172            3.67            5,142          187            3.64            5,846           293            5.01            (7.4        (13.4  
     
  37,055          1,384            3.73            35,110          1,392            3.96            33,467           1,451            4.34            5.0           (.2  
  2,185          98            4.49            2,049          100            4.86            1,850           97            5.25            3.9           (.4  
                                                       
  10,086          397            3.93            9,520          384            4.03            9,390           387            4.12            1.8           .6     
  377          29            7.70            473          37            7.81            598           46            7.66            (16.9        (16.2  
     
  10,463          426            4.07            9,993          421            4.21            9,988           433            4.34            1.0           (.7  
  1,404          103            7.33            1,269          121            9.53            1,167           113            9.62            6.2           (1.8  
  701          83            11.86            288          40            13.99            —             —              —              N/M           N/M     
                                                       
  1,172          74            6.26            1,551          97            6.26            1,992           125            6.28            (19.5        (19.2  
  74          6            8.32            102          8            8.14            142           11            7.87            (21.3        (22.9  
     
  1,246          80            6.38            1,653          105            6.38            2,134           136            6.38            (19.6        (19.5  
     
  15,999          790            4.94            15,252          787            5.16            15,139           779            5.14            .9           (.9  
     
  53,054          2,174            4.10            50,362          2,179            4.33            48,606           2,230            4.59            3.8           (.5  
  532          20            3.72            579          20            3.45            387           14            3.58            19.9           21.5     
  12,689          311            2.49            13,422          399            3.08            18,766           584            3.20            (6.1        (12.9  
  4,387          82            1.87            3,511          69            1.97            514           12            2.35            57.2           51.6     
  756          21            2.78            718          18            2.48            878           26            2.97            (2.8        (4.2  
  2,948          6            .20            2,116          6            .27            2,543           6            .25            2.3           5.9     
  1,028          29            2.84            1,141          38            3.27            1,264           42            3.14            (11.0        (15.6  
     
  75,394          2,643            3.51            71,849          2,729            3.82            72,958           2,914            4.02            2.5           (1.9  
  (879                   (919                   (1,250                    (8.7       
  9,662                      9,912                      10,341                       (.1       
  5,036                      5,573                      6,247                       (19.3       
     
$ 89,213                    $ 86,415                    $ 88,296                       1.3        %        

 

 

                 

 

 

                 

 

 

                         
                                                       
$ 32,846          53            .16          $ 29,673          56            .19          $ 27,001           71            .26            6.1        %         (4.6  
  2,505          1            .04            2,218          1            .05            1,958           1            .06            3.9           (100.0  
  2,829          50            1.76            3,574          94            2.64            4,931           149            3.02            (16.2        (29.5  
  4,084          53            1.30            5,386          104            1.92            7,185           166            2.31            (15.4        (33.2  
  567          1            .23            767          2            .23            807           3            .30            (9.5        (19.7  
     
  42,831          158            .37            41,618          257            .62            41,882           390            .93            1.1           (23.1  
  1,802          2            .13            1,814          4            .19            1,981           5            .27            (20.4        (100.0  
  394          8            1.89            413          7            1.69            619           11            1.84            (1.6        (3.9  
  4,184          127            3.28            4,673          173            4.10            7,293           216            3.18            .1           (5.8  
     
  49,211          295            .60            48,518          441            .92            51,775           622            1.21            .4           (15.1  
  23,046                      20,217                      17,381                       8.7          
  1,656                      1,958                      2,658                       (3.5       
  4,995                      5,555                      6,232                       (19.3       
     
  78,908                      76,248                      78,046                       1.4          
                                                       
  10,276                      10,144                      10,133                       1.0          
  29                      23                      117                       (36.6       
     
  10,305                      10,167                      10,250                       .7          
     
$ 89,213                    $ 86,415                    $ 88,296                       1.3        %        

 

 

                 

 

 

                 

 

 

                         
            2.91         %                   2.90         %                    2.81         %             
     
      2,348            3.12         %             2,288            3.21         %              2,292            3.16         %              .7     
         

 

 

                 

 

 

                  

 

 

              
      23                      24                       25                       2.3     
     
    $ 2,325                    $     2,264                     $     2,267                       .7        %   
   

 

 

                 

 

 

                  

 

 

                    
                                                                                                                                                                           

 

(e) Yield is calculated on the basis of amortized cost.

 

(f) Rate calculation excludes basis adjustments related to fair value hedges.

 

(g) A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations.

 

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Figure 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

 

     2015 vs. 2014          2014 vs. 2013      
in millions    Average
Volume
    Yield/
Rate
    Net
Change
    (a)    Average
Volume
    Yield/
Rate
    Net
Change
    (a)

INTEREST INCOME

                 

Loans

   $       110      $       (67   $       43         $ 105      $ (145   $ (40  

Loans held for sale

     15        1        16           1        —          1     

Securities available for sale

     33        (17     16           (11     (23     (34  

Held-to-maturity securities

     —          3        3           11        —          11     

Trading account assets

     (5     1        (4        5        (1     4     

Short-term investments

     —          2        2           —          —          —       

Other investments

     (4     —          (4        (4     (3     (7  
     

Total interest income (TE)

     149        (77     72           107        (172     (65  
                 

INTEREST EXPENSE

                 

NOW and money market deposit accounts

     3        5        8           2        (7     (5  

Savings deposits

     —          (1     (1        —          —          —       

Certificates of deposit ($100,000 or more)

     (7     (2     (9        (4     (11     (15  

Other time deposits

     (3     (7     (10        (7     (14     (21  

Deposits in foreign office

     —          —          —             —          —          —       
     

Total interest-bearing deposits

     (7     (5     (12        (9     (32     (41  

Federal funds purchased and securities sold under repurchase agreements

     (1     (1     (2        (1     1        —       

Bank notes and other short-term borrowings

     —          —          —             3        (2     1     

Long-term debt

     50        (23     27           27        (21     6     
     

Total interest expense

     42        (29     13           20        (54     (34  
     

Net interest income (TE)

   $ 107      $ (48   $ 59         $ 87      $ (118   $ (31  
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

   
     

 

(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 2015 was $1.88 billion, up $83 million, or 4.6%, from 2014. Investment banking and debt placement fees benefited from our business model and had a record year, increasing $48 million from 2014. Trust and investment services income increased $30 million, primarily due to the full year 2015 impact of the September 2014 acquisition of Pacific Crest Securities. Noninterest income for 2015 also included increases of $20 million in corporate services income due to higher non-yield loan fees and dealer trading and derivatives income and $17 million in cards and payments income due to higher merchant services, purchase card, and ATM debit card fees driven by increased volume. Other income also increased $10 million. These increases were partially offset by declines of $27 million in net gains from principal investing and $23 million in operating lease income and other leasing gains.

In 2014, noninterest income increased $31 million, or 1.8%, compared to 2013. Investment banking and debt placement fees increased $64 million from 2013. Net gains from principal investing were $26 million higher than prior year, and trust and investment services income increased $10 million, primarily due to the September 2014 acquisition of Pacific Crest Securities. These increases were partially offset by declines of $21 million in operating lease income and other leasing gains, $20 million in service charges on deposit accounts, $12 million in mortgage servicing fees, and $9 million in consumer mortgage income. Other income also decreased $15 million.

 

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Figure 7. Noninterest Income

 

Year ended December 31,                                 Change 2015 vs. 2014                 
dollars in millions    2015      2014      2013      Amount     Percent        
               

Trust and investment services income

   $ 433       $ 403       $ 393       $ 30        7.4        %   

Investment banking and debt placement fees

     445         397         333         48        12.1     

Service charges on deposit accounts

     256         261         281         (5     (1.9  

Operating lease income and other leasing gains

     73         96         117         (23     (24.0  

Corporate services income

     198         178         172         20        11.2     

Cards and payments income

     183         166         162         17        10.2     

Corporate-owned life insurance income

     127         118         120         9        7.6     

Consumer mortgage income

     12         10         19         2        20.0     

Mortgage servicing fees

     48         46         58         2        4.3     

Net gains (losses) from principal investing

     51         78         52         (27     (34.6  

Other income (a)

     54         44         59         10        22.7     

Total noninterest income

   $     1,880       $     1,797       $ 1,766       $ 83        4.6        %   
  

 

 

    

 

 

    

 

 

    

 

 

     
    

 

 

    

 

 

    

 

 

    

 

 

           

 

(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 2015 vs. 2014            
dollars in millions    2015     2014      2013      Amount      Percent        

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

   $     (9   $     (18)       $     (14)         $              9         N/M     

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

     20                27          13         185.7        %   

Total dealer trading and derivatives income (loss)

   $     11      $     (11)       $      13          $            22         N/M     
  

 

 

   

 

 

    

 

 

    

 

 

      
    

 

 

   

 

 

    

 

 

    

 

 

            

 

(a) For the year ended December 31, 2015, income of $5 million related to foreign exchange, interest rates, and commodity derivative trading was offset by losses related to fixed income, equity securities trading, and credit portfolio management activities. 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.

 

(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. Prohibitions and restrictions on proprietary trading activities imposed by the Volcker Rule 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 2015, trust and investment services income increased $30 million, or 7.4%, from the prior year primarily due to the full year 2015 impact of the September 2014 acquisition of Pacific Crest Securities. For 2014, trust and investment services income increased $10 million, or 2.5%, 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, 2015, our bank, trust, and registered investment advisory subsidiaries had assets under management of $34.0 billion, compared to $39.2 billion at December 31, 2014, and $36.9 billion at December 31, 2013. As shown in Figure 9, the decrease from 2014 to 2015 was primarily attributable to client attrition in the securities lending portfolio and market declines across all the portfolios. Increases from 2013 to 2014 across all the portfolios were attributable to market appreciation.

 

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Figure 9. Assets Under Management

 

Year ended December 31,                             Change 2015 vs. 2014            
dollars in millions    2015      2014      2013      Amount     Percent        

Assets under management by investment type:

               

Equity

   $ 20,199       $ 21,393       $ 20,971       $ (1,194     (5.6     %   

Securities lending

     1,215         4,835         3,422         (3,620     (74.9  

Fixed income

     9,705         10,023         9,767         (318     (3.2  

Money market

     2,864         2,906         2,745         (42     (1.4  
     

Total

   $     33,983       $ 39,157       $ 36,905       $ (5,174     (13.2     %   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   
     

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 2015, investment banking and debt placement fees increased $48 million, or 12.1%, from the prior year. For 2014, investment banking and debt placement fees increased $64 million, or 19.2%, from the prior year. These increases were primarily driven by strength in syndication and financial advisory fees as well as the impact of the September 2014 acquisition of Pacific Crest Securities.

Service charges on deposit accounts

Service charges on deposit accounts declined $5 million, or 1.9%, in 2015 compared to the prior year and $20 million, or 7.1%, in 2014 compared to 2013 primarily due to lower overdraft charges resulting from changes in posting order.

Operating lease income and other leasing gains

Operating lease income and other leasing gains decreased $23 million, or 24%, during 2015 compared to the prior year, and $21 million, or 17.9%, in 2014 compared to 2013 due to lower gains on the early terminations of leveraged leases. Figure 10 shows the corresponding operating lease expense related to the rental of leased equipment.

Corporate services income

Corporate services income increased $20 million, or 11.2%, in 2015 compared to 2014 driven by higher non-yield loan fees and dealer trading and derivatives income. Corporate services income increased $6 million, or 3.5%, in 2014 compared to 2013 driven by higher non-yield loan fees.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $17 million, or 10.2 %, in 2015 compared to 2014 and $4 million, or 2.5%, in 2014 compared to 2013. The increases were due to higher merchant services, purchase card, and ATM debit card fees driven by increased volume.

Consumer mortgage income

Consumer mortgage income increased $2 million, or 20%, in 2015 compared to 2014. This increase was primarily driven by gains on the sales of consumer mortgage loans. Consumer mortgage income decreased $9 million, or 47.4%, in 2014 compared to 2013, primarily due to lower mortgage originations caused by increasing mortgage interest rates.

 

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Mortgage servicing fees

Mortgage servicing fees increased $2 million, or 4.3%, in 2015 compared to 2014 due to lower mortgage servicing fee amortization expense. Mortgage servicing fees decreased $12 million, or 20.7%, in 2014 compared to 2013 due to lower special servicing fees.

Other income

Other income, which consists primarily of gains on sales of loans held for sale, other service charges, and certain dealer trading income, increased $10 million, or 22.7%, in 2015 compared to 2014, and decreased $15 million, or 25.4%, in 2014 compared to 2013 due to changes in various miscellaneous income categories.

Noninterest expense

As shown in Figure 10, noninterest expense for 2015 was $2.84 billion, an increase of $79 million, or 2.9%, from 2014. We recognized $61 million of merger-, efficiency-, and pension-related charges in 2015 compared to $80 million of efficiency- and pension-related charges in 2014. As shown in Figure 11, personnel expense increased $61 million, driven by higher incentive and stock-based compensation, employee benefits, and salaries, partially offset by lower technology contract labor and severance. Nonpersonnel expense increased $18 million, primarily due to increases in marketing of $8 million and computer processing of $6 million.

Noninterest expense for 2014 was $2.761 billion, a decrease of $51 million, or 1.8%, 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 in 2014 related to Pacific Crest Securities, which we acquired during the third quarter of 2014. As shown in Figure 11, personnel expense decreased by $18 million in 2014 due to declines in technology contract labor, severance, and employee benefits, partially offset by an increase in incentive and stock-based compensation. Nonpersonnel expense decreased $33 million, primarily due to declines in net occupancy costs and equipment expense.

Figure 10. Noninterest Expense

 

Year ended December 31,

dollars in millions

                            Change 2015 vs. 2014      
   2015      2014      2013      Amount     Percent  

Personnel

   $     1,652       $ 1,591       $ 1,609       $ 61        3.8  % 

Net occupancy

     255         261         275         (6     (2.3

Computer processing

     164         158         156         6        3.8   

Business services and professional fees

     159         156         151         3        1.9   

Equipment

     88         96         104         (8     (8.3

Operating lease expense

     47         42         47         5        11.9   

Marketing

     57         49         51         8        16.3   

FDIC assessment

     32         30         30         2        6.7   

Intangible asset amortization

     36         39         44         (3     (7.7

OREO expense, net

     6         5         7         1        20.0   

Other expense

     344         334         338         10        3.0   

Total noninterest expense

   $ 2,840       $ 2,761       $ 2,812       $ 79        2.9  % 
  

 

 

    

 

 

    

 

 

    

 

 

   

Average full-time equivalent employees (a)

     13,483         13,853         14,783         (370     (2.7 ) % 

 

(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, increased by $61 million, or 3.8%, in 2015 compared to 2014. Increases in incentive and stock-based compensation of $30 million,

 

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employee benefits of $26 million, and salaries of $21 million all contributed to the increase in personnel expense. These increases were partially offset by declines in technology contract labor of $10 million and severance of $6 million.

Personnel expense decreased by $18 million, or 1.1%, from 2013 to 2014. Declines in technology contract labor of $16 million, severance of $14 million, and employee benefits of $15 million all contributed to the decrease. These declines were partially offset by an increase in incentive and stock-based compensation of $27 million related to the performance of our business and the September 2014 acquisition of Pacific Crest Securities.

Figure 11. Personnel Expense

 

Year ended December 31,

dollars in millions

                            Change 2015 vs. 2014            
   2015      2014      2013      Amount     Percent         

Salaries

   $         912       $         891       $         891       $ 21        2.4        %   

Technology contract labor, net

     46         56         72         (10     (17.9  

Incentive and stock-based compensation (a)

     410         380         353                 30        7.9     

Employee benefits

     266         240         255         26        10.8     

Severance

     18         24         38         (6     (25.0  

Total personnel expense

   $ 1,652       $ 1,591       $ 1,609       $ 61        3.8        %   
  

 

 

    

 

 

    

 

 

    

 

 

     
    

 

 

    

 

 

    

 

 

    

 

 

           

 

(a) Excludes directors’ stock-based compensation of $1 million in 2015, $2 million in 2014, and $3 million in 2013, reported as “other expense” in Figure 10.

Net occupancy

Net occupancy expense decreased $6 million, or 2.3%, in 2015 compared to 2014, and $14 million, or 5.1%, in 2014 compared to 2013. These declines were primarily due to lower charges related to vacating leased property and a decrease in rental expenses.

Operating lease expense

Operating lease expense increased $5 million, or 11.9%, in 2015 compared to 2014 due to increased depreciation expense on operating lease equipment related to new business. Operating lease expense decreased $5 million, or 10.6%, in 2014 compared to 2013 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.”

Other expense

Other expense comprises various miscellaneous expense items such as travel and entertainment, costs associated with technology service providers, and franchise and business taxes. Other expense increased $10 million, or 3.0%, in 2015 compared to 2014, and declined $4 million, or 1.2%, in 2014 compared to 2013 due to fluctuations in several of those line items.

Income taxes

We recorded a tax provision from continuing operations of $303 million for 2015, compared to a tax provision of $326 million for 2014, and $271 million for 2013. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 24.8% for 2015, compared to 25.6% for 2014, and 23.7% for 2013.

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

 

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adjustments to our tax reserves. In 2015, our effective tax rate was reduced by additional federal tax credit refunds filed for prior years. In addition, in 2014 and 2013, 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 $.4 million at December 31, 2015, compared to $.3 million at December 31, 2014, and $1 million at December 31, 2013, 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 2015 vs. 2014        

dollars in millions

     2015        2014        2013        Amount         Percent       

REVENUE FROM CONTINUING OPERATIONS (TE)

             

Key Community Bank

   $     2,275      $     2,215      $     2,315      $ 60         2.7  

Key Corporate Bank

     1,811        1,646        1,557        165         10.0     

Other Segments

     177        257        243        (80      (31.1    

Total Segments

     4,263        4,118        4,115        145         3.5     

Reconciling Items

     (7     (4     (1     (3      N/M       

Total

   $ 4,256      $ 4,114      $ 4,114      $ 142         3.5  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY

             

Key Community Bank

   $ 256      $ 242      $ 197      $ 14         5.8  

Key Corporate Bank

     545        548        529        (3      (.6  

Other Segments

     124        158        158        (34      (21.5    

Total Segments

     925        948        884        (23      (2.4  

Reconciling Items

     (10     (9     (14     (1      N/M       

Total

   $ 915      $ 939      $ 870      $ (24      (2.6 )%   
  

 

 

   

 

 

   

 

 

   

 

 

      

 

    

 

 

   

 

 

   

 

 

   

 

 

            

 

Key Community Bank summary of operations

As shown in Figure 13, Key Community Bank recorded net income attributable to Key of $256 million for 2015, compared to $242 million for 2014, and $197 million for 2013. The increase in 2015 was primarily due to growth in net interest income, as the value of deposits increased, and noninterest income, partially offset by higher provision for credit losses and noninterest expense.

Taxable-equivalent net interest income increased $40 million, or 2.8%, from 2014. Average loans and leases grew $729 million while average deposits increased $837 million compared to 2014. The positive contribution to

 

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net interest income from loan and deposit growth and the increased value of deposits was partially offset by tightening credit spreads compared to one year ago.

Noninterest income increased $20 million, or 2.6% from 2014. Cards and payments income increased $16 million, or 10.5%, due to higher merchant services, purchase card, and ATM debit card income driven by increased volume. Trust and investment services income increased $5 million, or 1.7%, driven by higher insurance and brokerage commissions. Investment banking and debt placement fees and consumer mortgage fees also contributed to the higher noninterest income. These increases in noninterest income were partially offset by lower service charges on deposit accounts of $5 million, primarily due to reduced overdraft fees, and a decrease in other miscellaneous income.

The provision for loan and lease losses increased $11 million, or 18.6%, from 2014, primarily due to loan growth. Net loan charge-offs decreased $25 million from 2014 as a result of continued progress in the economic environment and further improvement in the credit quality of the portfolio.

Noninterest expense increased $27 million, or 1.5%, from 2014. Personnel expense increased $19 million, primarily due to increases in salaries and incentive and stock-based compensation. Nonpersonnel expense increased $8 million, primarily due to increased marketing spend and other support costs.

In 2014, Key Community Bank’s net income attributable to Key increased $45 million from the prior year. Taxable-equivalent net interest income declined $85 million from 2013. The positive contribution to net interest income from loan and deposit growth was offset by a reduction in the value of deposits in 2014 driven by the prolonged low-rate environment. Noninterest income decreased $15 million 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 credit losses decreased $84 million. Noninterest expense declined $87 million from 2013. Personnel expense decreased primarily due to declines in salaries, incentive and stock-based compensation, and employee benefits expenses. Nonpersonnel expense declined primarily due to decreases in outside loan servicing fees, computer processing, intangible asset amortization, and other support costs.

Figure 13. Key Community Bank

 

Year ended December 31,                             Change 2015 vs. 2014            
dollars in millions    2015      2014      2013      Amount     Percent        

SUMMARY OF OPERATIONS

               

Net interest income (TE)

   $ 1,486       $ 1,446       $ 1,531       $ 40        2.8        %   

Noninterest income

     789         769         784         20        2.6     

Total revenue (TE)

     2,275         2,215         2,315         60        2.7     

Provision for credit losses

     70         59         143         11        18.6     

Noninterest expense

     1,798         1,771         1,858         27        1.5     

Income (loss) before income taxes (TE)

     407         385         314         22        5.7     

Allocated income taxes (benefit) and TE adjustments

     151         143         117         8        5.6     

Net income (loss) attributable to Key

   $ 256       $ 242       $ 197       $ 14        5.8        %   
  

 

 

    

 

 

    

 

 

    

 

 

     

AVERAGE BALANCES

               

Loans and leases

   $ 30,834       $ 30,105       $ 29,311       $ 729        2.4        %   

Total assets

     32,884         32,188         31,583         696        2.2     

Deposits

     51,164         50,327         49,806         837        1.7     

Assets under management at year end

   $     33,983       $     39,157       $     36,815       $     (5,174     (13.2     %   

 

   

 

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ADDITIONAL KEY COMMUNITY BANK DATA

 

Year ended December 31,                          Change 2015 vs. 2014            
dollars in millions    2015     2014     2013     Amount     Percent          

NONINTEREST INCOME

            

Trust and investment services income

   $          296      $            291      $            290      $ 5        1.7        %   

Services charges on deposit accounts

     213        218        237        (5     (2.3  

Cards and payments income

     168        152        144        16        10.5     

Other noninterest income

     112        108        113        4        3.7     

Total noninterest income

   $ 789      $ 769      $ 784      $ 20        2.6        %   
  

 

 

   

 

 

   

 

 

   

 

 

     
                                            

AVERAGE DEPOSITS OUTSTANDING

            

NOW and money market deposit accounts

   $ 28,400      $ 27,526      $ 26,621      $             874        3.2        %   

Savings deposits

     2,363        2,436        2,495        (73     (3.0  

Certificates of deposits ($100,000 or more)

     1,588        2,048        2,331        (460     (22.5  

Other time deposits

     3,112        3,489        4,078        (377     (10.8  

Deposits in foreign office

     277        314        279        (37     (11.8  

Noninterest-bearing deposits

     15,424        14,514        14,002        910        6.3     

Total deposits

   $ 51,164      $ 50,327      $ 49,806      $ 837        1.7        %   
  

 

 

   

 

 

   

 

 

   

 

 

     
                                            

HOME EQUITY LOANS

            

Average balance

   $ 10,266      $ 10,340      $ 10,086         

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

     71   %      71   %      71   %       

Percent first lien positions

     61        60        58         

OTHER DATA

            

Branches

     966        994        1,028         

Automated teller machines

     1,256        1,287        1,335         

Key Corporate Bank summary of operations

As shown in Figure 14, Key Corporate Bank recorded net income attributable to Key of $545 million for 2015, compared to $548 million for 2014 and $529 million for 2013. The 2015 decrease was driven by increases in the provision for credit losses and noninterest expense, partially offset by an increase in revenue.

Taxable-equivalent net interest income increased $45 million, or 5.4%, in 2015 compared to 2014. The growth was primarily driven by a $45 million increase in the deposit and other borrowing spread due to a $2 billion increase in average deposit balances. Earning asset spread increased $26 million due to a $2.9 billion increase in average loan and lease balances. These increases were partially offset by decreases in other components of net interest income.

Noninterest income increased $120 million, or 14.9%, from 2014. Investment banking and debt placement fees increased $47 million due to a full-year impact of the September 2014 Pacific Crest securities acquisition as well as the strength of our business model. Trust and investment services income increased $25 million mostly due to the full-year impact of the Pacific Crest Securities acquisition. Corporate services income increased $23 million due to growth in non-yield loan fees associated with increases in loans, derivatives fees, and foreign exchange fees. Other noninterest income increased $25 million mostly driven by gains related to the disposition of certain investments held by the Real Estate Capital line of business and higher trading income.

The provision for credit losses increased $89 million, or 635.7%, from 2014, primarily due to a $2.9 billion increase in average loan and lease balances as well as a return to a more normal credit environment. Net loan charge-offs increased $58 million from 2014 due to both higher charge-offs and lower recoveries in 2015.

Noninterest expense increased $102 million, or 11.8%, from 2014. This increase was primarily driven by a $66 million increase in personnel expense due to higher incentive and stock-based compensation expense related to

 

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the performance of the Key Corporate Bank and the full-year impact of the September 2014 Pacific Crest Securities acquisition. In addition, there were increases in various other expense categories related to higher staffing and volume levels.

In 2014, Key Corporate Bank’s net income attributable to Key increased $19 million from the prior year. Taxable-equivalent net interest income increased $45 million in 2014 compared to 2013, 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 $44 million as increases in investment banking and debt placement fees, corporate services income, and trust and investment services income more than offset decreases in mortgage servicing fees, trading income, and other noninterest income categories. The provision for credit losses decreased $4 million due to improved credit quality within the portfolio. Noninterest expense increased $57 million mostly due to higher incentive compensation expense related to the performance of the Key Corporate Bank and the partial-year impact of the September 2014 Pacific Crest Securities acquisition, as well as increases in various other expense categories.

Figure 14. Key Corporate Bank

 

Year ended December 31,                             Change 2015 vs. 2014            
dollars in millions    2015      2014      2013      Amount     Percent        

SUMMARY OF OPERATIONS

               

Net interest income (TE)

   $ 885       $ 840       $ 795       $ 45        5.4        %   

Noninterest income

     926         806         762         120        14.9     

Total revenue (TE)

     1,811         1,646         1,557         165        10.0     

Provision for credit losses

     103         14         18         89        635.7     

Noninterest expense

     966         864         807         102        11.8     

Income (loss) before income taxes (TE)

     742         768         732         (26     (3.4  

Allocated income taxes and TE adjustments

     196         218         203         (22     (10.0  

Net income (loss)

     546         550         529         (4     (.7  

Less: Net income (loss) attributable to noncontrolling interests

     1         2         —           (1     (50.0  

Net income (loss) attributable to Key

   $ 545       $ 548       $ 529       $ (3     (.6     %   
  

 

 

    

 

 

    

 

 

    

 

 

     

AVERAGE BALANCES

               

Loans and leases

   $     25,865       $     22,978       $     20,419       $      2,887        12.6        %   

Loans held for sale

     937         549         492         388        70.7     

Total assets

     31,610         28,123         25,427         3,487        12.4     

Deposits

     19,042         17,083         15,972         1,959        11.5        %   

Assets under management at year end

     —           —         $ 90         —          —       
                                               

ADDITIONAL KEY CORPORATE BANK DATA

 

Year ended December 31,                             Change 2015 vs. 2014            
dollars in millions    2015      2014      2013      Amount     Percent        

NONINTEREST INCOME

               

Trust and investment services income

   $         137       $         112       $ 103       $         25        22.3        %   

Investment banking and debt placement fees

     439         392         329         47        12.0     

Operating lease income and other leasing gains

     61         64         61         (3     (4.7  

Corporate services income

     155         132         121         23        17.4     

Service charges on deposit accounts

     43         43         44         —          —       

Cards and payments income

     15         14         18         1        7.1     

Payments and services income

     213         189         183         24        12.7     

Mortgage servicing fees

     48         46         58         2        4.3     

Other noninterest income

     28         3         28         25        833.3     

Total noninterest income

   $ 926       $ 806       $         762       $ 120        14.9        %   
  

 

 

    

 

 

    

 

 

    

 

 

     
                                               

 

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Other Segments

Other Segments consist of Corporate Treasury, our Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $124 million for 2015, compared to $158 million for both 2014 and 2013. Taxable-equivalent net interest income decreased $33 million, and noninterest income declined $47 million compared to 2014, due to lower operating lease income and other leasing gains and gains from principal investments. These decreases in revenue were partially offset by a decline in noninterest expense of $23 million in 2015, primarily due to lower personnel expense.

In 2014, Other Segments’ net income attributable to Key was flat from the prior year. Taxable-equivalent net interest income increased $6 million and noninterest income increased $8 million. Noninterest expense declined $6 million. These improvements were partially offset by an increase in the provision for credit losses of $11 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

 

     2015      2014      2013        

  December 31,

  dollars in millions

   Amount          

Percent  

of Total  

            Amount          

Percent  

of Total  

            Amount     

Percent  

of Total  

       

  COMMERCIAL

                           

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

   $ 31,240           52.2        %       $         27,982           48.8        %       $ 24,963         45.8          %   

  Commercial real estate: (c)

                           

  Commercial mortgage

     7,959           13.3           8,047           14.0           7,720         14.2       

  Construction

     1,053             1.7                 1,100             1.9                 1,093         2.0       

  Total commercial real estate loans

     9,012           15.0           9,147           15.9           8,813         16.2       

  Commercial lease financing (d)

     4,020             6.7                 4,252             7.4                 4,551         8.4       

  Total commercial loans

     44,272           73.9           41,381           72.1           38,327         70.4       

  CONSUMER

                           

  Real estate — residential mortgage

     2,242           3.7           2,225           3.9           2,187         4.0       

  Home equity:

                           

  Key Community Bank

     10,127           16.9           10,366           18.1           10,340         19.0       

  Other

     208             .4                 267             .5                 334         .6       

  Total home equity loans

     10,335           17.3           10,633           18.6           10,674         19.6       

  Consumer other — Key Community Bank

     1,600           2.7           1,560           2.7           1,449         2.7       

  Credit cards

     806           1.3           754           1.3           722         1.3       

  Consumer other:

                           

  Marine

     583           1.0           779           1.3           1,028         1.9       

  Other

     38             .1                 49             .1                 70         .1       

  Total consumer other

     621             1.1                 828             1.4                 1,098         2.0       

  Total consumer loans

     15,604             26.1                 16,000             27.9                 16,130         29.6       

  Total loans (e), (f)

   $       59,876           100.0        %         $ 57,381           100.0        %         $     54,457         100.0          %   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

   
                                                                                 
     2012      2011                            
      Amount          

Percent  

of Total  

            Amount           Percent  
of Total  
                           

  COMMERCIAL

                           

  Commercial, financial and agricultural (a)

   $ 23,242           44.0        %       $ 19,759           39.9          %           

  Commercial real estate:

                           

  Commercial mortgage

     7,720           14.6           8,037           16.2               

  Construction

     1,003             1.9                 1,312             2.6               

  Total commercial real estate loans

     8,723           16.5           9,349           18.8               

  Commercial lease financing

     4,915             9.3                 5,674             11.4               

  Total commercial loans

     36,880           69.8           34,782           70.1               

  CONSUMER

                           

  Real estate — residential mortgage

     2,174           4.1           1,946           3.9               

  Home equity:

                           

  Key Community Bank

     9,816           18.6           9,229           18.6               

  Other

     423             .8                 535             1.1               

  Total home equity loans

     10,239           19.4           9,764           19.7               

  Consumer other — Key Community Bank

     1,349           2.5           1,192           2.4               

  Credit cards

     729           1.4           —             —                 

  Consumer other:

                           

  Marine

     1,358           2.6           1,766           3.6               

  Other

     93             .2                 125             .3               

  Total consumer other

     1,451             2.8                 1,891             3.9               

  Total consumer loans

     15,942             30.2                 14,793             29.9               

  Total loans (e), (f)

   $ 52,822           100.0        %       $ 49,575           100.0          %           
  

 

 

      

 

 

      

 

 

      

 

 

           
                                                               

 

  (a) Loan balances include $85 million, $88 million, $94 million, and $90 million of commercial credit card balances at December 31, 2015, 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, 2015, and December 31, 2014.

