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, 2019

Commission file number: 1-11302

KeyCorp

Exact name of registrant as specified in its charter:

Ohio	34-6542451
State or other jurisdiction of incorporation or organization:	I.R.S. Employer Identification Number:

127 Public Square,	Cleveland,	Ohio	44114-1306
Address of principal executive offices:			Zip Code:

(216) 689-3000

Registrant’s telephone number, including area code:

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, $1 par value	KEY	New York Stock Exchange
Depositary Shares (each representing a 1/40th interest in a share of Fixed-to-Floating Rate	KEY PrI	New York Stock Exchange
Perpetual Non-Cumulative Preferred Stock, Series E)
Depositary Shares (each representing a 1/40th interest in a share of Fixed Rate Perpetual Non-	KEY PrJ	New York Stock Exchange
Cumulative Preferred Stock, Series F)
Depositary Shares (each representing a 1/40th interest in a share of Fixed Rate Perpetual Non-	KEY PrK	New York Stock Exchange
Cumulative Preferred Stock, Series G)

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 ☒ 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 ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

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

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

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $17,805,275,417 (based on the June 28, 2019, closing price of KeyCorp Common Shares of $17.75 as reported on the New York Stock Exchange). As of February 21, 2020, there were 969,889,701 Common Shares outstanding.

Certain specifically designated portions of KeyCorp’s definitive Proxy Statement for its 2020 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:

• our concentrated credit exposure in commercial and industrial loans;

• deterioration of commercial real estate market fundamentals;

• defaults by our loan counterparties or clients;

• adverse changes in credit quality trends;

• declining asset prices;

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

• changes in accounting policies, standards, and interpretations;

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

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

• negative outcomes from claims or litigation;

• failure or circumvention of our controls and procedures;

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

• evolving capital and liquidity standards under applicable regulatory rules;

• disruption of the U.S. financial system;

• our ability to receive dividends from our subsidiaries, including KeyBank;

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

• downgrades in our credit ratings or those of KeyBank;

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

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

• uncertainty surrounding the transition from LIBOR to an alternate reference rate;

• 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;

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

• unanticipated adverse effects of strategic partnerships or acquisitions and dispositions of assets or businesses; 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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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 our government-guaranteed and private education lending business and Austin. The government-guaranteed and private education lending business and Austin have been accounted for as discontinued operations since 2009.

• We engage in capital markets activities primarily through business conducted by our Commercial 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. Banking regulators evaluate a component of Tier 1 capital, known as Common Equity Tier 1, under the Regulatory Capital Rules. The “Capital” section of this report under the heading “Capital adequacy” provides more information on total capital, Tier 1 capital, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how these measures are calculated.

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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. ALCO: Asset/Liability Management Committee. ALLL: Allowance for loan and lease losses. A/LM: Asset/liability management. AML: Anti-money laundering. AOCI: Accumulated other comprehensive income (loss). APBO: Accumulated postretirement benefit obligation. ASC: Accounting Standards Codification. ASU: Accounting Standards Update. 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. CAPM: Capital Asset Pricing Model. CCAR: Comprehensive Capital Analysis and Review. Cain Brothers: Cain Brothers & Company, LLC. CECL: Current Expected Credit Losses. CFPB: Consumer Financial Protection Bureau, also known as the Bureau of Consumer Financial Protection. CFTC: Commodities Futures Trading Commission. CMBS: Commercial mortgage-backed securities. CMO: Collateralized mortgage obligation. Common Shares: KeyCorp common shares, $1 par value. CVA: Credit Valuation Adjustment. 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. FICO: Fair Isaac Corporation. FINRA: Financial Industry Regulatory Authority. First Niagara: First Niagara Financial Group, Inc. 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. HelloWallet: HelloWallet, LLC. IRS: Internal Revenue Service. ISDA: International Swaps and Derivatives Association. KBCM: KeyBanc Capital Markets, Inc. KCC: Key Capital Corporation. KCDC: Key Community Development Corporation. KEF: Key Equipment Finance. KIBS: Key Insurance & Benefits Services, 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. SIFIs: Systemically important financial institutions, including large, interconnected BHCs and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. TCJ Act: Tax Cuts and Jobs Act. 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. VIE: Variable interest entity.

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KEYCORP

2019 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Item Number		Page Number
	PART I
1	Business	6
1A	Risk Factors	23
1B	Unresolved Staff Comments	33
2	Properties	34
3	Legal Proceedings	34
4	Mine Safety Disclosures	34
	PART II
5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
6	Selected Financial Data	36
7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
7A	Quantitative and Qualitative Disclosures About Market Risk	89
8	Financial Statements and Supplementary Data	90
	Management’s Annual Report on Internal Control over Financial Reporting	91
	Reports of Independent Registered Public Accounting Firm	92
	Consolidated Financial Statements and Related Notes	95
	Consolidated Balance Sheets	95
	Consolidated Statements of Income	96
	Consolidated Statements of Comprehensive Income	97
	Consolidated Statements of Changes in Equity	98
	Consolidated Statements of Cash Flows	99
	Notes to Consolidated Financial Statements	100
9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	175
9A	Controls and Procedures	175
9B	Other Information	175
	PART III
10	Directors, Executive Officers and Corporate Governance	175
11	Executive Compensation	176
12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	176
13	Certain Relationships and Related Transactions, and Director Independence	176
14	Principal Accountant Fees and Services	176
	PART IV
15	Exhibits and Financial Statement Schedules	176
	(a) (1) Financial Statements — See listing in Item 8 above	176
	(a) (2) Financial Statement Schedules — None required	176
	(a) (3) Exhibits	177
16	Form 10-K Summary	179
	Signatures	180

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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 $145.0 billion at December 31, 2019. KeyCorp is the parent holding company for KeyBank National Association, 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, student loan refinancing, commercial mortgage servicing and special servicing, and investment banking products and services to individual, corporate, and institutional clients through two major business segments: Consumer Bank and Commercial Bank.

As of December 31, 2019, these services were provided across the country through KeyBank’s 1,098 full-service retail banking branches and a network of 1,420 ATMs in 15 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 “Business Segment Results” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report, and in Note 25 (“Business Segment Reporting”) of the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data, which are incorporated herein by reference. Key had an average of 17,045 full-time equivalent employees for 2019.

In addition to the customary banking services of accepting deposits and making loans, our bank and its trust company subsidiary offer personal and institutional trust custody services, securities lending, personal financial and planning services, access to mutual funds, treasury services, 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. The Consumer Bank also purchases retail auto sales contracts via a network of auto dealerships. The auto dealerships finance the sale of automobiles as the initial lender and then assign the contracts to us pursuant to dealer agreements.

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, investment banking and capital markets products, and brokerage. We also provide merchant services to businesses.

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.

We derive the majority of our revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to our consolidated financial statements.

Demographics

In the first quarter of 2019, we revised our management structure and changed our basis of presentation into two business segments, Consumer Bank and Commercial Bank. Note 25 (“Business Segment Reporting”) describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments, including changes in basis of presentation.

The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, student loan refinancing, mortgage and home equity, credit card, treasury services, and business advisory services. The Consumer Bank also purchases retail auto sales contracts via a network of auto dealerships. The auto dealerships finance the sale of automobiles as the initial lender and then assign the contracts to us pursuant to dealer

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agreements. In addition, wealth management and investment services are offered to assist non-profit and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.

The Commercial Bank is an aggregation of our Institutional and Commercial operating segments. The Commercial operating segment is a full-service corporate 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. The Commercial operating segment is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. The Institutional operating segment 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.

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 Number
Selected Financial Data	36
Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations	44
Components of Net Interest Income Changes from Continuing Operations	46
Composition of Loans	54
Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates	58
Securities Available for Sale	60
Held-to-Maturity Securities	60
Maturity Distribution of Time Deposits of $100,000 or More	61
Allocation of the Allowance for Loan and Lease Losses	75
Summary of Loan and Lease Loss Experience from Continuing Operations	77
Summary of Nonperforming Assets and Past Due Loans from Continuing Operations	78
Summary of Changes in Nonperforming Loans from Continuing Operations	78
Short-Term Borrowings	162

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 Technology Committee, Audit Committee, Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee, and Risk Committee; our Corporate Governance Guidelines; the Code of Business Conduct and 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 & Filings” section under the “Financials” tab of the investor relations section of our website includes public disclosures concerning our historic 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.

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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.

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. Mergers and acquisitions have also led to increased concentration in the banking industry, placing added competitive pressure on Key’s core banking products and services as we see competitors enter some of our markets or offer similar products. 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.

Information About Our Executive Officers

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, 2019, the positions held by each at KeyCorp during the past five years, and the year each first became an executive officer of KeyCorp. On January 1, 2020, Paul Harris retired and Craig Beazer replaced him as KeyCorp’s General Counsel. On January 16, 2020, Victor Alexander became Head of Consumer Bank. Because Messrs. Midkiff and Beazer 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.

Victor B. Alexander (40) - Mr. Alexander became Head of Consumer Bank and an executive officer of KeyCorp on January 16, 2020. Prior to that time, he served as the Head of Home Lending from October 2018 to January 2020, Treasurer from July 2017 to October 2018, Merger Integration Executive from December 2015 to June 2017, and Head of Corporate Strategy from January 2015 to December 2015.

Craig T. Beazer (52) - Mr. Beazer became General Counsel of KeyCorp and an executive officer of KeyCorp on January 1, 2020. Mr. Beazer joined KeyCorp in July 2018 as Deputy General Counsel and served in that role until being appointed General Counsel. Mr. Beazer also became the Secretary of KeyCorp in July 2019. Prior to joining KeyCorp, he served as Deputy General Counsel and Corporate Secretary of The Bank of New York Mellon Corporation from January 2015 to July 2018.

Amy G. Brady (53) - Ms. Brady is KeyCorp’s Chief Information Officer, serving in that role since May 2012. Ms. Brady has been an executive officer of KeyCorp since she joined in 2012. She has been a director of DuPont de Nemours, Inc., a multi-industry specialty solutions company, since 2019.

Dennis A. Devine (48) - At December 31, 2019, Mr. Devine was Head of Consumer Bank. He previously served as the Co-President, Consumer and Small Business of Key Community Bank from April 2014 to May 2019 and became an executive officer of KeyCorp in 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.

Trina M. Evans (55) - Ms. Evans has been the Director of Corporate Center for KeyCorp since August 2012. 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

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associated with the call center, internet banking, retail banking, distribution management and information technology. She became an executive officer of KeyCorp in March 2013.

Brian L. Fishel (54) - Mr. Fishel became the Chief Human Resources Officer and an executive officer of KeyCorp in May 2018. From 2013 to 2018, he served as the Director of Talent Management for KeyCorp.

Christopher M. Gorman (59) - In September 2019, Mr. Gorman was appointed President and Chief Operating Officer of KeyCorp. At that time, it was announced that he will succeed Ms. Mooney as Chairman and Chief Executive Officer on May 1, 2020. Mr. Gorman previously served as President of Banking and Vice Chairman from 2017 to September 2019. From 2016 to 2017, he served as Merger Integration Executive responsible for leading the integration efforts related to KeyCorp’s merger with First Niagara. Prior to that, Mr. Gorman was the President of Key Corporate Bank from 2010 to 2016. 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 KBCM (2003 to 2010). He became an executive officer of KeyCorp in 2010.

Paul N. Harris (61) - Mr. Harris served as the General Counsel of KeyCorp from 2003 until his retirement from that position on January 1, 2020, and was an executive officer of KeyCorp from 2004 until January 1, 2020. Mr. Harris also served as the Secretary of KeyCorp from 2003 to July 2019.

Clark H.I. Khayat (48) - Mr. Khayat rejoined KeyCorp as Chief Strategy Officer in January 2018. Mr. Khayat previously served as an Executive Vice President and Head of Key’s Enterprise Commercial Payments group from April 2014 to June 2016 and an Executive Vice President in Corporate Strategy from July 2012 to April 2014. He became an executive officer of KeyCorp in September 2018.

Donald R. Kimble (59) - Mr. Kimble has been the Chief Financial Officer of KeyCorp since June 2013. In 2017, Mr. Kimble was also named Vice Chairman. In January 2020, Mr. Kimble was also appointed Chief Administrative Officer. Mr. Kimble became an executive officer upon joining KeyCorp in June 2013.

Angela G. Mago (54) - Ms. Mago is the Head of Commercial Bank. She previously served as Co-Head of Key Corporate Bank from 2016 to May 2019. She also serves as Head of Real Estate Capital for Key, a role she has held since 2014. From 2011 to 2014, Ms. Mago was Head of Key’s Commercial Mortgage Group. She became an executive officer of KeyCorp in 2016.

Mark W. Midkiff (57) - Mr. Midkiff became Chief Risk Officer and an executive officer of KeyCorp in January 2018. Prior to joining KeyCorp, Mr. Midkiff served as the Deputy Chief Credit Officer of BB&T from May 2017 to December 2017. He served as Chief Risk Officer of GE Capital from May 2015 to January 2017 and Chief Risk Officer of MUFG Union Bank from 2009 to April 2015.

Beth E. Mooney (64) - 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. She has been a director of AT&T, a publicly-traded telecommunications company, since 2013, and a director of Ford Motor Company, an automobile manufacturer, since 2019. In September 2019, it was announced that Ms. Mooney will retire as Chairman and Chief Executive Officer of KeyCorp effective May 1, 2020.

Andrew J. Paine III (50) - Mr. Paine is the Head of Institutional Bank. He previously served as Co-Head of Key Corporate Bank from 2016 to May 2019. He also serves as President of KeyBanc Capital Markets Inc., a role he has held since 2013. From 2010 to 2013, Mr. Paine was the Co-Head of KeyBanc Capital Markets Inc. He became an executive officer of KeyCorp in 2016.

Kevin T. Ryan (58) - Mr. Ryan has been the Chief Risk Review Officer and General Auditor of KeyCorp since 2007. He became an executive officer of KeyCorp in 2016.

Douglas M. Schosser (49) - 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 consumers, the DIF, 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 any such changes may materially affect our business, financial condition, results of operations, or access to liquidity or credit.

Overview

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 or functional regulators: (i) the OCC for national banks and federal savings associations; (ii) the FDIC for state non-member banks and savings associations; (iii) the Federal Reserve for state member banks; (iv) the CFPB for consumer financial products or services; (v) the SEC and FINRA for securities broker/dealer activities; (vi) the SEC, CFTC, and NFA for swaps and other derivatives; and (vii) 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.

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 from the Federal Reserve. In addition, BHCs are generally prohibited from engaging in commercial or industrial activities. However, a BHC that satisfies certain requirements regarding management, capital adequacy, and Community Reinvestment Act performance may elect to be treated as a Financial Holding Company (“FHC”) for purposes of federal law, and as a result may engage in a substantially broader scope of activities that are considered to be financial in nature or complementary to those activities. KeyCorp has elected to be treated as a FHC and, as such, is authorized to engage in securities underwriting and dealing, insurance agency and underwriting, and merchant banking activities. In addition, the Federal Reserve has permitted FHCs, like KeyCorp, to engage in the following activities, under the view that such activities are complementary to a financial activity: physical commodities trading activities, energy management services, and energy tolling, among others.

Under federal law, a BHC also must serve as a source of financial strength to its subsidiary depository institution(s) by providing financial assistance in the event of financial distress. This support may be required when the BHC does 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.

The Dodd-Frank Act created the FSOC to overlay the U.S. supervisory framework for BHCs, insured depository institutions, and other financial service providers, by serving as a systemic risk oversight body. Specifically, the FSOC is authorized 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.

As a FHC, KeyCorp is subject to regulation, supervision, and examination by the Federal Reserve under the BHCA. Our national bank subsidiaries and their subsidiaries are subject to regulation, supervision, and examination by the OCC. At December 31, 2019, 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, more limited regulatory, supervisory, and examination authority over KeyBank and KeyCorp under the FDIA and the Dodd-Frank Act.

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We have other financial services subsidiaries that are subject to regulation, supervision, and examination by the Federal Reserve, as well as other 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.

Regulatory capital requirements

Background

KeyCorp and KeyBank are subject to regulatory capital requirements that are based largely on the work of an international group of supervisors known as the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is responsible for establishing international bank supervisory standards for implementation in member jurisdictions, to enhance and align bank regulation on a global scale, and to promote financial stability.

The regulatory capital framework developed by the Basel Committee and implemented in the United States is a predominately risk-based capital framework that establishes minimum capital requirements based on the amount of regulatory capital a banking organization maintains relative to the amount of its total assets, adjusted to reflect credit risk (“risk-weighted assets”). Each banking organization subject to this regulatory capital framework is required to satisfy certain minimum risk-based capital measures (e.g., a tier 1 risk-based capital ratio requirement of tier 1 capital to total risk-weighted assets), and in the United States, a minimum leverage ratio requirement of tier 1 capital to average total on-balance sheet assets, which serves as a backstop to the risk-based measures.

A capital instrument is assigned to one of two tiers based on the relative strength and ability of that instrument to absorb credit losses on a going concern basis. Capital instruments with relatively robust loss-absorption capacity are assigned to tier 1, while other capital instruments with relatively less loss-absorption capacity are assigned to tier 2. A banking organization’s total capital equals the sum of its tier 1 and tier 2 capital.

The Basel Committee also developed a market risk capital framework (that also has been implemented in the United States) to address the substantial exposure to market risk faced by banking organizations with significant trading activity and augment the credit risk-based capital requirements described above. For example, the minimum total risk-based capital ratio requirement for a banking organization subject to the market risk capital rule equals the ratio of the banking organization’s total capital to the sum of its credit risk-weighted assets and market risk-weighted assets. Only KeyCorp is subject to the market risk capital rule, as KeyBank does not engage in substantial trading activity.

Basel III

To address deficiencies in the international regulatory capital standards identified during the 2007-2009 global financial crisis, in 2010 the Basel Committee released comprehensive revisions to the international regulatory capital framework, commonly referred to as “Basel III.” The Basel III revisions are designed to strengthen the quality and quantity of regulatory capital, in part through the introduction of a Common Equity Tier 1 capital requirement; provide more comprehensive and robust risk coverage, particularly for securitization exposures, equities, and off-balance sheet positions; and address pro-cyclicality concerns through the implementation of capital buffers. The Basel Committee also released a series of revisions to the market risk capital framework to address deficiencies identified during its initial implementation (e.g., arbitrage opportunities between the credit risk-based and market risk capital rules) and in connection with the global financial crisis.

In July 2013, the U.S. banking agencies adopted a final rule to implement Basel III with an effective date of January 1, 2015, and a multi-year transition period ending on December 31, 2018 (“Regulatory Capital Rules”). Consistent with the international framework, the Regulatory Capital Rules further restrict the type of instruments that may be recognized in tier 1 and tier 2 capital (including the phase out of trust preferred securities from tier 1 capital for BHCs above a certain asset threshold, like KeyCorp); establish a minimum Common Equity Tier 1 capital ratio requirement of 4.5% and capital buffers to absorb losses during periods of financial stress while allowing an institution to provide credit intermediation as it would during a normal economic environment; and refine several of the methodologies used for determining risk-weighted assets. The Regulatory Capital Rules provide additional requirements for large banking organizations with over $250 billion in total consolidated assets or $10 billion in foreign exposure, but those additional requirements do not apply to KeyCorp or KeyBank. Accordingly, for

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purposes of the Regulatory Capital Rules, KeyCorp and KeyBank are treated as “standardized approach” banking organizations.