 

  (c) See Figure 17 for a more detailed breakdown of our commercial real estate loan portfolio at December 31, 2015, and December 31, 2014.

 

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  (d) Commercial lease financing includes receivables held as collateral for a secured borrowing of $134 million, $302 million and $58 million at December 31, 2015, December 31, 2014, and December 31, 2013, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”).

 

  (e) Total loans exclude loans of $1.8 billion at December 31, 2015, $2.3 billion at December 31, 2014, $4.5 billion at December 31, 2013, $5.2 billion at December 31, 2012, and $5.8 billion at December 31, 2011, related to the discontinued operations of the education lending business.

 

  (f) At December 31, 2015, total loans include purchased loans of $114 million, of which $11 million were PCI loans. 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 included purchased loans of $217 million of which $23 million were PCI loans.

At December 31, 2015, total loans outstanding from continuing operations were $59.9 billion, compared to $57.4 billion at the end of 2014, and $54.5 billion at the end of 2013. Loans related to the discontinued operations of the education lending business and excluded from total loans were $1.8 billion at December 31, 2015, $2.3 billion at December 31, 2014, and $4.5 billion at December 31, 2013. 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 $44.3 billion at December 31, 2015, an increase of $2.9 billion, or 7.0%, compared to December 31, 2014.

Commercial, financial and agricultural.     As shown in Figure 15, our commercial, financial and agricultural loans represent 52% and 49% of our total loan portfolio at December 31, 2015, and December 31, 2014, respectively, and are the largest component of our total loans. These loans are originated by both Key Corporate Bank and Key Community Bank and consist of fixed and variable rate loans to our large, middle market and small business clients. These loans increased $3.3 billion, or 11.6%, from one year ago.

Figure 16 provides our commercial, financial and agricultural loans by industry classification as of December 31, 2015, and December 31, 2014.

Figure 16. Commercial, Financial and Agricultural Loans

 

     December 31, 2015            December 31, 2014        
dollars in millions    Amount      Percent
of Total
            Amount      Percent
of Total
       

Industry classification:

               

Services

     $ 6,722         21.5        %         $ 6,053         21.6        %   

Manufacturing

     4,937         15.8           4,621         16.5     

Financial services

     3,073         9.8           2,844         10.2     

Public utilities

     2,581         8.3           1,938         6.9     

Wholesale trade

     2,302         7.4           2,294         8.2     

Transportation

     1,691         5.4           1,407         5.0     

Dealer floor plan

     1,447         4.6           1,439         5.2     

Retail trade

     1,231         3.9           1,089         3.9     

Property management

     1,059         3.4           834         3.0     

Mining

     802         2.6           946         3.4     

Agriculture/forestry/fishing

     712         2.3           675         2.4     

Public administration

     705         2.3           501         1.8     

Building contractors

     661         2.1           683         2.4     

Insurance

     389         1.2           257         .9     

Communications

     213         .7           196         .7     

Other

     2,715         8.7                 2,205         7.9     

Total

     $     31,240               100.0        %         $     27,982               100.0        %   
  

 

 

    

 

 

      

 

 

    

 

 

   
                                               

Commercial, financial and agricultural loans increased $3.3 billion, or 11.6%, from December 31, 2014, with Key Corporate Bank increasing $3 billion and Key Community Bank up $340 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 11.1% and 6.8%, respectively, when compared to one year ago. The services and manufacturing industries represented approximately 22% and 16%, respectively, of the total commercial, financial and agricultural loan portfolio at December 31, 2015, and approximately 22% and 17%, respectively, at December 31, 2014. At the end of 2015 and 2014, loans in the services and manufacturing industry classifications accounted for approximately 37% and 38%, respectively, 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 $669 million, or 11.1%, compared to last year. Loans in the manufacturing classification grew by $316 million, or 6.8% 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. Loans in public utilities increased by $643 million, or 33.2%, compared to December 31, 2014, due to growth from our alternative energy and renewable energy clients.

Our loans in the financial services and transportation classifications increased 8.1% and 20.2%, respectively, compared to the prior year. The increase in financial services loans was primarily attributable to growth in real estate investment trust balances. The increase in transportation loans was primarily attributable to loan growth for rail cars and shipping containers.

Our oil and gas loan portfolio, included within the public utilities and mining industry classifications in Figure 16, focuses on lending to middle market companies and represents approximately 2% of total loans outstanding at December 31, 2015. We have nearly 15 years of experience in energy lending with over 20 specialists dedicated to this sector, focusing on middle market companies, which is aligned with our relationship strategy.

The upstream segment, comprising oil and gas exploration and production, represents approximately one-half of our exposure, is primarily secured by oil and gas reserves, subject to a borrowing base, and regularly stress-tested. The midstream segment, comprising mostly distribution companies, has lower exposure to commodity risk. Oil field services exposure is minimal and concentrated in very few borrowers. This mix was essentially unchanged from the prior year. Our total commitments in the energy sector were approximately $3 billion at December 31, 2015, slightly lower than the prior year.

Commercial real estate loans.    Commercial real estate loans represent 15% of our total loan portfolio at December 31, 2015, compared to 16% at December 31, 2014. These commercial real estate loans, including both owner- and nonowner-occupied properties, represented 20% of our commercial loan portfolio at December 31, 2015, compared to 22% one year ago. These loans have decreased $135 million, or 1.5%, to $9 billion at December 31, 2015, from $9.1 billion at December 31, 2014. Our commercial real estate 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 commercial real estate located both within and beyond the branch system. This line of business deals primarily with nonowner-occupied properties (generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties) and accounted for approximately 68% of our average year-to-date commercial real estate loans, compared to 61% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of commercial real estate.

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.

 

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As presented in Figure 17, at December 31, 2015, our commercial real estate portfolio included mortgage loans of $8 billion and construction loans of $1.1 billion, representing 13% and 2%, respectively, of our total loans. Nonowner-occupied loans represented 11% of our total loans and owner-occupied loans represented 4% of our total loans. The average size of mortgage loans originated during 2015 was $5.5 million, and our largest mortgage loan at December 31, 2015, had a balance of $69.3 million. At December 31, 2015, our average construction loan commitment was $8.5 million. Our largest construction loan commitment was $48 million, and our largest construction loan amount outstanding was $43 million.

Also shown in Figure 17, at December 31, 2015, 72% of our commercial real estate loans were for nonowner-occupied properties, compared to 70% at December 31, 2014. Approximately 15% of these loans were construction loans at both December 31, 2015, and December 31, 2014. 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.

Figure 17. Commercial Real Estate Loans

 

    Geographic Region          

Percent of

Total

                   

Commercial

Mortgage

 
dollars in millions   West     Southwest     Central     Midwest     Southeast     Northeast     National     Total           Construction        

December 31, 2015

                                                                                                   

Nonowner-occupied:

                         

Retail properties

    $ 204        $ 102        $ 69        $ 119        $ 266        $ 94        $ 144        $ 998        11.1        %          $ 181        $ 817   

Multifamily properties

    401        149        543        620        859        157        172        2,901        32.2            491        2,410   

Health facilities

    218        —          134        127        331        206        15        1,031        11.4            161        870   

Office buildings

    94        7        197        85        114        56        —          553        6.1            38        515   

Warehouses

    133        2        45        98        35        83        167        563        6.3            57        506   

Manufacturing facilities

    6        —          2        12        16        15        14        65        .7            —          65   

Hotels/Motels

    14        —          11        6        —          6        —          37        .4            —          37   

Residential properties

    1        —          25        1        2        12        1        42        .5            8        34   

Land and development

    6        —          5        11        8        10        —          40        .4            32        8   

Other

    65        12        4        24        33        80        76        294        3.3                    17        277   

Total nonowner-occupied

    1,142        272        1,035        1,103        1,664        719        589        6,524        72.4            985        5,539   

Owner-occupied

    1,021        5        274        568        57        563        —          2,488        27.6                    68        2,420   

Total

    $     2,163        $     277        $     1,309        $     1,671        $     1,721        $     1,282        $     589        $     9,012        100.0        %          $     1,053        $         7,959   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

December 31, 2014

                                                                                                   

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

         

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

                       

 

 

   

 

 

 

December 31, 2015

                         

Nonowner-occupied:

  

                       

Nonperforming loans

    —          —          —          $ 7        —          $ 9        —          $ 16        N/M            $ 7        $ 9   

Accruing loans past due 90 days or more

    —          —          —          2        —          4        —          6        N/M            —          6   

Accruing loans past due 30 through 89 days

    $ 2        —          —          5        —          —          1        8        N/M                    1        7   

 

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 2015, nonperforming loans related to our nonowner-occupied properties decreased by $5 million from $21 million at December 31, 2014, to $16 million at December 31, 2015, as a result of continued improvement in asset quality and market conditions. This category of loans declined by $2 million during 2014.

Since December 31, 2014, our nonowner-occupied commercial real estate portfolio has increased by approximately $84 million, or 1.3%, as many of our clients have taken advantage of opportunities to permanently refinance their loans at historically low interest rates.

 

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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 9% of commercial loans at December 31, 2015, and 10% at December 31, 2014.

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 other income sources.

Modifications are negotiated to achieve mutually agreeable terms that maximize loan credit quality while at the same time meeting our clients’ financing needs. Modifications made to loans of creditworthy borrowers not experiencing financial difficulties and under circumstances where ultimate collection of all principal and interest is not in doubt are not classified as TDRs. In accordance with applicable accounting guidance, a loan is classified as a TDR only when the borrower is experiencing financial difficulties and a creditor concession has been granted.

Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. Loan extensions are sometimes coupled with these primary concession types. Because economic conditions have improved modestly and we have restructured loans to provide the optimal opportunity for successful repayment by the borrower, certain of our restructured loans have returned to accrual status and consistently performed under the restructured loan terms over the past year.

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 2015, we had $53 million of new restructured commercial loans compared to $22 million of new restructured commercial loans in 2014.

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

Figure 18. Commercial TDRs by Accrual Status

 

December 31,              
in millions    2015      2014  

Commercial TDRs by Accrual Status

                 

Nonaccruing

     $             52          $             36    

Accruing

               

    Total Commercial TDRs

     $ 54          $ 40    
  

 

 

    

 

 

 
    

 

 

    

 

 

 

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.

 

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The B note typically is a structurally subordinate note that may or may not require any debt service until the primary payment source stabilizes and generates excess cash flow. This excess cash flow customarily is captured for application to either the A note or B note dependent upon the terms of the restructure. 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 in accordance with our interpretation of accounting and regulatory guidance applicable to TDRs. Alternatively, both A and B notes may be simultaneously returned to accrual if credit metrics are supportive.

Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented evaluation of the credit, which would include analysis of the borrower’s financial condition, prospects for repayment under the modified terms, and alternate sources of repayment such as the value of loan collateral. We consider the borrower’s ability to perform under the modified terms for a reasonable period (generally a minimum of six months) 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. At December 31, 2015, we had $47 million and $7 million of A note and B note commercial TDRs, respectively.

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 they are often 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 the client, the repayment source, 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 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, the strength of the guarantor, if any, and the structure and residual risk of the transaction. 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.

 

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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.

Mortgage and construction loans with a loan-to-value ratio greater than 1.0 are 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. As of December 31, 2015, we did not have any mortgage and construction loans that had a loan-to-value ratio greater than 1.0.

Consumer loan portfolio

Consumer loans outstanding decreased by $396 million, or 2.5%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 98% of this portfolio at December 31, 2015, was 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 decreased by $239 million, or 2.3%, over the past 12 months.

As shown in Figure 13, we hold the first lien position for approximately 61% of the Key Community Bank home equity portfolio at December 31, 2015, and 60% at December 31, 2014. 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, 2015, 39% of our home equity portfolio is secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.

 

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Figure 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    2015     2014           2013     2012           2011  

SOURCES OF YEAR END LOANS

                

Key Community Bank

   $         10,127          $         10,366             $         10,340          $         9,816             $         9,229     

Other

     208          267               334          423               535     

Total

   $ 10,335          $ 10,633             $ 10,674          $ 10,239             $ 9,764     
  

 

 

   

 

 

      

 

 

   

 

 

   

 

  

 

 

 

 

 

Nonperforming loans at year end

   $ 190          $ 195             $ 220          $ 231   (a), (b)         $ 120     

Net loan charge-offs for the year

     21          32             66          118             130     

Yield for the year

     3.98       4.02            4.07       4.21            4.34  

 

(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.

Loans held for sale

As shown in Note 4 (“Loans and Loans Held for Sale”), our loans held for sale were $639 million at December 31, 2015, compared to $734 million at December 31, 2014. During 2015, we recorded net gains from loan sales of $103 million. There were no loans held for sale related to the discontinued operations of the education lending business at December 31, 2015, and December 31, 2014.

At December 31, 2015, loans held for sale included $532 million of commercial mortgages, which decreased by $106 million from December 31, 2014, $76 million of commercial, financial and agricultural loans, which increased by $13 million from December 31, 2014, $17 million of residential mortgage loans, which decreased by $1 million from December 31, 2014, and $14 million of commercial lease financing, which decreased by $1 million from December 31, 2014. 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 2015, we sold $6.0 billion of commercial real estate loans, $415 million of commercial lease financing loans, $554 million of residential real estate loans, and $335 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;

 

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¿ 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 2015 and 2014.

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

 

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

2015

              

Fourth quarter

        $ 86             $         1,570             $         204            $         104             $         1,964    

Third quarter

     150          1,246          100          142          1,638    

Second quarter

     41          2,210          48          188          2,487    

First quarter

     58          1,010          63          120          1,251    

    Total

        $         335             $ 6,036            $ 415            $ 554            $ 7,340    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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

   2015       2014       2013       2012       2011   

Commercial real estate loans

   $ 211,274        $ 191,407        $ 177,731        $ 107,630        $ 99,608    

Education loans (a)

     1,339          1,589          —            —            —      

Commercial lease financing

     932          722          717          520          521    

Commercial loans

     335          344          327          343          306    

    Total

    $         213,880         $         194,062         $         178,775         $         108,493         $         100,435    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(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 $1.8 billion of the $214 billion of loans administered or serviced at December 31, 2015. 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 commercial real estate loans. Additional information about our mortgage servicing assets is included in Note 9 (“Mortgage Servicing Assets”).

 

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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, 2015, approximately 28.7% 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, 2015

in millions

   Within One Year         One - Five Years         Over Five Years         Total     

Commercial, financial and agricultural

     $ 8,942          $ 17,845          $ 4,453          $ 31,240    

Real estate — construction

     432          596          25          1,053    

Real estate — residential and commercial mortgage

     2,838          5,549          1,814          10,201    
     $             12,212          $             23,990          $             6,292          $             42,494    
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with floating or adjustable interest rates (a)

        $ 20,621          $ 3,639          $ 24,260    

Loans with predetermined interest rates (b)

        3,369          2,653          6,022    
  

 

 

 
      

 

 

 
        $ 23,990          $ 6,292          $ 30,282    
     

 

 

    

 

 

    

 

 

 

 

 

 

(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.

Securities

Our securities portfolio totaled $19.1 billion at December 31, 2015, compared to $18.4 billion at December 31, 2014. Available-for-sale securities were $14.2 billion at December 31, 2015, compared to $13.4 billion at December 31, 2014. Held-to-maturity securities were $4.9 billion at December 31, 2015, compared to $5 billion at December 31, 2014.

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

   2015        2014    

 FHLMC

     $         4,349         $ 5,666     

 FNMA

     4,511           4,998     

 GNMA

     10,152           7,636     

 Total (a)

     $ 19,012         $         18,300     
  

 

 

    

 

 

 

 

 

 

(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

 

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provide liquidity value under regulatory requirements. At December 31, 2015, we had $14.2 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $13.3 billion at December 31, 2014.

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 2014 and 2015, 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 prepare for future regulatory requirements.

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.

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, 2015

                       

Remaining maturity:

                       

One year or less

  $ 2        $ 285          —            —          $ 287          3.05  

After one through five years

    12          11,209        $ 1,523        $ 13          12,757          2.12     

After five through ten years

    —            501          663          7          1,171          2.12     

After ten years

    —              —              3            —              3            5.40     

Fair value

  $ 14        $ 11,995        $ 2,189        $ 20        $ 14,218          —       

Amortized cost

    14          12,082          2,193          21          14,310          2.14  

Weighted-average yield (c)

    6.19      %     2.12      %     2.21      %     —            2.14      % (d)     —       

Weighted-average maturity

    3.2 years            3.9 years            4.3 years            4.4 years            3.9 years            —       

December 31, 2014

                       

Fair value

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

Amortized cost

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

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  

 

(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 $20 million of securities at December 31, 2015, that have no stated yield.

 

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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, 2015

                        

Remaining maturity:

                        

One year or less

     —             —           $ 9         $ 9           2.34        %   

After one through five years

   $ 4,174           —             11           4,185           1.90     

After five through ten years

     —           $ 645           —             645           2.67     

After ten years

     —                   58                 —                   58                 2.92     

Amortized cost

   $ 4,174         $ 703         $ 20         $ 4,897           2.01        %   

Fair value

                     4,129           699           20           4,848           —       

Weighted-average yield

     1.90        %         2.69        %         2.64        %    (b)         2.01        %    (b)         —       

Weighted-average maturity

     3.4 years                   7.2 years                   1.7 years                         3.9 years                 —       

December 31, 2014

                        

Amortized cost

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

Fair value

     4,713                 241                 20                 4,974                 —       

December 31, 2013

                        

Amortized cost

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

Fair value

     4,597                 —                   20                 4,617                 —       

 

(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, 2015, that have no stated yield.

Other investments

Principal investments — investments in equity and debt instruments made by our Principal Investing unit — represented 46% and 53% of other investments at December 31, 2015, and December 31, 2014, respectively. 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 $69 million at December 31, 2015, and $104 million at December 31, 2014, while the fair value of the indirect investments was $235 million at December 31, 2015, and $302 million at December 31, 2014. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. The Federal Reserve extended the conformance period to July 21, 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 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, 2015, we have not committed to a plan to sell these investments. For more information about the Volcker Rule, see the discussion in Item 1 under the heading “Other Regulatory Developments under the Dodd-Frank Act – ‘Volcker Rule’” in the section entitled “Supervision and Regulation.”

In addition to principal investments, “other investments” include other equity and mezzanine instruments, such as certain real-estate-related investments and an indirect ownership interest in a partnership, that are carried at fair value, as well as other types of investments that generally are carried at cost. The real-estate-related investments were valued at $8 million at December 31, 2015, and $10 million at December 31, 2014. The indirect investment

 

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in a partnership was valued at $4 million at December 31, 2014. Under the requirements of the Volcker Rule, we were required to dispose of this investment. Prior to December 31, 2015, the investment was redeemed. Additional information pertaining to the equity investment is included in the “Changes in Level 3 Fair Value Measurements” section of Note 6 (“Fair Value Measurements”).

Most of our other investments are not traded on an active market. We determine the fair value at which these investments should be recorded based on the nature of the specific investment and all available relevant information. This review may encompass such factors as the issuer’s past financial performance and future potential, the values of public companies in comparable businesses, the risks associated with the particular business or investment type, current market conditions, the nature and duration of resale restrictions, the issuer’s payment history, our knowledge of the industry, third-party data, and other relevant factors. As of December 31, 2015, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $51 million, which includes $47 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.

Deposits and other sources of funds

Domestic deposits are our primary source of funding. The composition of our average deposits is shown in Figure 5 in the section entitled “Net interest income.” During 2015, average domestic deposits were $70.1 billion and represented 85% of the funds we used to support loans and other earning assets, compared to $67.3 billion and 86% during 2014. NOW and money market deposit accounts increased $2.0 billion, and noninterest-bearing deposits increased $1.9 billion, reflecting continued growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by a decline in certificates of deposit.

Wholesale funds, consisting of deposits in our foreign office and short-term borrowings, averaged $1.7 billion during 2015, compared to $2.4 billion during 2014. The decrease from 2014 was caused by declines of $550 million in federal funds purchased and securities sold under repurchase agreements, $126 million in foreign office deposits, and $25 million in bank notes and other short-term borrowings.

At December 31, 2015, we had $2.4 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 (a)

 

December 31, 2015

in millions

   Domestic
Offices
     Total  

Remaining maturity:

     

Three months or less

   $ 324         $ 324     

After three through six months

     366           366     

After six through twelve months

     542           542     

After twelve months

     1,160           1,160     

Total

   $         2,392         $         2,392     
  

 

 

    

 

 

 
   

 

(a) There were no deposits in foreign offices at December 31, 2015.

Capital

At December 31, 2015, our shareholders’ equity was $10.7 billion, up $216 million from December 31, 2014. 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.

 

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CCAR and capital actions

As part of its ongoing supervisory process, the Federal Reserve requires BHCs like KeyCorp to submit an annual comprehensive capital plan and to update that plan to reflect material changes in the BHC’s risk profile, business strategies, or corporate structure, including but not limited to changes in planned capital actions. In January 2015, we submitted to the Federal Reserve and provided to the OCC our 2015 capital plan under the annual CCAR process. On March 11, 2015, the Federal Reserve announced that it did not object to our 2015 capital plan. The 2015 capital plan includes a common share repurchase program of up to $725 million, which includes repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2015 capital plan began in the second quarter of 2015 and were suspended in the fourth quarter of 2015 due to the pending merger with First Niagara. Share repurchases are expected to be included in the upcoming 2016 CCAR submission.

During 2015, we repurchased $252 million of common shares under our 2015 capital plan authorization. In addition, during the first quarter of 2015, we repurchased $208 million of common shares under our 2014 capital plan for a total of $460 million of common share repurchases during 2015.

Dividends

As previously reported, our 2015 capital plan proposed an increase in our quarterly common share dividend from $.065 to $.075 per share, which was approved by our Board in May 2015. An additional potential increase in our quarterly common share dividend, up to $.085 per share, will be considered by the Board in 2016 for the fifth quarter of the 2015 capital plan. 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 2015 capital plan, we made a dividend payment of $.075 per share during each of the second, third, and fourth quarters of 2015, totalling $189 million, and a dividend payment of $.065 per share, or $55 million, during the first quarter of 2015.

We also made quarterly dividend payments of $1.9375 per share on our Series A Preferred Stock during each quarter of 2015 for a total of $23 million.

Common shares outstanding

Our common shares are traded on the New York Stock Exchange under the symbol KEY with 27,058 holders of record at December 31, 2015. Our book value per common share was $12.51 based on 835.8 million shares outstanding at December 31, 2015, compared to $11.91 based on 859.4 million shares outstanding at December 31, 2014. At December 31, 2015, our tangible book value per common share was $11.22, compared to $10.65 at December 31, 2014.

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, 2010, 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.

 

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Figure 27. Common Share Price Performance (2011 – 2015) (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

 

            2015 Quarters         
in thousands    2015        Fourth        Third        Second        First        2014    

Shares outstanding at beginning of period

     859,403           835,285           843,608           850,920           859,403           890,724     

Common shares repurchased

     (31,267)          —             (8,386)          (8,794)          (14,087)          (36,285)    

Shares reissued (returned) under employee benefit plans

     7,582           466           63           1,482           5,571           4,964     

Series A Preferred Stock exchanged for common shares

     33           —             —             —             33           —       

Shares outstanding at end of period

     835,751           835,751           835,285           843,608           850,920           859,403     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   

At December 31, 2015, we had 181.2 million treasury shares, compared to 157.6 million treasury shares at December 31, 2014. During 2015, common shares outstanding decreased by 24 million shares due to common share repurchases under our 2014 and 2015 capital plans, partially offset by the net share activity under our employee benefit plans and shares of Series A Preferred Stock that were exchanged for common shares. Going forward, we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.

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 will submit our 2016 capital plan to the Federal Reserve for review in April 2016.

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, 2015. 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 11.30% at December 31, 2015, compared to 11.22% at December 31, 2014. Our tangible common equity to tangible assets ratio was 9.98% at December 31, 2015, compared to 9.88% at December 31, 2014.

 

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Federal banking regulators have promulgated minimum risk-based capital and leverage ratio requirements for BHCs like KeyCorp and their banking subsidiaries like KeyBank. As of January 1, 2015, Key and KeyBank (consolidated) were each required to maintain a minimum Tier 1 risk-based capital ratio of 6.00%, a total risk-based capital ratio of 8.00%, and a Tier 1 leverage ratio of 4.00%. At December 31, 2015, our Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio were 11.35%, 12.97%, and 10.72%, respectively, compared to 11.90%, 13.89%, and 11.26%, respectively, at December 31, 2014. In addition, as of January 1, 2015, Key and KeyBank (consolidated) were each required to maintain a minimum Common Equity Tier 1 capital ratio of 4.5%. At December 31, 2015, our Common Equity Tier 1 capital ratio was 10.94%.

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 starting in 2016. The trust preferred securities issued by the KeyCorp capital trusts contribute $85 million, or 9 basis points, to our Tier 1 risk-based capital ratio of 11.35% and Tier 1 leverage ratio of 10.72% at December 31, 2015. The trust preferred securities contribute $340 million, or 38 basis points, to our total risk-based capital ratio of 12.97% at December 31, 2015. The new minimum capital and leverage ratios under the Regulatory Capital Rules together with the estimated ratios of Key at December 31, 2015, 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, 2015. Moreover, after accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and as Tier 2 instead) as of December 31, 2015, we estimate KeyCorp would still qualify for the “well capitalized” capital category under the Regulatory Capital Rules, with an estimated Tier 1 risk-based capital ratio, estimated Tier 1 leverage ratio, estimated Common Equity Tier 1 capital ratio, and estimated total risk-based capital ratio of 11.26%, 10.63%, 10.94%, and 12.97%, 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.

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 previously focused on a component of Tier 1 risk-based capital, known as Tier 1 common equity, and its review of the consolidated capitalization of SIFIs, including KeyCorp. The capital modifications mandated by the Regulatory Capital Rules, which became effective on January 1, 2015, for Key, require higher and better-quality capital and introduced a new capital measure, “Common Equity Tier 1.” Common Equity Tier 1 is not formally defined by GAAP and is considered to be a non-GAAP financial measure. Figure 4 in the “Highlights of Our Performance” section reconciles Key shareholders’ equity, the GAAP performance measure, to Common Equity Tier 1, the corresponding non-GAAP measure. Our Common Equity Tier 1 ratio was 10.94% at December 31, 2015.

At December 31, 2015, for Key’s consolidated operations, we had a federal net deferred tax asset of $289 million and a state deferred tax asset of $32 million, compared to a federal net deferred tax asset of $195 million and a state deferred tax asset of $22 million at December 31, 2014. We had a valuation allowance against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards of

 

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less than $1 million at December 31, 2015, and at December 31, 2014. Starting with the implementation of the Regulatory Capital Rules on January 1, 2015, deferred tax assets that arise from net operating loss and tax credit carryforwards are deductible from Common Equity Tier 1 on a phase-in basis. As of December 31, 2015, this balance was approximately $1 million.

Figure 29 represents the details of our regulatory capital position at December 31, 2015, under the Regulatory Capital Rules.

Figure 30 represents the details of our regulatory capital position at December 31, 2014.

Figure 29. Capital Components and Risk-Weighted Assets (Regulatory Capital Rules)

 

December 31,

dollars in millions

   2015  

COMMON EQUITY TIER 1

  

Key shareholders’ equity (GAAP)

   $                 10,746     

Less:

  Series A Preferred Stock (a)      281     
    Common Equity Tier 1 capital before adjustments and deductions      10,465     

Less:

  Goodwill, net of deferred taxes      1,034     
  Intangible assets, net of deferred taxes      26     
  Deferred tax assets      1     
  Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes      (58)    
  Accumulated gains (losses) on cash flow hedges, net of deferred taxes      (20)    
    Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes      (365)    
    Total Common Equity Tier 1 capital    $ 9,847     

TIER 1 CAPITAL

  

Common Equity Tier 1

   $ 9,847     

Additional Tier 1 capital instruments and related surplus

     281     

Non-qualifying capital instruments subject to phase out

     85     

Less:

  Deductions      1     
    Total Tier 1 capital      10,212     

TIER 2 CAPITAL

  

Tier 2 capital instruments and related surplus

     578     

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

     881     

Net unrealized gains on available-for-sale preferred stock classified as an equity security

     —     

Less:

  Deductions      —     
    Total Tier 2 capital      1,459     
  Total risk-based capital    $ 11,671     
    

 

 

 

RISK-WEIGHTED ASSETS

  

Risk-weighted assets on balance sheet

   $ 67,390     

Risk-weighted off-balance sheet exposure

     21,983     

Market risk-equivalent assets

     607     
  Gross risk-weighted assets      89,980     

Less:

  Excess allowance for loan and lease losses      —     
  Net risk-weighted assets    $ 89,980     
    

 

 

 

AVERAGE QUARTERLY TOTAL ASSETS

   $ 95,272     
    

 

 

 

CAPITAL RATIOS

  

Tier 1 risk-based capital

     11.35  

Total risk-based capital

     12.97     

Leverage (c)

     10.72     

Common Equity Tier 1

     10.94     
              

 

(a) Net of capital surplus.

 

(b) The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the institution’s standardized total risk-weighted assets (excluding its standardized market risk-weighted assets). The ALLL includes $28 million of allowance classified as “discontinued assets” on the balance sheet at December 31, 2015.

 

(c) This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible and deferred tax assets, and (iii) other deductions from assets for leverage capital purposes.

 

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Figure 30. Capital Components and Risk-Weighted Assets

 

December 31,

dollars in millions

   2014    

TIER 1 CAPITAL

  

Key shareholders’ equity

   $                 10,530     

Qualifying capital securities

     339     

Less:

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

TIER 2 CAPITAL

  

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

     859     

Net unrealized gains on equity securities available for sale

     1     

Qualifying long-term debt

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

 

 

 

TIER 1 COMMON EQUITY

  

Tier 1 capital

   $ 10,124     

Less:

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

 

 

 

RISK-WEIGHTED ASSETS

  

Risk-weighted assets on balance sheet

   $ 66,054     

Risk-weighted off-balance sheet exposure

     19,360     

Less:

  Goodwill      1,057     
  Other assets (b)      120     

Plus:

  Market risk-equivalent assets      863     
  Gross risk-weighted assets      85,100     

Less:

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

 

 

 

AVERAGE QUARTERLY TOTAL ASSETS

   $ 91,116     
    

 

 

 

CAPITAL RATIOS

  

Tier 1 risk-based capital

     11.90  

Total risk-based capital

     13.89     

Leverage (e)

     11.26     

Tier 1 common equity

     11.17     
              

 

(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.

 

(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 of allowance classified as “discontinued assets” on the balance sheet at December 31, 2014.

 

(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, 2015, is presented in Note 20 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Commitments to Extend Credit or Funding.” Figure 31 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 on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently 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 31 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments at December 31, 2015, by the specific time periods in which related payments are due or commitments expire.

Figure 31. Contractual Obligations and Other Off-Balance Sheet Commitments

 

December 31, 2015

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

   $ 65,527           —             —             —           $ 65,527     

Time deposits of $100,000 or more

     1,232         $ 1,056         $ 39         $ 65           2,392     

Other time deposits

     2,075           883           59           110           3,127     

Federal funds purchased and securities sold under repurchase agreements

     372           —             —             —             372     

Bank notes and other short-term borrowings

     533           —             —             —             533     

Long-term debt

     1,346           3,156           2,790           2,894           10,186     

Noncancelable operating leases

     110           190           130           326           756     

Liability for unrecognized tax benefits

     12           —             —             —             12     

Purchase obligations:

              

Banking and financial data services

     71           129           20           —             220     

Telecommunications

     23           23           7           —             53     

Professional services

     35           21           8           —             64     

Technology equipment and software

     53           94           38           16           201     

Other

     17           17           7           —             41     

Total purchase obligations

     199           284           80           16           579     

Total

   $ 71,406         $ 5,569         $ 3,098         $ 3,411         $ 83,484     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Lending-related and other off-balance sheet commitments:

              

Commercial, including real estate

   $ 9,508         $ 9,247         $ 9,757         $ 1,259         $ 29,771     

Home equity

     318           1,139           908           4,855           7,220     

Credit cards

     3,603           —             —             —             3,603     

Purchase cards

     163           —             —             —             163     

When-issued and to-be-announced securities commitments

     2           —             —             —             2     

Commercial letters of credit

     127           12           —             —             139     

Principal investing commitments

     30           16           4           —             50     

Tax credit investment commitments

     410           —             —             —             410     

Liabilities of certain limited partnerships and other commitments

     1           —             —             —             1     

Total

   $         14,162         $         10,414         $         10,669         $         6,114         $         41,359     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                              

 

(a) Deposits and borrowings exclude interest.

 

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

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

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

Our ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework, and governance structure for the management of risks across the entire company. The ERM Committee reports to the Board’s

 

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Risk Committee. Annually, the Board reviews and approves the ERM Policy, as well as the risk appetite, including corporate risk tolerances for major risk categories. We use a risk-adjusted capital framework to manage risks. This framework is approved and managed by the ERM Committee.

Tier 2 Risk Governance Committees support the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. Risk Governance Committees include attendees from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor, and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing, and reporting risk information. Risk Review, our internal audit function, provides the Third Line of Defense in 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 businesses. Key has exposures to a wide range of interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed income markets and 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.

 

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

The MRM is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. The MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. The MRM conducts stress tests for each covered position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.

Covered positions.    We monitor the market risk of our covered positions, 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. The 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 generally include 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 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

 

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

The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s 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.

Actual losses for the total covered positions did not exceed aggregate daily VaR on any day during the quarters ended December 31, 2015, and December 31, 2014. The MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR.

We do not engage in correlation trading, or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.

The aggregate VaR at the 99% confidence level for all covered positions was $1.2 million at December 31, 2015, and $.9 million at December 31, 2014. The increase in aggregate VaR was primarily due to the increased exposure in our credit derivative portfolio, and the composition of our fixed income portfolio. Figure 32 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended December 31, 2015, and December 31, 2014. During this period, none of our significant portfolios daily trading VaR numbers exceeded their VaR limits or stress VaR limits.

Figure 32. VaR for Significant Portfolios of Covered Positions

 

     2015      2014  
     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

   $ 1.0       $ .4       $ .6       $ .5       $ .5       $ .3       $ .4       $ .4     

Derivatives:

                       

Interest rate

   $ .1         —         $ .1       $ .1       $ .3         —         $ .1       $ .1     

Credit

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

Stressed VaR is calculated using our general VaR results at the 99% confidence level and applying certain assumptions. The aggregate stressed VaR for all covered positions was $3.5 million at December 31, 2015, and $2.6 million at December 31, 2014. Figure 33 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended December 31, 2015, and December 31, 2014, as used for market risk capital charge calculation purposes.

 

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Figure 33. Stressed VaR for Significant Portfolios of Covered Positions

 

     2015      2014  
     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

   $ 3.0       $ 1.3       $ 1.9       $ 1.5       $ 1.6       $ .8       $ 1.2       $ 1.2     

Derivatives:

                       

Interest rate

   $ .3       $ .1       $ .2       $ .3       $ .8       $ .1       $ .2       $ .2     

Credit

     1.3         .5         .9         1.3         1.0         .4         .7         .9     

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 the MRM, and approved by the Chief Market Risk Officer.

Nontrading market risk

Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. Such fluctuations may result from changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite and within Board-approved policy limits.

Interest rate risk positions are influenced by a number of factors including the balance sheet positioning that arises out of consumer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, changes in market interest rates that affect client activity, and our hedging, investing, funding, and capital positions. The primary components of interest rate risk exposure consist of reprice risk, basis risk, yield curve risk, and option risk.

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

 

  ¿   “Reprice 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 (e.g., deposits used to fund loans) do not mature or reprice at the same time.

 

  ¿   “Basis risk” is the exposure to asymmetrical changes in interest rate 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 occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve.

 

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  ¿   “Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities, or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or 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 and Board-approved policy limits.

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 direction, although at a slower pace. 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 50 basis points over three months with no change over the following nine 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 steepening or flattening of the 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 34 presents the results of the simulation analysis at December 31, 2015, and December 31, 2014. At December 31, 2015, 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%. In December 2015, the Federal Reserve increased the range for the Federal Funds Target Rate, which led to an increased modeled exposure to declining interest rates. Subsequent to the Federal Reserve’s action in December, we increased the magnitude of the declining rate scenario to 50 basis points, increasing our overall modeled exposure. The modeled exposure depends on the relationships of interest rates on our interest earning assets and interest bearing liabilities, notably on instruments that are expected to react to the short end of the yield curve. As shown in Figure 34, we are operating within these levels as of December 31, 2015.

 

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Figure 34. Simulated Change in Net Interest Income

 

December 31, 2015

                   

Basis point change assumption (short-term rates)

     -50           +200       

Tolerance level

     -4.00        -4.00    

Interest rate risk assessment

     -3.37        2.58    

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    

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 34. 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. Recent balance growth in deposits has caused the uncertainty in assumptions to increase further. 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 100 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 of the EVE as discussed in the following section.

Economic value of equity modeling.    EVE complements net interest income simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the base case of the current interest rate environment. Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in certain yield curve term points, we have modified the standard declining rate scenario to an immediate 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, 2015.

Management of interest rate exposure.    We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing

 

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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 35 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 35. Portfolio Swaps by Interest Rate Risk Management Strategy

 

     December 31, 2015               
                 

 

Weighted-Average

    December 31, 2014  
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)

   $ 11,705         $ 4            2.5         1.1       .3     $ 9,700         $ (4

Receive fixed/pay variable — conventional debt

     7,004           189        3.5         2.0          .4          5,124           209   

Pay fixed/receive variable — conventional debt

     50           (7     12.5                 .3          3.6          50           (7

 

 

Total portfolio swaps

   $                 18,759         $                 186   (b)      2.9         1.4       .3     $             14,874         $ 198   (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 $56 million and $49 million for December 31, 2015, and December 31, 2014, 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, the ERM Committee, the ALCO, and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The MRM, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are in compliance with the Federal Reserve 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.

Following our announced acquisition of First Niagara in October 2015, S&P and Fitch affirmed Key’s ratings but changed the outlook to negative. Moody’s placed Key’s ratings under review for downgrade. The Moody’s review could be outstanding beyond the targeted merger completion date.

Our credit ratings at December 31, 2015, are shown in Figure 36. We believe these credit ratings, under normal conditions in the capital markets, will enable KeyCorp or KeyBank to issue fixed income securities to investors.

Figure 36. Credit Ratings

 

December 31, 2015    Short-Term
Borrowings
     Long-Term
Deposits
    

Senior

Long-Term

Debt

    

Subordinated
Long-Term

Debt

    

Capital

Securities

    

Series A

Preferred

Stock

 

 

 

KEYCORP (THE PARENT COMPANY)

                 

 

                 

Standard & Poor’s

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

Moody’s

     P-2         N/A         Baa1         Baa1         Baa2         Baa3   

Fitch

     F1         N/A         A-         BBB+         BB+         BB   

DBRS

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

KEYBANK

                 

 

                 

Standard & Poor’s

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

Moody’s

     P-1         Aa3         A3         Baa1         N/A         N/A   

Fitch

     F1         A         A-         BBB+         N/A         N/A   

DBRS

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

 

 

Managing liquidity risk

Most of our liquidity risk is derived from our lending activities, which inherently 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

 

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responsibilities for managing liquidity through a problem period. As part of the plan, we maintain on-balance sheet liquid reserves referred to as our liquid asset portfolio, which consists of high quality liquid assets. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at December 31, 2015, totaled $15.4 billion, consisting of $12.9 billion of unpledged securities, $584 million of securities available for secured funding at the FHLB, and $1.9 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, 2015, our unused borrowing capacity secured by loan collateral was $18.9 billion at the Federal Reserve Bank of Cleveland and $3.0 billion at the FHLB. In 2015, Key’s outstanding FHLB advances were reduced by $33 million due to repayments.

Final U.S. liquidity coverage ratio

Under the Liquidity Coverage Rules, we will be required to calculate the Modified LCR for Key. Implementation for Modified LCR banking organizations, like Key, began on January 1, 2016, with a minimum requirement of 90% coverage, reaching 100% coverage by January 1, 2017. At December 31, 2015, our estimated Modified LCR was above 100%. In the future, we may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position.

Additional information about the 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 that, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan-to-deposit ratio as a metric to monitor these strategies. Our target loan-to-deposit ratio is 90-100% (at December 31, 2015, our loan-to-deposit ratio was 88%), which we calculate as total loans, loans held for sale, and nonsecuritized discontinued loans divided by domestic deposits.

Sources of liquidity

Our primary sources of liquidity include customer deposits, wholesale funding, and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or on-balance sheet liquid reserves. Conversely, excess cash generated by operating, investing, and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.

Liquidity programs

We have several liquidity programs, which are described in Note 18 (“Long-Term Debt”), that are designed to enable KeyCorp and KeyBank to raise funds in the public and private debt markets. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. These liquidity programs are reviewed from time to time by the Board and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs.

On February 12, 2015, KeyBank issued $1 billion of 2.250% Senior Bank Notes due March 16, 2020, under its Global Bank Note Program. On June 1, 2015, under its Global Bank Note Program, KeyBank issued $1.75 billion of Senior Bank Notes in three tranches; $250 million of Floating Rate Notes due June 1, 2018; $750

 

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million of 1.700% Senior Notes due June 1, 2018; and $750 million of 3.300% Senior Notes due June 1, 2025. On September 29, 2015, we updated the KeyBank Global Bank Note Program. This program has $20 billion authorized for issuance, separate from the $20 billion authorized under the 2012 program. There will be no additional notes issued under the 2012 program.

On May 22, 2015, KeyBank remarketed $300 million of 3.18% Term Enhanced ReMarketable Securities senior debt.

On September 15, 2015, KeyCorp issued $1 billion of 2.90% Senior Medium-Term Notes due September 15, 2020, under its Medium-Term Note Program.

Liquidity for KeyCorp

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

We use a parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the months into the future where projected obligations can be met with the current amount of liquidity. 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, 2015, KeyCorp held $2.7 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 2015, KeyBank paid $1 billion in dividends to KeyCorp. At January 1, 2016, KeyBank had regulatory capacity to pay $553 million in dividends to KeyCorp without prior regulatory approval.

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 an increase in unpledged securities offset by net customer loan and deposit flows. 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.

 

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We generate cash flows from operations and from investing and financing activities. We have approximately $185 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of December 31, 2015. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $2 million in taxes to be paid. We have included the appropriate amount as a deferred tax liability at December 31, 2015.

The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the years ended December 31, 2015, and December 31, 2014.

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 mitigate concentration risk in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower. Our legal lending limit is approximately $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, 2015, 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 $45 million at December 31, 2015. In general, our philosophy is to maintain a diverse portfolio with regard to credit exposures.

 

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We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. We utilize credit default swaps on a limited basis to transfer a portion of the credit risk associated with a particular extension of credit to a third party. At December 31, 2015, we used credit default swaps with a notional amount of $346 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, 2015, we did not have any sold credit default swaps outstanding.

Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the “corporate services income” and “other income” components of noninterest income.

Allowance for loan and lease losses

At December 31, 2015, the ALLL was $796 million, or 1.33% of period-end loans, compared to $794 million, or 1.38%, at December 31, 2014. The allowance includes $35 million that was specifically allocated for impaired loans of $308 million at December 31, 2015, compared to $40 million that was specifically allocated for impaired loans of $302 million at December 31, 2014. For more information about impaired loans, see Note 5 (“Asset Quality”). At December 31, 2015, the ALLL was 205.7% of nonperforming loans, compared to 190.0% at December 31, 2014.

Selected asset quality statistics for each of the past five years are presented in Figure 37. The factors that drive these statistics are discussed in the remainder of this section.

Figure 37. Selected Asset Quality Statistics from Continuing Operations

 

Year ended December 31,                               
dollars in millions    2015       2014       2013       2012       2011    

Net loan charge-offs

   $ 142        $ 113        $ 168        $ 345        $ 541     

Net loan charge-offs to average total loans

     .24       .20       .32       .69       1.11  

Allowance for loan and lease losses

   $ 796        $ 794        $ 848        $ 888        $ 1,004     

Allowance for credit losses (a)

     852          829          885          917          1,049     

Allowance for loan and lease losses to period-end loans

     1.33       1.38       1.56       1.68       2.03  

Allowance for credit losses to period-end loans

     1.42          1.44          1.63          1.74          2.12     

Allowance for loan and lease losses to nonperforming loans

             205.7                  190.0                  166.9                  131.8                  138.1     

Allowance for credit losses to nonperforming loans

     220.2          198.3          174.2          136.1          144.3     

Nonperforming loans at period end (b)

   $ 387        $ 418        $ 508        $ 674        $ 727     

Nonperforming assets at period end

     403          436          531          735          859     

Nonperforming loans to period-end portfolio loans

     .65       .73       .93       1.28       1.47  

Nonperforming assets to period-end portfolio loans plus

          

OREO and other nonperforming assets

     .67          .76          .97          1.39          1.73     

 

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

 

(b) Loan balances exclude $11 million, $13 million, $16 million, and $23 million of PCI loans at December 31, 2015, 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 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.

In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial ALLL. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors not fully captured within the statistical analysis of incurred loss. The enhancements of the methodology are described in Note 1 (“Basis of

 

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Presentation and Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.” As a result of the methodology enhancements, the ALLL within each commercial portfolio and the provision for credit losses within each business segment has increased or decreased accordingly. The impact of the increases or decreases on the commercial portfolio ALLL and the business segment provision for credit losses was not significant.

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. 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, 2015, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

As shown in Figure 38, our ALLL from continuing operations remained relatively stable, increasing by $2 million, or .3%, since 2014. Our allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors, such as changes in economic conditions, underwriting standards, and concentrations of credit. Our commercial ALLL increased by $33 million, or 5.3%, since 2014 primarily because of loan growth and increased incurred loss estimates. The increase in these incurred loss estimates during 2015 was primarily due to the continued decline in oil and gas prices since 2014. Partially offsetting this increase was a decrease in our consumer ALLL of $31 million, or 18.1%, since 2014. Our consumer ALLL decrease was primarily due to continued improvement in credit metrics, such as delinquency, average credit bureau score, and loan to value, which have decreased expected loss rates since 2014. The continued improvement in the consumer portfolio credit quality metrics since 2014 was primarily due to continued improved credit quality and benefits of relatively stable economic conditions. Our liability for credit losses on lending-related commitments increased by $21 million to $56 million at December 31, 2015. When combined with our ALLL, our total allowance for credit losses represented 1.42% of period-end loans at December 31, 2015, compared to 1.44% at December 31, 2014.

 

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Figure 38. Allocation of the Allowance for Loan and Lease Losses

 

    2015     2014     2013  

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

  $ 450        56.5   %      52.2   %    $ 391        49.2   %      48.8   %    $ 362                42.7   %      45.8   % 

Commercial real estate:

                 

Commercial mortgage

    134        16.8        13.3        148        18.7        14.0        165        19.4        14.2   

Construction

    25        3.2        1.7        28        3.5        1.9        32        3.8        2.0   

Total commercial real estate loans

    159        20.0        15.0        176        22.2        15.9        197        23.2        16.2   

Commercial lease financing

    47        5.9        6.7        56        7.1        7.4        62        7.3        8.4   

Total commercial loans

    656        82.4        73.9        623        78.5        72.1        621        73.2        70.4   

Real estate — residential mortgage

    18        2.3        3.7        23        2.9        3.9        37        4.4        4.0   

Home equity:

                 

Key Community Bank

    55        6.9        16.9        66        8.3        18.1        84        9.9        19.0   

Other

    2        .3        .4        5        .6        .5        11        1.3        .6   

Total home equity loans

    57        7.2        17.3        71        8.9        18.6        95        11.2        19.6   

Consumer other — Key Community Bank

    20        2.5        2.7        22        2.8        2.7        29        3.4        2.7   

Credit cards

    32        4.0        1.3        33        4.1        1.3        34        4.0        1.3   

Consumer other:

                 

Marine

    12        1.5        1.0        21        2.7        1.3        29        3.4        1.9   

Other

    1        .1        .1        1        .1        .1        3        .4        .1   

Total consumer other

    13        1.6        1.1        22        2.8        1.4        32        3.8        2.0   

Total consumer loans

    140        17.6        26.1        171        21.5        27.9        227        26.8        29.6   

Total (a)

  $ 796        100.0   %      100.0   %    $ 794        100.0   %      100.0   %    $     848        100.0   %      100.0   % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
       
    2012     2011        
     
 
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

  $ 327        36.8   %      44.0   %    $ 334        33.2   %      39.1   %       

Commercial real estate:

                 

Commercial mortgage

    198        22.3        14.6        272        27.1        16.2         

Construction

    41        4.6        1.9        63        6.3        2.7         

Total commercial real estate loans

    239        26.9        16.5        335        33.4        18.9         

Commercial lease financing

    55        6.2        9.3        78        7.8        12.2         

Total commercial loans

    621        69.9        69.8        747        74.4        70.2         

Real estate — residential mortgage

    30        3.4        4.1        37        3.7        3.9         

Home equity:

                 

Key Community Bank

    105        11.8        18.6        103        10.2        18.6         

Other

    25        2.8        .8        29        2.9        1.1         

Total home equity loans

    130        14.6        19.4        132        13.1        19.7         

Consumer other — Key Community Bank

    38        4.3        2.5        41        4.1        2.4         

Credit cards

    26        2.9        1.4        —          —          —           

Consumer other:

                 

Marine

    39        4.4        2.6        46        4.6        3.5         

Other

    4        .5        .2        1        .1        .3         

Total consumer other

    43        4.9        2.8        47        4.7        3.8         

Total consumer loans

    267        30.1        30.2        257        25.6        29.8         

Total (a)

  $         888        100.0   %      100.0   %    $ 1,004        100.0   %      100.0   %       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

(a) Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $28 million at December 31, 2015, $29 million at December 31, 2014, $39 million at December 31, 2013, $55 million at December 31, 2012, and $104 million at December 31, 2011.

Our provision for credit losses was $166 million for 2015, compared to $57 million for 2014. The increase in our provision is due to the growth in our loan portfolio over the past twelve months as well as lower recoveries in 2015 compared to 2014. 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.

Asset quality on our oil and gas loan portfolio, which represents approximately 2% of total loans at December 31, 2015, performed in-line with our expectations in 2015. Nonperforming loans in this sector increased to .54% of our total oil and gas loan portfolio at December 31, 2015, up from .09% at December 31, 2014. In 2015, net loan charge-offs in this sector were ..81% of our total oil and gas loan portfolio as a result of commodity price declines that began in 2014. Our reserve for credit losses allocated to our oil and gas loan exposure was 6% of the total oil and gas loan portfolio at December 31, 2015, and reflected the estimated impact of current oil prices at that date.

 

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Net loan charge-offs

Net loan charge-offs for 2015 totaled $142 million, or .24% of average loans, compared to net loan charge-offs of $113 million, or .20%, for the same period last year. Figure 39 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 40.

Over the past 12 months, net loan charge-offs increased $29 million. This increase is attributable to the growth in our loan portfolio and lower levels of recoveries over the same period. As shown in Figure 42, our exit loan portfolio contributed a total of $10 million in net loan charge-offs for 2015, compared to $13 million in net loan charge-offs for 2014. The decrease in net loan charge-offs in our exit loan portfolio was primarily driven by lower levels of net loan charge-offs in our consumer and commercial exit loan portfolios.

Figure 39. Net Loan Charge-offs from Continuing Operations (a)

 

Year ended December 31,                               
dollars in millions    2015     2014     2013     2012     2011  

Commercial, financial and agricultural

   $ 61       $ 12       $ 23       $ 17       $ 119    

Real estate — commercial mortgage

     (2)               (7)        79         103    

Real estate — construction

     —           (12)        (11)        19         56    

Commercial lease financing

            —           12                17    

Total commercial loans

     63                17         120         295    

Home equity — Key Community Bank

     19         28         52         88         89    

Home equity — Other

                   14         30         41    

Credit cards

     28         33         27         11         —      

Marine

            14         14         37         48    

Other

     21         32         44         59         68    

Total consumer loans

     79         111         151         225         246    

Total net loan charge-offs

   $         142       $         113       $         168       $         345       $         541    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                          

Net loan charge-offs to average loans

     .24      .20      .32      .69      1.11 

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

   $ 22       $ 31       $ 37       $ 58       $ 123    
                                          

 

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

 

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Figure 40. Summary of Loan and Lease Loss Experience from Continuing Operations

 

Year ended December 31,

dollars in millions

   2015     2014     2013     2012     2011   

Average loans outstanding

   $ 58,594      $ 55,679      $ 53,054      $ 50,362      $ 48,606    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Allowance for loan and lease losses at beginning of period

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

Loans charged off:

          

Commercial, financial and agricultural (a)

     77        45        62        80        169    

Real estate — commercial mortgage

     4        6        20        102        113    

Real estate — construction

     1        5        3        24        83    

 

 

Total commercial real estate loans (b)

     5        11        23        126        196    

Commercial lease financing

     11        10        27        27        42    

 

 

Total commercial loans

     93        66        112        233        407    

Real estate — residential mortgage

     6        10        20        27        29    

Home equity:

          

Key Community Bank

     26        37        62        99        100    

Other

     6        9        20        35        45    

 

 

Total home equity loans

     32        46        82        134        145    

Consumer other — Key Community Bank

     24        30        31        38        45    

Credit cards

     30        34        30        11        —      

Consumer other:

          

Marine

     17        23        29        59        80    

Other

     1        2        4        6          

 

 

Total consumer other

     18        25        33        65        89    

 

 

Total consumer loans

     110        145        196        275        308    

 

 

Total loans charged off

     203        211        308        508        715    

Recoveries:

          

Commercial, financial and agricultural (a)

     16        33        39        63        50    

Real estate — commercial mortgage

     6        4        27        23        10    

Real estate — construction

     1        17        14        5        27    

 

 

Total commercial real estate loans (b)

     7        21        41        28        37    

Commercial lease financing

     7        10        15        22        25    

 

 

Total commercial loans

     30        64        95        113        112    

Real estate — residential mortgage

     3        2        2        3          

Home equity:

          

Key Community Bank

     7        9        10        11        11    

Other

     4        5        6        5          

 

 

Total home equity loans

     11        14        16        16        15    

Consumer other — Key Community Bank

     6        6        7        6          

Credit cards

     2        1        3        —          —      

Consumer other:

          

Marine

     8        9        15        22        32    

Other

     1        2        2        3          

 

 

Total consumer other

     9        11        17        25        36    

 

 

Total consumer loans

     31        34        45        50        62    

 

 

Total recoveries

     61        98        140        163        174    

 

 

Net loans charged off

     (142     (113     (168     (345     (541)   

Provision (credit) for loan and lease losses

     145        59        130        229        (60)   

Foreign currency translation adjustment

     (1     —          (2     —            

 

 

Allowance for loan and lease losses at end of year

   $ 796      $ 794      $ 848      $ 888      $ 1,004    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 35      $ 37      $ 29      $ 45      $ 73    

Provision (credit) for losses on lending-related commitments

     21        (2     8        (16     (28)   

 

 

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

   $ 56      $ 35      $ 37      $ 29      $ 45    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for credit losses at end of the year

   $ 852      $ 829      $ 885      $ 917      $ 1,049    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan charge-offs to average total loans

     .24   %      .20   %      .32   %      .69   %      1.11 

Allowance for loan and lease losses to period-end loans

     1.33        1.38        1.56        1.68        2.03    

Allowance for credit losses to period-end loans

     1.42        1.44        1.63        1.74        2.12    

Allowance for loan and lease losses to nonperforming loans

     205.7        190.0        166.9        131.8        138.1    

Allowance for credit losses to nonperforming loans

     220.2        198.3        174.2        136.1        144.3    

Discontinued operations — education lending business:

          

Loans charged off

   $ 35      $ 45      $ 55      $ 75      $ 138    

Recoveries

     13        14        18        17        15    

 

 

Net loan charge-offs

   $ (22   $ (31   $ (37   $ (58   $ (123)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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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 41 shows the composition of our nonperforming assets. These assets totaled $403 million at December 31, 2015, and represented .67% of portfolio loans, OREO and other nonperforming assets, compared to $436 million, or .76%, at December 31, 2014. 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 41. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

 

December 31,                               
dollars in millions    2015      2014      2013      2012      2011   

Commercial, financial and agricultural (a)

   $ 82       $ 59       $ 77       $ 99       $ 188    

Real estate — commercial mortgage

     19         34         37         120         218    

Real estate — construction

            13         14         56         54    

 

 

Total commercial real estate loans (b)

     28         47         51         176         272    

Commercial lease financing

     13         18         19         16         27    

 

 

Total commercial loans

     123         124         147         291         487    

Real estate — residential mortgage

     64         79         107         103         87    

Home equity:

          

Key Community Bank

     182         185         205         210         108    

Other

            10         15         21         12    

 

 

Total home equity loans

     190         195         220         231         120    

Consumer other — Key Community Bank

                                   

Credit cards

                          11         —      

Consumer other:

          

Marine

            15         26         34         31    

Other

     —                                  

 

 

Total consumer other

            16         27         36         32    

 

 

Total consumer loans

     264         294         361         383         240    

 

 

Total nonperforming loans (c)

     387         418         508         674         727    

Nonperforming loans held for sale

     —           —                  25         46    

OREO

     14         18         15         22         65    

Other nonperforming assets

            —                  14         21    

 

 

Total nonperforming assets

   $         403       $         436       $         531       $         735       $         859    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                          

Accruing loans past due 90 days or more

   $ 72       $ 96       $ 71       $ 78       $ 164    

Accruing loans past due 30 through 89 days

     208         235         318         424         441    

Restructured loans — accruing and nonaccruing (d)

     280         270         338         320         276    

Restructured loans included in nonperforming loans (d)

     159         157         214         249         191    

Nonperforming assets from discontinued operations — education lending business

            11         25         20         23    

Nonperforming loans to year-end portfolio loans

     .65      .73      .93      1.28      1.47 

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

     .67         .76         .97         1.39         1.73    
                                          

 

(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 $11 million, $13 million, $16 million, and $23 million of PCI loans at December 31, 2015, 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.

 

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As shown in Figure 41, nonperforming assets decreased during 2015, having declined for the past five years. Most of the reduction came from nonperforming loans in our consumer loan portfolio. As shown in Figure 42, our exit loan portfolio accounted for $23 million, or 6%, of total nonperforming assets at December 31, 2015, compared to $41 million, or 9%, at December 31, 2014.

At December 31, 2015, the approximate carrying amount of our commercial nonperforming loans outstanding represented 66% 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 72% of its original contractual amount.

At December 31, 2015, our 20 largest nonperforming loans totaled $97 million, representing 25% of total loans on nonperforming status from continuing operations, compared to $88 million, representing 21% in the prior year.

Figure 42 shows the composition of our exit loan portfolio at December 31, 2015, and 2014, the net loan charge-offs recorded on this portfolio, and the nonperforming status of those loans at these dates. The exit loan portfolio represented 3% of total loans and loans held for sale at December 31, 2015, compared to 4% at December 31, 2014. Additional information about loan sales is included in the “Loans and loans held for sale” section under “Loan sales.”