Under the Regulatory Capital Rules, standardized approach banking organizations are required to meet the minimum capital and leverage ratios set forth in the following table. At December 31, 2019, Key had an estimated Common Equity Tier 1 Capital Ratio of 9.37% under the fully phased-in Regulatory Capital Rules. Also at December 31, 2019, 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.

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

Regulatory Capital Rules

Ratios (including capital conservation buffer)	Regulatory Minimum Requirement		Capital Conservation Buffer (c)		Regulatory Minimum With Capital Conservation Buffer		Key December 31, 2019 Pro forma
Common Equity Tier 1 (a)	4.50	%	2.50	%	7.00	%	9.37	%
Tier 1 Capital	6.00		2.50		8.50		10.77
Total Capital	8.00		2.50		10.50		12.82
Leverage (b)	4.00		N/A		4.00		9.88

(a) See section entitled “GAAP to Non-GAAP Reconciliations,” which presents the computation of Common Equity Tier 1 capital under the fully phased-in regulatory capital rules.

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

(c) 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.

Revised prompt corrective action framework

The federal prompt corrective action framework established under the FDIA groups 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, with an effective date of January 1, 2015. The Revised Prompt Corrective Action Framework table below identifies the capital category threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the Prompt Corrective Action Framework.

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

Revised Prompt Corrective Action Framework

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

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

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

We believe that, as of December 31, 2019, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements necessary to be considered “well capitalized” for purposes of the revised prompt corrective action framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the prompt corrective action framework is intended to serve a limited supervisory function. Moreover, it is important to note that the prompt corrective action framework does not apply to BHCs, like KeyCorp.

Recent regulatory capital-related developments

In December 2017, the Basel Committee released its final revisions to Basel III. The revisions seek to restore credibility in the calculation of risk-weighted assets (“RWAs”) and improve the comparability of regulatory capital ratios across banking organizations by: (1) enhancing the robustness and risk-sensitivity of the standardized approach for credit risk, credit valuation adjustment, and operational risk; (2) constraining the use of internal models by placing limits on certain inputs used to calculate capital requirements under the internal ratings-based approach for credit risk (used by advanced approaches banking organizations) and removing the ability to use an internal model for purposes of determining the capital charge for credit valuation adjustment (“CVA”) risk and operational risk; (3) introducing a leverage ratio buffer to further limit the leverage of global systemically-important banks; and

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(4) replacing the existing Basel II output floor with a more robust, risk-sensitive floor based on the Basel III standardized approach.

The U.S. federal banking agencies released a statement announcing their support for the Basel Committee’s efforts, but cautioned that they will consider how to appropriately incorporate these revisions into the Regulatory Capital Rules, and that any proposed changes based on the Basel Committee revisions would be subject to notice-and-comment rulemaking. In view of the prohibition under the Dodd-Frank Act on the use of credit ratings in federal regulation, there is some uncertainty as to whether or how the agencies would implement the ratings-based aspects of the Basel Committee revisions to Basel III, as well as any other aspect of the Basel Committee revisions that permit the U.S. agencies to exercise home-country discretion, for example, due to differences in accounting or market practices, and legal requirements.

Subsequently, in December 2018, the Basel Committee released an update to its Pillar 3 disclosure framework, to more appropriately align it to the changes adopted under the Basel Committee’s final revisions to Basel III. Before any action is taken by the federal banking agencies with respect to the revised Pillar 3 disclosure framework, the federal agencies must determine whether and to what extent they will implement the final revisions to Basel III released by the Basel Committee in December 2017.

In December 2018, the federal banking agencies published a final rule to amend their Regulatory Capital Rules to address the regulatory capital effects of forthcoming changes to GAAP set forth in the issuance by the FASB of ASU No. 2016-13, Financial Instruments - Credit Losses, Topic 326, Measurement of Credit Loses on Financial Instruments, which introduces the current expected credit loss methodology to replace the incurred loss methodology for financial assets. The final rule identifies which credit loss allowances under the new accounting standard are eligible for inclusion in a banking organization’s regulatory capital and provides banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of adoption of the new accounting standard on retained earnings, deferred tax assets, credit loss allowances, and average total consolidated assets. For SEC filers (excluding smaller reporting companies), such as KeyCorp, the new accounting standard will become effective for the first fiscal year starting after December 15, 2019. KeyCorp has elected to evenly phase in the capital impact from the adoption of CECL from 2020 to 2023.

On July 9, 2019, the federal banking agencies issued a final rule to simplify certain aspects of the Regulatory Capital Rules for standardized approach banking organizations, including Key. The final rule simplifies, for these banking organizations, the regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions. The final rule replaces multiple deduction thresholds with a single 25% deduction threshold for each of these categories and requires that a 250% risk weight be applied to mortgage servicing assets and deferred tax assets that are not deducted from capital. The final rule also simplifies the calculation of the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties that is includable in regulatory capital. In addition, the final rule makes certain technical amendments to the Regulatory Capital Rules that are applicable to standardized approach banking organizations as well as advanced approaches banking organizations. The final rule provided an effective date of October 1, 2019, for the technical amendments and an effective date of April 1, 2020, for the simplification changes. On November 13, 2019, the federal banking agencies published an amendment to the final rule to provide standardized approach banking organizations with the option to implement the simplification changes on either January 1, 2020, or April 1, 2020. We have chosen to implement the simplification changes on April 1, 2020.

In November 2019, the federal banking agencies adopted a final rule to amend the Regulatory Capital Rules by revising the definition of a high volatility commercial real estate (“HVCRE”) exposure. HVCRE exposures are subject to a heightened risk weight under the Regulatory Capital Rules. The final rule conforms the HVCRE definition to statutory changes enacted in May 2018. The final rule also clarifies the treatment under the revised HVCRE definition of credit facilities that finance one-to-four family residential properties as well as credit facilities that finance the development of land. The effective date of the final rule is April 1, 2020.

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Liquidity requirements

U.S. banking organizations are subject to regulatory liquidity requirements based on international liquidity standards established by the Basel Committee in 2010, and subsequently revised between 2013 and 2014 (as revised, the “Basel III liquidity framework”). The Basel III liquidity framework establishes quantitative standards designed to ensure that a banking organization is appropriately positioned, from a balance sheet perspective, to satisfy its short- and long-term funding needs.

To address short-term liquidity risk, the Basel III liquidity framework established a liquidity coverage ratio (“Basel III LCR”), calculated as the ratio of a banking organization’s high-quality liquid assets to its total net cash outflows over 30 consecutive calendar days. In addition, to address long-term liquidity risk, the Basel III liquidity framework established a net stable funding ratio (“Basel III NSFR”), calculated as the ratio of the amount of stable funding available to a banking organization to its required amount of stable funding.

In October 2014, the federal banking agencies published a final rule to implement the Basel III LCR for U.S. banking organizations (the “Liquidity Coverage Rules”). Consistent with the Basel III LCR, the U.S. Liquidity Coverage Rules established 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). Under the Liquidity Coverage Rules, KeyCorp was required to calculate a Modified LCR on a monthly basis and was required to satisfy a minimum Modified LCR requirement of 100%. At December 31, 2019, KeyCorp’s Modified LCR was above 100%. In the future, KeyCorp may change the composition of its investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position. KeyBank was not subject to the LCR or the Modified LCR under the Liquidity Coverage Rules.

In December 2016, the Federal Reserve adopted a final rule to implement public disclosure requirements for the LCR and Modified LCR. Under the final rule, each calendar quarter KeyCorp was required to publicly disclose certain quantitative information regarding its Modified LCR calculation, together with a discussion of the factors that have a significant effect on its Modified LCR. KeyCorp began complying with these disclosure requirements for the calendar quarter beginning October 1, 2018.

The federal banking agencies commenced implementation of the Basel III NSFR in the United States in April and May 2016, with the release of a proposed rule to implement a minimum net stable funding ratio (“NSFR”) requirement for certain internationally active banking organizations (excluding KeyCorp) and a modified version of the minimum NSFR requirement (“Modified NSFR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp), together with quarterly public disclosure requirements. The comment period for the NPR expired on August 5, 2016. The federal banking agencies have not yet issued a final rule to implement the NSFR in the United States.

Large BHCs, like KeyCorp, are also subject to liquidity requirements contained in regulations adopted pursuant to the Dodd-Frank Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). As enacted in 2010, the Dodd-Frank Act required the Federal Reserve to impose enhanced prudential standards and early remediation requirements (collectively, “EPSs”), including enhanced liquidity standards, upon BHCs (like KeyCorp) with at least $50 billion in total consolidated assets.

In March 2014, the Federal Reserve published a final rule to implement certain of the EPSs required under the Dodd-Frank Act, including liquidity requirements relating to cash flow projections, a contingency funding plan, liquidity risk limits, the monitoring of liquidity risks (with respect to collateral, legal entities, currencies, business lines, and intraday exposures), liquidity stress testing, a liquidity buffer, and liquidity risk management requirements, including requirements that apply to the board of directors, the risk committee, senior management, and the independent review function. KeyCorp was required to comply with the final rule starting on January 1, 2015.

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EGRRCPA, enacted on May 24, 2018, raised the asset threshold above which the Federal Reserve is required to apply EPSs to BHCs from $50 billion to $250 billion. EGRRCPA gave the Federal Reserve the authority, following notice and comment procedures, to continue to apply EPSs to any BHCs having at least $100 billion but less than $250 billion in total consolidated assets (like KeyCorp) if it determines that the application of the EPS is appropriate to prevent or mitigate risks to financial stability or to promote the safety and soundness of the BHC or BHCs, taking into consideration the BHC’s or BHCs’ capital structure, riskiness, complexity, financial activities, size, and other relevant factors.

In October 2019, the federal banking agencies issued two final rules related to the implementation of EGRRCPA (“Tailoring Rules”). The final rules established four risk-based categories of banking organizations with $100 billion or more in total consolidated assets and applied tailored regulatory requirements to each respective category. Based on Key’s analysis of the Tailoring Rules, KeyCorp falls within the least restrictive of those categories (“Category IV Firms”). The Tailoring Rules became effective on December 31, 2019.

In one of the Tailoring Rules, the federal banking agencies amended various rules, including the rules governing standardized liquidity requirements, thereby applying tailored liquidity requirements to large banking organizations in each of the four risk-based categories of institutions described in the Tailoring Rules. Under this final rule, Category IV Firms with weighted short-term wholesale funding of less than $50 billion will not be subject to a reduced LCR. KeyCorp believes that it does not meet the $50 billion threshold and that it will not be subject to the reduced LCR. Thus, as of December 31, 2019, KeyCorp is no longer subject to an LCR requirement or an LCR public disclosure requirement.

In the other Tailoring Rule, the Federal Reserve amended certain of its rules governing EPSs to apply tailored regulatory standards (including liquidity standards) to large BHCs in each of the four risk-based categories of institutions described in the Tailoring Rules. Under this rule, Category IV Firms (like KeyCorp) are required to conduct internal liquidity stress tests quarterly rather than monthly as was previously the case and are subject to simplified liquidity risk management requirements, including requirements to adopt a set of liquidity risk limits that is more limited than previously required, calculate collateral positions monthly rather than weekly, and monitor fewer elements of intraday liquidity risk exposures. Category IV Firms are still required to maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over a 30-day planning horizon under the firm’s internal liquidity stress test and remain subject to monthly tailored FR 2052a liquidity reporting requirements.

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 $100 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 to the Federal Reserve for supervisory review in connection with its CCAR (described below). The supervisory review includes an assessment of many factors, including KeyCorp’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, as set forth in a Federal Reserve guidance document 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 CCAR is an intensive assessment of the capital adequacy of large 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 and maintain regulatory capital in an amount that is sufficient to withstand a severely adverse operating environment and, at the same time, be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and provide credit intermediation.

The Federal Reserve conducts a supervisory stress test on KeyCorp, pursuant to which 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 and severely adverse scenarios (and through 2018, an adverse scenario), that are determined by the Federal Reserve. KeyCorp and KeyBank have also been required to conduct their own company-run stress tests to assess the impact

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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 has only had to conduct an annual stress test, KeyCorp has had to conduct both an annual and a mid-cycle stress test. KeyCorp and KeyBank have been required to report the results of their annual stress tests to the Federal Reserve and the OCC. KeyCorp has been required to report the results of its mid-cycle stress test to the Federal Reserve. Summaries of the results of these company-run stress tests have been disclosed each year under the “Regulatory Disclosures & Filings” section of the “Financials” tab of Key’s Investor Relations website: http://www.key.com/ir.

On February 5, 2019, the Federal Reserve announced that for 2019 certain less-complex BHCs with total consolidated assets between $100 billion and $250 billion (including KeyCorp) were not subject to supervisory stress testing or company-run stress testing and were not required to participate in CCAR or submit a capital plan to the Federal Reserve. However, the Federal Reserve indicated that each of these firms (including KeyCorp) remains subject to the requirement to develop and maintain a capital plan which will have to be reviewed and approved by the firm’s board of directors (or committee thereof) at least annually. KeyBank, like KeyCorp, did not have to conduct a company-run stress test in 2019 since the OCC informed OCC-regulated institutions with total consolidated assets from $100 billion to less than $250 billion that they will not be required to comply with any stress testing requirements in 2019.

One of the Tailoring Rules issued by the Federal Reserve in October 2019 to implement EGRRCPA changes the stress testing requirements applicable to BHCs that are Category IV Firms (like KeyCorp). Under this rule, Category IV Firms will no longer be required to conduct and publicly disclose the results of company-run stress tests and will be subject to a supervisory stress test conducted by the Federal Reserve every other year rather than every year as has been the case. In 2020, KeyCorp will be required to participate in the Federal Reserve’s CCAR process and will be subject to a supervisory stress test conducted by the Federal Reserve.

A separate rule was issued by the federal banking agencies in October 2019 to implement a provision in EGRRCPA that raised the asset threshold that triggers the requirement for federally-regulated banks to conduct company-run stress tests on an annual basis from $10 billion to $250 billion in total consolidated assets. Under this final rule, federally-regulated banks with total assets of less than $250 billion (like KeyBank) will no longer be required to conduct annual company-run stress tests. Also, this final rule removes the “adverse” scenario as a required scenario for all stress testing requirements applicable to BHCs and federally-regulated banks so that such stress tests will be required to include only “baseline” and “severely adverse” scenarios.

In a release published on April 10, 2018, the Federal Reserve invited comment on a proposal to integrate certain aspects of the Federal Reserve’s Regulatory Capital Rules with the CCAR and stress test rules, in order to simplify the overall capital framework that is currently applicable to banking organizations subject to the capital plan rule (including KeyCorp).  Under the proposal, the Federal Reserve would (i) amend the capital conservation buffer requirement under the Regulatory Capital Rules by replacing the static risk-weighted assets component of the buffer with a new measure, the stress capital buffer, which would be based on the results of an individual banking organization’s supervisory stress test; (ii) introduce a stress leverage buffer requirement that would replace the existing Tier 1 leverage requirement under CCAR; (iii) modify certain assumptions under the supervisory stress test; (iv) remove the 30% dividend payout ratio limitation as a criterion for heightened supervisory scrutiny of an organization’s capital plan; and (v) eliminate the CCAR quantitative objection.

Under the proposed rule, a banking organization would not be subject to any limitations on capital distributions and discretionary bonus payments if it satisfies all minimum capital requirements and its capital conservation requirement (as amended to incorporate the stress capital buffer), stress leverage buffer requirement, and, if applicable, the advanced approaches capital conservation buffer requirement and supplementary leverage ratio standard (the latter two of which do not apply to KeyCorp). The comment period for this proposal ended on June 25, 2018. Key expects that the proposal would have a marginally favorable impact on its capital requirements.

Dividend restrictions

Federal law and regulation 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

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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 less than “adequately capitalized” under the prompt corrective action framework or if the institution is in default in the payment of an assessment due to the FDIC. Similarly, under the Regulatory Capital Rules, a banking organization that fails to satisfy the minimum capital conservation buffer requirement will be subject to certain limitations, which include restrictions on capital distributions. 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 December 2016, the FDIC issued a final rule that imposes recordkeeping requirements on insured depository institutions with two million or more deposit accounts (including KeyBank), to facilitate rapid payment of insured deposits to customers if such an institution were to fail. The rule requires those insured depository institutions to: (i) maintain complete and accurate data on each depositor’s ownership interest by right and capacity for all of the institution’s deposit accounts; and (ii) develop the capability to calculate the insured and uninsured amounts for each deposit owner within 24 hours of failure. The FDIC will conduct periodic testing of compliance with these requirements, and institutions subject to the rule must submit to the FDIC a certification of compliance, signed by the bank’s CEO, and deposit insurance coverage summary report on or before the mandatory compliance date and annually thereafter. The final rule became effective on April 1, 2017, with a mandatory compliance date of April 1, 2020. On July 16, 2019, the FDIC approved amendments that revise certain aspects of this rule. Among other things, the amendments to this rule (i) provide covered institutions with the option to extend the compliance date to no later than April 1, 2021, upon notification to the FDIC; (ii) clarify the certification requirement; (iii) revise the actions that must be taken for deposit accounts insured on a pass-through basis (where the bank’s account holder is holding funds on behalf of the beneficial owners of the funds); and (iv) streamline the process for submitting exception requests to the FDIC.

Conservatorship and receivership of insured depository institutions

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

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Receivership of certain SIFIs

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

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

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

Depositor preference

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

Resolution plans

BHCs with at least $50 billion in total consolidated assets, like KeyCorp, have been 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, have also been required to submit a resolution plan to the FDIC. These plans have been due annually unless the requirement to submit the plans was deferred by the regulators. The Federal Reserve and FDIC make available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, that submitted plans. The public section of the resolution plans of KeyCorp and KeyBank is available at http://www.federalreserve.gov/supervisionreg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/.

In October 2019, the Federal Reserve and FDIC adopted a final rule to modify the resolution planning requirements applicable to large BHCs. Under this final rule, BHCs with less than $250 billion in total consolidated assets will no longer be required to submit a resolution plan unless they have $75 billion or more in certain risk-based indicators. Under this final rule, KeyCorp will no longer be subject to resolution planning requirements.

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On April 16, 2019, the FDIC issued an advance notice of proposed rulemaking (“ANPR”) requesting public comment on potential changes to its rule imposing resolution planning requirements on large insured depository institutions, including potential modifications to the rule in the following areas: (i) creation of tiered resolution planning requirements based on institution size, complexity, and other factors; (ii) revisions to the frequency and required content of plan submissions, including elimination of plan submissions for a category of smaller and less complex institutions; (iii) improvements to the process for periodic engagements between the FDIC and institutions on resolution-related matters; and (iv) revision of the $50 billion asset threshold in the current rule. The FDIC indicated that it is considering two alternate approaches with respect to the tiering of resolution plan requirements. Under each of these approaches, institutions would be placed into three groups with the first two groups required to submit resolution plans with streamlined content requirements and the third group not required to submit a resolution plan. The FDIC would engage with institutions in all three groups on a periodic basis on a limited number of items related to resolution planning and would conduct periodic testing of the resolution planning capabilities of these institutions. Comments on this ANPR were due by June 21, 2019. Any changes to this rule will impact KeyBank. The FDIC extended the due date for the next resolution plan submission for all institutions until after the rulemaking is completed.

Other Regulatory Developments

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.

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, which 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 financial instruments, including 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. A banking entity may also engage in risk-mitigating hedging activity if it 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.

Although the Volcker Rule became effective on April 1, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2017, with respect to covered funds. In addition, on December 12, 2016, the Federal Reserve released additional guidelines regarding how banking entities may seek an extension of the conformance period for certain legacy covered fund investments. Under the Dodd-Frank Act, the Federal Reserve is authorized to provide a banking entity up to an additional five years to conform legacy investments (i.e.,

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contractual commitments of a banking organization on or before May 1, 2010, to make an investment) in “illiquid” covered funds.

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 in Note 6 (“Fair Value Measurements”) in Item 8 of this report. On January 13, 2017, Key filed for an additional extension for illiquid funds, to retain certain indirect investments until the earlier of the date on which the investments are conformed or are expected to mature or July 21, 2022. The application for an extension was approved on February 14, 2017. As of December 31, 2019, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

On October 8, 2019, five federal agencies announced their adoption of a final rule to simplify and tailor requirements relating to the Volcker Rule. Among other things, the final rule (i) revises the definition of certain terms relevant in determining the scope of the Volcker Rule; (ii) modifies the eligibility criteria for a banking entity to be able to rely on certain exemptions and exclusions from the proprietary trading and covered fund prohibitions; (iii) adds additional proprietary trading exclusions; and (iv) tailors the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities. Under the final rule, a banking entity is subject to the most stringent compliance requirements if it has “significant” trading assets and liabilities, that is, total consolidated trading assets and liabilities of at least $20 billion. A banking entity with total consolidated trading assets and liabilities between $1 billion and $20 billion is regarded as having “moderate” trading assets and liabilities and is subject to a requirement to have a simplified compliance program that must be appropriate given that banking entity’s activities, size, scope, and complexity. A presumption of compliance applies to a banking entity with “limited” trading assets and liabilities, that is, total consolidated trading assets and liabilities of less than $1 billion. The effective date of the final rule is January 1, 2020, and the compliance date is January 1, 2021. Key believes that it will be regarded as having “moderate” trading assets and liabilities as calculated under the final rule. We do not expect the final rule to have a material impact on Key.

On January 30, 2020, five federal agencies invited public comment on a proposal that is intended to clarify and streamline the covered fund-related provisions of the Volcker Rule. Among other things, the proposal would (i) permit certain low-risk transactions (including intraday credit and payment, clearing, and settlement transactions) between a banking entity and covered funds for which the banking entity serves as investment adviser, investment manager, or sponsor; (ii) clarify exclusions from the covered fund definition for foreign public funds, loan securitizations, and small business investment companies; and (iii) permit banking entities to invest in or sponsor certain types of funds that do not raise the concerns that the Volcker Rule was intended to address, such as credit funds, venture capital funds, customer facilitation funds, and family wealth management vehicles. Comments on this proposal are due by April 1, 2020.

Enhanced prudential standards and early remediation requirements

As enacted in 2010, the Dodd-Frank Act required the Federal Reserve to impose EPSs upon BHCs, like KeyCorp, with at least $50 billion in total consolidated assets. Prudential standards were required to 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 were required to 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 would be triggered by forward-looking indicators including regulatory capital and liquidity measures.

The resolution plan requirements were implemented by a joint final rule adopted by the Federal Reserve and FDIC in 2011 and were revised by a joint final rule adopted by the Federal Reserve and FDIC in 2019. In 2011, the Federal Reserve also issued a proposal to implement the stress test, early remediation, and SCCL requirements. However, when that proposal was adopted as a final rule in 2012, it included only the stress test requirements and not the SCCL or early remediation requirements.

In March 2014, the Federal Reserve published a final rule to implement certain of the EPSs required under the Dodd-Frank Act, including: (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; (iii) the risk management framework, the risk committee, and the chief risk officer as well as the corporate governance requirements as they

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relate to liquidity risk management; 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.

EGRRCPA, which was enacted on May 24, 2018, raised, from $50 billion to $250 billion, the asset threshold above which the Federal Reserve is required to apply EPSs to BHCs. EGRRCPA gave the Federal Reserve the authority, following notice and comment procedures, to continue to apply EPSs to any BHCs having at least $100 billion but less than $250 billion in total consolidated assets (like KeyCorp). Also, this statute requires the Federal Reserve to continue to conduct periodic stress tests of BHCs with assets between $100 billion and $250 billion (like KeyCorp), and the requirement for a publicly traded BHC to have a risk committee continues to apply if a BHC has assets of at least $50 billion.

On June 14, 2018, the Federal Reserve issued a final rule establishing SCCL requirements for BHCs with $250 billion or more in total consolidated assets. The final rule does not apply to KeyCorp. The Federal Reserve has taken no further action on the early remediation requirements proposed in 2011.

In one of the Tailoring Rules issued in October 2019 to implement EGRRCPA, the Federal Reserve amended certain of its rules governing EPSs to apply tailored regulatory standards to large BHCs in each of the four risk-based categories of institutions described in the Tailoring Rules. Based on Key’s analysis of the Tailoring Rules, KeyCorp believes that it is a Category IV Firm, the least restrictive of these categories. The Tailoring Rules are discussed further under the headings “Regulatory capital requirements - liquidity requirements” and “Regulatory capital requirements - Capital planning and stress testing.”

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 significantly restrict the ability of KeyBank to fund its affiliates, including KeyCorp, KBCM, 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.

Supervision and governance

On November 2, 2018, the Federal Reserve announced that it is adopting a new supervisory rating system for large financial institutions, including BHCs with total consolidated assets of $100 billion or more (like KeyCorp) (“LFI Rating System”), in order to align the Federal Reserve’s rating system with the post-crisis supervisory programs for these firms. The LFI Rating System will provide a supervisory evaluation of whether an institution possesses sufficient operational strength and resilience to maintain safe and sound operations through a range of conditions and will assess an institution’s capital planning and positions, liquidity risk management and positions, and governance and controls. Institutions subject to the LFI Rating System will be rated using the following scale: Broadly Meets Expectations, Conditionally Meets Expectations, Deficient-1, and Deficient-2, with the Conditionally Meets Expectations rating intended to be used as a transitory rating to allow an institution time to remediate a concern identified during the supervisory evaluation. The Federal Reserve assigned initial ratings under the LFI

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Rating System in 2019 to institutions that are subject to the Large Institution Supervision Coordinating Committee framework (excluding KeyCorp) and intends to assign initial ratings in 2020 for all other large financial institutions subject to this rating system (including KeyCorp).

The governance and controls component of the LFI Rating System is the subject of two separate, but related proposals: (i) proposed guidance regarding supervisory expectations for boards of directors of large financial institutions; and (ii) proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. The proposed guidance regarding supervisory expectations for boards of directors (published by the Federal Reserve on August 3, 2017) identifies the attributes of effective boards of directors that would be used by an examiner to evaluate an institution’s governance and controls. The proposal also clarifies that for all institutions supervised by the Federal Reserve, most supervisory findings should be communicated to the organization’s senior management for corrective action and not its board of directors. In addition, the proposal identifies existing supervisory expectations for boards of directors set forth in Federal Reserve Supervision and Regulation Letters that could be eliminated or revised. The Federal Reserve extended the comment period for the proposed guidance regarding supervisory expectations for boards of directors until February 15, 2018.

On January 4, 2018, the Federal Reserve released the final proposal related to the LFI Rating System - the proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. This guidance would support the supervisory evaluation under the governance and controls component of the LFI Rating System, together with the above-mentioned guidance regarding the effectiveness of a firm’s board of directors. In general, the guidance proposes core principles for effective senior management, business line management, and the independent risk management and control function. The guidance encourages firms to establish a governance structure with appropriate levels of independence and stature, by appointing a Chief Risk Officer and a Chief Audit Officer. Finally, the guidance emphasizes the importance of independent risk management, internal controls, and internal audit, and establishes principles that firms should use to establish or augment those management and control frameworks. Comments on this proposal were due by March 15, 2018.

Community Reinvestment Act

The Community Reinvestment Act (“CRA”) was enacted in 1977 to encourage depository institutions to help meet the credit needs of the communities that they serve, including low- and moderate-income (“LMI”) neighborhoods, consistent with the institutions’ safe and sound operations. The CRA requires the federal banking agencies to assess the record of each institution that they supervise in meeting the credit needs of its entire community, including LMI neighborhoods.

On December 12, 2019, the OCC and the FDIC requested public comment on a proposal to revise the agencies’ CRA regulations to modernize the framework by which the OCC and the FDIC assess a bank’s CRA performance. The agencies stated that they were doing so in order to make the regulatory framework more objective, transparent, consistent, and easy to understand and thereby better achieve the statutory purpose of encouraging banks to serve their communities. The proposal would (i) clarify and expand which activities qualify for CRA credit; (ii) update the definition of the areas where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. The proposal was published in the Federal Register on January 9, 2020. Comments are due by April 8, 2020. Any revision of the OCC’s CRA regulations would apply to national banks, including KeyBank.

Control standards

On January 30, 2020, the Federal Reserve adopted a final rule setting forth a new, comprehensive framework for determining control under the BHCA and the Home Owners’ Loan Act. The final rule simplifies and provides greater transparency regarding the standards used by the Federal Reserve to determine whether one company has control over another company. The final rule codifies existing Federal Reserve precedents on control and makes certain targeted adjustments to these precedents. The final rule provides a tiered framework that looks at the size of an investing company’s voting and total equity investment in another company along with a variety of other factors, including board representation, officer and employee interlocks, and the existence of business relationships between the companies. By providing greater clarity regarding the standards that will be applied for control

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determinations, the final rule may facilitate (i) BHCs making minority investments in nonbank companies; and (ii) nonbank investors taking minority stakes in banking organizations.

ITEM 1A.  RISK FACTORS

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

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

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

As of December 31, 2019, approximately 72% of our loan portfolio consisted of commercial and industrial 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. The deterioration of a larger loan or a group of these loans could cause a significant increase in nonperforming loans, which could result in a net loss of earnings from these loans, an increase in the provision for loan and lease losses, and an increase in loan charge-offs.

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 over the past several years, 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 to 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. Given the Dodd-Frank legislative mandate to centrally clear eligible derivative contracts, we rely on central clearing counterparties to remain open and operationally viable at all times. The possibility of a large member failure or a cybersecurity breach could result in a disruption in this market.

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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 at December 31, 2019 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 current trends, all of which may undergo material changes.

As described in Note 1 (“Summary of Significant Accounting Policies”), on January 1, 2020, we adopted ASC 326, Financial Instruments-Credit Losses, and as such, in determining the ALLL under CECL, we must estimate expected lifetime credit losses based on information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. Changes in economic conditions affecting borrowers, the softening of certain macroeconomic variables that we are more susceptible to, such as GDP, unemployment, corporate bond rates, household income, 30 year mortgage rates and real estate values, along with 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.

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, which caused the credit markets to constrict and also caused a widespread liquidation of assets. 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 certain 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 new recession would likely reverse recent positive trends in asset prices.

II.  Compliance Risk

We are subject to extensive government regulation, supervision, and tax legislation.

As a financial services institution, we are subject to extensive federal and state regulation, supervision, and tax legislation. 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.

KeyBank and KeyCorp remain covered institutions under the Dodd-Frank Act’s heightened prudential standards and regulations, including its provisions designed to protect consumers from financial abuse. Like similarly-situated institutions, Key undergoes routine scrutiny from bank supervisors in the examination process and is subject to enforcement of regulations at the federal and state levels, particularly with respect to consumer banking-related practices as well as compliance with AML, BSA and Office of Foreign Assets Control efforts. Federal rulemaking bodies continue to pass new, or modifications to, significant regulations with upcoming effective dates. There has also been an increase in state legislative activity, particularly in areas such as student lending and privacy. As new privacy-related laws and regulations, such as the California Consumer Privacy Act, are implemented in jurisdictions in which KeyBank operates, the time and resources needed for us to comply with such laws and regulations, as well as our potential liability for noncompliance and reporting obligations in the case of data breaches, may significantly increase. Compliance with these laws and regulations may require us to change our policies, procedures, and technology for information security and segregation of data, which could, among other things, make us more vulnerable to operational failures, and subject us to monetary penalties for breach of such laws and regulations. As a result, some uncertainty remains as to the aggregate impact upon Key of significant regulations.

Changes to existing statutes and regulations, and taxes (including industry-specific taxes and surcharges), or their interpretation or implementation 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

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impact consumer behavior, limit the types of financial services and products we may offer, affect the investments we make, and change the manner in which we operate.

Certain federal regulations have been in existence for decades without modification to account for modern banking practices, such as digital delivery of products and services, which can create challenges in execution and in the examination process. Emerging technologies, such as cryptocurrencies, could limit KeyBank’s ability to track the movement of funds. KeyBank’s ability to comply with BSA/AML and other regulations is dependent on its ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.

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, fines, or restitution, to issue cease and desist or removal orders, and to initiate injunctive actions against banking organizations and affiliated parties. These enforcement actions may be initiated for violations of laws and regulations, for practices determined to be unsafe or unsound, or for practices or acts that are determined to be unfair, deceptive, or abusive. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputational damage, or restrictions on our business.

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 periodically changes 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, internal controls, systems, and external events. Operational risk includes the risk of fraud by employees, clerical and record-keeping errors, nonperformance by vendors, threats from cyber activity, and computer/telecommunications malfunctions. Fraudulent activity has escalated, become more sophisticated, and is ever evolving as there are more options to access financial services. For instance, in our Form 8-K filed July 16, 2019, we disclosed that on or about July 9, 2019, we discovered fraudulent activity associated with transactions conducted in the third quarter of 2019 by a business customer of KeyBank. This fraudulent activity resulted in $139 million of net loan charge-offs in 2019. 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 (including remediation 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

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increase in the future as we continue to increase mobile payments and other internet-based product offerings, expand our internal usage of web/cloud-based products and applications, and maintain and develop new relationships with third and fourth party providers. In addition, our ability to extend protections to customers’ information to individual customer devices is limited, especially if the customers willingly provide third parties access to their devices or information.

In the event of a failure, interruption, or breach of our information systems or that of a third party that provides services to us or our customers, we may be unable to avoid impact to our customers. Such a failure, interruption, or breach could result in legal liability, remediation costs, regulatory action, or reputational harm. 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 attacks have attempted to obtain unauthorized access to confidential information, hold for ransom, or alter or destroy data, often through the introduction of computer viruses or malware, phishing, cyberattacks, credential stuffing, and other means. To the extent that we use third parties to provide services to our clients, we seek to minimize the risk by performing due diligence and monitoring the third party, but we cannot control all of the risks at these third parties. Should an adverse event affecting another company’s systems occur, we may not have indemnification or other protection from the other company sufficient to fully compensate us or otherwise protect us or our clients from the consequences.

In addition, our customers routinely use Key-issued credit and debit cards to pay for transactions conducted with businesses in person and over the internet. If the business’s systems that process or store debit or credit card information experience a security breach, our card holders may experience fraud on their card accounts. We may suffer losses associated with such fraudulent transactions, as well as for other costs, such as replacing impacted cards. Key also provides card transaction processing services to some merchant customers under agreements we have with payment networks such as Mastercard. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data breach.

We also face risks related to the increasing interdependence and interconnectivity of financial entities and technology systems. A technology failure, cyberattack or other security breach that significantly compromises the systems of one or more financial parties or service providers could have a material impact on counterparties or market participants, including us. Any third-party technology failure, cyberattack, or security breach could adversely affect our ability to effect transactions, service clients, or otherwise operate our business.

To date, none of these efforts have had a material adverse effect on our business or operations or resulted in any material disruption of our operations or material harm to our customers. Such security attacks can originate from a wide variety of sources/malicious actors, including, but not limited to, persons who constitute an insider threat, 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 through social engineering, phishing, and other methods. 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 a malicious actor or our employees may intercept and/or transmit or otherwise misuse 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. Over the last few years, several large companies have disclosed that they suffered substantial data security breaches, compromising millions of user accounts and credentials. To date, our losses and costs related to these breaches have not been material, but other similar events in the future could have a significant impact on us.

We have incurred and will continue to incur significant expense in an effort to improve the reliability of our systems and their security against external and internal threats. Nonetheless, there remains the risk that one or more adverse events might occur. If one does occur, we might not be able to remediate the event or its consequences timely or adequately.

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

Third parties perform significant operational services on our behalf. Additionally, some of our third parties outsource aspects of their operations to other third parties (commonly referred to as “fourth parties”). These parties are subject

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to similar risks as Key relating to cybersecurity and breakdowns or failures of their own systems, internal processes and controls, 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 identify or 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, which could result in significant financial liability and/or reputational risk.

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, compliance, 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 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. Additionally, our internal audit function provides an independent assessment and testing of Key’s internal controls, policies, and procedures. Any system of controls and any system to reduce risk exposure, however well designed, operated, and tested, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. The systems may not work as intended or be circumvented by employees, third parties, or others outside of Key. 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 or fully mitigate our risk exposures in particular market environments or against particular types of risk.

Climate change, severe weather, global pandemics, 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, global pandemics, 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. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of

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collateral securing loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses.

Additionally, potential future shutdowns of portions of the Federal government could negatively impact the financial performance of certain customers and could negatively impact customers’ future access to certain loan and guaranty programs.

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.

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

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

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

Further, the Federal Reserve requires BHCs 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 BHCs 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 requirements” under the heading “Supervision and Regulation” in Item 1 of this report.

Recently, certain regulatory rule changes related to tailoring outlined in EGRRCPA have been finalized. While marginal relief from certain capital and liquidity standards has been afforded to Key (such as relief from LCR compliance), overall capital and liquidity management practices and expectations will remain unchanged for the foreseeable future. Moreover, Key does not anticipate significant changes to its overall liquidity and capital levels or composition as a result of the final rules. Finally, additional guidance and rule-making related to capital planning and stress testing have yet to be finalized and impacts resulting from these potential changes remain unknown.

Federal agencies’ actions to ensure stability of the U.S. financial system may have disruptive effects on us.

Since 2008, the federal government has taken unprecedented steps to provide stability to and confidence in the financial markets. For example, the Federal Reserve initiated a round of interest rate cuts designed to maintain economic expansion. In the future, federal 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 higher debt yields, a flatter or steeper slope to the yield curve, or unanticipated changes to quality spread premiums that may not follow historical relationships or patterns. 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

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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 a reduced level 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 issued by KeyCorp and KeyBank. The 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. Changes in any of these factors could impact our ability to maintain our current credit ratings. A rating downgrade of the securities of KeyCorp or KeyBank could adversely affect our access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us, reducing our ability to generate income.

V.  Market Risk

A reversal of the U.S. economic recovery and 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. The prolonged low-interest rate environment, despite a generally improving economy, has presented a challenge for the industry, including Key, and affects business and financial 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 debt and 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;

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• 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;

• An increase in competition or 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 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 Federal Reserve raises interest rates and begins to reverse quantitative easing, the behavior of national money market rate indices, the correlation of consumer deposit rates to financial market interest rates, and the setting of LIBOR rates may not follow historical relationships, which could influence net interest income and net interest margin.

Moreover, 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.