Figure 42. Exit Loan Portfolio from Continuing Operations

 

     Balance
Outstanding
    

 

 

Change
12-31-15 vs.
12-31-14

     Net Loan
Charge-offs
    Balance on
Nonperforming
Status
 
in millions    12-31-15      12-31-14         12-31-15 (b)     12-31-14 (b)     12-31-15      12-31-14  

Residential properties — homebuilder

   $       $ 10        $ (4)       $        —         $       $   

Marine and RV floor plan

                     (6)         —           —           —              

Commercial lease financing (a)

     765          967          (202)         (2   $ (5               

Total commercial loans

     772          984          (212)         (1     (5             15    

Home equity — Other

     208          267          (59)                               10    

Marine

     583          779          (196)                14                 15    

RV and other consumer

     41          54          (13)         —           —           —              

Total consumer loans

     832          1,100          (268)         11         18         14          26    

Total exit loans in loan portfolio

   $ 1,604        $ 2,084        $ (480)       $ 10       $ 13       $ 23        $ 41    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

   $         1,828        $         2,295        $         (467)       $         22       $         31       $         7        $         11    
                                                              

 

(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) Credit amounts indicate recoveries exceeded charge-offs.

Figure 43 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, 2015, and December 31, 2014.

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

 

            2015 Quarters         
in millions    2015      Fourth      Third      Second      First      2014  

Balance at beginning of period

   $ 418        $ 400        $ 419        $ 437        $ 418        $ 508    

Loans placed on nonaccrual status

     377          81          81          92          123          389    

Charge-offs

     (203)         (51)         (53)         (52)         (47)         (211)   

Loans sold

     (2)         —            (2)         —            —            (26)   

Payments

     (71)         (21)         (16)         (25)         (9)         (68)   

Transfers to OREO

     (20)         (4)         (4)         (5)         (7)         (20)   

Transfers to other nonperforming assets

     (1)         (1)         —            —            —            —      

Loans returned to accrual status

     (111)         (17)         (25)         (28)         (41)         (154)   

Balance at end of period (a)

   $         387        $         387        $         400        $         419        $         437        $ 418    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                       

 

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(a) Loan balances exclude $11 million and $13 million of PCI loans at December 31, 2015, and December 31, 2014, respectively.

Figure 44 shows the factors that contributed to the change in our OREO during 2015 and 2014.

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

 

            2015 Quarters         
in millions    2015      Fourth      Third      Second      First      2014  

Balance at beginning of period

   $         18        $ 17        $ 20        $ 20        $ 18        $ 15    

Properties acquired — nonperforming loans

     20                                          20    

Valuation adjustments

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

Properties sold

     (18)         (5)         (5)         (4)         (4)         (12)   

Balance at end of period

   $ 14        $         14       $         17        $         20        $         20        $         18    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                                                       

Operational and compliance risk management

Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the Internet to conduct our business activities.

Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key are subject to heightened prudential standards and regulation. This heightened level of regulation has increased our operational risk. 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. The Compliance Risk Committee serves the same function in managing compliance risk for Key. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Risk and Audit Committees and independently supports the Risk Committee’s oversight of these controls.

 

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Cybersecurity

We maintain comprehensive Cyber Incident Response Plans, and we devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, or cause other damage. We and many other U.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable 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 or 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 2015 are summarized below.

Earnings

Our fourth quarter net income from continuing operations attributable to Key common shareholders was $224 million, or $.27 per common share, compared to $246 million, or $.28 per common share, for the fourth quarter of 2014.

On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2015 was .97%, compared to 1.12% for the fourth quarter of 2014. The annualized return on average common equity from continuing operations was 8.51% for the fourth quarter of 2015, compared to 9.50% for the year-ago quarter.

Net interest income

Our taxable-equivalent net interest income was $610 million for the fourth quarter of 2015, and the net interest margin was 2.87%. These results compare to taxable-equivalent net interest income of $588 million and a net interest margin of 2.94% for the fourth quarter of 2014. The $22 million increase in net interest margin reflects higher earning asset balances, partially offset by lower earning asset yields, which also drove the decline in net interest margin.

Noninterest income

Our noninterest income was $485 million for the fourth quarter of 2015, compared to $490 million for the year-ago quarter. The slight decrease from the prior year was predominantly attributable to a decline in net gains from

 

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principal investing of $18 million and $7 million of lower trust and investment services income reflecting market variability. These decreases were partially offset by a $12 million increase in other income and growth in some of our other core fee-based businesses, including $4 million of higher cards and payments income due to higher credit card and merchant fees due to increased volume and a $4 million increase in mortgage servicing fees.

Noninterest expense

Our noninterest expense was $736 million for the fourth quarter of 2015. During the quarter, we incurred merger-related costs of $6 million, a pension settlement charge of $4 million, and costs associated with continuous improvement and efficiency efforts of $10 million. These costs impacted both personnel and nonpersonnel expense.

Compared to $704 million for the fourth quarter of last year, the increase in noninterest expense was primarily attributable to a $20 million increase in personnel expense related to investments made across the business, along with an increase in employee benefits expense. Nonpersonnel expense increased $12 million, most notably from higher business services and professional fees, partially due to merger-related costs.

Provision for credit losses

Our provision for credit losses was $45 million for the fourth quarter of 2015, compared to $22 million for the fourth quarter of 2014. Our ALLL was $796 million, or 1.33% of total period-end loans, at December 31, 2015, compared to $794 million, or 1.38%, at December 31, 2014.

Net loan charge-offs for the fourth quarter of 2015 totaled $37 million, or .25% of average loans, compared to $32 million, or .22%, for the same period last year.

Income taxes

For the fourth quarter of 2015, we recorded a tax provision from continuing operations of $73 million, compared to a tax provision of $94 million for the fourth quarter of 2014. The effective tax rate for the fourth quarter of 2015 was 23.9%, compared to 27.2% for the same quarter one year ago, due to additional federal tax credit refunds filed for prior years.

 

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Figure 45. Selected Quarterly Financial Data

 

     2015 Quarters     2014 Quarters         

dollars in millions, except per share amounts

     Fourth        Third        Second        First        Fourth        Third        Second        First      

FOR THE PERIOD

                   

Interest income

   $ 673      $ 661      $ 652      $ 636      $ 646      $ 639      $ 639      $ 630       

Interest expense

     71        70        68        65        64        64        66        67       

Net interest income

     602        591        584        571        582        575        573        563       

Provision for credit losses

     45        45        41        35        22        19        12             

Noninterest income

     485        470        488        437        490        417        455        435       

Noninterest expense

     736        724        711        669        704        706        687        664       

Income (loss) from continuing operations before income taxes

     306        292        320        304        346        267        329        330       

Income (loss) from continuing operations attributable to Key

     230        222        235        228        251        203        247        238       

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

     (4     (3     3        5        2        (17     (28          

Net income (loss) attributable to Key

     226        219        238        233        253        186        219        242       

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

     224        216        230        222        246        197        242        232       

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

     (4     (3     3        5        2        (17     (28          

Net income (loss) attributable to Key common shareholders

     220        213        233        227        248        180        214        236       

PER COMMON SHARE

                   

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

   $ .27      $ .26      $ .27      $ .26      $ .29      $ .23      $ .28      $ .26       

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

     (.01     —          —          .01        —          (.02     (.03     —         

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

     .27        .26        .28        .27        .29        .21        .24        .27       

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

   $ .27      $ .26      $ .27      $ .26      $ .28      $ .23      $ .27      $ .26       

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

     (.01     —          —          .01        —          (.02     (.03     —         

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

     .26        .25        .27        .26        .28        .21        .24        .26       

Cash dividends paid

     .075        .075        .075        .065        .065        .065        .065        .055       

Book value at period end

     12.51        12.47        12.21        12.12        11.91        11.74        11.65        11.43       

Tangible book value at period end

     11.22        11.17        10.92        10.84        10.65        10.47        10.50        10.28       

Market price:

                   

High

     14.01        15.46        15.70        14.74        14.18        14.62        14.59        14.70       

Low

     12.37        12.65        13.90        12.04        11.55        12.97        12.90        12.25       

Close

     13.19        13.01        15.02        14.16        13.90        13.33        14.33        14.24       

Weighted-average common shares outstanding (000)

     828,206        831,430        839,454        848,580        858,811        867,350        875,298        884,727       

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

     835,939        838,880        846,312        857,122        886,186        874,122        902,137        891,890       

AT PERIOD END

                   

Loans

   $ 59,876      $ 60,085      $ 58,264      $ 57,953      $ 57,381      $ 56,155      $ 55,600      $ 55,445       

Earning assets

     83,780        83,779        82,964        82,624        82,269        78,130        78,457        77,692       

Total assets

     95,133        95,422        94,606        94,206        93,821        89,784        91,798        90,802       

Deposits

     71,046        71,073        70,669        71,622        71,998        68,456        67,799        67,266       

Long-term debt

     10,186        10,310        10,267        8,713        7,875        7,172        8,213        7,712       

Key common shareholders’ equity

     10,456        10,415        10,300        10,313        10,239        10,195        10,213        10,112       

Key shareholders’ equity

     10,746        10,705        10,590        10,603        10,530        10,486        10,504        10,403       

PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS

                   

Return on average total assets

     .97     .95     1.03     1.03     1.12     .92     1.14     1.13          %   

Return on average common equity

     8.51        8.30        8.96        8.76        9.50        7.68        9.55        9.33       

Return on average tangible common equity (d)

     9.50        9.27        10.01        9.80        10.64        8.55        10.60        10.38       

Net interest margin (TE)

     2.87        2.87        2.88        2.91        2.94        2.96        2.98        3.00       

Cash efficiency ratio (d)

     66.4        66.9        65.1        65.1        64.4        69.7        65.6        65.1       

PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS

                   

Return on average total assets

     .93     .92     1.02     1.03     1.10     .81     .96     1.09          %   

Return on average common equity

     8.36        8.19        9.07        8.96        9.58        7.01        8.44        9.50       

Return on average tangible common equity (d)

     9.33        9.14        10.14        10.02        10.72        7.81        9.37        10.56       

Net interest margin (TE)

     2.84        2.84        2.85        2.88        2.93        2.94        2.94        2.95       

Loan to deposit (e)

     87.8        89.3        87.3        86.9        84.6        87.4        87.1        87.5       

CAPITAL RATIOS AT PERIOD END

                   

Key shareholders’ equity to assets

     11.30     11.22     11.19     11.26     11.22     11.68     11.44     11.46          %   

Key common shareholders’ equity to assets

     10.99        10.91        10.89        10.95        10.91        11.36        11.13        11.14       

Tangible common equity to tangible assets (d)

     9.98        9.90        9.86        9.92        9.88        10.26        10.15        10.14       

Common Equity tier 1 (d)

     10.94        10.47        10.71        10.64        N/A        N/A        N/A        N/A       

Tier 1 common equity (d)

     N/A        N/A        N/A        N/A        11.17        11.26        11.25        11.27       

Tier 1 risk-based capital

     11.35        10.87        11.11        11.04        11.90        12.01        11.99        12.01       

Total risk-based capital

     12.97        12.47        12.66        12.79        13.89        14.10        14.14        14.23       

Leverage

     10.72        10.68        10.74        10.91        11.26        11.15        11.24        11.30       

TRUST AND BROKERAGE ASSETS

                   

Assets under management

   $ 33,983      $ 35,158      $ 38,399      $ 39,281      $ 39,157      $ 39,283      $ 39,669      $ 38,893       

Nonmanaged and brokerage assets

     47,681        46,796        48,789        49,508        49,147        48,273        48,728        47,396       

OTHER DATA

                   

Average full-time-equivalent employees

     13,359        13,555        13,455        13,591        13,590        13,905        13,867        14,055       

Branches

     966        972        989        992        994        997        1,009        1,027       

 

(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,” “Common Equity Tier 1” (compliance date of January 1, 2015, under the Regulatory Capital Rules), “Tier 1 common equity” (prior to January 1, 2015), 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     12-31-15                9-30-15                6-30-15                3-31-15                12-31-14                9-30-14                6-30-14                3-31-14     

Tangible common equity to tangible assets at period end

                               

Key shareholders’ equity (GAAP)

  $     10,746        $     10,705        $     10,590        $     10,603        $     10,530        $     10,486        $     10,504        $     10,403     

Less:

 

Intangible assets (a)

    1,080          1,084          1,085          1,088          1,090          1,105          1,008          1,012     
 

Series A Preferred Stock (b)

    281          281          281          281          282          282          282          282     
                                                                                                                               
 

Tangible common equity (non-GAAP)

  $ 9,385        $ 9,340        $ 9,224        $ 9,234        $ 9,158        $ 9,099        $ 9,214        $ 9,109     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total assets (GAAP)

  $ 95,133        $ 95,422        $ 94,606        $ 94,206        $ 93,821        $ 89,784        $ 91,798        $ 90,802     

Less:

 

Intangible assets (a)

    1,080          1,084          1,085          1,088          1,090          1,105          1,008          1,012     
                                                                                                                               
 

Tangible assets (non-GAAP)

  $ 94,053        $ 94,338        $ 93,521        $ 93,118        $ 92,731        $ 88,679        $ 90,790        $ 89,790     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

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

    9.98        %        9.90        %        9.86        %        9.92        %        9.88       10.26        %        10.15        %        10.14        %   

Common Equity Tier 1 at period end

                               

Key shareholders’ equity (GAAP)

  $ 10,746        $ 10,705        $ 10,590        $ 10,603          —            —            —            —       

Less:

 

Series A Preferred Stock (b)

    281          281          281          281          —            —            —            —       
                                                                                                                               
 

Common Equity Tier 1 capital before adjustments and deductions

    10,465          10,424          10,309          10,322          —            —            —            —       

Less:

 

Goodwill, net of deferred taxes

    1,034          1,036          1,034          1,036          —            —            —            —       
 

Intangible assets, net of deferred taxes

    26          29          33          36          —            —            —            —       
 

Deferred tax assets

    1          1          1          1          —            —            —            —       
 

Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes

    (58       54          —            52          —            —            —            —       
 

Accumulated gains (losses) on cash flow hedges, net of deferred taxes

    (20       21          (20       (8       —            —            —            —       
 

Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes

    (365       (385       (361       (364       —            —            —            —       
                                                                                                                               
 

Total Common Equity Tier 1 capital

  $ 9,847        $ 9,668        $ 9622        $ 9569          —            —            —            —       
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net risk-weighted assets (regulatory)

  $ 89,980        $ 92,307        $ 89,851        $ 89,967          —            —            —            —       

Common Equity Tier 1 ratio (non-GAAP)

    10.94        %        10.47        %        10.71        %        10.64        %        —            —            —            —       

Tier 1 common equity at period end

                               

Key shareholders’ equity (GAAP)

    —            —            —            —          $ 10,530        $ 10,486        $ 10,504        $ 10,403     

Qualifying capital securities

    —            —            —            —            339          340          339          339     

Less:

 

Goodwill

    —            —            —            —            1,057          1,051          979          979     
 

Accumulated other comprehensive income (loss) (c)

    —            —            —            —            (395       (366       (328       (367  
 

Other assets (d)

    —            —            —            —            83          110          86          84     
                                                                                                                               
 

Total Tier 1 capital (regulatory)

    —            —            —            —            10,124          10,031          10,106          10,046     

Less:

 

Qualifying capital securities

    —            —            —            —            339          340          339          339     
 

Series A Preferred Stock (b)

    —            —            —            —            282          282          282          282     
                                                                                                                               
 

Total Tier 1 common equity (non-GAAP)

    —            —            —            —          $ 9,503        $ 9,409        $ 9,485        $ 9,425     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net risk-weighted assets (regulatory)

    —            —            —            —          $ 85,100        $ 83,547        $ 84,287        $ 83,637     

Tier 1 common equity ratio (non-GAAP)

    —            —            —            —            11.17        %        11.26        %        11.25        %        11.27        %   

Average tangible common equity

                               

Average Key shareholders’ equity (GAAP)

  $ 10,731        $ 10,614        $ 10,590        $ 10,570        $ 10,562        $ 10,473        $ 10,459        $ 10,371     

Less:

 

Intangible assets (average) (e)

    1,082          1,083          1,086          1,089          1,096          1,037          1,010          1,013     
 

Series A Preferred Stock (average)

    290          290          290          290          291          291          291          291     
                                                                                                                               
 

Average tangible common equity (non-GAAP)

  $ 9,359        $ 9,241        $ 9,214        $ 9,191        $ 9,175        $ 9,145        $ 9,158        $ 9,067     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Return on average tangible common equity from continuing operations

                               

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

  $ 224        $ 216        $ 230        $ 222        $ 246        $ 197        $ 242        $ 232     

Average tangible common equity (non-GAAP)

    9,359          9,241          9,214          9,191          9,175          9,145          9,158          9,067     

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

    9.50       9.27        %        10.01        %        9.80        %        10.64        %        8.55        %        10.60        %        10.38        %   

Return on average tangible common equity consolidated

                               

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

  $ 220        $ 213        $ 233        $ 227        $ 248        $ 180        $ 214        $ 236     

Average tangible common equity (non-GAAP)

    9,359          9,241          9,214          9,191          9,175          9,145          9,158          9,067     

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

    9.33       9.14        %        10.14        %        10.02        %        10.72        %        7.81        %        9.37        %        10.56        %   

Cash efficiency ratio

                               

Noninterest expense (GAAP)

  $ 736        $ 724        $ 711        $ 669        $ 704        $ 706        $ 687        $ 664     

Less:

 

Intangible asset amortization (GAAP)

    9          9          9          9          10          10          9          10     
                                                                                                                               
 

Adjusted noninterest expense (non-GAAP)

  $ 727        $ 715        $ 702        $ 660        $ 694        $ 696        $ 678        $ 654     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net interest income (GAAP)

  $ 602        $ 591        $ 584        $ 571        $ 582        $ 575        $ 573        $ 563     

Plus:

 

Taxable-equivalent adjustment

    8          7          7          6          6          6          6          6     
 

Noninterest income (GAAP)

    485          470          488          437          490          417          455          435     
                                                                                                                               
 

Total taxable-equivalent revenue (non-GAAP)

  $ 1,095        $ 1,068        $ 1,079        $ 1,014        $ 1,078        $ 998        $ 1,034        $ 1,004     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Cash efficiency ratio (non-GAAP)

    66.4             66.9        %        65.1        %        65.1        %        64.4        %        69.7        %        65.6        %        65.1        %   

 

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(a) For the three months ended December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, intangible assets exclude $45 million, $50 million, $55 million, and $61 million, respectively, of period-end purchased credit card receivables. 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.

 

(b) Net of capital surplus.

 

(c) Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

 

(d) Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at any quarter-end during 2014.

 

(e) For the three months ended December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, average intangible assets exclude $47 million, $52 million, $58 million, and $64 million, respectively, of average purchased credit card receivables. 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.

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

 

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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.

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, 2015, 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 $44 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 $44 million increase in the commercial loan portfolio allowance would have reduced earnings on an after-tax basis by approximately $28 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.

In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration loss to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The enhanced framework utilizes the nine qualitative factors recommended within the OCC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses (issued 12/13/2006) to quantify the commercial qualitative component. The impact of these changes was largely neutral to the total ALLL. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each business segment and each portfolio caused the business segment and commercial portfolio reserves to increase or decrease accordingly. The impact of the increases and decreases on the business segment and commercial portfolio reserves was not significant.

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

 

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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, 2015, $15.9 billion, or 17%, 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, 2015, $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, 2015, $7 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, 2015, 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 $304 million at December 31, 2015. A 10% positive or negative variance in that fair value would have increased or decreased our 2015 earnings by approximately $30 million ($19 million after tax, or $.02 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 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 2015. 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 recorded in the Key Corporate Bank unit. Approximately $72 million of the goodwill was allocated to KBCM in the second quarter of 2015,

 

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when Pacific Crest Securities was fully merged into KBCM. During the third quarter of 2015, goodwill increased $3 million to account for a tax item associated with the business combination. 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, 2015, is provided in Note 7 (“Securities”).

Derivatives and hedging

We primarily use 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 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, 2015.

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.

 

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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 2015, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates except for the ALLL enhanced methodology discussed above.

 

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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, 2015

in millions

   Short- and Long- 
Term Commercial 
Total (a)
     Foreign Exchange
and Derivatives
with Collateral (b)
    Net 
Exposure 
 

France:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —        $             1      $             1   
   

Non-sovereign non-financial institutions

   $             17                 17   
 

Total

     17          1        18   

Germany:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     187                 187   
 

Total

     187                 187   

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

                    1   
 

Total

                    1   

Italy:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     34                 34   
 

Total

     34                 34   

Netherlands:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     12                 12   
 

Total

     12                 12   

Portugal:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     —                   
 

Total

     —                   

Spain:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     20                 20   
 

Total

     20                 20   

Switzerland:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —          (2     (2
   

Non-sovereign non-financial institutions

     63                 63   
 

Total

     63          (2     61   

United Kingdom:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —          58        58   
   

Non-sovereign non-financial institutions

     83                 83   
 

Total

     83          58        141   

Other Europe: (c)

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —                   
   

Non-sovereign non-financial institutions

     70                 70   
 

Total

     70                 70   

Total Europe:

       
 

Sovereigns

     —                   
 

Non-sovereign financial institutions

     —          57        57   
   

Non-sovereign non-financial institutions

     487                 487   
 

Total

   $ 487        $ 57      $ 544   
    

 

 

    

 

 

   

 

 

 
                               

 

(a) Represents our outstanding leases.

 

(b) Represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients’ trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls.

 

(c) Other Europe consists of the following countries: Austria, Belarus, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, Hungary, Lithuania, Luxembourg, Malta, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. 100% 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 79 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

     111   

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

     112   

Report of Independent Registered Public Accounting Firm

     113   

Consolidated Balance Sheets

     114   

Consolidated Statements of Income

     115   

Consolidated Statements of Comprehensive Income

     116   

Consolidated Statements of Changes in Equity

     117   

Consolidated Statements of Cash Flows

     118   

Notes to Consolidated Financial Statements

     119   

Note 1. Summary of Significant Accounting Policies

     119   

Note 2. Earnings Per Common Share

     135   

Note 3. Restrictions on Cash, Dividends and Lending Activities

     136   

Note 4. Loans and Loans Held for Sale

     137   

Note 5. Asset Quality

     138   

Note 6. Fair Value Measurements

     153   

Note 7. Securities

     169   

Note 8. Derivatives and Hedging Activities

     171   

Note 9. Mortgage Servicing Assets

     180   

Note 10. Goodwill and Other Intangible Assets

     181   

Note 11. Variable Interest Entities

     182   

Note 12. Income Taxes

     184   

Note 13. Acquisitions and Discontinued Operations

     186   

Note 14. Securities Financing Activities

     194   

Note 15. Stock-Based Compensation

     195   

Note 16. Employee Benefits

     198   

Note 17. Short-Term Borrowings

     207   

Note 18. Long-Term Debt

     208   

Note 19. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

     209   

Note 20. Commitments, Contingent Liabilities and Guarantees

     210   

Note 21. Accumulated Other Comprehensive Income

     214   

Note 22. Shareholders’ Equity

     216   

Note 23. Line of Business Results

     218   

Note 24. Condensed Financial Information of the Parent Company

     222   

 

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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, 2015. Our independent registered public accounting firm has issued an attestation report, dated February 24, 2016, 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, 2015, 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, 2015, 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, 2015 and 2014, 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, 2015 and our report dated February 24, 2016 expressed an unqualified opinion thereon.

 

 

Cleveland, Ohio

February 24, 2016

   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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 February 24, 2016 expressed an unqualified opinion thereon.

 

 

Cleveland, Ohio

February 24, 2016

   LOGO

 

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Consolidated Balance Sheets

 

December 31,  
in millions, except per share data    2015        2014   

 

 

ASSETS

     

Cash and due from banks

   $                 607         $                 653    

Short-term investments

     2,707           4,269    

Trading account assets

     788           750    

Securities available for sale

     14,218           13,360    

Held-to-maturity securities (fair value: $4,848 and $4,974)

     4,897           5,015    

Other investments

     655           760    

Loans, net of unearned income of $646 and $682

     59,876           57,381    

Less: Allowance for loan and lease losses

     796           794    

 

 

Net loans

     59,080           56,587    

Loans held for sale

     639           734    

Premises and equipment

     779           841    

Operating lease assets

     340           330    

Goodwill

     1,060           1,057    

Other intangible assets

     65           101    

Corporate-owned life insurance

     3,541           3,479    

Derivative assets

     619           609    

Accrued income and other assets

     3,292           2,952    

Discontinued assets (including $4 and $191 of portfolio loans at fair value, see Note 13)

     1,846           2,324    

 

 

Total assets

   $ 95,133         $ 93,821    
  

 

 

    

 

 

 

LIABILITIES

     

Deposits in domestic offices:

     

NOW and money market deposit accounts

   $ 37,089         $ 34,536    

Savings deposits

     2,341           2,371    

Certificates of deposit ($100,000 or more)

     2,392           2,040    

Other time deposits

     3,127           3,259    

 

 

Total interest-bearing deposits

     44,949           42,206    

Noninterest-bearing deposits

     26,097           29,228    

Deposits in foreign office — interest-bearing

     —             564    

 

 

Total deposits

     71,046           71,998    

Federal funds purchased and securities sold under repurchase agreements

     372           575    

Bank notes and other short-term borrowings

     533           423    

Derivative liabilities

     632           784    

Accrued expense and other liabilities

     1,605           1,621    

Long-term debt

     10,186           7,875    

Discontinued liabilities

     —               

 

 

Total liabilities

     84,374           83,279    

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 2,900,234 and 2,904,839 shares

     290           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

     3,922           3,986    

Retained earnings

     8,922           8,273    

Treasury stock, at cost (181,218,648 and 157,566,493 shares)

     (3,000)          (2,681)   

Accumulated other comprehensive income (loss)

     (405)          (356)   

 

 

Key shareholders’ equity

     10,746           10,530    

Noncontrolling interests

     13           12    

 

 

Total equity

     10,759           10,542    

 

 

Total liabilities and equity

   $ 95,133         $ 93,821    
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

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    2015       2014       2013   

 

 

INTEREST INCOME

        

Loans

   $         2,149         $         2,110         $         2,151     

Loans held for sale

     37           21           20     

Securities available for sale

     293           277           311     

Held-to-maturity securities

     96           93           82     

Trading account assets

     21           25           21     

Short-term investments

     8           6           6     

Other investments  

     18           22           29     

 

 

Total interest income

     2,622           2,554           2,620     

INTEREST EXPENSE

        

Deposits

     105           117           158     

Federal funds purchased and securities sold under repurchase agreements

     —             2           2     

Bank notes and other short-term borrowings

     9           9           8     

Long-term debt

     160           133           127     

 

 

Total interest expense

     274           261           295     

 

 

NET INTEREST INCOME

     2,348           2,293           2,325     

Provision for credit losses

     166           57           138     

 

 

Net interest income after provision for credit losses

     2,182           2,236           2,187     

NONINTEREST INCOME

        

Trust and investment services income

     433           403           393     

Investment banking and debt placement fees

     445           397           333     

Service charges on deposit accounts

     256           261           281     

Operating lease income and other leasing gains

     73           96           117     

Corporate services income

     198           178           172     

Cards and payments income

     183           166           162     

Corporate-owned life insurance income

     127           118           120     

Consumer mortgage income

     12           10           19     

Mortgage servicing fees

     48           46           58     

Net gains (losses) from principal investing

     51           78           52     

Other income (a)

     54           44           59     

 

 

Total noninterest income

     1,880           1,797           1,766     

NONINTEREST EXPENSE

        

Personnel

     1,652           1,591           1,609     

Net occupancy

     255           261           275     

Computer processing

     164           158           156     

Business services and professional fees

     159           156           151     

Equipment

     88           96           104     

Operating lease expense

     47           42           47     

Marketing

     57           49           51     

FDIC assessment

     32           30           30     

Intangible asset amortization

     36           39           44     

OREO expense, net

     6           5           7     

Other expense

     344           334           338     

 

 

Total noninterest expense

     2,840           2,761           2,812     

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     1,222           1,272           1,141     

Income taxes

     303           326           271     

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     919           946           870     

Income (loss) from discontinued operations, net of taxes of $1, ($23) and $26 (see Note 13)

     1           (39)          40     

 

 

NET INCOME (LOSS)

     920           907           910     

Less: Net income (loss) attributable to noncontrolling interests

     4           7           —       

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 916         $ 900         $ 910     
  

 

 

    

 

 

    

 

 

 

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

   $ 892         $ 917         $ 847     

Net income (loss) attributable to Key common shareholders

     893           878           887     

Per common share:

        

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

   $ 1.06         $ 1.05         $ .93     

Income (loss) from discontinued operations, net of taxes

     —             (.04)          .04     

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

     1.06           1.01           .98     

Per common share — assuming dilution:

        

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

   $ 1.05         $ 1.04         $ .93     

Income (loss) from discontinued operations, net of taxes

     —             (.04)          .04     

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

     1.05           .99           .97     

Cash dividends declared per common share

   $ .29         $ .25         $ .215     

Weighted-average common shares outstanding (000)

     836,846           871,464           906,524     

Effect of convertible preferred stock

     —             —             —       

Effect of common share options and other stock awards

     7,643           6,735           6,047     

 

 

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

     844,489           878,199           912,571     

 

 

 

(a) Net securities gains (losses) totaled less than $1 million for the years ended December 31, 2015, and 2014, and $1 million for the year ended December 31, 2013. For 2015, 2014 and 2013, 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    2015      2014      2013  

 

 

Net income (loss)

   $         920       $         907       $         910   

Other comprehensive income (loss), net of tax:

        

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($32), $35, and ($173)

     (54)         59         (292)   

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $17, $2, and ($17)

     28         3         (29)   

Foreign currency translation adjustments, net of income taxes of ($14), ($8), and ($3)

     (24)         (20)         (13)   

Net pension and postretirement benefit costs, net of income taxes of ($2), ($27), and $63

     1         (46)         106   
   

Total other comprehensive income (loss), net of tax

     (49)         (4)         (228)   

 

 

Comprehensive income (loss)

     871         903         682   

Less: Comprehensive income attributable to noncontrolling interests

     4         7         —     

 

 

Comprehensive income (loss) attributable to Key

   $ 867       $ 896       $ 682   
  

 

 

    

 

 

    

 

 

 

 

 

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, 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   

Net income (loss)

              916            4   

Other comprehensive income (loss):

                 

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($32)

                  (54  

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $17

                  28     

Foreign currency translation adjustments, net of income taxes of ($14)

                  (24  

Net pension and postretirement benefit costs, net of income taxes of ($2)

                  1     

Deferred compensation

            11           

Cash dividends declared on common shares ($.29 per share)

              (244      

Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share)

              (23      

Common shares repurchased

      (31,267             (448    

Series A Preferred Stock exchanged for common shares

    (5     33        (1           1       

Common shares reissued (returned) for stock options and other employee benefit plans

      7,582            (75       128       

Net contribution from (distribution to) noncontrolling interests

                    (3
   

BALANCE AT DECEMBER 31, 2015

    2,900        835,751      $ 290      $ 1,017      $ 3,922      $ 8,922      $ (3,000   $ (405   $ 13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

See Notes to Consolidated Financial Statements.