Uncertainty surrounding the transition from LIBOR to an alternate reference rate may adversely affect our business.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “Authority”), which regulates LIBOR, announced that the Authority intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. A transition away from the widespread use of LIBOR to alternative rates is expected to occur before the end of 2021. Although no consensus exists at this time as to what benchmark rate or rates may become accepted alternatives to LIBOR, in the United States, the Alternative Reference Rates Committee of the Federal Reserve and the Federal Reserve Bank of New York started in May 2018 to publish the Secured Overnight Finance Rate (“SOFR”) as an alternative to U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight that is collateralized by U.S. treasury securities. While SOFR is currently considered a likely alternative to LIBOR, issues remain as to its implementation. Accordingly, whether SOFR will become an accepted alternative to LIBOR remains uncertain. At this time, it is not possible to predict the effect of the Authority’s announcement or other regulatory changes or announcements, any establishment of alternative reference rates, or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States, or elsewhere. The uncertainty regarding the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect KeyCorp’s financial condition and results of operations. The adverse impact could take various forms and is dependent upon certain factors outside of our control such as: timing of adoption by market forces of a new widely accepted LIBOR replacement, timing of LIBOR cessation, and counterparty acceptance of a new reference rate for both new and existing contracts, among others. Additionally, since LIBOR and any replacement reference rate may have significantly different attributes, it is difficult to predict the amount of increased costs associated with implementing the transition to a new reference rate, including costs relative to product changes, systems changes, compliance and operational oversight costs, and legal expenses, among others.

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

We have concentrations of loans and other business activities in geographic regions where our bank branches are located — Washington; Oregon/Alaska; Rocky Mountains; Indiana/Northwest Ohio/Michigan; Central/Southwest Ohio; East Ohio/Western Pennsylvania; Atlantic; Western New York; Eastern New York; and New England — and additional exposure to geographic regions outside of our branch footprint. Economic growth in the various regions where we operate has been uneven, and the health of the overall U.S. economy may differ from 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 commercial 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.

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 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, failure to meet external commitments and goals, including financial, 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 is 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.

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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; embracing the changes required by our clients and the marketplace; and acquiring, expanding, and retaining targeted client relationships. 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, including large technology companies, to offer products and services traditionally provided by banks. We expect the competitive landscape of the financial services industry to become even more intense 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 an effective compliance program and keeping our assets safe and sound; our ability to attract, retain, and develop a highly competent employee workforce; and industry and general economic trends. Increased competition in the financial services industry, or 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 (such as 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 loans and deposits and related income generated from those products.

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. Additionally, the profile of some of the people we target has changed significantly, causing those with whom we compete for talent to also change and to include nonbanks and large technology companies. To attract and retain qualified employees, we must compensate these

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employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense.

Our incentive compensation structure and sales practices are subject to review by our regulators, who may identify deficiencies in the structure of or issue additional guidance on our compensation practices, causing us to make changes that may affect our ability to offer competitive compensation to these individuals or that place us at a disadvantage to non-financial service competitors. Our ability to attract and retain talented employees may be affected by these developments or any new executive compensation limits and regulations.

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

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

VIII.  Model Risk

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

We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating incurred loan and lease 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 (such as setting reserves), and for capital planning purposes (including during the capital stress testing process). Our modeling methodologies rely on many assumptions, historical analyses, correlations, and being compatible to the available data. These assumptions have certain limitations and 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, use of bad data during development or input into the model during model use, or the use of a model for a purpose outside the scope of the model’s design.

As a result, our models may not fully capture or express the risks we face, may suggest that we have sufficient capital when we may 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, 2019, Key leased approximately 477,744 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 563,458 square feet at December 31, 2019. Our office space is used by all of our segments. As of the same date, KeyBank owned 467 branches and leased 631 branches. The lease terms for applicable branches are not individually material, with terms ranging from month-to-month to 99 years from inception.

ITEM 3.  LEGAL PROCEEDINGS

The information presented in the Legal Proceedings section of Note 22 (“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.

PART II

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

The following 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”	62
Discussion of dividends in the section captioned “Capital — Dividends”	62

The following graph compares the price performance of our Common Shares (based on an initial investment of $100 on December 31, 2014, and assuming reinvestment of dividends) with that of the S&P 500 Index and a group of other banks that constitute our peer group. The peer group consists of the banks that make up the S&P 500 Regional Bank Index and the banks that make up the Standard & Poor’s 500 Diversified Bank Index. We are

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included in the S&P 500 Index and the peer group.

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

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. On October 21, 2019, KeyCorp redeemed for cash all of the outstanding $300 million aggregate principal amount of its 6.750% Senior Notes due 2020.

On April 18, 2019, we announced our 2019 capital plan. Share repurchases of up to $1.0 billion were included in the 2019 capital plan, which is effective from the third quarter of 2019 through the second quarter of 2020. During 2019, we repurchased $379 million of common shares under our 2018 capital plan authorization and $489 million under our 2019 capital plan authorization.

The following table summarizes our repurchases of our Common Shares for the three months ended December 31, 2019.

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	6,871,625	18.23		6,871,625	34,899,443
November 1 - 30	6,096,263	$	19.05	6,096,263	26,353,864
December 1 - 31	566	19.21		566	25,246,568
Total	12,968,454	$	18.61	12,968,454

(a) Includes Common Shares repurchased in the open market.

(b) Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp Common Shares as follows: on October 31, 2019, at $17.97; on November 29, 2019, at $19.39; and on December 31, 2019, at $20.24.

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ITEM 6.  SELECTED FINANCIAL DATA

dollars in millions, except per share amounts	2019			2018			2017			2016			2015			Compound Annual Rate of Change (2015-2019)
YEAR ENDED DECEMBER 31,
Interest income	$	5,235		$	4,878		$	4,390		$	3,319		$	2,622		14.8	%
Interest expense	1,326			969			613			400			274			37.1
Net interest income	3,909			3,909			3,777			2,919			2,348			10.7
Provision for credit losses	445			246			229			266			166			21.8
Noninterest income	2,459			2,515			2,478			2,071			1,880			5.5
Noninterest expense	3,901			3,975			4,098			3,756			2,840			6.6
Income (loss) from continuing operations before income taxes	2,022			2,203			1,928			968			1,222			10.6
Income (loss) from continuing operations attributable to Key	1,708			1,859			1,289			790			915			13.3
Income (loss) from discontinued operations, net of taxes	9			7			7			1			1			N/A
Net income (loss) attributable to Key	1,717			1,866			1,296			791			916			13.4
Income (loss) from continuing operations attributable to Key common shareholders	1,611			1,793			1,219			753			892			12.6
Income (loss) from discontinued operations, net of taxes	9			7			7			1			1			N/A
Net income (loss) attributable to Key common shareholders	1,620			1,800			1,226			754			893			12.7
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	1.62		$	1.72		$	1.13		$	.81		$	1.06		8.9
Income (loss) from discontinued operations, net of taxes	.01			.01			.01			—			—			N/A
Net income (loss) attributable to Key common shareholders (a)	1.63			1.73			1.14			.81			1.06			9.0
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	1.61			1.70			1.12			.80			1.05			8.9
Income (loss) from discontinued operations, net of taxes — assuming dilution	.01			.01			.01			—			—			N/A
Net income (loss) attributable to Key common shareholders — assuming dilution (a)	1.62			1.71			1.13			.80			1.05			9.1
Cash dividends paid	.71			.565			.38			.33			.29			19.6
Book value at year end	15.54			13.90			13.09			12.58			12.51			4.4
Tangible book value at year end	12.56			11.14			10.35			9.99			11.22			2.3
Market price at year end	20.24			14.78			20.17			18.27			13.19			8.9
Dividend payout ratio	43.6		%	32.7		%	33.3		%	40.7		%	27.4		%	N/A
Weighted-average common shares outstanding (000)	992,091			1,040,890			1,072,078			927,816			834,846			3.5
Weighted-average common shares and potential common shares outstanding (000) (b)	1,002,254			1,054,682			1,088,593			938,536			844,489			3.5
AT DECEMBER 31,
Loans	$	94,646		$	89,552		$	86,405		$	86,038		$	59,876		9.6	%
Earning assets	130,807			125,803			123,490			121,966			83,780			9.3
Total assets	144,988			139,613			137,698			136,453			95,131			8.8
Deposits	111,870			107,309			105,235			104,087			71,046			9.5
Long-term debt	12,448			13,732			14,333			12,384			10,184			4.1
Key common shareholders’ equity	15,138			14,145			13,998			13,575			10,456			7.7
Key shareholders’ equity	17,038			15,595			15,023			15,240			10,746			9.7
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets	1.19		%	1.36		%	.96		%	.70		%	.99		%	N/A
Return on average common equity	10.83			12.88			8.65			6.26			8.63			N/A
Return on average tangible common equity (c)	13.46			16.22			10.84			7.39			9.64			N/A
Net interest margin (TE)	3.04			3.17			3.17			2.92			2.88			N/A
Cash efficiency ratio (c)	59.6			60.0			63.5			73.7			65.9			N/A
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets	1.19		%	1.35		%	.96		%	.69		%	.97		%	N/A
Return on average common equity	10.89			12.93			8.70			6.27			8.64			N/A
Return on average tangible common equity (c)	13.53			16.28			10.90			7.40			9.65			N/A
Net interest margin (TE)	3.03			3.15			3.15			2.91			2.85			N/A
Loan to deposit (d)	86.6			85.6			84.4			85.2			87.8			N/A
CAPITAL RATIOS AT DECEMBER 31,
Key shareholders’ equity to assets	11.75		%	11.17		%	10.91		%	11.17		%	11.30		%	N/A
Key common shareholders’ equity to assets	10.47			10.15			10.17			9.95			10.99			N/A
Tangible common equity to tangible assets (c)	8.64			8.30			8.23			8.09			9.98			N/A
Common Equity Tier 1	9.44			9.93			10.16			9.54			10.94			N/A
Tier 1 risk-based capital	10.86			11.08			11.01			10.89			11.35			N/A
Total risk-based capital	12.79			12.89			12.92			12.85			12.97			N/A
Leverage	9.88			9.89			9.73			9.90			10.72			N/A
TRUST ASSETS
Assets under management	$	40,833		$	36,775		$	39,588		$	36,592		$	33,983		3.7	%
OTHER DATA
Average full-time-equivalent employees	17,045			18,180			18,415			15,700			13,483			4.8	%
Branches	1,098			1,159			1,197			1,217			966			2.6

 

(a) EPS may not foot due to rounding.

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

(c) See the section entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity” and “cash efficiency.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

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

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

	Page Number
Introduction	38
Long-term financial targets	39
Corporate strategy	40
Strategic developments	40
Results of Operations	42
Earnings overview	42
Net interest income	42
Provision for credit losses	46
Noninterest income	46
Noninterest expense	48
Income taxes	50
Business Segment Results	50
Consumer Bank	50
Commercial Bank	52
Financial Condition	54
Loans and loans held for sale	54
Securities	59
Deposits and other sources of funds	61
Capital	61
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations	63
Off-balance sheet arrangements	63
Contractual obligations	64
Guarantees	65
Risk Management	65
Overview	65
Market risk management	66
Liquidity risk management	71
Credit risk management	74
Operational and compliance risk management	78
GAAP to Non-GAAP Reconciliations	80
Fourth Quarter Results	81
Earnings	81
Net interest income	81
Noninterest income	81
Noninterest expense	81
Provision for credit losses	82
Income taxes	82
Critical Accounting Policies and Estimates	84
Allowance for loan and lease losses	84
Valuation methodologies	85
Derivatives and hedging	87
Contingent liabilities, guarantees and income taxes	87
Accounting and reporting developments	88
European Sovereign and Non-Sovereign Debt Exposures	89

37

Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for 2019 and 2018. 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. To review our financial condition and results of operations for 2017 and a comparison between the 2017 and 2018 results, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2018 Form 10-K filed with the SEC on February 25, 2019.

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Long-term financial targets

(a) See the section entitled “GAAP to non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “cash efficiency.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(a) See the section entitled “GAAP to non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

Positive Operating Leverage

Generate positive operating leverage and a cash efficiency ratio in the range of 54.0% to 56.0%.

Full year expenses were down 1.9% from the prior year, as we completed our $200 million cost reduction program and drove further savings through our continuous improvement efforts. Overall, we have generated positive operating leverage over the past three years as our cash efficiency ratio has declined 390 basis points. We expect to make continued progress on our cash efficiency ratio during 2020 as we focus on expenses and strategically invest back into our business.

Moderate Risk Profile

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

During 2019, our net loan charge-offs to average loans ratio was impacted by $139 million of net loan charge-offs related to a previously disclosed fraud loss. Overall, credit quality remains strong as we continue to remain consistent and disciplined in our credit underwriting and portfolio management and are committed to maintaining our moderate risk profile.

Financial Return

A return on average tangible common equity in the range of 16.00% to 19.00%.

During 2019, our return on average tangible common equity ratio was impacted by the previously disclosed fraud loss of $106 million, after taxes. During 2019, we repurchased $868 million of Common Shares. Our full-year dividend for 2019 was $.71, a 26% increase from the previous year. In 2020, we remain committed to consistently delivering on our stated priorities of supporting organic growth, increasing dividends, and prudently repurchasing Common Shares.

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Corporate strategy

We remain committed to enhancing long-term shareholder value by continuing to execute our relationship-based business model, growing our franchise, and being disciplined in our capital management. Our strategic focus is to deliver ease, value, and expertise to help our clients make better financial decisions and build enduring relationships. 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 intend to 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 plan to leverage our continuous improvement culture to maintain an efficient cost structure that is aligned, sustainable, and consistent with the current operating environment and that supports our relationship business model.

• Acquire and expand targeted client relationships — We seek to be client-centric in our actions and have taken purposeful steps to enhance our ability to acquire and expand targeted relationships. We seek to provide solutions to serve our clients' needs. We focus on markets and clients where we can be the most relevant. In aligning our businesses and investments against these targeted client segments, we are able to make a meaningful impact for our clients.

• 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 intend to remain focused on sustaining strong reserves, liquidity and capital. We plan to 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 intend to 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 took the following actions during 2019 in support of our corporate strategy:

• We continued to grow profitably during 2019. Our cash efficiency ratio improved to 59.6% and we achieved our seventh consecutive year of positive operating leverage. Full year expenses were down 1.9% from the prior year as we completed our $200 million cost reduction program. Revenue was slightly down for the year, reflecting the impact of lower interest rates. We continued to see strong balance sheet growth as average loans were up 3.6% and average deposits were up 4.7% compared to the prior year. Our relationship-based business model continues to position us well with our targeted clients, which results in new and expanded relationships.

• We acquired Laurel Road in April of 2019, which originated $1.8 billion of consumer direct loans during the year, well above our original expectations. These high quality loans provide us with an opportunity to build a broader digital relationship with our clients. Our residential mortgage business is another area where we are seeing strong returns on our investments. Residential mortgage loan originations for 2019 were $4.3 billion, up over 120% from 2018, with $1.5 billion originated in the fourth quarter of 2019. These two investments highlight our commitment to acquire and expand targeted client relationships.

• During 2019, our net loan charge-offs to average loans ratio was impacted by a previously disclosed fraud loss. Our provision for credit losses and net loan charge-offs include $139 million related to the fraud loss. Overall, credit quality remains strong as our new loan originations in both our commercial and consumer book continue to meet our criteria for high quality loans as we continue to effectively manage risk and rewards.

• Maintaining financial strength while driving long-term shareholder value was again a focus during 2019. At December 31, 2019, our Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.44% and 10.86%, respectively. During 2019, we repurchased $379 million of Common Shares under our 2018 capital plan authorization and $489 million under our 2019 capital plan authorization. Our full-year dividend for 2019 was $.71, a 26% increase from the previous year.

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• We remained committed to our strategy to engage a high-performing, talented, and diverse workforce. In 2019, we were recognized by multiple organizations for our dedication to creating an environment where employees are treated with respect and empowered to bring their authentic selves to work. Some of these awards and recognitions included the Human Rights Campaign naming us one of the Best Places to Work for LGBT Equality, G.I. Jobs and Military Spouse Magazine recognizing us as a Military Friendly^® and Military Friendly^® Spouse Employer, and receiving the Leading Disability Employer Seal from the National Organization on Disability. We were also named to DiversityInc’s 2019 Top 50 Companies for Diversity.

CEO Transition

On September 19, 2019, we announced that Beth Mooney will retire as Chairman and Chief Executive Officer of KeyCorp, effective May 1, 2020. Our Board has appointed Christopher Gorman as President and Chief Operating Officer. The Board has also appointed Mr. Gorman to the Board for a term expiring at our 2020 Annual Meeting of Shareholders. Mr. Gorman will succeed Ms. Mooney as Chairman and Chief Executive Officer on May 1, 2020. Mr. Gorman’s appointment is in keeping with the Board’s succession management process and will ensure a seamless leadership transition.

LIBOR Transition

As disclosed in Item 1A. Risk Factors of this report, LIBOR in its current form is not expected to be available after 2021. The most likely replacement rate is expected to be SOFR, which has been recommended by the ARRC. The Federal Reserve has encouraged financial institutions not to wait for the end of 2021 to make the transition away from LIBOR. We have established an enterprise wide program to identify and address all LIBOR transition issues. The goals of the LIBOR transition program are to:

• Identify and analyze LIBOR-based exposure and develop and execute transition strategies;

• Review and update near-term strategies and actions for our current LIBOR-based business currently being written;

• Assess financial impact and risk while planning and executing mitigation actions;

• Understand and strategically address the current market approach to LIBOR and SOFR; and

• Determine and execute system and process work to be operationally ready for SOFR.

We are also collaborating closely with regulators and industry groups on the transition. We also expect to leverage recommendations made by the ARRC and ISDA that are tailored to our specific client segments.

41

Results of Operations

Earnings Overview

The following chart provides a reconciliation of net income from continuing operations attributable to Key common shareholders for the year ended December 31, 2018, to the year ended December 31, 2019 (dollars in millions):

(a) Includes Net income (loss) attributable to noncontrolling interest and Preferred dividends.

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;

• asset quality; and

• fair value accounting of acquired earning assets and interest-bearing liabilities.

To make it easier to compare both the 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 “TE basis” (i.e., as if all income were taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $126, an amount that, if taxed at the statutory federal income tax rate of 21%, would yield $100. Prior to 2018, $100 of tax-exempt income would be presented as $154, an amount that, if taxed at the previous statutory federal income tax rate of 35%, would yield $100.

Figure 1 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 TE 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 our earning assets less the cost of funding, is calculated by dividing taxable-equivalent net interest income by average earning assets.

42

TE net interest income for 2019 was $3.9 billion, and the net interest margin was 3.04%, compared to TE net interest income of $3.9 billion and a net interest margin of 3.17% for the prior year. Net interest income for 2019 reflects an increase in earning asset balances, partially offset by a decline in loan fees and a lower net interest margin. Additionally, purchase accounting accretion declined $38 million. The net interest margin was impacted by a lag in deposit pricing as interest rates moved lower during the second half of 2019. In 2020, we expect TE net interest income to be up 1% to 3% compared to 2019 and the net interest margin to be relatively stable compared to the fourth quarter of 2019.

(a) Average deposits for the year ended December 31, 2015, exclude deposits in foreign office.

Average loans totaled $91.5 billion for 2019, compared to $88.3 billion in 2018. Commercial loans increased $2.1 billion, reflecting broad-based growth in commercial and industrial loans, partially offset by declines in commercial mortgage and construction loans. Consumer loans increased $1.1 billion, driven by solid growth from Laurel Road, residential mortgage loans, and indirect auto lending. For 2020, we expect average loans to be up 4% to 6% compared to 2019.

Average deposits totaled $110.0 billion for 2019, an increase of $5.0 billion compared to 2018, reflecting growth from consumer and commercial relationships. For 2020, we expect average deposits to be up 1% to 3% compared to 2019.

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Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations

Year ended December 31,	2019							2018
dollars in millions	Average Balance			Interest (a)		Yield/ Rate (a)		Average Balance			Interest (a)		Yield/ Rate (a)
ASSETS
Loans (b), (c)
Commercial and industrial (d)	$	47,482		$	2,144	4.51	%	$	44,418		$	1,926	4.34	%
Real estate — commercial mortgage	13,641			676		4.95		14,267			698		4.90
Real estate — construction	1,485			78		5.24		1,816			90		4.97
Commercial lease financing	4,488			163		3.63		4,534			168		3.70
Total commercial loans	67,096			3,061		4.56		65,035			2,882		4.43
Real estate — residential mortgage	6,095			241		3.95		5,473			217		3.97
Home equity loans	10,634			526		4.95		11,530			547		4.74
Consumer direct loans	2,475			176		7.11		1,782			137		7.66
Credit cards	1,100			127		11.51		1,092			125		11.40
Consumer indirect loans	4,111			168		4.09		3,426			146		4.27
Total consumer loans	24,415			1,238		5.07		23,303			1,172		5.03
Total loans	91,511			4,299		4.70		88,338			4,054		4.59
Loans held for sale	1,411			63		4.48		1,501			66		4.43
Securities available for sale (b), (e)	21,362			537		2.51		17,898			409		2.20
Held-to-maturity securities (b)	10,841			262		2.41		12,003			284		2.37
Trading account assets	1,017			32		3.18		893			29		3.25
Short-term investments	2,876			61		2.11		2,450			46		1.86
Other investments (e)	630			13		2.09		697			21		3.04
Total earning assets	129,648			5,267		4.06		123,780			4,909		3.94
Allowance for loan and lease losses	(880		)					(878		)
Accrued income and other assets	14,411							13,910
Discontinued assets	984							1,212
Total assets	$	144,163						$	138,024
LIABILITIES
NOW and money market deposit accounts	$	63,731		566		.89		$	56,001		297		.53
Savings deposits	4,740			4		.09		5,704			14		.24
Certificates of deposit ($100,000 or more)(f)	7,757			180		2.32		7,728			139		1.80
Other time deposits	5,426			103		1.90		5,025			67		1.34
Deposits in foreign office	—			—		—		—			—		—
Total interest-bearing deposits	81,654			853		1.04		74,458			517		.69
Federal funds purchased and securities sold under repurchase agreements	264			2		.66		928			11		1.14
Bank notes and other short-term borrowings	730			17		2.31		915			21		2.34
Long-term debt (f), (g)	13,062			454		3.52		12,715			420		3.27
Total interest-bearing liabilities	95,710			1,326		1.39		89,016			969		1.09
Noninterest-bearing deposits	28,376							30,593
Accrued expense and other liabilities	2,456							2,071
Discontinued liabilities (g)	984							1,212
Total liabilities	127,526							122,892
EQUITY
Key shareholders’ equity	16,636							15,131
Noncontrolling interests	1							1
Total equity	16,637							15,132
Total liabilities and equity	$	144,163						$	138,024
Interest rate spread (TE)						2.67	%						2.85	%
Net interest income (TE) and net interest margin (TE)				3,941		3.04	%				3,940		3.17	%
Less: TE adjustment (b)				32							31
Net interest income, GAAP basis				$	3,909						$	3,909

(a) Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology.

(b) Interest income on tax-exempt securities and loans has been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.

(c) For purposes of these computations, nonaccrual loans are included in average loan balances.

(d) Commercial and industrial average balances include $141 million, $126 million, $117 million, $99 million, and $88 million of assets from commercial credit cards for the years ended December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, respectively.

44

Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations (Continued)

2017							2016							2015							Compound Annual Rate of Change (2015-2019)
Average Balance			Interest (a)		Yield/ Rate (a)		Average Balance			Interest (a)		Yield/ Rate (a)		Average Balance			Interest (a)		Yield/ Rate (a)		Average Balance		Interest
$	40,848		$	1,613	3.95	%	$	35,276		$	1,215	3.45	%	$	29,658		$	953	3.21	%	9.9	%	17.6	%
14,878			687		4.62		11,063			451		4.07		8,020			295		3.68		11.2		18.0
2,143			103		4.78		1,460			76		5.22		1,143			43		3.73		5.4		12.6
4,677			185		3.96		4,261			161		3.78		3,976			143		3.60		2.5		2.7
62,546			2,588		4.14		52,060			1,903		3.66		42,797			1,434		3.35		9.4		16.4
5,499			214		3.89		3,632			148		4.09		2,244			95		4.21		22.1		20.5
12,380			536		4.33		11,286			456		4.04		10,503			418		3.98		.2		4.7
1,765			126		7.12		1,661			113		6.79		1,580			103		6.54		9.4		11.3
1,055			118		11.15		916			98		10.73		752			81		10.76		7.9		9.4
3,120			148		4.75		1,593			89		5.58		718			46		6.43		41.8		29.6
23,819			1,142		4.79		19,088			904		4.74		15,797			743		4.70		9.1		10.8
86,365			3,730		4.32		71,148			2,807		3.95		58,594			2,177		3.71		9.3		14.6
1,325			52		3.96		979			34		3.51		959			37		3.85		8.0		11.2
18,548			369		1.96		16,661			329		1.98		13,720			293		2.14		9.3		12.9
10,515			222		2.11		6,275			122		1.94		4,936			96		1.95		17.0		22.2
949			27		2.81		884			23		2.59		761			21		2.80		6.0		8.8
2,363			26		1.11		4,656			22		.47		2,843			8		.27		.2		50.1
712			17		2.35		679			16		2.37		706			18		2.63		(2.3	)	(6.3	)
120,777			4,443		3.67		101,282			3,353		3.31		82,519			2,650		3.21		9.5		14.7
(865		)					(835		)					(791		)					2.2
13,807							12,090							10,298							7.0
1,448							1,707							2,132							(14.3	)
$	135,167						$	114,244						$	94,158						8.9	%
$	54,032		143		.26		$	46,079		87		.19		$	36,258		56		.15		11.9	%	58.8
6,569			13		.20		3,957			3		.07		2,372			—		.02		14.9		—
6,233			82		1.31		3,911			48		1.22		2,041			26		1.28		30.6		47.3
4,698			40		.85		4,088			33		.81		3,115			22		.71		11.7		36.2
—			—		—		—			—		—		489			1		.23		N/M		N/M
71,532			278		.39		58,035			171		.30		44,275			105		.24		13.0		52.0
517			1		.24		487			1		.10		632			—		.04		(16.0	)	—
1,140			15		1.34		852			10		1.18		572			9		1.52		5.0		13.6
11,921			319		2.69		9,802			218		2.29		7,332			160		2.24		12.2		23.2
85,110			613		.72		69,176			400		.58		52,811			274		.52		12.6		37.1
31,414							28,317							26,355							1.5
1,970							2,393							2,222							2.0
1,448							1,706							2,132							(14.3	)
119,942							101,592							83,520							8.8
15,224							12,647							10,626							9.4
1							5							12							(39.2	)
15,225							12,652							10,638							9.4
$	135,167						$	114,244						$	94,158						8.9	%
					2.95	%						2.73	%						2.69	%
			3,830		3.17	%				2,953		2.92	%				2,376		2.88	%			10.7
			53							34							28						2.7
			$	3,777						$	2,919						$	2,348					10.7	%

(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 2 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 2. Components of Net Interest Income Changes from Continuing Operations

	2019 vs. 2018
in millions	Average Volume			Yield/ Rate			Net Change(a)
INTEREST INCOME
Loans	$	146		$	99		$	245
Loans held for sale	(4		)	1			(3		)
Securities available for sale	84			44			128
Held-to-maturity securities	(28		)	6			(22		)
Trading account assets	4			(1		)	3
Short-term investments	9			6			15
Other investments	(2		)	(6		)	(8		)
Total interest income (TE)	209			149			358
INTEREST EXPENSE
NOW and money market deposit accounts	46			223			269
Savings deposits	(2		)	(8		)	(10		)
Certificates of deposit ($100,000 or more)	1			40			41
Other time deposits	6			30			36
Total interest-bearing deposits	51			285			336
Federal funds purchased and securities sold under repurchase agreements	(6		)	(3		)	(9		)
Bank notes and other short-term borrowings	(4		)	—			(4		)
Long-term debt	12			22			34
Total interest expense	53			304			357
Net interest income (TE)	$	156		$	(155	)	$	1

(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.

Provision for credit losses

Our provision for credit losses was $445 million for 2019, compared to $246 million for 2018. The increase of $199 million in our provision for credit losses is primarily due to the realization of $139 million from a previously disclosed fraud loss. In 2020, given a relatively stable economic outlook, we expect the provision to slightly exceed net loan charge-offs to provide for loan growth.

Noninterest income

Noninterest income for 2019 was $2.5 billion, compared to $2.5 billion during 2018. Noninterest income represented 38% of total revenue for 2019 and 39% of total revenue for 2018. In 2020, we expect noninterest income to be up 4% to 6% compared to 2019.

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

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Figure 3. Noninterest Income

(a) Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, mortgage servicing fees, and other income. See the "Consolidated Statements of Income" in Part II, Item 8. Financial Statements and Supplementary Data of this report.

Trust and investment services income

Trust and investment services income consists of brokerage commissions, trust and asset management commissions, and insurance income. For 2019, trust and investment services income decreased $24 million, or 4.8%, from the prior year primarily due to a decrease in insurance commissions as a result of the sale of KIBS in the second quarter of 2018, which contributed $22 million of income for 2018 prior to the sale.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At December 31, 2019, our bank, trust, and registered investment advisory subsidiaries had assets under management of $40.8 billion, compared to $36.8 billion at December 31, 2018. The increase from 2018 to 2019 was primarily attributable to the market appreciation during the year as the market recovered from a decline that occurred during the second half of 2018.

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Figure 4. Assets Under Management

Year ended December 31,					Change 2019 vs. 2018
dollars in millions	2019		2018		Amount			Percent
Assets under management by investment type:
Equity	$	25,271	$	21,325	$	3,946		18.5	%
Securities lending	309		774		(465		)	(60.1	)
Fixed income	11,000		10,696		304			2.8
Money market	4,253		3,980		273			6.9
Total	$	40,833	$	36,775	$	4,058		11.0	%

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 2019, investment banking and debt placement fees decreased $20 million, or 3.1%, from the prior year due to the market disruption from the government shutdown that occurred early in 2019.

Service charges on deposit accounts

Service charges on deposit accounts decreased $12 million, or 3.4%, in 2019 compared to the prior year.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $5 million, or 1.9%, in 2019 compared to 2018. This increase was primarily due to higher debit card, credit card, and merchant fees.

Other noninterest income

Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, mortgage servicing fees, and other income. Other noninterest income decreased $5 million, or .7%, in 2019 compared to 2018. Other income was down primarily due to a $78 million gain related to the sale of KIBS during the second quarter of 2018. Partially offsetting this was an increase in operating lease income and other leasing gains which was negatively impacted by a $42 million lease residual loss in the second quarter of 2018, as well as higher consumer mortgage income and mortgage servicing fees reflecting our ongoing investment in our residential mortgage business.

Noninterest expense

Noninterest expense for 2019 was $3.9 billion, compared to $4.0 billion for 2018. Figure 5 gives a breakdown of our major categories of noninterest expense as a percentage of total noninterest expense for the twelve months ended December 31, 2019. In 2020, we expect noninterest expense to be relatively stable compared to 2019.

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

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Figure 5. Noninterest Expense

(a) Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expense, net, and other expense. See the "Consolidated Statements of Income" in Part II, Item 8. Financial Statements and Supplementary Data of this report.

Personnel

As shown in Figure 6, personnel expense, the largest category of our noninterest expense, decreased by $59 million, or 2.6%, in 2019 compared to 2018. The decrease reflected the successful implementation of our expense initiatives, which resulted in a $83 million decrease in salary and contract labor expense.

Figure 6. Personnel Expense

Year ended December 31, dollars in millions					Change 2019 vs. 2018
	2019		2018		Amount			Percent
Salaries and contract labor	$	1,268	$	1,351	$	(83	)	(6.1	)%
Incentive and stock-based compensation (a)	584		569		15			2.7
Employee benefits	348		343		5			1.6
Severance	50		46		4			7.9
Total personnel expense	$	2,250	$	2,309	$	(59	)	(2.6	)%

(a) Excludes directors’ stock-based compensation of $3 million in 2019 and 2018, reported as “other noninterest expense” in Figure 5.

Net occupancy

Net occupancy expense decreased $15 million, or 4.9%, in 2019 compared to 2018, primarily due to lower depreciation and rental expenses.

Other noninterest expense

Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expenses, and other miscellaneous expense categories. In total, other noninterest expense decreased $6 million, or .6%, in 2019 compared to 2018. This decline was primarily attributable to the elimination of the FDIC surcharge.

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Income taxes

We recorded a tax provision from continuing operations of $314 million for 2019, compared to $344 million for 2018. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 15.6% for 2019 and 2018. In 2020, we expect our GAAP tax rate to be in the range of 17% to 18%.

In 2019, our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 (“Income Taxes”).

Business Segments Results

We previously reported our results of operations through two business segments, Key Community Bank and Key Corporate Bank, with the remaining operations recorded in Other. In the first quarter of 2019, we underwent a company-wide organizational change, resulting in the realignment of our businesses into two reportable business segments, Consumer Bank and Commercial Bank, with the remaining operations that do not meet the criteria for disclosure as a separate reportable business recorded in Other. The new business segment structure aligns with how management reviews performance and makes decisions by client, segment, and business unit. Prior period information was restated to conform to the new business segment structure.

This section summarizes the highlights and segment imperatives, market and business overview, and financial performance of our two major business segments (operating segments): Consumer Bank and Commercial Bank. Note 25 (“Business Segment Reporting”) describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments. Dollars in the charts are presented in millions.

Consumer Bank

Segment imperatives

• Simplification and digitalization to drive growth and operating leverage

• Relationship-based strategy with a focus on financial wellness as a differentiator

• Deliver ease, value, and expertise to help guide our clients to the right approach to meet their goals

Market and business overview

As the banking industry moves forward, so do our clients. Anticipating our clients’ needs not only today, but for tomorrow and into the future, has become one of the biggest challenges for the banking industry. We view these challenges as an opportunity to help our current client base meet their own goals, as well as attract new and diverse clients. In an increasingly digital world focused on specialized convenience, we have made meaningful steps to meet those demands through new digital portals and the acquisitions of HelloWallet in 2017 and Laurel Road in 2019. These platforms place us in a strong position to develop long lasting and meaningful relationships with our current and prospective clients. Financial wellness is a core tenet of our customer relationships and we see it in three different ways: diagnose, enhance, and sustain. Our goal is to get our clients to a place where they can comfortably sustain their current financial position so we can be there for them when they are ready to grow. Clients no longer go to a branch to conduct transactions only, they go to seek advice and gain new perspectives on issues they may be facing. Overall, we have a passion to help our clients through:

• Ease - enabling simple and clear banking with no surprises

• Value - knowing our clients and valuing each relationship

• Expertise - provide our clients with industry-leading expertise and personalized service

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Summary of operations

• Net income attributable to Key of $706 million in 2019, compared to $632 million in 2018, an increase of 11.7%.

• Taxable equivalent net interest income increased in 2019 by $60 million, or 2.6%, from the prior year. The increase in net interest income was primarily driven by strong balance sheet growth.

• Average loans and leases increased in 2019 by $1.2 billion, or 3.9%, from the prior year. This was driven by the addition of Laurel Road along with strength in residential mortgage and indirect auto lending.

• Average deposits increased in 2019 by $3.7 billion, or 5.4%, from the prior year. This was driven by growth in money market and certificates of deposit, reflecting Key’s relationship strategy.

• Provision for credit losses increased $41 million in 2019 compared to the prior year, driven by higher net loan charge-offs and balance sheet growth. Credit quality in 2019 remained stable to 2018.

• Noninterest income increased in 2019 by $7 million, or .8%, from the prior year, primarily driven by growth in consumer mortgage income.

• Noninterest expense decreased in 2019 by $71 million, or 3.2%, from the prior year. The decline reflects the benefit of efficiency initiatives, strong expense discipline, and the elimination of the FDIC quarterly surcharge. The decline in expense was partially offset by expenses related to the acquisition of Laurel Road.

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Commercial Bank

Segment imperatives

• Solve complex client needs through a differentiated product set of banking and capital markets capabilities

• Drive targeted scale through distinct product capabilities delivered to a broad set of clients

• Utilize industry expertise and broad capabilities to build relationships with narrowly targeted client sets

Market and business overview

Building relationships and delivering complex solutions for middle market clients requires a distinctive operating model that understands their business and can provide a broad set of product capabilities. As competition for these clients intensifies, we have positioned the business to maintain and grow our competitive advantage by building targeted scale in businesses and client segments. Strong market share in businesses such as real estate loan servicing and equipment finance highlights our ability to successfully meet customer needs through targeted scale in distinct product capabilities. Clients expect us to understand every aspect of their business. Our seven industry verticals are aligned to drive targeted scale in segments where we have a deep breadth of industry expertise. Healthcare is the largest sector of the economy and one of our targeted verticals. Our acquisition of Cain Brothers in 2017 is one example of how we have expanded our business capabilities to further enhance our reputation as a trusted advisor to current and prospective clients. Our business model is positioned to meet our client needs because our focus is not on being a universal bank, but rather being the right bank for our clients.

Summary of operations

• Net income attributable to Key of $1.1 billion in 2019, compared to $1.1 billion in 2018, an increase of 3.6%.

• Taxable equivalent net interest income decreased in 2019 by $36 million, or 2.2%, from the prior year. The decrease in net interest income was primarily driven by loan spread compression due to a lower rate environment, lower purchase accounting accretion, and lower loan fees.

• Average loan and lease balances increased $2.2 billion in 2019, or 3.9%, compared to the prior year driven by broad-based growth in commercial and industrial loans.

• Average deposit balances increased $2.5 billion in 2019, or 7.5%, compared to the prior year, driven by growth in core deposits.

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• Provision for credit losses increased $16 million in 2019 compared to the prior year, driven by balance sheet growth, lower recoveries, and higher charge-offs. Net charge-offs to average loans remained well below Key’s long term targeted range.

• Noninterest income increased $62 million in 2019, or 4.7%, from the prior year. Operating lease income and other leasing gains increased $75 million from the prior year driven by favorable client activity and a $42 million lease residual loss in 2018.

• Noninterest expense decreased by $46 million in 2019, or 2.9%, from the prior year. The decline reflects the benefit of efficiency initiatives, strong expense discipline, and the elimination of the FDIC quarterly surcharge.