 

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Consolidated Statements of Cash Flows

 

Year ended December 31,                     
in millions    2015      2014      2013  

 

 

OPERATING ACTIVITIES

        

Net income (loss)

   $ 920         $ 907         $ 910     

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

        

Provision for credit losses

     166           57           138     

Provision (credit) for losses on LIHTC guaranteed funds

     —           (7)          4     

Depreciation, amortization and accretion expense, net

     247           246           221     

Increase in cash surrender value of corporate-owned life insurance

     (108)          (106)          (106)    

Stock-based compensation expense

     58           44           35     

FDIC reimbursement (payments), net of FDIC expense

     —           1           296     

Deferred income taxes (benefit)

     (76)          5           29     

Proceeds from sales of loans held for sale

     7,333           5,386           5,595     

Originations of loans held for sale, net of repayments

     (7,072)          (5,415)          (5,440)    

Net losses (gains) from sale of loans held for sale

     (103)          (97)          (115)    

Net losses (gains) from principal investing

     (51)          (78)          (52)    

Net losses (gains) and writedown on OREO

     4           3           6     

Net losses (gains) on leased equipment

     (6)          (35)          (43)    

Net losses (gains) on sales of fixed assets

     8           7           12     

Net securities losses (gains)

     —           —           (1)    

Net decrease (increase) in trading account assets

     (38)          (12)          (133)    

Gain on sale of Victory

     —           (10)          (146)    

Loss on sale of residual interests and deconsolidation of securitization trusts

     —           40           —     

Other operating activities, net

     (151)          384           337     

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     1,131           1,320           1,547     

INVESTING ACTIVITIES

        

Net decrease (increase) in short-term investments, excluding acquisitions

     1,562           1,358           (1,650)    

Purchases of securities available for sale

     (4,090)          (3,797)          (5,222)    

Proceeds from sales of securities available for sale

     19           —           35     

Proceeds from prepayments and maturities of securities available for sale

     3,098           2,860           4,470     

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

     1,102           850           847     

Purchases of held-to-maturity securities

     (988)          (1,109)          (1,672)    

Purchases of other investments

     (32)          (49)          (46)    

Proceeds from sales of other investments

     145           334           187     

Proceeds from prepayments and maturities of other investments

     8           4           6     

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

     (2,951)          (3,296)          (2,026)    

Proceeds from sales of portfolio loans

     110           120           185     

Proceeds from corporate-owned life insurance

     46           35           31     

Purchases of premises, equipment, and software

     (75)          (97)          (100)    

Proceeds from sales of premises and equipment

     1           1           8     

Proceeds from sales of OREO

     22           17           23     

Cash received (used) in acquisitions, net of cash acquired

     —           (114)          601     

Proceeds from sale of residual interests

     —           57           —     

Proceeds from sale of Victory

     —           10           131     

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (2,023)          (2,816)          (4,192)    

FINANCING ACTIVITIES

        

Net increase (decrease) in deposits, excluding acquisitions

     (952)          2,736           2,333     

Net increase (decrease) in short-term borrowings

     (93)          (879)          (18)    

Net proceeds from issuance of long-term debt

     3,756           1,727           2,573     

Payments on long-term debt

     (1,172)          (1,355)          (1,545)    

Repurchase of common shares

     (448)          (484)          (474)    

Net proceeds from reissuance of common shares

     22           27           26     

Cash dividends paid

     (267)          (240)          (217)    

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     846           1,532           2,678     

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     (46)          36           33     

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR

     653           617           584     

 

 

CASH AND DUE FROM BANKS AT END OF YEAR

   $ 607         $ 653         $ 617     
  

 

 

    

 

 

    

 

 

 

 

 

Additional disclosures relative to cash flows:

        

Interest paid

   $ 329         $ 298         $ 304     

Income taxes paid (refunded)

     281           131           185     

Noncash items:

        

Reduction of secured borrowing and related collateral

   $ 160         $ 152           —     

Loans transferred to portfolio from held for sale

     1           19         $ 9     

Loans transferred to held for sale from portfolio

     63           16           61     

Loans transferred to other real estate owned

     20           23           21     

Assets acquired

     —           41           41     

Liabilities assumed

     —           17           —     

LIHTC guaranteed funds put

     —           7           —     

 

 

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.

ATMs: Automated teller machines.

Austin: Austin Capital Management, Ltd.

BSA: Bank Secrecy Act.

BHCA: Bank Holding Company Act of 1956, as amended.

BHCs: Bank holding companies.

Board: KeyCorp Board of Directors.

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: KeyCorp 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.

EBITDA: Earnings before interest, taxes, depreciation, and

amortization.

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.

FHLB: Federal Home Loan Bank of Cincinnati.

FHLMC: Federal Home Loan Mortgage Corporation.

FINRA: Financial Industry Regulatory Authority.

First Niagara: First Niagara Financial Group, Inc. (NASDAQ: FNFG)

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.

KBCM: KeyBanc Capital Markets, Inc.

KCDC: Key Community Development Corporation.

KEF: Key Equipment Finance.

KREEC: Key Real Estate Equity Capital, Inc.

LCR: Liquidity coverage ratio.

LIBOR: London Interbank Offered Rate.

LIHTC: Low-income housing tax credit.

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

MRM: Market Risk Management group.

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).

OREO: Other real estate owned.

OTTI: Other-than-temporary impairment.

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.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

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Organization

We are one of the nation’s largest bank-based financial services companies, with consolidated total assets of $95.1 billion at December 31, 2015. 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 and private debt and equity, syndications, and derivatives to middle market companies in selected industries throughout the United States through our subsidiary, KBCM. As of December 31, 2015, KeyBank operated 966 full-service retail banking branches and 1,256 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 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

 

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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.

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, 2015, and December 31, 2014, 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.

 

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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 assessed for impairment), 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.

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 net realizable value 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

 

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necessary. As of December 31, 2015, the probability of default ratings was based on our default data for the period from January 2008 through October 2015, 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 one to two years.

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:

 

¿   changes in international, national, regional, and local economic and business conditions;

 

¿   changes in the experience, ability, and depth of our lending management and staff;

 

¿   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

 

¿   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.

In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The impact of these changes was largely neutral to the total ALLL. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each business segment and each portfolio caused the business segment and commercial portfolio reserves to increase or decrease accordingly. The impact of the increases and decreases on the business segment and commercial portfolio reserves was not significant.

 

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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 $56 million at December 31, 2015, and $35 million at December 31, 2014. 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.

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.

 

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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”).

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 two privately held companies.

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.

 

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“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 46% and 53% of other investments at December 31, 2015, and December 31, 2014, 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 privately held companies and are carried at fair value ($304 million at December 31, 2015, and $406 million at December 31, 2014). 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.

 

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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.

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 $321 million at December 31, 2015, and $323 million at December 31, 2014, 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.

 

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Servicing assets are evaluated quarterly for possible impairment. This process involves classifying the assets based on the types of loans serviced 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 reserve allowance. Any impairment of servicing assets recorded for the years ended December 31, 2015, December 31, 2014, and December 2013, was not 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.”

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 12 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

 

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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. Purchased 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 applicable accounting guidance 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 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 PCI 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

 

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method over the terms of the leases. Accumulated depreciation and amortization on premises and equipment totaled $1.4 billion at December 31, 2015, and $1.3 billion at December 31, 2014.

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 $77 million at December 31, 2015, and $64 million at December 31, 2014, 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.

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.

 

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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.

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 2015

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 was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or a prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not 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 was effective for interim and annual reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and was implemented using a cumulative-effect approach to transactions outstanding as of the effective date with no adjustment to prior periods. The disclosure for secured borrowings has been 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 was not permitted. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Discontinued operations.    In April 2014, the FASB issued new accounting guidance that revises the criteria for determining when disposals should be reported as discontinued operations and modifies the disclosure requirements. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. The adoption of this accounting guidance did not 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 or the practical expedient method to the proportional amortization method. This accounting guidance was effective retrospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. We elected to amortize our LIHTCs under the practical expedient method to the proportional amortization method. As our LIHTCs were previously accounted for under the effective yield method and related amortization expense was previously classified as income taxes in our Consolidated Statements of Income, 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 our LIHTCs in Note 11 (“Variable Interest Entities”).

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

 

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residential real estate collateralized consumer mortgage loans by derecognizing the loan and recognizing the collateral asset. This accounting guidance was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide the disclosure related to consumer residential mortgages required by this new accounting guidance in Note 5 (“Asset Quality”).

Accounting Guidance Pending Adoption at December 31, 2015

Financial instruments.    In January 2016, the FASB issued new accounting guidance that requires equity investments, except those accounted for under the equity method of accounting or consolidated, to be measured at fair value with changes recognized in net income. If there is no readily determinable fair value, the guidance allows entities the ability to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost and changes the presentation of financial assets and financial liabilities on the balance sheet or in the footnotes. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in the fair value of a liability resulting from credit risk to be presented in OCI. We have not elected to measure any of our liabilities at fair value. This accounting and disclosure guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). For the guidance applicable to us, the accounting will be implemented on a prospective basis, whereby early adoption is not permitted. We are currently evaluating the impact that this accounting guidance may have on our financial condition or results of operations.

Business combinations.    In September 2015, the FASB issued new accounting guidance that obligates an acquirer in a business combination to recognize adjustments to provisional amounts in the reporting period that the amounts were determined, eliminating the requirement for retrospective adjustments. The acquirer should record in the current period any income effects that resulted from the change in provisional amounts, calculated as if the accounting were completed at the acquisition date. 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 the 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.

Fair value measurement.    In May 2015, the FASB issued new disclosure guidance that eliminates the requirement to categorize investments measured using the net asset value practical expedient in the fair value hierarchy table. Entities will be required to disclose the fair value of investments measured using the net asset value practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. This disclosure will be presented for interim and annual reporting periods beginning after December 15, 2015 (March 31, 2016, for us) on a retrospective basis. Early adoption is permitted. The adoption of this disclosure guidance will not affect our financial condition or results of operations.

Cloud computing fees.    In April 2015, the FASB issued new accounting guidance that clarifies a customer’s accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service 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 can be implemented using either a prospective method or a retrospective method. Early adoption is permitted. We have elected to implement this new accounting guidance using a prospective approach. The

 

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adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Imputation of interest.    In April 2015, the FASB issued new accounting guidance that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. 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 retrospective 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.

Consolidation.    In February 2015, the FASB issued new accounting guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance amends the current accounting guidance to address limited partnerships and similar legal entities, certain investment funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. 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.

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.

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.

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. We have elected to implement this 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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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 can be implemented using either a retrospective method or a cumulative-effect approach. In August 2015, the FASB issued an update that defers the effective date of the revenue recognition guidance by one year. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. We have elected to implement this new accounting guidance using a cumulative-effect approach. 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 this new accounting guidance that are still being interpreted, and the FASB has recently issued and proposed updates to certain aspects of the guidance. Therefore, the results of our materiality analysis may change based on the conclusions reached as to the application of the new guidance.

 

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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    2015        2014        2013    

 EARNINGS

        

 Income (loss) from continuing operations

     $ 919           $ 946           $ 870     

 Less: Net income (loss) attributable to noncontrolling interests

     4           7           —     

 Income (loss) from continuing operations attributable to Key

     915           939           870     

 Less: Dividends on Series A Preferred Stock

     23           22           23     

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

     892           917           847     

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

     1           (39)          40     

 Net income (loss) attributable to Key common shareholders

     $                 893           $                 878           $                 887     
  

 

 

    

 

 

    

 

 

 
   

 WEIGHTED-AVERAGE COMMON SHARES

        

 Weighted-average common shares outstanding (000)

     836,846           871,464           906,524     

 Effect of convertible preferred stock

     —           —           —     

 Effect of common share options and other stock awards

     7,643           6,735           6,047     

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

     844,489           878,199           912,571     
  

 

 

    

 

 

    

 

 

 
   

 EARNINGS PER COMMON SHARE

        

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

     $ 1.06           $ 1.05           $ .93     

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

     —           (.04)          .04     

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

     1.06           1.01           .98     

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

     $ 1.05           $ 1.04           $ .93     

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

     —           (.04)          .04     

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

     1.05           .99           .97     

 

 

 

(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 $243 million in 2015 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 previous two calendar years and for the current year, up to the date the dividend is declared.

During 2015, KeyBank paid $1 billion in dividends to KeyCorp. At January 1, 2016, KeyBank had regulatory capacity to pay $553 million in dividends to KeyCorp without prior regulatory approval. At December 31, 2015, KeyCorp held $2.7 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    2015        2014    

 Commercial, financial and agricultural (a)

       $                     31,240             $                     27,982     

 Commercial real estate:

     

 Commercial mortgage

     7,959           8,047     

 Construction

     1,053           1,100     

 Total commercial real estate loans

     9,012           9,147     

 Commercial lease financing (b)

     4,020           4,252     

 Total commercial loans

     44,272           41,381     

 Residential — Prime Loans:

     

 Real estate — residential mortgage

     2,242           2,225     

 Home equity:

     

 Key Community Bank

     10,127           10,366     

 Other

     208           267     

 Total home equity loans

     10,335           10,633     

 Total residential — prime loans

     12,577           12,858     

 Consumer other — Key Community Bank

     1,600           1,560     

 Credit cards

     806           754     

 Consumer other:

     

 Marine

     583           779     

 Other

     38           49     

 Total consumer other

     621           828     

 Total consumer loans

     15,604           16,000     

 Total loans (c) (d)

       $ 59,876             $ 57,381     
  

 

 

    

 

 

 

 

 

 

(a) Loan balances include $85 million and $88 million of commercial credit card balances at December 31, 2015, and December 31, 2014, respectively.

 

(b) Commercial lease financing includes receivables of $134 million and $302 million held as collateral for a secured borrowing at December 31, 2015, and December 31, 2014, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 18 (“Long-Term Debt”).

 

(c) At December 31, 2015, total loans include purchased loans of $114 million, of which $11 million were PCI loans. At December 31, 2014, total loans include purchased loans of $138 million, of which $13 million were PCI loans.

 

(d) Total loans exclude loans in the amount of $1.8 billion at December 31, 2015, and $2.3 billion at December 31, 2014, 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

   2015        2014    

 Commercial, financial and agricultural

   $ 76         $ 63     

 Real estate — commercial mortgage

                 532                       638     

 Commercial lease financing

     14           15     

 Real estate — residential mortgage

     17           18     

 Total loans held for sale

   $ 639         $ 734     
  

 

 

    

 

 

 

 

 

 

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Our summary of changes in loans held for sale follows:

 

 Year ended December 31,              
 in millions    2015        2014    

 Balance at beginning of the period

   $ 734         $ 611     

 New originations

                     7,108           5,681     

 Transfers from (to) held to maturity, net

     62           (3)    

 Loan sales

     (7,229)          (5,289)    

 Loan draws (payments), net

     (36)          (266)    

 Balance at end of period

   $ 639         $ 734     
  

 

 

    

 

 

 

 

 

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    2015        2014    

 Direct financing lease receivables

   $ 2,821         $ 3,009     

 Unearned income

     (224)          (205)    

 Unguaranteed residual value

     261           220     

 Deferred fees and costs

     17           18     

 Net investment in direct financing leases

    $                 2,875          $                 3,042     
  

 

 

    

 

 

 

 

 

At December 31, 2015, minimum future lease payments to be received are as follows: 2016 — $930 million; 2017 — $695 million; 2018 — $451 million; 2019 — $294 million; 2020 — $169 million; and all subsequent years — $200 million. The allowance related to lease financing receivables is $47 million at December 31, 2015.

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.

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. Nonperforming assets include nonperforming loans, nonperforming loans held for sale, OREO, and other nonperforming assets.

Our nonperforming assets and past due loans were as follows:

 

 December 31,              
 in millions    2015        2014    
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 Total nonperforming loans (a), (b)

    $ 387          $ 418     

 OREO (c)

     14           18     

 Other nonperforming assets

     2           —     

 Total nonperforming assets

    $ 403          $ 436     

 Nonperforming assets from discontinued operations — education lending (d)

    $ 7          $ 11     

 Restructured loans included in nonperforming loans

    $ 159          $ 157     

 Restructured loans with an allocated specific allowance (e)

     69           82     

 Specifically allocated allowance for restructured loans (f)

     30           34     

 Accruing loans past due 90 days or more

    $ 72          $                     96     

 Accruing loans past due 30 through 89 days

                             208           235     

 

 

 

(a) Loan balances exclude $11 million and $13 million of PCI loans at December 31, 2015, and December 31, 2014, respectively.

 

(b) Includes carrying value of consumer residential mortgage loans in the process of foreclosure of approximately $114 million at December 31, 2015.

 

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(c) Includes carrying value of foreclosed residential real estate of approximately $11 million at December 31, 2015.

 

(d) Restructured loans of approximately $21 million and $17 million are included in discontinued operations at December 31, 2015, and December 31, 2014, respectively. See Note 13 (“Acquisitions and Discontinued Operations”) for further discussion.

 

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

 

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

We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. All PCI loans were acquired in 2012. At the 2012 acquisition date, the estimated gross contractual amount receivable of all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The 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, 2015, the outstanding unpaid principal balance and carrying value of all PCI loans was $17 million and $11 million, respectively. At December 31, 2014, the outstanding unpaid principal balance and carrying value of all PCI loans was $20 million and $13 million, respectively, compared to $24 million and $16 million, respectively, at December 31, 2013. Changes in the accretable yield during 2015 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at December 31, 2015, which was unchanged from the ending balance at December 31, 2014. 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, which was unchanged from the ending balance at December 31, 2013.

At December 31, 2015, the approximate carrying amount of our commercial nonperforming loans outstanding represented 66% of their original contractual amount owed, 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 owed.

At December 31, 2015, our 20 largest nonperforming loans totaled $97 million, representing 25% of total loans on nonperforming status. At December 31, 2014, our 20 largest nonperforming loans totaled $88 million, representing 21% of total loans on nonperforming status.

Nonperforming loans and loans held for sale reduced expected interest income by $16 million for each of the years ended December 31, 2015, and December 31, 2014.

 

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The following tables set forth a further breakdown of individually impaired loans as of December 31, 2015, December 31, 2014, and December 31, 2013:

 

December 31, 2015

in millions

   Recorded  
Investment  
    (a)    Unpaid  
Principal  
Balance  
    (b)    Specific  
Allowance  
     Average  
Recorded  
Investment  
 
With no related allowance recorded:                

Commercial, financial and agricultural

   $ 40           $ 74             —           $ 23     

Commercial real estate:

               

Commercial mortgage

     5             8             —             10     

Construction

     5               5               —             5     

Total commercial real estate loans

     10               13               —             15     

Total commercial loans

     50               87               —             38     

Real estate — residential mortgage

     23             23             —             24     
               

Home equity:

               

Key Community Bank

     59             59             —             61     

Other

     2               2               —             1     

Total home equity loans

     61             61             —             62     

Consumer other:

               

Marine

     1               1               —             1     

Total consumer other

     1               1               —             1     

Total consumer loans

     85               85               —             87     

Total loans with no related allowance recorded

     135             172             —             125     
               
With an allowance recorded:                

Commercial, financial and agricultural

     28             43           $ 7           33     

Commercial real estate:

               

Commercial mortgage

     5             6             1           6     

Construction

     —                 —                 —             1     

Total commercial real estate loans

     5               6               1           7     

Total commercial loans

     33               49               8           40     
               

Real estate — residential mortgage

     33             33             4           32     
               

Home equity:

               

Key Community Bank

     55             55             19           50     

Other

     9               9               1           10     

Total home equity loans

     64             64             20           60     
               

Consumer other — Key Community Bank

     3             3             —             4     

Credit cards

     3             3             —             4     

Consumer other:

               

Marine

     36             36             3           39     

Other

     1               1               —             1     

Total consumer other

     37               37               3           40     

Total consumer loans

     140               140               27           140     

Total loans with an allowance recorded

     173               189               35           180     

Total

   $             308           $             361           $             35         $             305     
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

(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, 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, 2015, December 31, 2014, and December 31, 2013, interest income recognized on the outstanding balances of accruing impaired loans totaled $6 million, $7 million, and $6 million, respectively.

At December 31, 2015, aggregate restructured loans (accrual and nonaccrual loans) totaled $280 million, compared to $270 million at December 31, 2014, and $338 million at December 31, 2013. During 2015, we added $99 million in restructured loans, which were partially offset by $89 million in payments and charge-offs.

 

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During 2014, we added $93 million in restructured loans, which were offset by $161 million in payments and charge-offs. During 2013, we added $182 million in restructured loans, which were partially offset by $164 million in payments and charge-offs.

A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2015, follows:

 

December 31, 2015

dollars in millions

  

Number  

of Loans  

     Pre-modification  
Outstanding  
Recorded  
Investment  
    

Post-modification  
Outstanding  

Recorded  
Investment  

 

LOAN TYPE

        

Nonperforming:

        

Commercial, financial and agricultural

     12         $ 56         $ 45     

Commercial real estate:

        

Real estate — commercial mortgage

     12           30           7     

Total commercial real estate loans

     12           30           7     

Total commercial loans

     24           86           52     

Real estate — residential mortgage

     366           23           23     

Home equity:

        

Key Community Bank

     1,138           82           73     

Other

     124           3           3     

Total home equity loans

     1,262           85           76     

Consumer other — Key Community Bank

     28           1           1     

Credit cards

     339           2           2     

Consumer other:

        

Marine

     86           6           5     

Other

     17           —           —     

Total consumer other

     103           6           5     

Total consumer loans

     2,098           117           107     

Total nonperforming TDRs

     2,122           203           159     

Prior-year accruing: (a)

        

Commercial, financial and agricultural

     7           5           2     

Total commercial loans

     7           5           2     

Real estate — residential mortgage

     489           34           34     

Home equity:

        

Key Community Bank

     760           48           41     

Other

     311           9           8     

Total home equity loans

     1,071           57           49     

Consumer other — Key Community Bank

     42           2           2     

Credit cards

     461           4           2     

Consumer other:

        

Marine

     371           57           31     

Other

     59           2           1     

Total consumer other

     430           59           32     

Total consumer loans

     2,493           156           119     

Total prior-year accruing TDRs

     2,500           161           121     

Total TDRs

             4,622         $                     364         $                         280     
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) All TDRs that were restructured prior to January 1, 2015, and are fully accruing.

 

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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, 2015, there were two commercial loan TDRs with a combined recorded investment of $1 million and 269 consumer loan TDRs with a combined recorded investment of $12 million that experienced payment defaults after modifications resulting in TDR status during 2014. During the year ended December 31, 2014, there were four commercial loan TDRs with a combined recorded investment of $11 million and 441 consumer loan TDRs with a combined recorded investment of $15 million that experienced payment defaults after 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 after 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’ debts 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.

 

in millions    2015        2014        2013    

Commercial loans:

        

Interest rate reduction

   $ 51         $ 13         $ 95     

Forgiveness of principal

     2           2           5     

Other

     1           25           7     

Total

   $ 54         $ 40         $ 107     
  

 

 

    

 

 

    

 

 

 

Consumer loans:

        

Interest rate reduction

   $ 132         $ 140         $ 130     

Forgiveness of principal

     8           4           5     

Other

     86           86           96     

Total

   $ 226         $ 230         $ 231     
  

 

 

    

 

 

    

 

 

 

Total commercial and consumer TDRs (a)

   $ 280         $ 270         $ 338     

Total loans

             59,876                   57,381                   54,457     

 

(a) Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $9 million, $5 million, and $15 million at December 31, 2015, 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, 2015, approximately $59.2 billion, or 98.9%, of our total loans were current, compared to $56.6 billion, or 98.7%, at December 31, 2014. At December 31, 2015, total past due loans and nonperforming loans of $667 million represented approximately 1.1% of total loans, compared to $749 million, or 1.3%, at December 31, 2014.

 

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The following aging analysis of past due and current loans as of December 31, 2015, and December 31, 2014, provides further information regarding Key’s credit exposure.

 

December 31, 2015

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

  $ 31,116      $ 11      $ 11      $ 20      $ 82      $ 124             $ 31,240   

Commercial real estate:

               

Commercial mortgage

    7,917        8        5        10        19        42               7,959   

Construction

    1,042        1        1               9        11               1,053   

Total commercial real estate loans

    8,959        9        6        10        28        53               9,012   

Commercial lease financing

    3,952        33        11        11        13        68               4,020   

Total commercial loans

  $ 44,027      $ 53      $ 28      $ 41      $ 123      $ 245             $ 44,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate — residential mortgage

  $ 2,149      $ 14      $ 3      $ 2      $ 64      $ 83      $ 10      $ 2,242   

Home equity:

               

Key Community Bank

    9,863        46        22        13        182        263        1        10,127   

Other

    193        4        2        1        8        15               208   

Total home equity loans

    10,056        50        24        14        190        278        1        10,335   

Consumer other — Key Community Bank

    1,580        10        3        5        2        20               1,600   

Credit cards

    785        6        4        9        2        21               806   

Consumer other:

               

Marine

    565        8        3        1        6        18               583   

Other

    36        1        1                      2               38   

Total consumer other

    601        9        4        1        6        20               621   

Total consumer loans

  $ 15,171      $ 89      $ 38      $ 31      $ 264      $ 422      $ 11      $ 15,604   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 59,198      $ 142      $ 66      $ 72      $ 387      $ 667      $ 11      $ 59,876   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                 

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 $11 million and $13 million of PCI loans at December 31, 2015, and December 31, 2014, respectively, based on bond rating, regulatory classification, and payment activity as of December 31, 2015, and December 31, 2014, 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)

     2015         2014         2015         2014         2015         2014         2015         2014         2015         2014   

AAA — AA

   $ 384       $ 311       $ 7       $ 2               $ 1       $ 503       $ 513       $ 894       $ 827   

A

     1,475         1,272         2         1                         509         608         1,986         1,881   

BBB — BB

     27,321         24,949         7,492         7,527       $ 920         956         2,858         2,952         38,591         36,384   

B

     740         686         301         287         86         105         99         112         1,226         1,190   

CCC — C

     1,320         764         157         230         47         38         51         67         1,575         1,099   

Total

   $         31,240       $         27,982       $         7,959       $         8,047       $         1,053       $         1,100       $         4,020       $         4,252       $         44,272       $         41,381   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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

     2015         2014      

Pass

   $ 12,296       $ 12,552      

Substandard

     270         293      

Total

   $         12,566       $         12,845      
  

 

 

    

 

 

    
    

 

 

    

 

 

    

 

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Table of Contents

Credit Risk Profile Based on Payment Activity (a)

 

December 31,

in millions

  Consumer — Key
Community Bank
    Credit cards     Consumer — Marine     Consumer — Other     Total      
    2015        2014        2015        2014        2015        2014        2015        2014        2015        2014     

Performing

  $ 1,598      $ 1,558      $ 804      $ 752      $ 577      $ 764      $ 38      $ 48      $ 3,017      $ 3,122     

Nonperforming

    2        2        2        2        6        15               1        10        20     

Total

  $         1,600      $         1,560      $         806      $         754      $         583      $         779      $         38      $         49      $         3,027      $         3,142     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(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 qualitative factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The impact of these changes was largely neutral to the total ALLL. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each portfolio caused the commercial portfolio ALLL to increase or decrease accordingly. The impact of the increases and decreases on the commercial portfolio ALLL was not significant.

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, 2015, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.

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

 

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At December 31, 2015, the ALLL was $796 million, or 1.33% of loans, compared to $794 million, or 1.38% of loans, at December 31, 2014. At December 31, 2015, the ALLL was 205.7% of nonperforming loans, compared to 190.0% at December 31, 2014.

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

 

December 31,

in millions

   2015     2014     2013  

Balance at beginning of period — continuing operations

   $             794      $             848      $             888   

Charge-offs

     (203     (211     (308

Recoveries

     61        98        140   

Net loans and leases charged off

     (142     (113     (168

Provision for loan and lease losses from continuing operations

     145        59        130   

Foreign currency translation adjustment

     (1     —          (2

Balance at end of period — continuing operations

   $ 796      $ 794      $ 848   
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

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

 

     December 31,                         December 31,  
in millions    2014      Provision      Charge-offs      Recoveries         2015  

Commercial, financial and agricultural

   $ 391       $ 120      $ (77   $ 16       $ 450   

Real estate — commercial mortgage

     148         (16     (4     6         134   

Real estate — construction

     28         (3     (1     1         25   

Commercial lease financing

     56         (5     (11     7         47   

Total commercial loans

     623         96        (93     30         656   

Real estate — residential mortgage

     23         (2     (6     3         18   

Home equity:

            

Key Community Bank

     66         8        (26     7         55   

Other

     5         (1     (6     4         2   

Total home equity loans

     71         7        (32     11         57   

Consumer other — Key Community Bank

     22         16        (24     6         20   

Credit cards

     33         27        (30     2         32   

Consumer other:

            

Marine

     21         —          (17     8         12   

Other

     1         —          (1     1         1   

Total consumer other:

     22         —          (18     9         13   

Total consumer loans

     171         48        (110     31         140   

Total ALLL — continuing operations

     794         144 (a)      (203     61         796   

Discontinued operations

     29         21        (35     13         28   

Total ALLL — including discontinued operations

   $         823       $         165        $        (238)      $         74       $         824   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Includes a $1 million foreign currency translation adjustment. Excludes a provision for losses on lending-related commitments of $21 million.

 

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     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 (a)      (211     98         794   

Discontinued operations

     39         21        (45     14         29   

Total ALLL — including discontinued operations

   $         887       $         80        $        (256   $         112       $         823   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Excludes a credit for losses on lending-related commitments of $2 million.

 

     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 a $2 million foreign currency translation adjustment.

Our ALLL from continuing operations remained relatively stable, increasing by $2 million, or .3%, since 2014. Our allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors, such as changes in economic conditions, underwriting standards, and concentrations of credit. Our commercial ALLL increased by $33 million, or 5.3%, since 2014 primarily because of loan growth and increased incurred loss estimates. The increase in these incurred loss estimates during 2015 was primarily due to the continued decline in oil and gas prices since 2014. Partially offsetting this increase was a decrease in our consumer ALLL of $31 million, or 18.1%, since 2014. Our consumer ALLL decrease was primarily due to continued improvement in credit metrics, such as delinquency,

 

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average credit bureau score, and loan to value, which have decreased expected loss rates since 2014. The continued improvement in the consumer portfolio credit quality metrics since 2014 was primarily due to continued improved credit quality and benefits of relatively stable economic conditions.

For continuing operations, the loans outstanding individually evaluated for impairment totaled $308 million, with a corresponding allowance of $35 million at December 31, 2015. Loans outstanding collectively evaluated for impairment totaled $59.6 billion, with a corresponding allowance of $760 million at December 31, 2015. At December 31, 2015, PCI loans evaluated for impairment totaled $11 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, 2015. At December 31, 2014, the loans outstanding individually evaluated for impairment totaled $302 million, with a corresponding allowance of $40 million. 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, 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, 2015, follows:

 

     Allowance      Outstanding  

December 31, 2015

in millions

   Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Purchased
Credit
Impaired
     Loans     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
    Purchased
Credit
Impaired
 

Commercial, financial and agricultural

   $ 7       $ 443         —         $ 31,240      $ 68       $ 31,172        —     

Commercial real estate:

                  

Commercial mortgage

     1         133         —           7,959        10         7,949        —     

Construction

     —           25         —           1,053        5         1,048        —     

Total commercial real estate loans

     1         158         —           9,012        15         8,997        —     

Commercial lease financing

     —           47         —           4,020        —           4,020        —     

Total commercial loans

     8         648         —           44,272        83         44,189        —     

Real estate — residential mortgage

     4         13       $ 1         2,242        56         2,176      $ 10   

Home equity:

                  

Key Community Bank

     19         36         —           10,127        114         10,012        1   

Other

     1         1         —           208        11         197        —     

Total home equity loans

     20         37         —           10,335        125         10,209        1   

Consumer other — Key Community Bank

     —           20         —           1,600        3         1,597        —     

Credit cards

     —           32         —           806        3         803        —     

Consumer other:

                  

Marine

     3         9         —           583        37         546        —     

Other

     —           1         —           38        1         37        —     

Total consumer other

     3         10         —           621        38         583        —     

Total consumer loans

     27         112         1         15,604        225         15,368        11   

Total ALLL — continuing operations

     35         760         1         59,876        308         59,557        11   

Discontinued operations

     2         26         —           1,828 (a)      21         1,807 (a)      —     

Total ALLL — including discontinued operations

   $             37       $             786       $             1       $         61,704      $         329       $             61,364      $             11   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Amount includes $4 million of 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, 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        —     

Construction

     1         27         —           1,100        8         1,092        —     

Total commercial real estate loans

     3         173         —           9,147        29         9,117        —     

Commercial lease financing

     —           56         —           4,252        —           4,252        —     

Total commercial loans

     12         611         —           41,381        72         41,308        —     

Real estate — residential mortgage

     5         17       $ 1         2,225        55         2,159      $ 12   

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        13   

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 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 was $56 million at December 31, 2015. When combined with our ALLL, our total allowance for credit losses represented 1.42% of loans at December 31, 2015, compared to 1.44% at December 31, 2014.

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

 

Year ended December 31,

in millions

   2015      2014     2013  

Balance at beginning of period

   $ 35       $         37      $         29   

Provision (credit) for losses on lending-related commitments

     21         (2     8   

Balance at end of period

   $         56       $ 35      $ 37   
  

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

   

 

 

 

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

 

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valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

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

 

¿   the amount of time since the last relevant valuation;

 

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

 

¿   volatility associated with the primary pricing components.

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

 

¿   an independent review and approval of valuation models and assumptions;

 

¿   recurring detailed reviews of profit and loss; and

 

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

We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process. Various Working Groups that report to the Fair Value Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note 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, 2015, our Level 3 instruments consist of two convertible preferred securities. Our Strategy group is responsible for reviewing the valuation model and determining the fair value of these investments on a quarterly basis. The securities are valued using a cash flow analysis of the associated private company issuers. The valuations of the securities are negatively impacted by projected net losses of the associated private companies and positively impacted by projected net gains.

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

On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure 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. There were no significant direct equity and mezzanine investments at December 31, 2015, and December 31, 2014.

 

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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, 2015, 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, 2015. We did not provide any financial support to investees related to our direct and indirect investments for the years ended December 31, 2015, and December 31, 2014.

 

December 31, 2015

in millions

   Fair Value      Unfunded
Commitments
      

INVESTMENT TYPE

        

Indirect investments

        

Passive funds (a)

   $             8       $             1      

Total

   $ 8       $ 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.

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. The valuation of our Level 2 investment includes a quoted price, which is adjusted by liquidity assumptions due to a contractual term of the investment. 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

 

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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 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, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

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

 

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The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at December 31, 2015, as well as financial support provided for the years ended December 31, 2015, and December 31, 2014.

 

            Financial support provided  
            Year ended December 31,  
     December 31, 2015      2015      2014  
in millions    Fair Value      Unfunded
Commitments
     Funded
Commitments
     Funded
Other
     Funded
Commitments
     Funded
Other
 

INVESTMENT TYPE

                 

Direct investments (a)

   $ 69         —           —         $ 2         —         $ 3   

Indirect investments (b)

     235       $ 50       $ 8         —         $ 11         —     

Total

   $             304       $             50       $             8       $             2       $             11       $             3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

Other.    We had one indirect equity investment in the form of limited partnership units representing less than a five percent ownership interest in the equity. The investment was classified as a Level 3 asset since our significant inputs were not observable in the marketplace. This investment was valued using a methodology that was consistent with accounting guidance that allowed us to estimate fair value based upon net asset value per share (or its equivalent, such an ownership interest in partners’ capital to which a proportionate share of net asset is attributed). The significant unobservable input used in estimating fair value was primarily the most recent value of the capital account as reported by the general partner of the partnership in which we invested. Under the requirements of the Volcker Rule, we were required to dispose of this investment. Prior to December 31, 2015, the investment was redeemed. Additional information pertaining to the equity investment is included in the “Changes in Level 3 Fair Value Measurements” section of this Note.

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 MRM group using a credit valuation adjustment methodology. Swap details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these

 

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Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.

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

Other assets and liabilities.    The value of our short positions is driven by the valuation of the underlying securities. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For 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, 2015, and December 31, 2014.

 

December 31, 2015

in millions

   Level 1      Level 2      Level 3      Total  

ASSETS MEASURED ON A RECURRING BASIS

           

Trading account assets:

           

U.S. Treasury, agencies and corporations

     —         $ 704         —         $ 704   

States and political subdivisions

     —           25         —           25   

Collateralized mortgage obligations

     —           —           —           —     

Other mortgage-backed securities

     —           26         —           26   

Other securities

   $ 3         24         —           27   

Total trading account securities

     3         779         —           782   

Commercial loans

     —           6         —           6   

Total trading account assets

     3         785         —           788   

Securities available for sale:

           

States and political subdivisions

     —           14         —           14   

Collateralized mortgage obligations

     —           11,995         —           11,995   

Other mortgage-backed securities

     —           2,189         —           2,189   

Other securities

     3         —         $ 17         20   

Total securities available for sale

     3         14,198         17         14,218   

Other investments:

           

Principal investments:

           

Direct

     —           19         50         69   

Indirect

     —           —           235         235   

Total principal investments

     —           19         285         304   

Equity and mezzanine investments:

           

Direct

     —           —           —           —     

Indirect

     —           —           8         8   

Total equity and mezzanine investments

     —           —           8         8   

Other

     —           —           —           —     

Total other investments

     —           19         293         312   

Derivative assets:

           

Interest rate

     —           868         16         884   

Foreign exchange

     143         8         —           151   

Commodity

     —           444         —           444   

Credit

     —           4         2         6   

Derivative assets

     143         1,324         18         1,485   

Netting adjustments (a)

     —           —           —           (866

Total derivative assets

     143         1,324         18         619   

Accrued income and other assets

     —           1         —           1   

Total assets on a recurring basis at fair value

   $ 149       $ 16,327       $ 328       $ 15,938   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES MEASURED ON A RECURRING BASIS

           

Bank notes and other short-term borrowings:

           

Short positions

     —         $ 533         —         $ 533   

Derivative liabilities:

           

Interest rate

     —           563         —           563   

Foreign exchange

   $ 116         8         —           124   

Commodity

     —           433         —           433   

Credit

     —           5       $ 1         6   

Derivative liabilities

     116         1,009         1         1,126   

Netting adjustments (a)

     —           —           —           (494

Total derivative liabilities

     116         1,009         1         632   

Accrued expense and other liabilities

     —           1         —           1   

Total liabilities on a recurring basis at fair value

   $         116       $         1,543       $         1       $         1,166   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 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   

Other

     —           —           4         4   

Total other investments

     2         —           418         420   

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       $ 444       $ 15,139   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

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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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, 2015, and December 31, 2014. 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

    (d)     Transfers
out of
Level 3
    (d)     End of
Period
Balance
     (f)   Unrealized
Gains
(Losses)
Included in
Earnings
        

Year ended December 31, 2015

                            

Securities available for sale

                            

Other securities

  $         10        —          $         7        —          —          —            —          $         17           —       

Other investments

                            

Principal investments

                            

Direct

    102      $         23        (b )      5      $ (61     —          —          $ (19     (e )      50         $ 3        (b ) 

Indirect

    302        30        (b )      6        (103     —          —            —            235           (33     (b ) 

Equity and mezzanine investments

                            

Direct

    —          2        (b )      —          (2     —          —            —            —             2        (b ) 

Indirect

    10        5        (b )      —          (7     —          —            —            8           5        (b ) 

Other

    4        —            —          —        $ (4     —            —            —             —       

Derivative instruments (a)

                            

Interest rate

    13        2        (c )      1        (1     —        $             10        (e )      (9     (e )      16           —       

Commodity

    —          —            —          —          —          —            —            —             —       

Credit

    2        (12     (c )      —          —          11        —                  —                  1             —             

 

in millions   Beginning
of Period
Balance
    Gains
(Losses)
Included
in Earnings
           Purchases     Sales     Settlements     Transfers
into
Level 3
    (d)     Transfers
out of
Level 3
    (d)     End of
Period
Balance
     (f)   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        (b )      1      $ (58     —          —            —            102         $             13        (b ) 

Indirect

    413        57        (b )      8        (176     —          —            —            302           (26     (b ) 

Equity and mezzanine investments

                            

Direct

    —          —            —          —          —          —            —            —             —       

Indirect

    23        (1     (b )      —          (12     —          —            —            10           (1     (b ) 

Other

    4        —            —          —          —          —            —            4           —       

Derivative instruments (a)

                            

Interest rate

    25        4        (c )      4        (3     —        $ 7        (e )    $ (24     (e )      13           —       

Commodity

    —          —            —          —          —          1        (e )      (1     (e )      —             —       

Credit

    3        (17     (c )      —          —        $ 16        —                  —                  2             —             

 

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

 

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

 

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

 

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

 

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

 

(f) There were no issuances for the years ended December 31, 2015, and December 31, 2014.

 

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2015, and December 31, 2014. The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2015, and December 31, 2014:

 

    December 31, 2015     December 31, 2014  
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     

Loans held for sale (a)

    —          —          —          —          —          —          —          —     

Accrued income and other assets

    —          —        $ 7        $ 7          —          —          7          7     

Total assets on a nonrecurring basis at fair value

            —                  —        $         7        $         7                  —                  —        $         12        $         12     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) During 2015, we transferred $62 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 $11 million during 2014.

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.

 

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

Loans held for sale.    Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no loans held for sale adjusted to fair value at December 31, 2015, or December 31, 2014.

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

 

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premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.

Goodwill and other intangible assets.    On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. However, we did not choose to utilize a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2015. 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

 

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reporting of all broker price opinion evaluations, appraisals, and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 180 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate.

Quantitative Information about Level 3 Fair Value Measurements

The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at December 31, 2015, and December 31, 2014, along with the valuation techniques used, are shown in the following table:

 

December 31, 2015

dollars in millions

   Fair Value of
Level 3 Assets
     Valuation Technique   

Significant

Unobservable Input

  

Range

(Weighted-Average)

 

Recurring

                           

Other investments —  principal investments —   direct:

   $ 50       Individual analysis of the condition of each investment      

Debt instruments

         EBITDA multiple      N/A (5.40)   

Equity instruments of private companies

         EBITDA multiple (where applicable)      5.40 - 6.70 (6.60)   

Nonrecurring

                           

Impaired loans (a)

     —         Fair value of underlying collateral    Discount      00.00 - 34.00% (15.00%)   

Goodwill

     1,060       Discounted cash flow and market data    Earnings multiple of peers      10.30 - 17.80 (12.79)   
         Equity multiple of peers      1.25 - 1.56 (1.43)   
         Control premium      10.00 - 30.00% (19.18%)   
                   Weighted-average cost of capital      12.00 - 13.00% (12.54%)   

 

(a) Impaired loans are less than $1 million at December 31, 2015.

 

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%)   

 

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Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at December 31, 2015, and December 31, 2014, are shown in the following table.

 

     December 31, 2015  
            Fair Value  
in millions    Carrying
Amount
     Level 1      Level 2      Level 3     

Netting

Adjustment

    Total  

ASSETS

                

Cash and short-term investments (a)

   $ 3,314       $             3,314         —           —           —        $ 3,314   

Trading account assets (b)

     788         3       $ 785         —           —          788   

Securities available for sale (b)

                 14,218         3                     14,198       $ 17         —                      14,218   

Held-to-maturity securities (c)

     4,897         —           4,848         —           —          4,848   

Other investments (b)

     655         —           19         636         —          655   

Loans, net of allowance (d)

     59,080         —           —                     57,508         —          57,508   

Loans held for sale (b)

     639         —           —           639         —          639   

Derivative assets (b)

     619         143         1,324         18       $         (866) (f)      619   
                

LIABILITIES

                

Deposits with no stated maturity (a)

   $ 65,527         —         $ 65,527         —           —        $ 65,527   

Time deposits (e)

     5,519         —           5,575         —           —          5,575   

Short-term borrowings (a)

     905         —           533         —           —          533   

Long-term debt (e)

     10,186       $ 9,987         420         —           —          10,407   

Derivative liabilities (b)

     632         116         1,009       $ 1       $ (494 )(f)      632   

 

       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         —           758         —           760   

Loans, net of allowance (d)

     56,587         —           —                   54,993         —           54,993   

Loans held for sale (b)

     734         —           —           734         —           734   

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   

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.

 

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(e) Fair values of 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 2014 and 2015, the fair values of our loan portfolios generally remained stable, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.

Education lending business.    The discontinued education lending business consists of loans in portfolio (recorded at carrying value with appropriate valuation reserves) and loans in portfolio (recorded at fair value). All of these loans were excluded from the table above as follows:

 

  ¿   Loans at carrying value, net of allowance, of $1.8 billion ($1.5 billion at fair value) at December 31, 2015, and $2.1 billion ($1.8 billion at fair value) at December 31, 2014;

 

  ¿   Portfolio loans at fair value of $4 million at December 31, 2015, and $191 million at December 31, 2014.

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.

Residential real estate mortgage loans.    Residential real estate mortgage loans with carrying amounts of $2.2 billion at December 31, 2015, and December 31, 2014, respectively, are included in “Loans, net of allowance” in the previous table.

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

 

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7. Securities

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”).

 

    2015     2014  

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

  $         14        —          —          14      $         22      $ 1        —        $         23   

Collateralized mortgage obligations

    12,082      $ 51      $ 138      $ 11,995        11,310        96      $         136        11,270   

Other mortgage-backed securities

    2,193        11        15        2,189        2,004        32        1        2,035   

Other securities

    21        —          1        20        29        3        —          32   

Total securities available for sale

  $ 14,310      $ 62      $ 154      $ 14,218      $ 13,365      $ 132      $ 137      $ 13,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

HELD-TO-MATURITY SECURITIES

               

Collateralized mortgage obligations

  $ 4,174      $ 5      $ 50      $ 4,129      $ 4,755      $ 15      $ 57      $ 4,713   

Other mortgage-backed securities

    703        —          4        699        240        1        —          241   

Other securities

    20        —          —          20        20        —          —          20   

Total held-to-maturity securities

  $ 4,897      $ 5      $         54      $ 4,848      $ 5,015      $         16      $ 57      $ 4,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes our securities that were in an unrealized loss position as of December 31, 2015, and December 31, 2014.

 

     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, 2015

                 

Securities available for sale:

                 

Collateralized mortgage obligations

   $     5,190       $     43       $     3,206       $         96       $     8,396       $     139   

Other mortgage-backed securities

     1,670         15         —           —           1,670         15   

Other securities (a)

     —           —           3         —           3         —     

Held-to-maturity:

                 

Collateralized mortgage obligations

     1,793         16         1,320         34         3,113         50   

Other mortgage-backed securities

     547         4         —           —           547         4   

Other securities (b)

     4         —           —           —           4         —     

Total temporarily impaired securities

   $ 9,204       $ 78       $ 4,529       $ 130       $ 13,733       $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Gross unrealized losses totaled less than $1 million for other securities available for sale as of December 31, 2015, and December 31, 2014.

 

(b) Gross unrealized losses totaled less than $1 million for other securities held-to-maturity as of December 31, 2015.

 

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At December 31, 2015, we had $139 million of gross unrealized losses related to 96 fixed-rate CMOs that we invested in as part of our overall A/LM strategy. These securities had a weighted-average maturity of 4.3 years at December 31, 2015. We also had $15 million of gross unrealized losses related to 35 other mortgage-backed securities positions, which had a weighted-average maturity of 2.9 years at December 31, 2015. Because these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. These unrealized losses are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments were reduced to their fair value through OCI, not earnings.

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

The debt securities identified as other-than-temporarily impaired 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 had less than $1 million of impairment losses recognized in earnings for the year ended December 31, 2015.

 

Year ended December 31, 2015

  

in millions        

Balance at December 31, 2014

   $         4   

Impairment recognized in earnings

     —     

Balance at December 31, 2015

   $ 4   
  

 

 

 
          

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

 

Year ended December 31

in millions

   2015      2014(a)      2013(b)       

Realized gains

   $ 1         —         $ 1      

Realized losses

     1         —                   —        

Net securities gains (losses)

             —           —         $ 1      
  

 

 

    

 

 

    

 

 

    
                               

 

(a) Realized gains and losses totaled less than $1 million for the year ended December 31, 2014.

 

(b) Realized losses totaled less than $1 million for the year ended December 31, 2013.

At December 31, 2015, securities available for sale and held-to-maturity securities totaling $6.1 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.

 

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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, 2015

in millions

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $          283       $          287       $             9       $         9   

Due after one through five years

     12,834         12,757         4,185         4,140   

Due after five through ten years

     1,190         1,171         645         641   

Due after ten years

     3         3         58         58   

Total

   $ 14,310       $ 14,218       $ 4,897       $ 4,848   
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

8. Derivatives and Hedging Activities

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

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

 

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

 

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

 

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

Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow us to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related cash collateral, where applicable. As a result, we 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, 2015, after taking into account the effects of bilateral collateral and master netting agreements, we had $67 million of derivative assets and a positive $23 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 $552 million and derivative liabilities of $655 million that were not designated as hedging instruments.

 

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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.

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 were also used to hedge the floating-rate debt that funded fixed-rate leases entered into by our equipment finance line of business. These swaps were 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, 2015, 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.

 

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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 option 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 and option contracts entered into primarily to accommodate the needs of clients.

These contracts are not designated as part of hedge relationships.

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

The following table summarizes the fair values of our derivative instruments on a gross and net basis as of December 31, 2015, and December 31, 2014. The change in the notional amounts of these derivatives by type from December 31, 2014, to December 31, 2015, indicates the volume of our derivative transaction activity during 2015. 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, 2015     December 31, 2014  
            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

   $ 18,917       $ 257      $ 15      $ 15,095       $ 272      $ 26   

Foreign exchange

     312         20        —          371         8        —     

Total

     19,229         277        15        15,466         280        26   

Derivatives not designated as hedging instruments:

              

Interest rate

     43,965         627        548        43,771         665        618   

Foreign exchange

     6,454         131        124        4,024         85        81   

Commodity

     1,144         444        433        1,544         608        594   

Credit

     632         6        6        512         5        7   

Total

     52,195         1,208        1,111        49,851         1,363        1,300   

Netting adjustments (a)

     —           (866     (494     —           (1,034     (542

Net derivatives in the balance sheet

     71,424         619        632        65,317         609        784   

Other collateral (b)

     —           (91     (204     —           (155     (241

Net derivative amounts

   $ 71,424       $ 528      $ 428      $ 65,317       $ 454      $ 543   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

 

(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

 

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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, 2015, 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, 2015.

The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the years ended December 31, 2015, and December 31, 2014, and where they are recorded on the income statement.

 

    

Year ended December 31, 2015

       
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    $ (20   Long-term debt    Other income    $ 21        (a

Interest rate

   Interest expense – Long-term debt      123                       

Total

      $             103            $             21     
     

 

 

         

 

 

   
         

 

 

             

 

 

   
    

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)     
     

 

 

         

 

 

   
         

 

 

             

 

 

   

 

(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, 2015, 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, 2015.

Considering the interest rates, yield curves, and notional amounts as of December 31, 2015, we would expect to reclassify an estimated $26 million of after-tax 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 $1 million of net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of December 31, 2015, the maximum length of time over which we hedge forecasted transactions is 13 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, 2015, AOCI reflected unrecognized after-tax gains totaling $41 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, 2015. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the year ended December 31, 2015.

 

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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, 2015, and December 31, 2014, 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, 2015  
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

  $ 102         Interest income –Loans      $ 98         Other income        —     

Interest rate

    (2)        Interest expense –Long-term debt        (4)        Other income        —     

Interest rate

           Investment banking and debt placement fees        —          Other income        —     

Net Investment Hedges

         

Foreign exchange contracts

    38         Other Income        —          Other income        —     

Total

  $ 139         $ 94           —     
 

 

 

     

 

 

     

 

 

 
   

 

 

           

 

 

           

 

 

 
    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           —     
 

 

 

     

 

 

     

 

 

 
   

 

 

           

 

 

           

 

 

 

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

 

in millions    December 31,
2014
     2015 Hedging
Activity
     Reclassification
of Gains to Net
Income
     December 31,
2015
 

AOCI resulting from cash flow and net investment hedges

   $                     (8)       $                     87       $                     (59)       $                     20   

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, 2015, December 31, 2014, and December 31, 2013, and where they are recorded on the income statement.

 

    2015     2014     2013  

Year ended 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

  $ 28        —        $ 28      $ 16        —        $ 16      $ 17        —        $ 17   

Foreign exchange

    36        —          36        34        —          34        38        —          38   

Commodity

    5                —          5        6        —          6        5                —          5   

Credit

    (1   $ (15     (16             —        $ (21     (21     1      $ (15     (14

Total net gains (losses)

  $         68      $ (15   $         53      $ 56      $ (21   $         35      $         61      $ (15   $         46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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 $377 million at December 31, 2015, and $518 million at December 31, 2014. The cash collateral netted against derivative liabilities totaled $5 million at December 31, 2015, and $26 million at December 31, 2014. 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, 2015, we posted $143 million of cash collateral with clearing organizations and held $6 million of cash collateral from clearing organizations. At December 31, 2014, we posted $56 million of cash collateral with clearing organizations and did not hold any cash collateral from 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

   2015     2014  

Largest gross exposure (derivative asset) to an individual counterparty

   $                     158      $                     133   

Collateral posted by this counterparty

     85        100   

Derivative liability with this counterparty

     74        31   

Collateral pledged to this counterparty

     —          —     

Net exposure after netting adjustments and collateral

     (1     2   

 

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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

   2015      2014  

Interest rate

   $                     628       $                         607   

Foreign exchange

     66         41   

Commodity

     298         478   

Credit

     4         1   

Derivative assets before collateral

     996         1,127   

Less: Related collateral

     377         518   

Total derivative assets

   $ 619       $ 609   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

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 first quarter of 2014. The swap clearing and swap trade execution requirements were mandated by the Dodd-Frank Act for the purpose of reducing counterparty credit risk and increasing transparency in the derivative market. At December 31, 2015, we had gross exposure of $780 million to broker-dealers and banks. We had net exposure of $188 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $76 million after considering $112 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 $8 million at December 31, 2015, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At December 31, 2015, we had gross exposure of $469 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 $431 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 positions 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, 2015, and December 31, 2014. 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

   2015     2014  
       Purchased     Sold     Net         Purchased     Sold      Net  

Single-name credit default swaps

   $                 (3                 —        $             (3   $             (3                 —         $                 (3

Traded credit default swap indices

     4        —          4        1        —           1   

Other (a)

     —        $ (1     (1     —          —           —     

Total credit derivatives

   $ 1      $ (1     —        $ (2     —         $ (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) As of December 31, 2014, the fair value of other credit derivatives sold totaled less than $1 million.

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

A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.

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

 

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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, 2015, and December 31, 2014. 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.

 

     2015             2014  

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

Other

   $             5         2.67         14.46         %         6         2.89         9.58   

Total credit derivatives sold

   $ 5         —           —            $ 11         —           —     
  

 

 

             

 

 

       
    

 

 

                               

 

 

                   

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, 2015, KeyBank’s rating was “A3” with Moody’s and “A-” with S&P, and KeyCorp’s rating was “Baa1” with Moody’s and “BBB+” with S&P. As of December 31, 2015, 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 $211 million, which includes $199 million in derivative assets and $410 million in derivative liabilities. We had $208 million in cash and securities collateral posted to cover those positions as of December 31, 2015. The aggregate fair value of all derivative contracts with credit risk contingent features held by KeyCorp as of December 31, 2015, 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, 2015.

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, 2015, and December 31, 2014. 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, 2015, and December 31, 2014, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required as of December 31, 2015, while additional collateral of less than $1 million as of December 31, 2014, would have been required. For more information about the credit ratings for KeyBank and KeyCorp, see the discussion under the heading “Factors affecting liquidity” in the section entitled “Liquidity risk management” in Item 7 of this report.

 

December 31,

in millions

   2015      2014  
   Moody’s      S&P      Moody’s      S&P  

KeyBank’s long-term senior
unsecured credit ratings

     A3         A-         A3         A-   

One rating downgrade

   $                 2       $                 2       $ 1       $ 1   

Two rating downgrades

     2         2                         1                         1   

Three rating downgrades

     4         4         3         3   

 

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KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of December 31, 2015, and December 31, 2014. If KeyBank’s ratings had been downgraded below investment grade as of December 31, 2015, and 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, 2015, and 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

   2015     2014  

Balance at beginning of period

   $ 323      $ 332   

Servicing retained from loan sales

     55        38   

Purchases

     38        51   

Amortization

     (94     (98

Balance at end of period

   $ 322      $ 323   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

Fair value at end of period

   $               423      $               417   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

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, 2015, and December 31, 2014, along with the valuation techniques, are shown in the following table:

 

December 31, 2015

dollars in millions

   Valuation Technique   

Significant

Unobservable Input

  

Range

(Weighted-Average)

Mortgage servicing assets

   Discounted cash flow    Prepayment speed    1.90 - 17.20%(4.60%)
      Expected defaults    1.00 - 3.00%(1.70%)
      Residual cash flows discount rate    7.00 - 15.00%(7.80%)
      Escrow earn rate    1.00 - 3.50%(2.30%)
      Servicing cost    $150 - $2,700($1,215)
      Loan assumption rate    0.00 - 3.00%(1.34%)
          Percentage late    0.00 - 2.00%(0.33%)

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%)

If these economic assumptions change or prove incorrect, the fair value of mortgage servicing assets may also change. Expected credit losses, escrow earn rates, and discount rates are critical to the valuation of servicing

 

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assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earn rates would cause a decrease in the fair value of our mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our mortgage servicing assets.

Contractual fee income from servicing commercial mortgage loans totaled $48 million for the year ended December 31, 2015, $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.”

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 2015, we determined that the estimated fair value of the Key Community Bank unit was 52% greater than its carrying amount; in 2014, the excess was 26%. On that date in 2015, we determined that the estimated fair value of the Key Corporate Bank unit was 27% greater than its carrying amount; in 2014, the excess was 16%. 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 2015 and 2014, 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 and Key Corporate Bank units 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, 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   

Impairment losses based on results of interim impairment testing

     —           —           —     

Tax adjustment resulting from Pacific Crest Securities acquisition

     —           3         3   

BALANCE AT DECEMBER 31, 2015

   $             979       $                 81       $             1,060   
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

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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. Approximately $72 million of the goodwill was allocated to KBCM in the second quarter of 2015, when Pacific Crest Securities was fully merged into KBCM. During the third quarter of 2015, goodwill increased $3 million to account for a tax item associated with the business combination. Additional information regarding the acquisition is provided in Note 13 (“Acquisitions and Discontinued Operations”).

As of December 31, 2015, we expected goodwill in the amount of $96 million to be deductible for tax purposes in future periods.

There were no accumulated impairment losses related to the Key Community Bank unit or the Key Corporate Bank unit at December 31, 2015, December 31, 2014, and December 31, 2013.

The following table shows the gross carrying amount and the accumulated amortization of intangible assets subject to amortization.

 

     2015      2014  

December 31,

in millions

   Gross Carrying
Amount
     Accumulated
Amortization
     Gross Carrying
Amount
     Accumulated
Amortization
 

Intangible assets subject to amortization:

           

Core deposit intangibles

   $                 105       $                 91       $                 105       $                 82   

PCCR intangibles

     136         91         136         69   

Other intangible assets (a)

     76         70         148         137   

Total

   $ 317       $ 252       $ 389       $ 288   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Carrying amount and accumulated amortization excludes $18 million each at December 31, 2015, and December 31, 2014, 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.

Intangible asset amortization expense was $36 million for 2015, $39 million for 2014, and $44 million for 2013. Estimated amortization expense for intangible assets for each of the next five years is as follows: 2016 — $28 million; 2017 — $19 million; 2018 — $11 million; 2019 — $5 million; and 2020 — $1 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.

 

¿   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.

 

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Our significant 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.”

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

Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. We had $1.1 billion and $958 million of investments in LIHTC operating partnerships at December 31, 2015, and December 31, 2014, respectively. These investments are recorded in “accrued income and other assets” on our balance sheet. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss is remote. For all legally binding unfunded equity commitments, we increase our recognized investment and recognize a liability. As of December 31, 2015, and December 31, 2014, we had liabilities of $410 million and $309 million, respectively, related to investments in qualified affordable housing projects, which are recorded in “accrued expenses and other liabilities” on our balance sheet. We continue to invest in these LIHTC operating partnerships.

The assets and liabilities presented in the table below convey the size of KCDC’s direct and indirect investments at December 31, 2015, and December 31, 2014. As these investments represent unconsolidated VIEs, the assets and liabilities of the investments themselves are not recorded on our balance sheet. During 2015, we noted that not all of KCDC’s unconsolidated VIEs were captured in the table below. As a result, the amounts in the table were revised to incorporate all of KCDC’s unconsolidated VIEs for the year ended December 31, 2014. Because our LIHTC investments were appropriately accounted for, these revisions did not impact our financial condition or results of operations for the year ended December 31, 2014.