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Financial Condition

Loans and loans held for sale

Figure 10 shows the composition of our loan portfolio at December 31 for each of the past five years.

Figure 10. Composition of Loans  

	2019				2018				2017
December 31, dollars in millions	Amount		Percent   of Total		Amount		Percent   of Total		Amount		Percent   of Total
COMMERCIAL
Commercial and industrial (a)	$	48,295	51.0	%	$	45,753	51.1	%	$	41,859	48.4	%
Commercial real estate:
Commercial mortgage	13,491		14.3		14,285		15.9		14,088		16.3
Construction	1,558		1.6		1,666		1.9		1,960		2.3
Total commercial real estate loans	15,049		15.9		15,951		17.8		16,048		18.6
Commercial lease financing (b)	4,688		5.0		4,606		5.1		4,826		5.6
Total commercial loans	68,032		71.9		66,310		74.0		62,733		72.6
CONSUMER
Real estate — residential mortgage	7,023		7.4		5,513		6.2		5,483		6.3
Home equity loans	10,274		10.9		11,142		12.4		12,028		13.9
Consumer direct loans	3,513		3.7		1,809		2.0		1,794		2.1
Credit cards	1,130		1.2		1,144		1.3		1,106		1.3
Consumer indirect loans	4,674		4.9		3,634		4.1		3,261		3.8
Total consumer loans	26,614		28.1		23,242		26.0		23,672		27.4
Total loans (c)	$	94,646	100.0	%	$	89,552	100.0	%	$	86,405	100.0	%
	2016				2015
	Amount		Percent   of Total		Amount		Percent   of Total
COMMERCIAL
Commercial and industrial (a)	$	39,768	46.2	%	$	31,240	52.2	%
Commercial real estate:
Commercial mortgage	15,111		17.6		7,959		13.3
Construction	2,345		2.7		1,053		1.7
Total commercial real estate loans	17,456		20.3		9,012		15.0
Commercial lease financing (b)	4,685		5.5		4,020		6.7
Total commercial loans	61,909		72.0		44,272		73.9
CONSUMER
Real estate — residential mortgage	5,547		6.4		2,242		3.7
Home equity loans	12,674		14.7		10,335		17.3
Consumer direct loans	1,788		2.1		1,600		2.7
Credit cards	1,111		1.3		806		1.3
Consumer indirect loans	3,009		3.5		621		1.1
Total consumer loans	24,129		28.0		15,604		26.1
Total loans (c)	$	86,038	100.0	%	$	59,876	100.0	%

 

(a) Loan balances include $144 million, $132 million, $119 million, $116 million, and $85 million of commercial credit card balances at December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, respectively.

(b) Commercial lease financing includes receivables held as collateral for a secured borrowing of $15 million, $10 million, $24 million, $68 million, and $134 million at December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, 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 20 (“Long-Term Debt”).

(c) Total loans exclude loans of $865 million at December 31, 2019, $1.1 billion at December 31, 2018, $1.3 billion at December 31, 2017, $1.6 billion at December 31, 2016, and $1.8 billion at December 31, 2015, related to the discontinued operations of the education lending business.

At December 31, 2019, total loans outstanding from continuing operations were $94.6 billion, compared to $89.6 billion at the end of 2018. 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 $68.0 billion at December 31, 2019, an increase of $1.7 billion, or 2.6%, compared to December 31, 2018, primarily driven by an increase in commercial and industrial loans.

Figure 11 provides our commercial loan portfolio by industry classification as of December 31, 2019, and December 31, 2018.

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Figure 11. Commercial Loans by Industry

December 31, 2019	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
dollars in millions
Industry classification:
Agriculture	$	1,036	$	178	$	112	$	1,326	1.9	%
Automotive	2,048		467		18		2,533		3.7
Business products	1,513		111		57		1,681		2.5
Business services	3,083		203		210		3,496		5.2
Chemicals	776		40		46		862		1.3
Construction materials and contractors	1,876		238		244		2,358		3.5
Consumer discretionary	3,646		400		467		4,513		6.6
Consumer services	4,567		863		535		5,965		8.8
Equipment	1,428		76		98		1,602		2.4
Finance	6,186		64		386		6,636		9.7
Healthcare	3,000		1,564		331		4,895		7.2
Materials manufacturing and mining	1,117		44		41		1,202		1.8
Oil and gas	2,219		54		90		2,363		3.5
Public exposure	2,422		24		706		3,152		4.6
Commercial real estate	5,126		10,469		12		15,607		22.9
Technology	916		27		182		1,125		1.6
Transportation	1,298		218		737		2,253		3.3
Utilities	5,560		2		397		5,959		8.8
Other	478		7		19		504		.7
Total	$	48,295	$	15,049	$	4,688	$	68,032	100.0	%
December 31, 2018	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
dollars in millions
Industry classification:
Agriculture	$	1,045	$	176	$	120	$	1,341	2.0	%
Automotive	2,140		448		46		2,634		4.0
Business products	1,596		127		50		1,773		2.7
Business services	2,779		136		228		3,143		4.7
Chemicals	933		43		56		1,032		1.6
Construction materials and contractors	1,756		207		221		2,184		3.3
Consumer discretionary	3,675		516		489		4,680		7.1
Consumer services	3,354		746		195		4,295		6.5
Equipment	1,586		89		81		1,756		2.6
Finance	5,178		459		357		5,994		9.0
Healthcare	2,999		1,743		369		5,111		7.7
Materials manufacturing and mining	1,093		46		41		1,180		1.8
Oil and gas	1,739		51		57		1,847		2.8
Public exposure	2,656		73		1,054		3,783		5.7
Commercial real estate	5,808		10,830		28		16,666		25.1
Technology	996		28		64		1,088		1.6
Transportation	1,377		229		829		2,435		3.7
Utilities	4,357		4		321		4,682		7.1
Other	686		—		—		686		1.0
Total	$	45,753	$	15,951	$	4,606	$	66,310	100.0	%

Commercial and industrial. Commercial and industrial loans are the largest component of our loan portfolio, representing 51% of our total loan portfolio at December 31, 2019, and 51% at December 31, 2018. This portfolio is approximately 89% variable rate and consists of loans primarily to large corporate, middle market, and small business clients.

Commercial and industrial loans totaled $48.3 billion at December 31, 2019, an increase of $2.5 billion compared to December 31, 2018, driven by increases in the finance, utilities, oil and gas, and consumer services industries, which combined accounted for approximately 38% of the total portfolio mix at December 31, 2019.

Commercial real estate loans. Our commercial real estate lending business includes both mortgage and construction loans, and is conducted through two primary sources: our 15-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of commercial real estate located both within and beyond the branch system. Nonowner-occupied properties, generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties, represented 80% of total commercial real estate loans outstanding at December 31, 2019. Construction loans, which provide a stream of funding for properties not fully leased at origination to support debt service payments over the term of the contract or project, represented 10% of commercial real estate loans at year end.

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At December 31, 2019, commercial real estate loans totaled $15.0 billion, comprised of $13.5 billion of mortgage loans and $1.6 billion of construction loans. Compared to December 31, 2018, this portfolio decreased $902 million, driven by elevated paydowns as a result of competitive headwinds and strategic exits.

As shown in Figure 12, our commercial real estate loan portfolio includes various property types and geographic locations of the underlying collateral. These loans include commercial mortgage and construction loans in both Consumer Bank and Commercial Bank.

Figure 12. Commercial Real Estate Loans

	Geographic Region
dollars in millions	West		Southwest		Central		Midwest		Southeast		Northeast		National		Total		Percent of Total		Construction		Commercial Mortgage
December 31, 2019
Nonowner-occupied:
Retail properties	$	133	$	41	$	143	$	155	$	161	$	580	$	124	$	1,337	8.9	%	$	85	$	1,252
Multifamily properties	698		354		767		795		1,205		1,350		225		5,394		35.8		1,189		4,205
Health facilities	76		44		104		93		163		497		405		1,382		9.2		40		1,342
Office buildings	214		7		293		132		244		725		134		1,749		11.6		69		1,680
Warehouses	51		34		51		51		46		238		134		605		4.0		7		598
Manufacturing facilities	36		—		38		4		40		43		54		215		1.4		5		210
Hotels/Motels	76		—		19		—		12		129		57		293		1.9		6		287
Residential properties	—		—		—		2		—		98		—		100		.7		5		95
Land and development	20		5		—		3		2		9		—		39		.3		34		5
Other	80		9		71		86		22		259		358		885		5.9		23		862
Total nonowner-occupied	1,384		494		1,486		1,321		1,895		3,928		1,491		11,999		79.7		1,463		10,536
Owner-occupied	833		4		285		536		71		1,321		—		3,050		20.3		95		2,955
Total	$	2,217	$	498	$	1,771	$	1,857	$	1,966	$	5,249	$	1,491	$	15,049	100.0	%	$	1,558	$	13,491
Nonowner-occupied:
Nonperforming loans	$	1	—		—		$	7	$	7	$	20	$	52	$	87	N/M		$	2	$	85
Accruing loans past due 90 days or more	—		—		—		2		—		11		—		13		N/M		1		12
Accruing loans past due 30 through 89 days	1		—		—		7		—		8		—		16		N/M		2		14
December 31, 2018
Nonowner-occupied:
Retail properties	$	126	$	45	$	142	$	174	$	184	$	674	$	302	$	1,647	10.3	%	$	82	$	1,565
Multifamily properties	452		210		914		608		1,153		1,708		693		5,738		36.0		1,163		4,575
Health facilities	98		—		49		59		153		724		385		1,468		9.2		20		1,449
Office buildings	270		7		224		90		165		851		119		1,726		10.8		120		1,605
Warehouses	66		34		20		47		71		290		203		731		4.6		48		684
Manufacturing facilities	42		—		36		3		25		38		91		235		1.5		20		215
Hotels/Motels	95		—		19		—		6		204		62		386		2.4		—		386
Residential properties	3		—		—		3		21		135		—		162		1.0		53		109
Land and development	17		4		5		2		—		48		—		76		.5		52		23
Other	46		9		61		53		4		323		151		647		4.0		11		636
Total nonowner-occupied	1,215		309		1,470		1,039		1,782		4,995		2,006		12,816		80.3		1,569		11,247
Owner-occupied	837		25		283		493		58		1,439		—		3,135		19.7		97		3,038
Total	$	2,052	$	334	$	1,753	$	1,532	$	1,840	$	6,434	$	2,006	$	15,951	100.0	%	$	1,666	$	14,285
Nonperforming loans	$	1	—		—		$	8	—		$	7	$	53	$	69	N/M		—		$	69
Accruing loans past due 90 days or more	—		—		—		2		$	11	11		—		24		N/M		$	12	12
Accruing loans past due 30 through 89 days	—		—		$	11	1		1		23		13		49		N/M		13		36

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

Consumer loan portfolio

Consumer loans outstanding at December 31, 2019, totaled $26.6 billion, an increase of $3.4 billion, or 14.5%, from one year ago, driven by growth in consumer direct lending as a result of the Laurel Road acquisition, residential mortgage loans, and indirect auto lending.

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The home equity portfolio is comprised of loans originated by our Consumer Bank within our 15-state footprint and is the largest segment of our consumer loan portfolio, representing approximately 39% of consumer loans outstanding at year end. 

As shown in Figure 8, we held the first lien position for approximately 61% of the Consumer Bank home equity portfolio at December 31, 2019, and 60% at December 31, 2018. For loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent FICO scores as well as original and updated loan-to-value ratios. This information is used in establishing the ALLL. Our methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.”

Figure 13. Consumer Loans by State

December 31, 2019	Real estate — residential mortgage		Home equity loans		Consumer direct loans		Credit cards		Consumer indirect loans		Total
State
New York	$	1,146	$	2,655	$	548	$	404	$	797	$	5,550
Ohio	601		1,458		461		247		827		3,594
Washington	1,126		1,546		252		102		8		3,034
Pennsylvania	282		677		189		55		477		1,680
Connecticut	1,029		375		68		26		154		1,652
Oregon	517		852		94		48		2		1,513
Colorado	544		428		109		34		2		1,117
Maine	123		434		71		38		359		1,025
Indiana	117		412		131		47		118		825
Massachusetts	257		48		62		6		437		810
Other	1,281		1,389		1,528		123		1,493		5,814
Total	$	7,023	$	10,274	$	3,513	$	1,130	$	4,674	$	26,614
December 31, 2018
New York	$	1,117	$	2,881	$	402	$	415	$	730	$	5,545
Ohio	479		1,538		383		252		506		3,158
Washington	714		1,714		234		104		11		2,777
Connecticut	1,090		413		30		23		143		1,699
Pennsylvania	275		726		83		52		276		1,412
Oregon	366		905		80		47		3		1,401
Colorado	256		509		76		35		2		878
Massachusetts	255		50		27		5		341		678
California	49		27		13		4		38		131
Texas	1		15		8		4		18		46
Other	911		2,364		473		203		1,566		5,517
Total	$	5,513	$	11,142	$	1,809	$	1,144	$	3,634	$	23,242

Loan sales

As shown in Figure 14, during 2019, we sold $12.2 billion of our loans. Sales of loans classified as held for sale generated net gains of $188 million during 2019.

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Figure 14 summarizes our loan sales during 2019 and 2018.

Figure 14. Loans Sold (Including Loans Held for Sale)  

in millions	Commercial		Commercial Real Estate		Commercial Lease Financing		Residential Real Estate		Consumer Direct		Total
2019
Fourth quarter	$	50	$	3,138	$	222	$	559	—		$	3,969
Third quarter	220		2,600		68		569		$	247	3,704
Second quarter	154		1,864		96		329		—		2,443
First quarter	301		1,536		34		225		—		2,096
Total	$	725	$	9,138	$	420	$	1,682	$	247	$	12,212
2018
Fourth quarter	$	157	$	4,918	$	104	$	331	—		$	5,510
Third quarter	247		2,242		52		302		—		2,843
Second quarter	253		2,266		144		308		—		2,971
First quarter	141		2,251		66		284		—		2,742
Total	$	798	$	11,677	$	366	$	1,225	—		$	14,066

Figure 15 shows loans that are either administered or serviced by us but not recorded on the balance sheet; this includes loans that were sold.

Figure 15. Loans Administered or Serviced  

December 31, in millions	2019		2018		2017		2016		2015
Commercial real estate loans	$	347,186	$	291,158	$	238,718	$	218,135	$	211,274
Residential mortgage	6,146		5,209		4,582		4,198		—
Education loans	625		766		932		1,122		1,339
Commercial lease financing	1,047		916		862		899		932
Commercial loans	591		549		488		418		335
Consumer direct	2,243		—		—		—		—
Total	$	357,838	$	298,598	$	245,582	$	224,772	$	213,880

In the event of default by a borrower, we are subject to recourse with respect to approximately $4.9 billion of the $358 billion of loans administered or serviced at December 31, 2019. Additional information about this recourse arrangement is included in Note 22 (“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 “mortgage servicing fees”) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing loans. Additional information about our mortgage servicing assets is included in Note 9 (“Mortgage Servicing Assets”).

Maturities and sensitivity of certain loans to changes in interest rates

Figure 16 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, 2019, approximately 27% of these outstanding loans were scheduled to mature within one year.

Figure 16. Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates

December 31, 2019
in millions	Within One Year		One - Five Years		Over Five Years		Total
Commercial and industrial	$	12,529	$	28,246	$	7,520	$	48,295
Real estate — construction	896		532		130		1,558
Total	$	13,425	$	28,778	$	7,650	$	49,853
Loans with floating or adjustable interest rates (a)			$	25,631	$	4,602	$	30,233
Loans with predetermined interest rates (b)			3,147		3,048		6,195
Total			$	28,778	$	7,650	$	36,428

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

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

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Securities

Our securities portfolio totaled $31.9 billion at December 31, 2019, compared to $30.9 billion at December 31, 2018. Available-for-sale securities were $21.8 billion at December 31, 2019, compared to $19.4 billion at December 31, 2018. Held-to-maturity securities were $10.1 billion at December 31, 2019, compared to $11.5 billion at December 31, 2018.

As shown in Figure 17, 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 17. Mortgage-Backed Securities by Issuer

December 31, in millions	2019		2018
FHLMC	$	5,115	$	7,048
FNMA	12,308		10,076
GNMA	14,112		13,637
Total (a)	$	31,535	$	30,761

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

Securities available for sale

The majority of our securities available-for-sale portfolio consists of Federal Agency CMOs and mortgage-backed securities. CMOs are debt securities secured by a pool of mortgages or mortgage-backed securities. These mortgage securities generate interest income, serve as collateral to support certain pledging agreements, and provide liquidity value under regulatory requirements.

We periodically evaluate our securities available-for-sale portfolio in light of established A/LM objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which we are exposed. These evaluations may cause us to take steps to adjust our overall balance sheet positioning.

In addition, the size and composition of our securities available-for-sale portfolio could vary with our needs for liquidity and the extent to which we are required (or elect) to hold these assets as collateral to secure public funds and trust deposits. Although we generally use debt securities for this purpose, other assets, such as securities purchased under resale agreements or letters of credit, are used occasionally when they provide a lower cost of collateral or more favorable risk profiles.

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Our investing activities continue to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times 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 high quality liquid assets, including GNMA-related securities, is related to liquidity management strategies to satisfy regulatory requirements.

Figure 18 shows the composition, TE yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 7 (“Securities”).

Figure 18. Securities Available for Sale

dollars in millions	U.S. Treasury, Agencies, and Corporations			States and Political Subdivisions			Agency Residential Collateralized Mortgage Obligations(a)			Agency Residential Mortgage-backed Securities(a),(b)			Agency Commercial Mortgage-backed Securities(a)			Other Securities		Total			Weighted-Average Yield(b)
December 31, 2019
Remaining maturity:
One year or less	$	294		$	4		$	182		$	3		—			$	11	$	494		2.12	%
After one through five years	40			—			11,923			1,339			$	4,184		—		17,486			2.46
After five through ten years	—			—			678			365			2,813			—		3,856			2.82
After ten years	—			—			—			7			—			—		7			3.07
Fair value	$	334		$	4		$	12,783		$	1,714		$	6,997		$	11	$	21,843		—
Amortized cost	334			4			12,772			1,677			6,898			7		21,692			2.52	%
Weighted-average yield (b)	1.86		%	5.52		%	2.34		%	2.76		%	2.81		%	—		2.52		%	—
Weighted-average maturity	.7 years			.8 years			3.3 years			4.1 years			5.0 years			.5 years		3.9 years			—
December 31, 2018
Fair value	$	147		$	7		$	13,962		$	2,105		$	3,187		$	20	$	19,428		—
Amortized cost	150			7			14,315			2,128			3,300			17		19,917			2.46	%

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

(b) Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.

Held-to-maturity securities

Federal Agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance comprises asset-back securities and foreign bonds. Figure 19 shows the composition, yields, and remaining maturities of these securities.