 

     Unconsolidated VIEs  
in millions   

Total

Assets

     Total
Liabilities
     Maximum
Exposure to Loss
 

December 31, 2015

        

LIHTC investments

   $ 4,914       $ 1,368       $ 1,332   

December 31, 2014

        

LIHTC investments

   $             4,362       $         887       $             1,157   

We amortize our LIHTC investments over the period that we expect to receive the tax benefits. In 2015, we recognized $115 million of amortization and $134 million of tax credits associated with these investments within “income taxes” on our income statement. In 2014, we recognized $99 million of amortization and $114 million of tax credits associated with these investments within “income taxes” on our income statement.

Other unconsolidated VIEs.    We are involved with other various entities in the normal course of business which we have determined to be VIEs. We have determined that we are not the primary beneficiary of these

 

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partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance. Assets associated with these unconsolidated VIEs totaled $172 million at December 31, 2015, and $188 million at December 31, 2014. These assets are recorded in “accrued income and other assets,” “other investments,” “loans,” and “securities available for sale” on our balance sheet. Liabilities associated with these unconsolidated VIEs totaled less than $1 million at both December 31, 2015, and December 31, 2014, and are recorded in “accrued expenses and other liabilities” on our balance sheet.

Consolidated VIEs.    Prior to 2004, 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. While we have neither formed new guaranteed funds nor added LIHTC partnerships to the existing funds since October 2003, we continue to act as asset manager and provide occasional funding to 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 and have consolidated them. The guaranteed funds’ assets totaled $1 million at both December 31, 2015, and December 31, 2014, and can only be used to settle the funds’ obligations. The guaranteed funds liabilities totaled $1 million at both December 31, 2015, and December 31, 2014, and neither creditors nor equity investors in these funds have any recourse to our general credit. Information regarding our maximum potential undiscounted future payments in connection with these guaranteed funds is included in Note 20 (“Commitments, Contingent Liabilities and Guarantees”) 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 had previously deferred the effective date of this guidance for such nonregistered investment companies. New accounting guidance was issued in February 2015 that removes this deferral. The effective date for this guidance is January 1, 2016, for us. Additional information regarding this new accounting guidance is provided in Note 1 (“Summary of Significant Accounting Policies”).

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

   2015      2014      2013  

Currently payable:

        

Federal

   $                     337        $                     288        $                     216    

State

     42          33          26    

Total currently payable

     379          321          242    

Deferred:

        

Federal

     (69)         16          39    

State

     (7)         (11)         (10)   

Total deferred

     (76)                 29    

Total income tax (benefit) expense (a)

   $ 303        $ 326        $ 271    
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

(a) There was no income tax (benefit) expense on securities transactions in 2015 and 2014. 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 $16 million in 2015, $17 million in 2014, and $23 million in 2013.

 

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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

   2015      2014  

Allowance for loan and lease losses

   $                     327       $                     316   

Employee benefits

     268         251   

Net unrealized securities losses

     48         17   

Federal credit carryforwards

     88         96   

State net operating losses and credits

     5         9   

Other

     341         312   

Gross deferred tax assets

     1,077         1,001   

Total deferred tax assets

     1,077         1,001   

Leasing transactions

     651         682   

Other

     127         125   

Total deferred tax liabilities

     778         807   

Net deferred tax assets (liabilities) (a)

   $ 299       $ 194   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(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, 2015, we had a gross federal credit carryforward of $91 million. Additionally, we had state net operating loss carryforwards of $37 million and state credit carryforwards of $3 million, resulting in a net state deferred tax asset of $4.3 million. These carryforwards are subject to limitations imposed by tax laws and, if not utilized, will gradually expire through 2031.

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

  2015     2014     2013  
  Amount      Rate     Amount      Rate     Amount      Rate  

Income (loss) before income taxes times 35% statutory federal tax rate

   $ 428           35.0      $ 445           35.0      $ 399           35.0  

Amortization of tax-advantaged investments

    81           6.7          69           5.4          63           5.5     

Foreign tax adjustments

    (1)          (.1)         10           .8          (4)          (.3)    

Reduced tax rate on lease financing income

    5           .4          (3)          (.2)         (13)          (1.2)    

Tax-exempt interest income

    (18)          (1.5)         (16)          (1.3)         (15)          (1.3)    

Corporate-owned life insurance income

    (45)          (3.6)         (41)          (3.2)         (42)          (3.7)    

Interest refund (net of federal tax benefit)

    —             —            (1)          (.1)         (1)          (.1)    

State income tax, net of federal tax benefit

    22           1.8          15           1.1          10           .9     

Tax credits

    (155)          (12.7)         (134)          (10.5)         (130)          (11.4)    

Other

    (14)          (1.2)         (18)          (1.4)         4           .3     

Total income tax expense (benefit)

   $         303                   24.8      $         326           25.6      $         271                   23.7  
 

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Liability for Unrecognized Tax Benefits

The change in our liability for unrecognized tax benefits is as follows:

 

Year ended December 31,

in millions

   2015        2014    

Balance at beginning of year

   $ 6          $ 6     

Increase for other tax positions of prior years

     7            —     

Decrease related to other settlements with taxing authorities

     (1)           —     

Balance at end of year

   $                 12          $                 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 $12 million at December 31, 2015, and $6 million at December 31, 2014. 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 expense of $.6 million in 2015, net interest credits of $10.6 million in 2014, and $1.4 million in 2013. We recovered state tax penalties of $.3 million in 2015 and $.2 million in 2013. We did not recover any state tax penalties in 2014. At December 31, 2015, we had an accrued interest payable of $.9 million, compared to $1.2 million at December 31, 2014. Our liability for accrued state tax penalties was $1 million at December 31, 2015, and $.3 million at December 31, 2014.

The amount of 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 at December 31, 2015, and December 31, 2014, are $2.7 million and $1 million, respectively.

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 2013 and forward. Currently, we are not under audit for the tax years 2013 and forward. We are not subject to income tax examinations by other tax authorities for years prior to 2006.

13. Acquisitions and Discontinued Operations

Acquisitions

First Niagara Financial Group, Inc.    On October 30, 2015, we announced that KeyCorp entered into a definitive agreement and plan of merger (“Agreement”) pursuant to which it will acquire all of the outstanding capital stock of First Niagara. Under the terms of the Agreement, at the effective time of the merger, each share of First Niagara common stock will be converted into the right to receive (i) 0.680 of a share of KeyCorp common stock and (ii) $2.30 in cash. The exchange ratio of KeyCorp stock for First Niagara stock is fixed and will not adjust based on changes in KeyCorp’s share trading price. First Niagara equity awards outstanding immediately prior to the effective time of the merger will be converted into equity awards for KeyCorp common stock as provided in the Agreement. Each share of First Niagara’s Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Stock, Series B, will be converted into a share of a newly created series of preferred stock of KeyCorp having substantially the same terms as First Niagara’s preferred stock. Based on the closing price of KeyCorp common shares on Thursday, October 29, 2015, of $13.38 and assuming First Niagara has 356.272 million shares outstanding on a fully-diluted basis, the value of the total consideration to be paid by KeyCorp pursuant to the Agreement is approximately $4.1 billion.

The merger is currently expected to be completed during the third quarter of 2016 and is subject to customary closing conditions including the approval of regulators and the shareholders of both KeyCorp and First Niagara.

 

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As of December 31, 2015, First Niagara, headquartered in Buffalo, New York, had approximately 390 branches with $40 billion of total assets and $29 billion of deposits.

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 was accounted for as a business combination, expanded our corporate and investment banking business unit and added 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. During the third quarter of 2015, goodwill increased $3 million to account for a tax item associated with the business combination. 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”).

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 was 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 retained interests in the securitization trusts through our ownership of an insignificant percentage of certificates in two of the securitization trusts and two interest-only strips in one of the securitization trusts. These retained interests were remeasured at fair value on September 30, 2014, and their fair value of $1 million was recorded in “discontinued assets” on our balance sheet. These assets were valued using a similar approach and inputs that have been used to value the education loan securitization trust loans and securities, which are further discussed later in this note.

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

 

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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

   2015      2014      2013  

Net interest income

   $             36        $             77        $             105    

Provision for credit losses

     21          21          20    

Net interest income after provision for credit losses

     15          56          85    

Noninterest income

             (111)         (136)   

Noninterest expense

     17          24          28    

Income (loss) before income taxes

             (79)         (79)   

Income taxes

             (30)         (29)   

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

   $       $ (49)       $ (50)   
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

(a) Includes after-tax charges of $23 million, $32 million, and $40 million for the years ended December 31, 2015, December 31, 2014, and December 31, 2013, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

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

 

December 31,

in millions

   2015      2014  

Held-to-maturity securities

   $ 1       $ 1   

Portfolio loans at fair value

     4         191   

Loans, net of unearned income (a)

     1,824         2,104   

Less: Allowance for loan and lease losses

     28         29   

Net loans

     1,800         2,266   

Accrued income and other assets

     30         38   

Total assets

   $             1,831       $             2,305   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) At December 31, 2015, and December 31, 2014, unearned income was less than $1 million.

The discontinued education lending business consisted of loans in portfolio (recorded at fair value) and loans in portfolio (recorded at carrying value with appropriate valuation reserves). As of June 30, 2015, we decided to sell the portfolio loans that are recorded at fair value, which were subsequently sold during the fourth quarter of 2015. 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, 2015, education loans included 1,901 TDRs with a recorded investment of approximately $21 million (pre-modification and post-modification). A specifically allocated allowance of $2 million was assigned to these loans as of December 31, 2015. At December 31, 2014, education loans included 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. At December 31, 2013, education loans included 1,041 TDRs with a recorded investment of approximately $13 million (pre-modification and post-modification). A specifically allocated allowance of $1 million was assigned to these loans at December 31, 2013. There have been no significant payment defaults. There are no significant commitments outstanding to lend additional funds to these borrowers. Additional information regarding TDR classification and ALLL methodology is provided in Note 5 (“Asset Quality”).

In the past, as part of our education lending business model, we originated and securitized education loans. The process of securitization involved taking a pool of loans from our balance sheet and selling them to a bankruptcy-

 

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remote qualifying special purpose entity, 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 had 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, 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 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 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 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.

In June 2015, we transferred $179 million of loans that were previously purchased from three of the outstanding securitizations trusts pursuant to the legal terms of those particular trusts to held for sale and accounted for them at fair value. These portfolio loans held for sale were valued based on indicative bids to sell the loans. These portfolio loans were previously valued using an internal discounted cash flow model, which was affected by assumptions for defaults, loss severity, discount rates, and prepayments. These loans were considered Level 3 assets since we relied on unobservable inputs when determining their fair value. Our valuation process for these loans prior to June 2015, as well as the trust loans and securities prior to the sale of the residual interests in September 2014, is discussed in more detail below. On October 29, 2015, government-guaranteed loans were sold for $117 million. On December 8, 2015, private loans were sold for $45 million. The gain on the sale of these loans was $1 million. The remaining portfolio loans held for sale, totaling $4 million, were reclassified to portfolio loans at fair value at December 31, 2015. Portfolio loans accounted for at fair value were $191 million at December 31, 2014.

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.

Corporate Treasury, within our Finance area, was responsible for the quarterly valuation process that previously determined the fair value of our student loans held in portfolio that were accounted for at fair value and for our loans and securities in our education loan securitization trusts. Corporate Treasury provided 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 reviewed all significant inputs and assumptions and approved the resulting fair values.

 

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The Working Group reviewed actual performance trends of the loans on a quarterly basis and used statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models that incorporate delinquency and charge-off trends along with economic outlooks assisted the Working Group to forecast future defaults. The Working Group used this information to formulate the credit outlook 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. Default expectations and discount rate changes had 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 were accounted for at fair value was based on a discounted cash flow analysis using a model purchased from a third party and maintained by Corporate Treasury. The valuation process began with loan-level data that was 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 were developed using a financial model that reflected certain assumptions for defaults, recoveries, status changes, and prepayments. A net earnings stream, taking into account cost of funding, was calculated and discounted back to the measurement date using an appropriate discount rate. This resulting amount was used to determine the present value of the loans, which represented 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 reconciled 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 considered loan and securities run-off, yields, future default and recovery changes, and the timing of cash releases to us from the trusts. We also performed back-testing to compare expected defaults to actual experience; the impact of future defaults could significantly affect the fair value of these loans and securities over time. In addition, our internal model validation group periodically performed a review to ensure the accuracy and validity of the model for determining the fair value of these loans and securities.

The following table shows the significant unobservable inputs used to measure the fair value of the portfolio loans accounted for at fair value at December 31, 2015, and December 31, 2014:

 

December 31, 2015

dollars in millions

 

  

Fair Value of Level 3
Assets and Liabilities

 

    

Valuation
Technique

 

  

Significant
Unobservable Input

 

  

Range
(Weighted-Average)

 

 

Portfolio loans

   $              4       Market approach    Indicative bids      84.50 – 104.00%   

accounted for at fairvalue

           
                             

 

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%)   
                             

 

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The following table shows the principal and fair value amounts for our portfolio loans at carrying value and portfolio loans at fair value at December 31, 2015, and December 31, 2014. 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, 2015      December 31, 2014  
   Principal      Fair Value      Principal      Fair Value  

Portfolio loans at carrying value

           

Accruing loans past due 90 days or more

   $             26         N/A       $ 29         N/A   

Loans placed on nonaccrual status

     8         N/A         11         N/A   

Portfolio loans at fair value

           

Accruing loans past due 90 days or more

   $ 1       $             1       $             5       $             5   

Loans placed on nonaccrual status

     —           —           —           —     
                                     

The following table shows the portfolio loans at fair value and their related contractual amounts at December 31, 2015, and December 31, 2014.

 

in millions

 

   December 31, 2015      December 31, 2014  
   Contractual
Amount
     Fair Value      Contractual
Amount
     Fair Value  

ASSETS

           

Portfolio loans

   $             4       $             4       $             192       $             191   

The following tables present the assets of the portfolio loans measured at fair value on a recurring basis at December 31, 2015, and December 31, 2014.

 

December 31, 2015

in millions

   Level 1      Level 2      Level 3      Total  

ASSETS MEASURED ON A RECURRING BASIS

           

Portfolio loans

     —           —         $         4       $         4   

Total assets on a recurring basis at fair value

     —           —         $ 4       $ 4   
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 
                                     

 

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The following table shows the change in the fair values of the Level 3 portfolio loans held for sale, portfolio loans, and consolidated education loan securitization trusts for the years ended December 31, 2015, and December 31, 2014.

 

in millions    Portfolio
Student
Loans Held
For Sale
    Portfolio
Student
Loans
    Trust
Student
Loans
    Trust
Other
Assets
    Trust
Securities
    Trust
Other
Liabilities
 

Balance at December 31, 2013

     —        $ 147      $             1,960      $             20      $             1,834      $             20   

Gains (losses) recognized in earnings (a)

     —          (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        —          —          —          —     

Gains (losses) recognized in earnings (a)

   $ (3     1        —          —          —          —     

Sales

     (161     —          —          —          —          —     

Settlements

     (11     (13     —          —          —          —     

Loans transferred to held for sale

                 179        (179     —          —          —          —     

Loans transferred to portfolio

     (4     4        —          —          —          —     

Balance at December 31, 2015 (b)

     —        $ 4        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                  

 

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

 

(b) There were no issuances or transfers into Level 3 for the year ended December 31, 2014. There were no purchases, issuances, transfers into Level 3 or transfers, out of Level 3 for the year ended December 31, 2015.

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

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

 

Year ended December 31,

in millions

   2015      2014      2013  

Net interest income

     —         $ 12         —     

Noninterest income

     —           10       $ 212   

Noninterest expense

     —           1         66   

Income (loss) before income taxes

     —           21         146   

Income taxes

     —           8         54   

Income (loss) from discontinued operations, net of taxes

                 —         $             13       $             92   
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

There were no discontinued assets or liabilities of Victory for the years ended December 31, 2015, and 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.

 

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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 Austin are as follows:

 

Year ended December 31,

in millions

   2015      2014     2013  

Noninterest expense

     —         $             4      $             1   

Income (loss) before income taxes

     —           (4     (1

Income taxes

     —           (1     1   

Income (loss) from discontinued operations, net of taxes

             —         $ (3   $ (2
  

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

   

 

 

 

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

 

December 31,

in millions

   2015      2014       

Cash and due from banks

   $             15       $             19      

Total assets

   $ 15       $ 19      
  

 

 

    

 

 

    

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

   2015      2014     2013  

Net interest income

   $         36        $         89       $         105    

Provision for credit losses

     21          21         20    

Net interest income after provision for credit losses

     15          68         85    

Noninterest income

             (101     76    

Noninterest expense

     17          29         95    

Income (loss) before income taxes

             (62     66    

Income taxes

             (23     26    

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

   $       $ (39   $ 40    
  

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

   

 

 

 

 

(a) Includes after-tax charges of $23 million, $32 million, and $40 million for the years ended December 31, 2015, December 31, 2014, and December 31, 2013, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

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

 

December 31,

in millions

   2015      2014  

Cash and due from banks

   $             15        $             19    

Held-to-maturity securities

               

Portfolio loans at fair value

             191    

Loans, net of unearned income (a)

     1,824          2,104    

Less: Allowance for loan and lease losses

     28          29    

Net loans

     1,800          2,266    

Accrued income and other assets

     30          38    

Total assets

   $ 1,846        $ 2,324    
  

 

 

    

 

 

 

Accrued expense and other liabilities

     —         $   

Total liabilities

     —         $   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) At December 31, 2015, and December 31, 2014, unearned income was less than $1 million.

 

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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 that 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.”

The following table summarizes our securities financing agreements at December 31, 2015, and December 31, 2014:

 

     December 31, 2015  
in millions    Gross Amount
Presented in
Balance Sheet
     Netting
Adjustments
   

(a)

   Collateral (b)     Net
Amounts
 

Offsetting of financial assets:

            

Reverse repurchase agreements

   $ 1         —             $ (1     —     

Total

   $ 1                 —           $ (1     —     
  

 

 

    

 

 

      

 

 

   

 

 

 

Offsetting of financial liabilities:

                                      

Repurchase agreements (c)

     —           —               —          —     

Total

     —           —             —          —     
  

 

 

    

 

 

      

 

 

   

 

 

 
   
     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     —     

Total

   $ 3       $         (1      $         (2     —     
  

 

 

    

 

 

      

 

 

   

 

 

 

Offsetting of financial liabilities:

                                      

Repurchase agreements

   $ 1       $         (1          —          —     

Total

   $         1       $         (1        —          —     
  

 

 

    

 

 

      

 

 

   

 

 

 
    

 

 

    

 

 

        

 

 

   

 

 

 

 

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

 

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

 

(c) Repurchase agreements are collateralized by U.S. Treasury securities and contracted on an overnight basis.

Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we received from counterparties and either request additional collateral or return a portion

 

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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 $59 million for 2015, $46 million for 2014, and $38 million for 2013. The total income tax benefit recognized in the income statement for these plans was $22 million for 2015, $17 million for 2014, and $14 million for 2013. 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.”

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, 2015, we had 66,728,574 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 2015, 2014, and 2013 are shown in the following table.

 

Year ended December 31,    2015     2014     2013      

 

   

Average option life

     6.0 years        6.2 years        6.3 years     

Future dividend yield

     1.84   %      1.70   %      2.14   %   

Historical share price volatility

     .382        .497        .495     

Weighted-average risk-free interest rate

     1.7   %      1.9   %      1.1   %   

 

   

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.

 

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The following table summarizes activity, pricing and other information for our stock options for the year ended December 31, 2015.

 

      Number of
Options
    Weighted-Average
Exercise Price Per
Option
     Weighted-Average
Remaining Life
(Years)
     Aggregate
Intrinsic
Value (a)
 

Outstanding at December 31, 2014

     19,915,556      $             19.67         3.8       $             58   

Granted

     894,900        14.11         

Exercised

     (2,496,965     8.78         

Lapsed or canceled

     (3,247,043     34.11         

Outstanding at December 31, 2015

     15,066,448      $ 18.04         3.8         39   
  

 

 

         
    

 

 

                           

Expected to vest

     2,199,240      $ 11.30         7.7       $ 5   

Exercisable at December 31, 2015

     12,680,764      $ 19.28         3.0       $ 34   
                                    

 

(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, 2015, the fair value of the underlying stock was less than the weighted-average exercise price per option.

The weighted-average grant-date fair value of options was $4.33 for options granted during 2015, $5.26 for options granted during 2014, and $3.55 for options granted during 2013. Stock option exercises numbered 2,496,965 in 2015, 3,050,309 in 2014, and 3,574,354 in 2013. The aggregate intrinsic value of exercised options was $14 million for 2015, $16 million for 2014, and $13 million for 2013. As of December 31, 2015, unrecognized compensation cost related to nonvested options under the plans totaled $4 million. We expect to recognize this cost over a weighted-average period of 2.6 years.

Cash received from options exercised was $22 million, $26 million, and $26 million in 2015, 2014, and 2013, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $2 million for 2015, $2 million for 2014, and $1 million for 2013.

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 2015 numbered 1,075,082 and were payable in cash. The total fair value of the performance units that vested in 2015 was $15 million. No performance units were scheduled to vest during 2014; therefore, no corresponding payments were made during that year.

 

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The following table summarizes activity and pricing information for the nonvested shares in the Program for the year ended December 31, 2015.

 

     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, 2014

     5,024,212      $ 10.61         4,074,320      $ 13.04   

Granted

     4,335,823        14.11         1,297,239        13.60   

Vested

     (1,978,447     9.73         (1,531,950     13.19   

Forfeited

 

    

 

(231,086

 

 

   

 

12.69

 

  

 

    

 

(126,338

 

 

   

 

12.97

 

  

 

Outstanding at December 31, 2015

     7,150,502      $   12.88         3,713,271      $   13.17   
  

 

 

      

 

 

   
    

 

 

            

 

 

         

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 $13.99 during 2015, $13.00 during 2014, and $10.96 during 2013. As of December 31, 2015, unrecognized compensation cost related to nonvested shares under the Program totaled $63 million. We expect to recognize this cost over a weighted-average period of 2.2 years. The total fair value of shares vested was $39 million in 2015, $36 million in 2014, and $23 million in 2013.

Deferred Compensation and Other Restricted Stock Awards

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.

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 our deferred compensation plans and these other restricted stock or unit award programs for the year ended December 31, 2015.

 

      Number of
Nonvested
Shares
   

Weighted-Average
Grant-Date

Fair Value

      

Outstanding at December 31, 2014

     3,123,540      $             11.21      

Granted

     1,108,249        14.22      

Dividend equivalents

     8,692        13.83      

Vested

     (1,127,841     10.72      

Forfeited

     18,758        13.16      

Outstanding at December 31, 2015

     3,131,398      $ 12.47      
  

 

 

      
    

 

 

            

The weighted-average grant-date fair value of awards granted was $14.22 during 2015, $13.53 during 2014, and $10.71 during 2013. As of December 31, 2015, unrecognized compensation cost related to nonvested shares

 

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granted under our deferred compensation plans and the other restricted stock or unit award programs totaled $14 million. We expect to recognize this cost over a weighted-average period of 2.2 years. The total fair value of shares vested was $15 million in 2015, $12 million in 2014, and $19 million in 2013. 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 issue treasury shares on or around the fifteenth day of the month following the month employee payments are received. We issued 250,913 common shares at a weighted-average cost to the employee of $12.55 during 2015, 238,257 common shares at a weighted-average cost to the employee of $12.06 during 2014, and 264,775 common shares at a weighted-average cost to the employee of $9.83 during 2013.

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 $593 million at December 31, 2015, and $587 million at December 31, 2014, consisting entirely of net unrecognized losses. During 2016, we expect to recognize $17 million of net unrecognized losses in pre-tax AOCI as net pension cost.

During 2015, 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

   2015     2014     2013      

Interest cost on PBO

   $ 41      $ 46      $ 42     

Expected return on plan assets

     (56     (66     (67  

Amortization of losses

     18        16        19     

Settlement loss

 

    

 

23

 

  

 

   

 

23

 

  

 

   

 

27

 

  

 

 

Net pension cost (benefit)

   $ 26      $ 19      $ 21     
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

Other changes in plan assets and benefit obligations recognized in OCI:

        

Net (gain) loss

   $ 47      $ 97      $ (106  

Amortization of losses

 

    

 

(41

 

 

   

 

(39

 

 

   

 

(46

 

 

 

Total recognized in comprehensive income

   $ 6      $ 58      $ (152  
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

Total recognized in net pension cost and comprehensive income

   $ 32      $ 77      $ (131  
  

 

 

   

 

 

   

 

 

   
    

 

 

   

 

 

   

 

 

   

 

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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, 2015, and December 31, 2014.

The following table summarizes changes in the PBO related to our pension plans.

 

Year ended December 31,

in millions

   2015     2014      

PBO at beginning of year

   $         1,206      $         1,156     

Interest cost

     41        46     

Actuarial losses (gains)

     (24     97     

Benefit payments

     (87     (93  

PBO at end of year

   $ 1,136      $ 1,206     
  

 

 

   

 

 

   
    

 

 

   

 

 

   

The following table summarizes changes in the FVA.

 

Year ended December 31,

in millions

   2015     2014      

FVA at beginning of year

   $         957      $           970     

Actual return on plan assets

     (15     66     

Employer contributions

     14        14     

Benefit payments

     (87     (93  

FVA at end of year

   $ 869      $ 957     
  

 

 

   

 

 

   
    

 

 

   

 

 

   

The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2015, and December 31, 2014.

 

December 31,

in millions

   2015     2014      

Funded status (a)

   $         (267   $         (249  
  

 

 

   

 

 

   

Net prepaid pension cost recognized consists of:

                  

Current liabilities

   $ (14   $ (14  

Noncurrent liabilities

     (253     (235  

Net prepaid pension cost recognized (b)

   $ (267   $ (249  
  

 

 

   

 

 

   
    

 

 

   

 

 

   

 

(a) The shortage of the FVA under the PBO.

 

(b) Represents the accrued benefit liability of the pension plans.

At December 31, 2015, 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 2016. We also do not expect to make any significant discretionary contributions during 2016.

At December 31, 2015, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2016 — $98 million; 2017— $98 million; 2018 — $97 million; 2019 — $84 million; 2020 — $80 million and $366 million in the aggregate from 2021 through 2025.

The ABO for all of our pension plans was $1.1 billion at December 31, 2015, and $1.2 billion at December 31, 2014. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:

 

December 31,                   
in millions    2015      2014     

PBO

   $     1,136       $     1,206      

ABO

     1,136         1,206      

Fair value of plan assets

     869         957      

 

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To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.

 

December 31,    2015      2014      

Discount rate

     3.75       3.50   

Compensation increase rate

     N/A         N/A     

To determine net pension cost, we assumed the following weighted-average rates.

 

Year ended December 31,    2015      2014      2013      

Discount rate

     3.50       4.25       3.25   

Compensation increase rate

     N/A         N/A         N/A     

Expected return on plan assets

     6.25         7.25         7.25     

We estimate that we will recognize $6 million in net pension cost for 2016, compared to $26 million for 2015, and $19 million for 2014. Costs are expected be less in 2016 than in 2015 unless the 2016 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 2016, 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 2016 than 2015, primarily due to a lower expected return on plan assets and higher discount rate. Costs increased from 2014 to 2015 due to a lower expected return on plan assets and a change to new mortality tables and mortality improvements that were finalized in October 2014. Costs slightly declined from 2013 to 2014 due to a smaller settlement loss in 2014.

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 2016 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 2016 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.

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 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.

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 6.25% for 2015 and 7.25% for 2014 and 2013. As part of an annual reassessment of current and expected future capital market returns, we deemed a rate of 6.00% to be appropriate in estimating 2016 pension cost.

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

 

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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, 2015.

 

Asset Class    Target  
Allocation  
2015  
     

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, 2015, and December 31, 2014.

 

December 31, 2015                                 
in millions    Level 1      Level 2      Level 3      Total       

ASSET CLASS

              

Equity securities:

              

Common — U.S.

   $ 128         —           —         $ 128      

Common — International

     20         —           —           20      

Preferred — U.S.

     2         —           —           2      

Debt securities:

              

Corporate bonds — U.S.

     —         $         92         —           92      

Corporate bonds — International

     —           26         —           26      

Government and agency bonds — U.S.

     —           100         —           100      

Government bonds — International

     —           1         —           1      

State and municipal bonds

     —           6         —           6      

Mutual funds:

              

Equity — U.S.

     16         —           —           16      

Equity — International

     24         —           —           24      

Fixed income — U.S.

     5         —           —           5      

Fixed income — International

     2         —           —           2      

Collective investment funds:

              

Equity — U.S.

     —           26         —           26      

Equity — International

     —           106         —           106      

Convertible securities

     —           41         —           41      

Fixed income securities

     —           86         —           86      

Short-term investments

     —           21         —           21      

Real assets

     —           101         —           101      

Insurance investment contracts and pooled separate accounts

     —           —         $ 14         14      

Other assets

     —           —           52         52      

 

    

Total net assets at fair value

   $         197       $ 606       $           66       $         869      
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

 

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December 31, 2014                                 
in millions    Level 1      Level 2      Level 3      Total       

ASSET CLASS

              

Equity securities:

              

Common — U.S.

   $ 161         —           —         $ 161      

Common — 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:

              

Equity — U.S.

     18         —           —           18      

Equity — International

     28         —           —           28      

Fixed Income — U.S.

     2         —           —           2      

Fixed Income — International

     2         —           —           2      

Collective investment funds:

              

Equity — U.S.

     —           28         —           28      

Equity — International

     —           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      
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

The following table shows the changes in the fair values of our Level 3 plan assets for the years ended December 31, 2015, and December 31, 2014.

 

in millions    Insurance
Investment
Contracts and
Pooled
Separate
Accounts
     Other
Assets
    Total      

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     

Sales

     —           (14 )      (14 )   

Balance at December 31, 2015

   $             14       $             52      $             66     
  

 

 

    

 

 

   

 

 

   
    

 

 

    

 

 

   

 

 

   

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.

The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.

 

December 31,                   
in millions    2015      2014          

Net unrecognized losses (gains)

   $             (5)       $      

Net unrecognized prior service credit

     (3)         (5)      

Total unrecognized AOCI

   $             (8)       $             (3)      
  

 

 

    

 

 

    
    

 

 

    

 

 

    

 

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During 2016, 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    2015     2014     2013         

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

   $ (6   $ 13      $ (17)      

Amortization of prior service credit

     1        1             

Amortization of losses

     —          1        —         

Total recognized in comprehensive income

   $ (5   $ 15      $ (16)      
  

 

 

   

 

 

   

 

 

    

Total recognized in net postretirement benefit cost and comprehensive income

   $ (5   $ 14      $ (16)      
  

 

 

   

 

 

   

 

 

    
    

 

 

   

 

 

   

 

 

    

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, 2015, and December 31, 2014.

The following table summarizes changes in the APBO.

 

Year ended December 31,                   
in millions    2015       2014        

APBO at beginning of year

   $             79        $ 65       

Service cost

                  

Interest cost

                  

Plan participants’ contributions

                  

Actuarial losses (gains)

     (12)         15       

Benefit payments

     (6)         (7)      

APBO at end of year

   $ 67        $             79       
  

 

 

    

 

 

    
    

 

 

    

 

 

    

The following table summarizes changes in FVA.

 

Year ended December 31,                   
in millions    2015      2014       

FVA at beginning of year

   $ 56        $ 57       

Employer contributions

     —            (1)      

Plan participants’ contributions

                  

Benefit payments

     (6)         (7)      

Actual return on plan assets

     (3)              

FVA at end of year

   $             49        $             56       
  

 

 

    

 

 

    
    

 

 

    

 

 

    

 

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The following table summarizes the funded status of the postretirement plans, which corresponds to the amounts recognized in the balance sheets at December 31, 2015, and December 31, 2014.

 

December 31,                 
in millions    2015     2014      

Funded status (a)

   $         (18   $         (23  

Accrued postretirement benefit cost recognized (b)

     (18     (23  

 

(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 2016, if any, will be minimal.

At December 31, 2015, we expect to pay the benefits from all funded and unfunded other postretirement plans as follows: 2016 — $5 million; 2017 — $5 million; 2018 — $5 million; 2019 — $5 million; 2020 — $5 million; and $22 million in the aggregate from 2021 through 2025.

To determine the APBO, we assumed discount rates of 4.00% at December 31, 2015, and 3.75% at December 31, 2014.

To determine net postretirement benefit cost, we assumed the following weighted-average rates.

 

Year ended December 31,      2015      2014      2013      

Discount rate

       3.75      4.50      3.50  

Expected return on plan assets

       4.50         5.25         5.25     

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 a credit of less than $1 million in net postretirement benefit cost for 2016, compared to an expense of less than $1 million for 2015 and a credit of $1 million for 2014.

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, 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  
2015  
     

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,

 

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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, 2015, and December 31, 2014.

 

December 31, 2015                                 
in millions            Level 1      Level 2              Level 3      Total       

ASSET CLASS

              

Mutual funds:

              

Equity — U.S.

   $ 18         —           —         $ 18      

Equity — International

     4         —           —           4      

Fixed income — U.S.

     4         —           —           4      

Common investment funds:

              

Equity — U.S.

     —         $ 16         —           16      

Equity — International

     —           4         —           4      

Convertible securities

     —           2         —           2      

Short-term investments

     —           1         —           1      

Total net assets at fair value

   $         26       $         23                 —         $         49      
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

 

December 31, 2014                                 
in millions            Level 1      Level 2              Level 3      Total       

ASSET CLASS

              

Mutual funds:

              

Equity — U.S.

   $ 18         —           —         $ 18      

Equity — International

     1         —           —           1      

Fixed income — U.S.

     4         —           —           4      

Fixed income — International

     1         —           —           1      

Common investment funds:

              

Equity — U.S.

     —         $ 21         —           21      

Equity — International

     —           7         —           7      

Convertible securities

     —           3         —           3      

Short-term investments

     —           1         —           1      

Total net assets at fair value

   $         24       $         32                 —         $         56      
  

 

 

    

 

 

    

 

 

    

 

 

    
    

 

 

    

 

 

    

 

 

    

 

 

    

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, 2015, and December 31, 2014, we did not receive federal subsidies.

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 2015 and made contributions of 2% for each of 2014 and 2013 on eligible compensation for employees eligible on the last business day of the

 

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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 $79 million in 2015, $73 million in 2014, and $71 million in 2013.

17. Short-Term Borrowings

Selected financial information pertaining to the components of our short-term borrowings is as follows:

 

December 31,                       
dollars in millions    2015     2014     2013      

FEDERAL FUNDS PURCHASED

        

Balance at year end

   $             20      $             18      $             18     

Average during the year

     195        32        164     

Maximum month-end balance

     678        36        1,486     

Weighted-average rate during the year (a)

     .14     .10     .09  

Weighted-average rate at December 31 (a)

     .05        .08        .10     

SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

        

Balance at year end

   $ 352      $ 557      $ 1,516     

Average during the year

     437        1,150        1,638     

Maximum month-end balance

     589        1,519        2,099     

Weighted-average rate during the year (a)

     .00     .16     .13  

Weighted-average rate at December 31 (a)

     .00        .01        .15     

OTHER SHORT-TERM BORROWINGS

        

Balance at year end

   $ 533      $ 423      $ 343     

Average during the year

     572        597        394     

Maximum month-end balance

     1,122        996        466     

Weighted-average rate during the year (a)

     1.52     1.49     1.89  

Weighted-average rate at December 31 (a)

     1.78        1.58        2.00     

 

(a) 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.

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 $1.9 billion at December 31, 2015, 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 FHLB and the Federal Reserve Bank of Cleveland to satisfy short-term liquidity requirements. As of December 31, 2015, our unused secured borrowing capacity was $18.9 billion at the Federal Reserve Bank of Cleveland and $3.5 billion at the FHLB.

 

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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    2015        2014    

Senior medium-term notes due through 2021 (a)

   $ 2,819         $ 2,575     

1.066% Subordinated notes due 2028 (b)

     162           162     

6.875% Subordinated notes due 2029 (b)

     114           113     

7.750% Subordinated notes due 2029 (b)

     147           147     

Total parent company

     3,242           2,997     

Senior medium-term notes due through 2039 (c)

     5,242           2,611     

3.18% Senior remarketable notes due 2027 (d)

     183           —       

7.413% Subordinated remarketable notes due 2027 (d)

     —             272     

4.95% Subordinated notes due 2015 (e)

     —             251     

5.45% Subordinated notes due 2016 (e)

     503           524     

5.70% Subordinated notes due 2017 (e)

     215           222     

4.625% Subordinated notes due 2018 (e)

     103           103     

6.95% Subordinated notes due 2028 (e)

     298           298     

Secured borrowing due through 2021 (f)

     134           302     

Federal Home Loan Bank advances due through 2036 (g)

     166           200     

Investment Fund Financing due through 2052 (h)

     100           95     

Total subsidiaries

     6,944           4,878     

Total long-term debt

   $   10,186         $   7,875     
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(a) The senior medium-term notes had a weighted-average interest rate of 3.58% at December 31, 2015, and 3.89% at December 31, 2014. These notes had fixed interest rates at December 31, 2015, and December 31, 2014. These 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 1.99% at December 31, 2015, and 1.84% at December 31, 2014. These notes had a combination of fixed and floating interest rates, and may not be redeemed prior to their maturity dates.

 

(d) The subordinated remarketable notes were remarketed on May 22, 2015, as senior remarketable notes. These notes may be redeemed prior to their maturity date.

 

(e) These notes are all obligations of KeyBank and may not be redeemed prior to their maturity dates.

 

(f) The secured borrowing had weighted-average interest rates of 4.42% at December 31, 2015, and 4.41% at December 31, 2014. 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”).

 

(g) Long-term advances from the Federal Home Loan Bank had a weighted-average interest rate of 3.58% at December 31, 2015, and 3.47% at December 31, 2014. These advances, which had fixed interest rates, were secured by real estate loans and securities totaling $251 million at December 31, 2015, and $280 million at December 31, 2014.

 

(h) Investment Fund Financing had a weighted-average interest rate of 1.94% at December 31, 2015, and 2.01% December 31, 2014.

At December 31, 2015, scheduled principal payments on long-term debt were as follows:

 

in millions    Parent      Subsidiaries      Total       

2016

     —          $         1,346        $         1,346       

2017

     —            280          280       

2018

   $         752          2,124          2,876       

2019

     —            786          786       

2020

     994          1,010          2,004       

All subsequent years

     1,496          1,398          2,894       

 

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As described below, KeyBank and KeyCorp have a number of programs that support our long-term financing needs.

Global bank note program.    In August 2012, KeyBank adopted a Global Bank Note Program permitting the issuance of up to $20 billion of notes domestically and abroad. On September 29, 2015, KeyBank updated its Global Bank Note Program, authorizing the issuance of up to $20 billion of notes domestically and abroad, separate from the $20 billion authorized under the program in 2012. There will be no additional notes issued under the 2012 authorization. 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 and any prior bank note programs are classified as “long-term debt” on the balance sheet.

Prior to updating its Global Bank Note Program on September 29, 2015, KeyBank issued the following notes under the Global Bank Note Program in 2014 and 2015: on November 24, 2014, $750 million of 2.50% Senior Notes due December 15, 2019; on February 12, 2015, $1 billion of 2.250% Senior Bank Notes due March 16, 2020; and on June 1, 2015, $750 million of 1.70% Senior Bank Notes and $250 million of Floating Rate Senior Notes each due June 1, 2018, and $750 million of 3.30% Senior Bank Notes due June 1, 2025. At December 31, 2015, $20 billion remained available for future issuance under the updated Global Bank Note Program.

Separately from the Global Bank Note Program, on May 22, 2015, KeyBank remarketed $300 million of 3.18% Term Enhanced ReMarketable Securities senior debt.

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. On September 15, 2015, KeyCorp issued $1 billion of 2.90% Medium-Term Notes due September 15, 2020. At December 31, 2015, KeyCorp had authorized and available for issuance up to $3 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.

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. The outstanding common stock of these business trusts is recorded in “other investments” on our balance sheet.

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 starting in 2016 requires us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.

 

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As of December 31, 2015, the trust preferred securities issued by the KeyCorp capital trusts represent $85 million, or .8%, 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, 2015

             

KeyCorp Capital I

   $ 156       $ 6       $ 162         1.066     2028   

KeyCorp Capital II

     109         4         113         6.875        2029   

KeyCorp Capital III

     143         4         147         7.750        2029   

Total

   $ 408       $ 14       $ 422         4.961     —     
  

 

 

    

 

 

    

 

 

      
    

 

 

    

 

 

    

 

 

                  

December 31, 2014

   $ 408       $ 14       $ 422         4.926     —     
  

 

 

    

 

 

    

 

 

      
    

 

 

    

 

 

    

 

 

                  

 

(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 both December 31, 2015, and December 31, 2014. 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 both December 31, 2015, and December 31, 2014. 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.

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 $121 million in 2015, $122 million in 2014, and $122 million in 2013. Minimum future rental payments under noncancelable operating leases at December 31, 2015, are as follows: 2016 — $110 million; 2017 — $103 million; 2018 — $87 million; 2019 — $71 million; 2020 — $59 million; all subsequent years — $326 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

 

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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”).

We also provide financial support to private equity investments, including existing direct portfolio companies and indirect private equity funds, to satisfy unfunded commitments. These unfunded commitments are not recorded on our balance sheet. Additional information on principal investing commitments is provided in Note 6 (“Fair Value Measurements”). Other unfunded equity investment commitments at December 31, 2015, and December 31, 2014, related to tax credit investments and were primarily attributable to LIHTC investments. Unfunded tax credit investments commitments are recorded on our balance sheet in “other liabilities.” Additional information on LIHTC commitments is provided in Note 11 (“Variable Interest Entities”).

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, 2015, and December 31, 2014. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.

 

December 31,

 

in millions

   2015      2014       

Loan commitments:

        

Commercial and other

   $ 28,053       $ 25,979      

Commercial real estate and construction

     1,718         1,965      

Home equity

     7,220         7,164      

Credit cards

     3,603         3,762      

Total loan commitments

     40,594         38,870      

When-issued and to be announced securities commitments

     2         102      

Commercial letters of credit

     139         121      

Purchase card commitments

     163         63      

Principal investing commitments

     50         60      

Tax credit investment commitments

     410         309      

Liabilities of certain limited partnerships and other commitments

     1         1      

Total loan and other commitments

   $ 41,359       $ 39,526      
  

 

 

    

 

 

    
                      

Legal Proceedings

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 has filed an appeal.

 

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

Guarantees

We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at December 31, 2015. 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, 2015

in millions

 

  

Maximum Potential
Undiscounted
Future Payments

 

    

Liability
Recorded

 

 

Financial guarantees:

     

Standby letters of credit

   $         11,447       $         62    

Recourse agreement with FNMA

     1,813           

Return guarantee agreement with LIHTC investors

     4           

Written put options (a)

     2,439         98    

Total

   $ 15,703       $ 168    
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

(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% to 30% probability of payment), moderate (greater than 30% to 70% probability of payment), or high (greater than 70% 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, 2015, 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, 2015, our standby letters of credit had a remaining weighted-average life of 2.9 years, with remaining actual lives ranging from less than 1 year to as many as 11 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, 2015, the outstanding commercial mortgage loans in this program had

 

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a weighted-average remaining term of 7.8 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $6.3 billion. The maximum potential amount of undiscounted future payments that we could be required to make under this program, as shown in the preceding table, is equal to approximately 30% of the principal balance of loans outstanding at December 31, 2015. 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 streams from the properties and the residual value of the operating partnership interests.

As shown in the previous table, KAHC maintained a reserve in the amount of $4 million at December 31, 2015, 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, 2015, our written put options had an average life of 2.6 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, 2015, we had $7 million 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.

 

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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.

21. Accumulated Other Comprehensive Income

Our changes in AOCI for the years ended December 31, 2015, and December 31, 2014, are as follows:

 

in millions    Unrealized gains
(losses) on securities
available for sale
    Unrealized gains
(losses) on derivative
financial instruments
    Foreign currency
translation
adjustment
    Net pension and
postretirement
benefit costs
    Total  

Balance at December 31, 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

Other comprehensive income before reclassification, net of income taxes

     (54     87        (25     (24     (16

Amounts reclassified from accumulated other comprehensive income, net of income taxes (a)

     —          (59     1        25        (33

Net current-period other comprehensive income, net of income taxes

     (54     28        (24     1        (49

Balance at December 31, 2015

   $ (58   $ 20      $ (2   $ (365   $ (405
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Our reclassifications out of AOCI for the years ended December 31, 2015, and December 31, 2014, are as follows:

 

Year ended December 31, 2015

 

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

Realized losses

     (1   Other income
              
     —        Income (loss) from continuing operations before income taxes
     —        Income taxes
              
     —        Income (loss) from continuing operations
  

 

 

   

Unrealized gains (losses) on derivative financial instruments

    

Interest rate

   $ 98      Interest income — Loans

Interest rate

     (4   Interest expense — Long-term debt
              
     94      Income (loss) from continuing operations before income taxes
     35      Income taxes
              
   $ 59      Income (loss) from continuing operations
  

 

 

   

Foreign currency translation adjustment

    
   $ (1   Corporate services income
              
     (1   Income (loss) from continuing operations before income taxes
     (0   Income taxes
              
   $ (1   Income (loss) from continuing operations
  

 

 

   

Net pension and postretirement benefit costs

    

Amortization of losses

   $ (18   Personnel expense

Settlement loss

     (23   Personnel expense

Amortization of prior service credit

     1      Personnel expense
              
     (40   Income (loss) from continuing operations before income taxes
     (15   Income taxes
              
   $ (25   Income (loss) from continuing operations
  

 

 

   
    

 

 

     

 

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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
  

 

 

   
    

 

 

     

22. Shareholders’ Equity

Comprehensive Capital Plan

As previously reported and as authorized by the Board and pursuant to our 2015 capital plan submitted to and not objected to by the Federal Reserve, we had authority to repurchase up to $725 million of our common shares, which include repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under our 2015 capital plan began in the second quarter of 2015 and were suspended in the fourth quarter of 2015 due to the pending merger with First Niagara. Share repurchases are expected to be included in the upcoming 2016 CCAR submission.

During 2015, we repurchased $252 million of common shares under our 2015 capital plan authorization. In addition, during the first quarter of 2015, we repurchased $208 million of common shares under our 2014 capital plan for a total of $460 million of common share repurchases during 2015.

Our Board declared a quarterly dividend of $.065 per common share for the first quarter of 2015. Consistent with our 2015 capital plan, the Board declared a quarterly dividend of $.075 per common share for the second, third, and fourth quarters of 2015, which brought our annual dividend to $.29 per common share for 2015. Our Board will consider an additional potential increase in our quarterly common share dividend, up to $.085 per share, in 2016 for the fifth quarter of the 2015 capital plan.

Preferred Stock

We made quarterly dividend payments of $1.9375 per share on our Series A Preferred Stock during each quarter of 2015 for a total of $23 million.

 

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Capital Adequacy

KeyCorp and KeyBank (consolidated) must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that 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, 2015, KeyCorp and KeyBank (consolidated) 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 (consolidated) qualified for the “well capitalized” prompt corrective action capital category at December 31, 2015, because its capital and leverage ratios exceeded the prescribed threshold ratios for that capital category and it 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 the capital category for KeyBank (consolidated) to change.

As previously indicated in the “Supervision and Regulation” section referenced above, 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, 2015, 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.

 

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At December 31, 2015, 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, 2015

               

TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $         11,671                 12.97   $         7,198                     8.00     N/A         N/A   

KeyBank (consolidated)

     10,454         12.34        6,776         8.00      $         8,470                 10.00

TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS

               

Key

   $ 10,212         11.35   $ 5,399         6.00     N/A         N/A   

KeyBank (consolidated)

     9,197         10.86        5,082         6.00      $ 5,082         6.00

TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS

               

Key

   $ 10,212         10.72   $ 3,811         4.00     N/A         N/A   

KeyBank (consolidated)

     9,197         9.89        3,718         4.00      $ 4,647         5.00

 

 

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

 

 

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, some of which are delivered by Key Corporate Bank, that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives, and foreign exchange.

Key Corporate Bank

Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad suite of banking and capital markets products to its

 

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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.

Other Segments

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

Reconciling Items

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

The table on the following pages shows selected financial data for our major business segments for the years ended December 31, 2015, 2014, and, 2013.

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

The selected financial data 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 that each line of business actually uses the services.

 

¿   The consolidated provision for credit losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated 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.”

As previously reported, in the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial ALLL. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors not fully captured within the statistical analysis of incurred loss. The enhancements of the methodology are described in Note 1 under the heading “Allowance for Loan and Lease Losses.” These methodology enhancements did not create a significant difference in provisioning between segments.

 

¿   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    2015     2014     2013     2015     2014     2013  

SUMMARY OF OPERATIONS

            

Net interest income (TE)

   $ 1,486      $ 1,446      $ 1,531      $ 885      $ 840      $ 795   

Noninterest income

     789        769        784        926        806        762   

Total revenue (TE) (a)

     2,275        2,215        2,315        1,811        1,646        1,557   

Provision for credit losses

     70        59        143        103        14        18   

Depreciation and amortization expense

     56        65        76        43        31        28   

Other noninterest expense

     1,742        1,706        1,782        923        833        779   

Income (loss) from continuing operations before income taxes (TE)

     407        385        314        742        768        732   

Allocated income taxes (benefit) and TE adjustments

     151        143        117        196        218        203   

Income (loss) from continuing operations

     256        242        197        546        550        529   

Income (loss) from discontinued operations, net of taxes

     —          —          —          —          —          —     

Net income (loss)

     256        242        197        546        550        529   

Less: Net income (loss) attributable to noncontrolling interests

     —          —          —          1        2        —     

Net income (loss) attributable to Key

   $ 256      $ 242      $ 197      $ 545      $ 548      $ 529   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AVERAGE BALANCES (b)

                                                

Loans and leases

   $         30,834      $         30,105      $         29,311      $         25,865      $         22,978      $         20,419   

Total assets (a)

     32,884        32,188        31,583        31,610        28,123        25,427   

Deposits

     51,164        50,327        49,806        19,042        17,083        15,972   

OTHER FINANCIAL DATA

            

Expenditures for additions to long-lived assets (a), (b)

   $ 44      $ 8      $ 6      $ 8      $ 9      $ 9   

Net loan charge-offs (b)

     92        117        147        40        (18     6   

Return on average allocated equity (b)

     9.52     8.90     6.71     28.97     33.72     31.93

Return on average allocated equity

     9.52        8.90        6.71        28.97        33.72        31.93   

Average full-time equivalent employees (c)

     7,351        7,563        8,243        2,100        1,975        1,886   

 

(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  
2015     2014     2013     2015     2014     2013     2015     2014     2013     2015     2014     2013  
                     
  (6   $ 27      $              21      $ 2,365      $ 2,313      $ 2,347      $ 11      $ 4      $ 1      $ 2,376      $ 2,317      $ 2,348   
$         183        230        222        1,898        1,805        1,768        (18     (8     (2     1,880        1,797        1,766   
  177        257        243        4,263        4,118        4,115        (7     (4     (1     4,256        4,114        4,114   
  (8     (15     (26     165        58        135        1        (1     3        166        57        138   
  8        12        12        107        108        116        148        152        144        255        260        260   
  51        70        76        2,716        2,609        2,637        (131     (108     (85     2,585        2,501        2,552   
  126        190        181        1,275        1,343        1,227        (25     (47     (63     1,250        1,296        1,164   
  (1     27        23        346        388        343        (15     (38     (49     331        350        294   
  127        163        158        929        955        884        (10     (9     (14     919        946        870   
  —          —          —          —          —          —          1        (39     40        1        (39     40   
  127        163        158        929        955        884        (9     (48     26        920        907        910   
  3        5        —          4        7        —          —          —          —          4        7        —     
$ 124      $ 158      $ 158      $ 925      $ 948      $ 884      $ (9   $ (48   $ 26      $ 916      $ 900      $ 910   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                                             
$ 1,852      $ 2,528      $ 3,268      $     58,551      $       55,611      $     52,998      $ 43      $ 68      $ 56      $ 58,594      $ 55,679      $ 53,054   
  26,937        26,115        26,655        91,431        86,426        83,665        597        653        512        92,028        87,079        84,177   
  467        579        453        70,673        67,989        66,231        (43     (124     (354     70,630        67,865        65,877   
                     
  —          —          —        $ 52      $ 17      $ 15      $ 49      $ 118      $ 73      $ 101      $ 135      $ 88   
$ 9      $ 14      $ 15        141        113        168        1        —          —          142        113        168   
  38.63     36.83     30.27     18.91     19.86     17.29     (.17 )%      (.16 )%      (.27 )%      8.61     8.97     8.47
  38.63        36.83        30.27        18.91        19.86        17.29        (.16     (.84     .50        8.62        8.60        8.86   
  14        42        74        9,465        9,580        10,203              4,018              4,273            4,580            13,483            13,853            14,783   

 

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24. Condensed Financial Information of the Parent Company

CONDENSED BALANCE SHEETS

 

December 31,

in millions

   2015      2014  

ASSETS

     

Cash and due from banks

   $       2,608       $       2,207   

Short-term investments

     58         31   

Securities available for sale

     10         22   

Other investments

     14         15   

Loans to:

     

Banks

     250         90   

Nonbank subsidiaries

     187         211   

Total loans

     437         301   

Investment in subsidiaries:

     

Banks

     9,955         9,998   

Nonbank subsidiaries

     703         632   

Total investment in subsidiaries

     10,658         10,630   

Goodwill

     167         244   

Other intangible assets

     —           11   

Corporate-owned life insurance

     206         212   

Derivative assets

     12         11   

Accrued income and other assets

     321         356   

Total assets

   $ 14,491       $ 14,040   
  

 

 

    

 

 

 

LIABILITIES

     

Accrued expense and other liabilities

   $ 503       $ 511   

Derivative liabilities

     —           2   

Long-term debt due to:

     

Subsidiaries

     423         422   

Unaffiliated companies

     2,819         2,575   

Total long-term debt

     3,242         2,997   

Total liabilities

     3,745         3,510   

SHAREHOLDERS’ EQUITY (a)

     10,746         10,530   

Total liabilities and shareholders’ equity

   $ 14,491       $ 14,040   
  

 

 

    

 

 

 
                   

 

(a) See Key’s Consolidated Statements of Changes in Equity.

CONDENSED STATEMENTS OF INCOME

Year ended December 31,

 

in millions    2015     2014      2013  

INCOME

       

Dividends from subsidiaries:

       

Bank subsidiaries

   $       1,000      $       300       $       600   

Nonbank subsidiaries

     1        —           —     

Interest income from subsidiaries

     10        16         26   

Other income

     20        15         15   

Total income

     1,031        331         641   

EXPENSE

       

Interest on long-term debt with subsidiary trusts

     10        10         14   

Interest on other borrowed funds

     52        53         59   

Personnel and other expense

     73        40         65   

Total expense

     135        103         138   

Income (loss) before income taxes and equity in net income (loss) less dividends from subsidiaries

     896        228         503   

Income tax (expense) benefit

     39        45         33   

Income (loss) before equity in net income (loss) less dividends from subsidiaries

     935        273         536   

Equity in net income (loss) less dividends from subsidiaries (a)

     (15     634         374   

NET INCOME (LOSS)

     920        907         910   

Less: Net income attributable to noncontrolling interests

     4        7         —     

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $ 916      $ 900       $ 910   
  

 

 

   

 

 

    

 

 

 
                           

 

(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    2015     2014     2013  

OPERATING ACTIVITIES

      

Net income (loss) attributable to Key

   $       916      $       900        $      910   

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

      

Deferred income taxes (benefit)

     10        (8     37   

Stock-based compensation expense

     9        14        11   

Equity in net (income) loss less dividends from subsidiaries (a)

     15        (634     (374

Other intangible asset amortization

     2        —          —     

Net (increase) decrease in goodwill and other intangibles

     86        —          —     

Net (increase) decrease in other assets

     29        (53     612   

Net increase (decrease) in other liabilities

     (7     98        (154

Other operating activities, net

     (52     24        (151

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     1,008        341        891   

INVESTING ACTIVITIES

      

Net (increase) decrease in short-term investments

     (27     4        2,096   

Purchases of securities available for sale

     (11     (2     (14

Cash used in acquisitions

     —          (114     —     

Proceeds from sales, prepayments and maturities of securities available for sale

     20        —          39   

Net (increase) decrease in loans to subsidiaries

     (146     257        (4

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     (164     145        2,117   

FINANCING ACTIVITIES

      

Net proceeds from issuance of long-term debt

     1,000        —          750   

Payments on long-term debt

     (750     —          (750

Repurchase of Treasury Shares

     (448     (484     (474

Net proceeds from the issuance of common shares and preferred stock

     22        27        26   

Cash dividends paid

     (267     (240     (217

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (443     (697     (665

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     401        (211     2,343   

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR

     2,207        2,418        75   

CASH AND DUE FROM BANKS AT END OF YEAR

   $ 2,608      $ 2,207      $ 2,418   
  

 

 

   

 

 

   

 

 

 
                          

 

(a) Includes results of discontinued operations described in Note 13 (“Acquisitions and Discontinued Operations”).

KeyCorp paid interest on borrowed funds totaling $112 million in 2015, $114 million in 2014, and $119 million in 2013.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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 111, 112, and 113, 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 2016 Annual Meeting of Shareholders to be held May 19, 2016 (the “2016 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”

 

¿   “The Board of Directors and Its Committees — Audit Committee”

KeyCorp expects to file the 2016 Proxy Statement with the SEC on or about April 6, 2016. 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 2016 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 2016 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 2016 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 2016 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

     113   

Consolidated Financial Statements

     114   

Consolidated Balance Sheets at December 31, 2015, and 2014

     114   

Consolidated Statements of Income for the Years Ended December 31, 2015, 2014, and 2013

     115   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014,
and 2013

     116   

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2015, 2014, and 2013

     117   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013

     118   

Notes to Consolidated Financial Statements

     119   

(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*

 

    2.1    Agreement and Plan of Merger between KeyCorp and First Niagara Financial Group, Inc., dated as of October 30, 2015, filed as Exhibit 2.1 to Form 8-K filed on November 2, 2015.*
    3.1    Amended and Restated Articles of Incorporation of KeyCorp (effective August 12, 2009), filed as Exhibit 3.1 to Form 10-K for the year ended December 31, 2014.*
    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), filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2014.*
  10.2    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.*
  10.3    Form of Performance Shares Award Agreement (2014-2016), filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2013.*
  10.4    Form of Performance Shares Award Agreement (2015-2017), filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2014.*
  10.5    Form of Performance Shares Award Agreement (2016-2018).
  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    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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  10.10    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.*
  10.11    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.*
  10.12    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.*
  10.13    KeyCorp Annual Incentive Plan (January 1, 2011 Restatement), filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 2011.*
  10.14    KeyCorp 2011 Annual Performance Plan, filed as Appendix A to Schedule 14A filed on April 5, 2011.*
  10.15    KeyCorp 2004 Equity Compensation Plan (effective March 18, 2004), filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 2014.*
  10.16    KeyCorp 2010 Equity Compensation Plan (effective March 11, 2010).
  10.17    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.*
  10.18    Amendment to the Director Deferred Compensation Plan (effective December 31, 2004), filed as Exhibit 10.20 to Form 10-K for the year ended December 31, 2014.*
  10.19    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.*
  10.20    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.*
  10.21    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.*
  10.22    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.*
  10.23    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.*
  10.24    Restated Amendment to KeyCorp Excess Cash Balance Pension Plan (effective December 31, 2004), filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 2014.*
  10.25    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.*
  10.26    KeyCorp Second Excess Cash Balance Pension Plan (effective February 8, 2010), filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 2014.*
  10.27    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.*
  10.28    KeyCorp 2013 Equity Compensation Plan (effective March 13, 2014), filed as Appendix A to Schedule 14A filed on March 29, 2013. *
  10.29    KeyCorp Deferred Savings Plan (effective January 1, 2015), filed as Exhibit 10.31 to Form 10-K for the year ended December 31, 2014.*
  10.30    KeyCorp Deferred Equity Allocation Plan (effective May 22, 2003), filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 2014.*
  10.31    Letter Agreement between Robert Morris and KeyCorp, dated as of May 28, 2015, filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2015.*
  10.32    Form of Merger Integration Performance Shares Award Agreement.
  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.

 

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  31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.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.

 

* 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.
Certain schedules to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and KeyCorp agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.

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)
February 24, 2016
/s/ Douglas M. Schosser
Douglas M. Schosser
Chief Accounting Officer (Principal Accounting Officer)
February 24, 2016

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)

*Douglas M. Schosser

   Chief Accounting Officer (Principal Accounting Officer)

*Bruce D. Broussard

   Director

*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
February 24, 2016

 

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