Figure 19. Held-to-Maturity Securities

dollars in millions	Agency Residential Collateralized Mortgage Obligations(a)			Agency Residential Mortgage-backed Securities(a)			Agency Commercial Mortgage-backed Securities(a)			Asset-backed securities			Other Securities			Total			Weighted-Average Yield(b)
December 31, 2019
Remaining maturity:
One year or less	$	59		—			—			$	3		$	4		$	66		1.95	%
After one through five years	4,970			$	162		$	2,022		8			11			7,173			2.35
After five through ten years	663			247			1,918			—			—			2,828			2.64
After ten years	—			—			—			—			—			—			—
Amortized cost	$	5,692		$	409		$	3,940		$	11		$	15		$	10,067		2.43	%
Fair value	5,666			415			4,009			11			15			10,116			—
Weighted-average yield(b)	2.12		%	2.63		%	2.86		%	2.48		%	3.29		%	2.43		%	—
Weighted-average maturity	3.5 years			5.5 years			5.5 years			.4 years			1.9 years			4.4 years			—
December 31, 2018
Amortized cost	$	7,021		$	490		$	3,996		—			$	12		$	11,519		2.41	%
Fair value	6,769			476			3,865			—			12			11,122			—

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

(b) Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.

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Deposits and other sources of funds

Figure 20. Breakdown of Deposits at December 31, 2019

Deposits are our primary source of funding. At December 31, 2019, our deposits totaled $111.9 billion, an increase of $4.6 billion, compared to December 31, 2018. The increase in deposits compared to the prior year reflects our strategy to acquire and expand client relationships.

Wholesale funds, consisting of short-term borrowings and long-term debt, totaled $13.5 billion at December 31, 2019, compared to $14.6 billion at December 31, 2018. The decrease from the prior year reflects a shift in funding mix stemming from strong deposit growth.

Figure 21 shows the maturity distribution of time deposits of $100,000 or more.

Figure 21. Maturity Distribution of Time Deposits of $100,000 or More

December 31, 2019	Total
in millions
Remaining maturity:
Three months or less	$	1,748
After three through six months	1,727
After six through twelve months	2,209
After twelve months	914
Total	$	6,598

Capital

The objective of management of capital is to maintain capital levels consistent with our risk appetite and sufficient in size to operate within a wide range of operating environments. We have identified three primary uses of capital:

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

2. Maintaining or increasing our Common Share dividend; and

3. Returning capital in the form of Common Share repurchases to our shareholders.

The following sections discuss certain ways we have deployed our capital. For further information, see the Consolidated Statements of Changes in Equity and Note 24 (“Shareholders' Equity”).

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(a) Common Share repurchases were suspended during the third quarter of 2015 due to the then pending merger with First Niagara. We resumed our Common Share repurchase program during the third quarter of 2016 upon the completion of the First Niagara merger.

Dividends

Consistent with our 2018 capital plan, the Board declared a quarterly dividend of $.170 per Common Share for the first and second quarters of 2019. The Board declared a quarterly dividend of $.185 per Common Share for the third and fourth quarters of 2019, consistent with our 2019 capital plan. These quarterly dividend payments brought our annual dividend to $.71 per Common Share for 2019.

Common Shares outstanding

Our Common Shares are traded on the NYSE under the symbol KEY with 32,943 holders of record at February 21, 2020. Our book value per Common Share was $15.54 based on 977.2 million shares outstanding at December 31, 2019, compared to $13.90 based on 1.020 billion shares outstanding at December 31, 2018. At December 31, 2019, our tangible book value per Common Share was $12.56, compared to $11.14 at December 31, 2018.

Figure 35 in the section entitled “Fourth Quarter Results” shows per Common Share earnings and dividends paid by quarter for each of the last two years.

Figure 22 shows activities that caused the change in our outstanding Common Shares over the past two years.

Figure 22. Changes in Common Shares Outstanding

			2019 Quarters
in thousands	2019		Fourth		Third		Second		First		2018
Shares outstanding at beginning of period	1,019,503		988,538		1,003,114		1,013,186		1,019,503		1,069,084
Common Shares repurchased	(50,247	)	(12,968	)	(15,076	)	(10,412	)	(11,791	)	(56,292	)
Shares reissued (returned) under employee benefit plans	7,933		1,619		500		340		5,474		6,711
Shares outstanding at end of period	977,189		977,189		988,538		1,003,114		1,013,186		1,019,503

During 2019, Common Shares outstanding decreased by 42.3 million shares due to Common Share repurchases under our 2018 and 2019 capital plans.

At December 31, 2019, we had 279.5 million treasury shares, compared to 237.2 million treasury shares at December 31, 2018. Going forward, we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.

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, 2019. Our capital and liquidity levels are intended to position us to weather an adverse operating environment 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 11.75% at December 31, 2019, compared to 11.17% at December 31, 2018. Our tangible common equity to tangible assets ratio was 8.64% at December 31, 2019, compared to 8.30% at December 31, 2018. The new minimum capital and leverage ratios under the Regulatory Capital Rules together with the estimated ratios of KeyCorp at December 31, 2019, calculated on a fully phased-in basis, are set forth under the heading “Basel III” in the “Supervision and Regulation” section in Item 1 of this report.

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Figure 23 represents the details of our regulatory capital positions at December 31, 2019, and December 31, 2018, under the Regulatory Capital Rules. Information regarding the regulatory capital ratios of KeyCorp’s banking subsidiaries is presented in Note 24 (“Shareholders' Equity”).

Figure 23. Capital Components and Risk-Weighted Assets

December 31,  dollars in millions		2019			2018
COMMON EQUITY TIER 1
Key shareholders’ equity (GAAP)		$	17,038		$	15,595
Less:	Preferred Stock (a)	1,856			1,421
	Common Equity Tier 1 capital before adjustments and deductions	15,182			14,174
Less:	Goodwill, net of deferred taxes	2,584			2,455
	Intangible assets, net of deferred taxes	207			250
	Deferred tax assets	9			9
	Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes	115			(372		)
	Accumulated gains (losses) on cash flow hedges, net of deferred taxes	250			(78		)
	Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes	(339		)	(381		)
	Total Common Equity Tier 1 capital	12,356			12,291
TIER 1 CAPITAL
Common Equity Tier 1		12,356			12,291
Additional Tier 1 capital instruments and related surplus		1,856			1,421
Less:	Deductions	—			—
	Total Tier 1 capital	14,212			13,712
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus		1,546			1,279
Allowance for losses on loans and liability for losses on lending-related commitments (b)		978			962
Less:	Deductions	—			—
	Total Tier 2 capital	2,524			2,241
	Total risk-based capital	$	16,736		$	15,953
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet		$	102,441		$	98,232
Risk-weighted off-balance sheet exposure		27,303			24,593
Market risk-equivalent assets		1,121			963
	Gross risk-weighted assets	130,865			123,788
Less:	Excess allowance for loan and lease losses	—			—
	Net risk-weighted assets	$	130,865		$	123,788
AVERAGE QUARTERLY TOTAL ASSETS		$	143,910		$	138,689
CAPITAL RATIOS
Tier 1 risk-based capital		10.86		%	11.08		%
Total risk-based capital		12.79			12.89
Leverage (c)		9.88			9.89
Common Equity Tier 1		9.44			9.93

(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 $10 million and $14 million of allowance classified as “discontinued assets” on the balance sheet at December 31, 2019, and December 31, 2018, respectively.

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

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

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 “Principles of Consolidation and Basis of Presentation” and in Note 13 (“Variable Interest Entities”).

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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, 2019, is presented in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) under the heading “Commitments to Extend Credit or Funding.” Figure 24 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.

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 22 under the heading “Other Off-Balance Sheet Risk.”

Contractual obligations

Figure 24 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments at December 31, 2019, by the specific time periods in which related payments are due or commitments expire.

Figure 24. Contractual Obligations and Other Off-Balance Sheet Commitments

December 31, 2019	Within 1   year		After 1   through 3   years		After 3   through 5   years		After 5     years		Total
in millions
Contractual obligations:(a)
Deposits with no stated maturity	$	100,218	—		—		—		$	100,218
Time deposits of $100,000 or more	5,684		$	873	$	31	$	10	6,598
Other time deposits	4,078		867		93		16		5,054
Federal funds purchased and securities sold under repurchase agreements	387		—		—		—		387
Bank notes and other short-term borrowings	705		—		—		—		705
Long-term debt	1,010		5,970		525		4,943		12,448
Noncancellable operating leases	149		259		189		278		875
Liability for unrecognized tax benefits	19		—		—		—		19
Purchase obligations (b)	200		225		94		18		537
Total	$	112,450	$	8,194	$	932	$	5,265	$	126,841
Lending-related and other off-balance sheet commitments:
Commercial, including real estate	$	15,647	$	14,480	$	16,922	$	1,235	$	48,284
Home equity	436		800		618		8,091		9,945
Credit cards	6,560		—		—		—		6,560
Purchase cards	729		—		—		—		729
Commercial letters of credit	37		47		7		—		91
Principal investing commitments	20		1		—		—		21
Tax credit investment commitments	547		—		—		—		547
Total	$	23,976	$	15,328	$	17,547	$	9,326	$	66,177

(a) Deposits and borrowings exclude interest.

(b) Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees.

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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 22 (“Commitments, Contingent Liabilities, and Guarantees”) 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 shown in the following chart, and we 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.

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. The table below depicts our risk management hierarchy and associated responsibilities and activities of each group.

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Group	Overview and Responsibilities	Activities
Board of Directors	– Oversight capacity – Ensure Key’s risks are managed in a manner that is not only effective and balanced, but also has a fiduciary duty to the shareholders	– 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 – Is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately – Challenges management and ensures accountability
Board of Directors Audit Committee (a)	– 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 – Financial reporting, legal matters, and fraud risk	– Meets with management and approves significant policies relating to the risk areas overseen by the Audit Committee – Receives reports on enterprise risk – Meets bi-monthly – Convenes to discuss the content of our financial disclosures and quarterly earnings releases
Board of Directors Risk Committee (a)	– Assist 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 – Assist the Board in overseeing risks related to capital adequacy, capital planning, and capital actions	– Reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, which includes an annual review of the ERM Policy, including the Risk Appetite Statement, and management and ERM reports – Approves any material changes to the charter of the ERM Committee and significant policies relating to risk management, including corporate risk tolerances for major risk categories
ERM Committee	– Chaired by the Chief Executive Officer and comprising other senior level executives – Manage risk and ensure that the corporate risk profile is managed in a manner consistent with our risk appetite – Oversees the ERM Program, which encompasses our risk philosophy, policy, framework, and governance structure for the management of risks across the entire company	– Approves and manages the risk-adjusted capital framework we use to manage risks
Disclosure Committee	– Includes representatives from each of the Three Lines of Defense – Meets quarterly to review recent internal and external events to determine whether all appropriate disclosures have been made in reports filed with the SEC	– Convenes quarterly to discuss the content of our 10-Q and 10-K
Tier 2 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. Its role is to provide independent assessment and testing of the effectiveness of, appropriateness of, and adherence to KeyCorp’s risk management policies, practices, and controls	– Supports the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments
Chief Risk Officer	– Ensure that relevant risk information is properly integrated into strategic and business decisions – Ensure appropriate ownership of risks	– Provides input into performance and compensation decisions – Assesses aggregate enterprise risk – Monitors capabilities to manage critical risks – Executes appropriate Board and stakeholder reporting

(a) 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.

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. We are exposed to market risk both in our trading and nontrading activities, which include asset and liability management activities. 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.

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Trading market risk

Key incurs market risk as a result of trading activities that are used in support of client facilitation and hedging activities, principally within our investment banking and capital markets businesses. Key has exposures to a wide range of risk factors including 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 and hedging activities in the derivative and fixed income markets, including securitization exposures. At December 31, 2019, we did not have any re-securitization positions. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks including but not limited to credit risk and interest rate risk. The risks associated with these activities are mitigated in accordance with the Market Risk hedging policy.  The majority of our positions are traded in active markets.

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

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

Covered positions. We monitor the market risk of our covered positions as defined in the Market Risk Rule, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. Key’s covered positions may also include mortgage-backed and asset-backed securities that may be identified as securitization positions or re-securitization positions under the Market Risk Rule. The MRM as well as the LOB that trades securitization positions monitor the positions, the portfolio composition and the risks identified in this section on a daily basis consistent with the Market Risk policies and procedures. At December 31, 2019, covered positions did not include any re-securitization positions. 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 and asset-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.

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. The 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.

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We use a historical simulation VaR model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions and other non-covered positions. Historical scenarios are customized for specific positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level.

The VaR model is an effective tool in estimating ranges of possible gains and losses on our positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs, and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s internal model validation group on an annual basis. The Model Risk 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, 2019, and December 31, 2018. 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 with a one day holding period for all covered positions was $.9 million at December 31, 2019, and $.8 million at December 31, 2018. Figure 25 summarizes our VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended December 31, 2019, and December 31, 2018.

Figure 25. VaR for Significant Portfolios of Covered Positions

	2019								2018
	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	$	1.2	$	.6	$	.9	$	.8	$	.8	$	.3	$	.6	$	.6
Derivatives:
Interest rate	$	.1	.1		$	.1	$	.1	$	.2	.1		$	.1	$	.1

Stressed VaR is calculated by running the portfolios through a predetermined stress period which is approved by the Market Risk Committee and is calculated at the 99% confidence level using the same model and assumptions used for general VaR. The aggregate stressed VaR for all covered positions was $5.1 million at December 31, 2019, and at December 31, 2018. Figure 26 summarizes our stressed VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended December 31, 2019, and December 31, 2018.

Figure 26. Stressed VaR for Significant Portfolios of Covered Positions

	2019								2018
	Three months ended December 31,								Three months ended December 31,
in millions	High		Low		Mean		December 31,		High		Low		Mean		December 31,
Trading account assets:
Fixed income	$	5.7	$	3.2	$	4.5	$	4.3	$	5.6	$	3.6	$	4.6	$	3.9
Derivatives:
Interest rate	$	1.2	$	.2	$	.4	$	.7	$	.9	$	.5	$	.6	$	.6

Internal capital adequacy assessment.  Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset amount, which consists of a VaR

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component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on including the securitization positions. The aggregate market value of the securitization positions as defined by the Market Risk Rule was $44.9 million at December 31, 2019. This amount included $16.3 million of mortgage-backed securities positions and $28.6 million of asset-backed securities positions. 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. Market risk weighted assets, including the specific risk calculations, are run quarterly by the MRM in accordance with the Market Risk Rule 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 in accordance with the Board approved ERM policy.

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

• “Reprice risk” is the exposure to changes in the level of interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (e.g., deposits used to fund loans) do not mature or reprice at the same time.

• “Basis risk” is the exposure to asymmetrical changes in interest rate 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.

• “Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities, or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or prepayments are not mitigated with an offsetting position or appropriate compensation.

The management of nontrading market risk is centralized within Corporate Treasury. The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and the ALCO review reports on the interest rate risk exposures described above. In addition, the ALCO reviews reports on stress tests and sensitivity analyses related to interest rate risk. 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. The MRM, as the second line of defense, provides additional oversight.

Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments and balance sheet growth projections based on a most likely macroeconomic view. The results of this simulation analysis reflect management's desired interest rate risk positioning. The modeling incorporates investment portfolio and swap portfolio balances consistent with management's desired interest rate risk positioning. The simulation model estimates the amount of net interest income at risk by simulating the change in net interest income that would occur if rates were to gradually increase or decrease over the next 12 months (subject to a 25 basis point floor in rates).

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Figure 27 presents the results of the simulation analysis at December 31, 2019, and December 31, 2018. At December 31, 2019, our simulated impact to changes in interest rates was modest. The asset sensitive position declined from 2018 as a result of hedging actions executed to guide the position closer to neutral over time. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual, parallel 200 basis point increase or 200 basis point decrease (subject to a 25 basis point floor in rates) in interest rates over the next 12 months would adversely affect net interest income over the same period by more than 5.5%. Current modeled exposure is within Board approved tolerances.

Figure 27. Simulated Change in Net Interest Income

	December 31, 2019				December 31, 2018
Basis point change assumption (short-term rates)	-150		+200		-200		+200
Tolerance level	-5.50	%	-5.50	%	-5.50	%	-5.50	%
Interest rate risk assessment	-2.47	%	-1.45	%	-4.89	%	2.22	%

Simulation analysis produces a sophisticated estimate of interest rate exposure based on assumptions input into the model. We tailor certain assumptions to the specific interest rate environment and yield curve shape being modeled and validate those assumptions on a regular basis. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, changes in management’s desired interest rate risk positioning, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.

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

The results of additional assessments indicate that net interest income could increase or decrease from the base simulation results presented in Figure 27. 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. If fixed rate assets increase by $1 billion, or fixed rate liabilities decrease by $1 billion, then the benefit to rising rates would decrease by approximately 25 basis points. If the interest-bearing liquid deposit beta assumption increases or decreases by 5% (e.g., 40% to 45%), then the benefit to rising rates would decrease or increase by approximately 95 basis points.

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. Corporate Treasury discretionary activities related to funding, investing, and hedging may also change as a result of changes in customer business flows or changes in management’s desired interest rate risk positioning. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.

We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a 12-month horizon. To capture longer-term exposures, we calculate exposures to changes of the EVE as discussed in the following section.

Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities, 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.  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

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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, 2019.

Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing securities, issuing term debt with floating or fixed interest rates, and using derivatives. We predominantly use interest rate swaps and options, which modify the interest rate characteristics of certain assets and liabilities.

Figure 28 shows all derivative positions that we hold for A/LM purposes. The swap 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 28. Portfolio Swaps and Options by Interest Rate Risk Management Strategy

	December 31, 2019
							Weighted-Average					December 31, 2018
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)	$	19,270	$	312			2.1	2.3	%	1.7	%	$	10,720	$	(87	)
Receive fixed/pay variable — conventional debt	8,189		240				3.2	2.2		1.7		9,923		(7		)
Receive fixed/pay variable — forward A/LM	3,400		32				1.9	1.9		1.8		3,050		45
Pay fixed/receive variable — conventional debt	50		(7		)		8.5	2.1		3.6		50		(4		)
Total portfolio swaps	$	30,909	$	577		(c)	2.4	2.2	%	1.7	%	$	23,743	$	(53	)	(c)
Floors — conventional A/LM — purchased (b)	$	4,200	$	149			2.0	—		—		$	4,760	—
Floors — conventional A/LM — sold (b)	3,900		(15		)		2.0	—		—		—		—
Total floors	$	8,100	$	134			2.0	—		—		$	4,760	—

(a) Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities.

(b) Conventional A/LM floors do not have a stated receive rate or pay rate and are given a strike price on the option.

(c) Excludes accrued interest of $543 million and $114 million at December 31, 2019, and December 31, 2018, 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 Corporate Treasury Oversight group within 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

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that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis.

Factors affecting liquidity

Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, global pandemics, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general, may adversely affect the cost and availability of normal funding sources.

Our credit ratings at December 31, 2019, are shown in Figure 29. 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 29. Credit Ratings

December 31, 2019	Short-Term Borrowings	Long-Term Deposits	Senior Long-Term Debt	Subordinated Long-Term Debt	Capital Securities	Preferred Stock
KEYCORP (THE PARENT COMPANY)
Standard & Poor’s	A-2	N/A	BBB+	BBB	BB+	BB+
Moody’s	P-2	N/A	Baa1	Baa1	Baa2	Baa3
Fitch	F1	N/A	A-	BBB+	BB+	BB
DBRS	R-1(low)	N/A	A	A (low)	A (low)	BBB
KEYBANK
Standard & Poor’s	A-2	N/A	A-	BBB+	N/A	N/A
Moody’s	P-2	Aa3	A3	Baa1	N/A	N/A
Fitch	F1	A	A-	BBB+	N/A	N/A
DBRS	R-1(middle)	A (high)	A (high)	A	N/A	N/A

Managing liquidity risk

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

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

We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain 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, 2019, totaled $25.2 billion, consisting of $24.0 billion of unpledged securities, $140 million of securities available for secured funding at the FHLB, and $1.1 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, 2019, our unused borrowing capacity secured by loan collateral was $25.2 billion at the Federal

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Reserve Bank of Cleveland and $8.0 billion at the FHLB of Cincinnati. In 2019, Key’s outstanding FHLB of Cincinnati advances decreased by $1.0 billion due to paydowns.

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, 2019, our loan-to-deposit ratio was 87%), which we calculate as the sum of total loans, loans held for sale, and nonsecuritized discontinued loans divided by 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 20 (“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 1, 2019, KeyBank issued $600 million of 3.300% Senior Bank Notes due February 1, 2022, and $400 million of Floating Rate Senior Bank Notes due February 1, 2022. On March 13, 2019, KeyBank issued $350 million of 3.900% Subordinated Bank Notes due April 13, 2029.

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 fund capital distributions in the form of dividends and share buybacks.

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 number of months into the future where projected obligations can be met with the current quantity 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, 2019, KeyCorp held $3.8 billion in cash, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.

Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, 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 2019, KeyBank paid $1.2 billion in cash dividends to KeyCorp. At January 1, 2020, KeyBank had regulatory capacity to pay $920 million in dividends to KeyCorp without prior regulatory approval.

On April 29, 2019, KeyCorp issued $450 million of 5.625% fixed-for-life Perpetual Preferred Stock.

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On September 11, 2019, KeyCorp issued $750 million of 2.550% Senior Notes due October 1, 2029, under its Medium-Term Note Program.

On October 21, 2019, KeyCorp redeemed for cash all of the outstanding $300 million aggregate principal amount of its 6.750% Senior Notes due March 19, 2020.

On February 6, 2020, KeyCorp issued $800 million of 2.250% Senior Notes due April 6, 2027, under its Medium-Term Note Program.

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, partially offset by lower balances held at the Federal Reserve. 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.

The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the years ended December 31, 2019, and December 31, 2018.

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, add financial and payments products, 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 management credit policies and recommends significant credit policies to the Enterprise Risk Management Committee, the KeyBank Board, and the Risk Committee of the Board for approval. These policies are communicated throughout the organization to foster a consistent approach to granting credit.

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

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.

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Allowance for loan and lease losses

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 incurred loss rates to existing loans with similar risk characteristics. We exercise judgment to assess any adjustment to the incurred 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. As described in Note 1, (“Summary of Significant Accounting Policies”), on January 1, 2020, we adopted ASC 326, Financial Instruments — Credit Losses, and as such, an expected credit loss methodology, specifically current expected credit losses for the remaining life of our loans and leases, will be used to estimate the appropriate level of the ALLL. The ALLL at December 31, 2019, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date. For more information about impaired loans, see Note 5 (“Asset Quality”).

As shown in Figure 30, our ALLL from continuing operations increased by $17 million, or 1.9%, from December 31, 2018. Our commercial ALLL increased by $8 million, or 1.1%, from December 31, 2018, primarily due to loan growth over the period and risk rating migration. Our consumer ALLL increased by $9 million, or 6.4%, from December 31, 2018. The consumer ALLL increase was primarily due to loan growth and modest shifts in credit quality metrics.

Figure 30. Allocation of the Allowance for Loan and Lease Losses  

	2019						2018						2017
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 and industrial	$	551	61.2	%	51.0	%	$	532	60.2	%	51.1	%	$	529	60.3	%	48.4	%
Commercial real estate:
Commercial mortgage	143		15.9		14.3		142		16.1		15.9		133		15.2		16.3
Construction	22		2.4		1.6		33		3.8		1.9		30		3.4		2.3
Total commercial real estate loans	165		18.3		15.9		175		19.9		17.8		163		18.6		18.6
Commercial lease financing	35		3.9		5.0		36		4.1		5.1		43		4.9		5.6
Total commercial loans	751		83.4		71.9		743		84.2		74.0		735		83.8		72.6
Real estate — residential mortgage	7		.8		7.4		7		.8		6.2		7		0.8		6.3
Home equity loans	31		3.5		10.9		35		3.9		12.4		43		4.9		13.9
Consumer direct loans	34		3.8		3.7		30		3.4		2.0		28		3.2		2.1
Credit cards	47		5.2		1.2		48		5.4		1.3		44		5.0		1.3
Consumer indirect loans	30		3.3		4.9		20		2.3		4.1		20		2.3		3.8
Total consumer loans	149		16.6		28.1		140		15.8		26.0		142		16.2		27.4
Total loans (a)	$	900	100.0	%	100.0	%	$	883	100.0	%	100.0	%	$	877	100.0	%	100.0	%
	2016						2015
	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 and industrial	$	508	59.2	%	46.2	%	$	450	56.5	%	52.2	%
Commercial real estate:
Commercial mortgage	144		16.8		17.6		134		16.8		13.3
Construction	22		2.6		2.7		25		3.2		1.7
Total commercial real estate loans	166		19.4		20.3		159		20.0		15.0
Commercial lease financing	42		4.9		5.4		47		5.9		6.7
Total commercial loans	716		83.5		71.9		656		82.4		73.9
Real estate — residential mortgage	17		2.0		6.5		18		2.3		3.7
Home equity loans	54		6.3		14.7		57		7.2		17.3
Consumer direct loans	24		2.8		2.1		20		2.5		2.7
Credit cards	38		4.4		1.3		32		4.0		1.3
Consumer indirect loans	9		1.0		3.5		13		1.6		1.1
Total consumer loans	142		16.5		28.1		140		17.6		26.1
Total loans (a)	$	858	100.0	%	100.0	%	$	796	100.0	%	100.0	%

(a) Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $10 million at December 31, 2019, $14 million at December 31, 2018, $16 million at December 31, 2017, $24 million at December 31, 2016, and $28 million at December 31, 2015.

Net loan charge-offs

Figure 31 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 32.

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Over the past 12 months, net loan charge-offs increased $190 million. This increase was primarily due to $139 million of charge-offs related to a previously disclosed fraud loss. In 2020, we expect net loan charge-offs to average loans to remain below our long-term targeted range of 40 to 60 basis points.

Figure 31. Net Loan Charge-offs from Continuing Operations ^(a) 

Year ended December 31,
dollars in millions	2019			2018			2017			2016			2015
Commercial and industrial	$	292		$	122		$	93		$	107		$	61
Real estate — commercial mortgage	6			18			9			(4		)	(2		)
Real estate — construction	5			(2		)	1			7			—
Commercial lease financing	21			5			8			9			4
Total commercial loans	324			143			111			119			63
Real estate — residential mortgage	1			1			(1		)	3			3
Home equity loans	11			10			15			16			21
Consumer direct loans	34			29			28			22			18
Credit cards	37			37			39			31			28
Consumer indirect loans	17			14			16			14			9
Total consumer loans	100			91			97			86			79
Total net loan charge-offs	$	424		$	234		$	208		$	205		$	142
Net loan charge-offs to average loans	.46		%	.26		%	.24		%	.29		%	.24		%
Net loan charge-offs from discontinued operations — education lending business	$	7		$	10		$	18		$	17		$	22

 

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

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Figure 32. Summary of Loan and Lease Loss Experience from Continuing Operations

Year ended December 31, dollars in millions	2019			2018			2017			2016			2015
Average loans outstanding	$	91,511		$	88,338		$	86,365		$	71,148		$	58,594
Allowance for loan and lease losses at beginning of period	$	883		$	877		$	858		$	796		$	794
Loans charged off:
Commercial and industrial	319			159			133			118			77
Real estate — commercial mortgage	8			21			11			5			4
Real estate — construction	5			—			2			9			1
Total commercial real estate loans (a)	13			21			13			14			5
Commercial lease financing	26			10			14			12			11
Total commercial loans (b)	358			190			160			144			93
Real estate — residential mortgage	3			3			3			4			6
Home equity loans	19			21			30			30			32
Consumer direct loans	41			36			34			27			24
Credit cards	44			44			44			35			30
Consumer indirect loans	34			30			31			21			18
Total consumer loans	141			134			142			117			110
Total loans charged off	499			324			302			261			203
Recoveries:
Commercial and industrial	27			37			40			11			16
Real estate — commercial mortgage	2			3			2			9			6
Real estate — construction	—			2			1			2			1
Total commercial real estate loans (a)	2			5			3			11			7
Commercial lease financing	5			5			6			3			7
Total commercial loans (b)	34			47			49			25			30
Real estate — residential mortgage	2			2			4			1			3
Home equity loans	8			11			15			14			11
Consumer direct loans	7			7			6			5			6
Credit cards	7			7			5			4			2
Consumer indirect loans	17			16			15			7			9
Total consumer loans	41			43			45			31			31
Total recoveries	75			90			94			56			61
Net loan charge-offs	(424		)	(234		)	(208		)	(205		)	(142		)
Provision (credit) for loan and lease losses	441			240			227			267			145
Foreign currency translation adjustment	—			—			—			—			(1		)
Allowance for loan and lease losses at end of year	$	900		$	883		$	877		$	858		$	796
Liability for credit losses on lending-related commitments at beginning of the year	$	64		$	57		$	55		$	56		$	35
Provision (credit) for losses on lending-related commitments	4			6			2			(1		)	21
Liability for credit losses on lending-related commitments at end of the year (c)	$	68		$	63		$	57		$	55		$	56
Total allowance for credit losses at end of the year	$	968		$	946		$	934		$	913		$	852
Net loan charge-offs to average total loans	.46		%	.26		%	.24		%	.29		%	.24		%
Allowance for loan and lease losses to period-end loans	.95			.99			1.01			1.00			1.33
Allowance for credit losses to period-end loans	1.02			1.06			1.08			1.06			1.42
Allowance for loan and lease losses to nonperforming loans	156.0			162.9			174.4			137.3			205.7
Allowance for credit losses to nonperforming loans	167.8			174.5			185.7			146.1			220.2
Discontinued operations — education lending business:
Loans charged off	$	12		$	15		$	26		$	28		$	35
Recoveries	5			5			8			11			13
Net loan charge-offs	$	(7	)	$	(10	)	$	(18	)	$	(17	)	$	(22	)

(a) See Figure 12 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.

(b) See Figure 11 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.

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

Nonperforming assets

Figure 33 shows the composition of our nonperforming assets. As shown in Figure 33, nonperforming assets increased $138 million during 2019. The increase was primarily driven by the transfer of three criticized commercial loans as well as a number of consumer residential mortgages that were moved to nonperforming loans held for sale. See Note 1 (“Summary of Significant Accounting Policies”) under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” for a summary of our nonaccrual and charge-off policies.

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Figure 33. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

December 31,
dollars in millions	2019			2018			2017			2016			2015
Commercial and industrial	$	264		$	152		$	153		$	297		$	82
Real estate — commercial mortgage	83			81			30			26			19
Real estate — construction	2			2			2			3			9
Total commercial real estate loans (a)	85			83			32			29			28
Commercial lease financing	6			9			6			8			13
Total commercial loans (b)	355			244			191			334			123
Real estate — residential mortgage	48			62			58			56			64
Home equity loans	145			210			229			223			190
Consumer direct loans	4			4			4			6			2
Credit cards	3			2			2			2			2
Consumer indirect loans	22			20			19			4			6
Total consumer loans	222			298			312			291			264
Total nonperforming loans (c)	577			542			503			625			387
Nonperforming loans held for sale	94			—			—			—			—
OREO	35			35			31			51			14
Other nonperforming assets	9			—			—			—			2
Total nonperforming assets (c)	$	715		$	577		$	534		$	676		$	403
Accruing loans past due 90 days or more	$	101		$	112		$	89		$	87		$	72
Accruing loans past due 30 through 89 days	389			312			359			404			208
Restructured loans — accruing and nonaccruing (d)	347			399			317			280			280
Restructured loans included in nonperforming loans (d)	183			247			189			141			159
Nonperforming assets from discontinued operations — education lending business	7			8			7			5			7
Nonperforming loans to period-end portfolio loans (c)	.61		%	.61		%	.58		%	.73		%	.65		%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets (c)	.75			.64			.62			.79			.67

(a) See Figure 12 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.

(b) See Figure 11 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.

(c) Nonperforming loan balances exclude $446 million, $575 million, $738 million, $865 million, and $11 million of PCI loans at December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, 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. See Note 5,(“Asset Quality“) for more information on our TDRs.

Figure 34 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, 2019, and December 31, 2018.

Figure 34. Summary of Changes in Nonperforming Loans from Continuing Operations

				2019 Quarters
in millions	2019			Fourth			Third			Second			First			2018
Balance at beginning of period	$	542		$	585		$	561		$	548		$	542		$	503
Loans placed on nonaccrual status	924			268			271			189			196			723
Charge-offs	(380		)	(114		)	(91		)	(84		)	(91		)	(321		)
Loans sold	(57		)	(1		)	—			(38		)	(18		)	(17		)
Payments	(141		)	(59		)	(37		)	(23		)	(22		)	(172		)
Transfers to OREO	(19		)	(3		)	(4		)	(4		)	(8		)	(24		)
Transfers to nonperforming loans held for sale	(125		)	(47		)	(78		)	—			—			—
Transfers to other nonperforming assets	(13		)	—			—			—			(13		)	—
Loans returned to accrual status	(154		)	(52		)	(37		)	(27		)	(38		)	(150		)
Balance at end of period (a)	$	577		$	577		$	585		$	561		$	548		$	542

(a) Nonperforming loan balances exclude $446 million and $575 million of PCI loans at December 31, 2019, and December 31, 2018, respectively.

Operational and compliance risk management

Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the Internet to conduct our business activities. Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key are subject to heightened prudential standards and regulation. This heightened level of regulation has increased our operational risk. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation, or foregone opportunities.

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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. The Operational Risk Committee supports the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. The Operational Risk Committee includes attendees from each of the Three Lines of Defense. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Risk and Audit Committees and independently supports the Risk Committee’s oversight of these controls.

Cybersecurity

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

Cyberattack risks may also occur with our third-party technology service providers, and may result in financial loss or liability that could adversely affect our financial condition or results of operations. Cyberattacks could also interfere with third-party providers’ ability to fulfill their contractual obligations to us. Recent high-profile cyberattacks have targeted retailers, credit bureaus, 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. We may also incur expenses to enhance our systems or processes to protect against cyber or other security incidents. 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.

As described in more detail in “Risk Management — Overview” in Item 7 of this report, 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’s Risk Committee has primary oversight for enterprise-wide risk at KeyCorp, including operational risk (which includes cybersecurity). The Risk Committee reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, including cyber-related risk. The ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk (including cyber-related risk) and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Committee reports to the Board’s Risk Committee.

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GAAP to Non-GAAP Reconciliations

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not

audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company,

they have limitations as analytical tools, and should not be considered in isolation, nor as a substitute for analyses

of results as reported under GAAP.

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes that these ratios may assist investors in analyzing Key’s capital position without regard to the effects of intangible assets and preferred stock. Since analysts and banking regulators may assess our capital adequacy using tangible common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases.

Year ended December 31,
dollars in millions		2019			2018			2017			2016			2015
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP)		$	17,038		$	15,595		$	15,023		$	15,240		$	10,746
Less:	Intangible assets (a)	2,910			2,818			2,928			2,788			1,080
	Preferred Stock (b)	1,856			1,421			1,009			1,640			281
	Tangible common equity (non-GAAP)	$	12,272		$	11,356		$	11,086		$	10,812		$	9,385
Total assets (GAAP)		$	144,988		$	139,613		$	137,698		$	136,453		$	95,131
Less:	Intangible assets (a)	2,910			2,818			2,928			2,788			1,080
	Tangible assets (non-GAAP)	$	142,078		$	136,795		$	134,770		$	133,665		$	94,051
Tangible common equity to tangible assets ratio (non-GAAP)		8.64		%	8.30		%	8.23		%	8.09		%	9.98		%
Average tangible common equity
Average Key shareholders’ equity (GAAP)		$	16,636		$	15,131		$	15,224		$	12,647		$	10,626
Less:	Intangible assets (average) (c)	2,909			2,869			2,837			1,825			1,085
	Preferred Stock (average)	1,755			1,205			1,137			627			290
	Average tangible common equity (non-GAAP)	$	11,972		$	11,057		$	11,250		$	10,195		$	9,251
Return on average tangible common equity from continuing operations
Income (loss) from continuing operations attributable to Key common shareholders (GAAP)		$	1,611		$	1,793		$	1,219		$	753		$	892
Average tangible common equity (non-GAAP)		$	11,972		$	11,057		$	11,250		$	10,195		$	9,251
Return on average tangible common equity from continuing operations (non-GAAP)		13.46		%	16.22		%	10.84		%	7.39		%	9.64		%
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)		$	1,620		$	1,800		$	1,226		$	754		$	893
Average tangible common equity (non-GAAP)		11,972			11,057			11,250			10,195			9,251
Return on average tangible common equity consolidated (non-GAAP)		13.53		%	16.28		%	10.90		%	7.40		%	9.65		%

(a) For the years ended December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, intangible assets exclude $7 million, $14 million, $26 million, $42 million, and $45 million, respectively, of period-end purchased credit card relationships.

(b) Net of capital surplus.

(c) For the years ended December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, and December 31, 2015, average intangible assets exclude $10 million, $20 million, $34 million, $43 million, and $55 million, respectively, of average purchased credit card relationships.

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 to evaluate how effectively management is controlling noninterest expenses in generating revenue, as they develop earnings forecasts and peer bank analysis.

Year ended December 31,
dollars in millions		2019			2018			2017			2016			2015
Cash efficiency ratio
Noninterest expense (GAAP)		$	3,901		$	3,975		$	4,098		$	3,756		$	2,840
Less:	Intangible asset amortization (GAAP)	89			99			95			55			36
Adjusted noninterest expense (non-GAAP)		$	3,812		$	3,876		$	4,003		$	3,701		$	2,804
Net interest income (GAAP)		$	3,909		$	3,909		$	3,777		$	2,919		$	2,348
Plus:	TE adjustment	32			31			53			34			28
Noninterest income (GAAP)		2,459			2,515			2,478			2,071			1,880
Total TE revenue (non-GAAP)		$	6,400		$	6,455		$	6,308		$	5,024		$	4,256
Cash efficiency ratio (non-GAAP)		59.6		%	60.0		%	63.5		%	73.7		%	65.9		%

80

Year ended December 31,
dollars in millions	2019
Common Equity Tier 1 under the Regulatory Capital Rules
Common Equity Tier 1 under current Regulatory Capital Rules	$	12,356
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:
Deferred tax assets and other intangible assets (a)	—
Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules (b)	$	12,356
Net risk-weighted assets under current Regulatory Capital Rules	$	130,865
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules:
Mortgage servicing assets (c)	878
Deferred tax assets	171
All other assets	—
Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules (b)	$	131,914
Common Equity Tier 1 ratio under the fully phased-in Regulatory Capital Rules (b)	9.37		%

(a) 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.

(b) 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.”

(c) Item is included in the 25% exceptions bucket calculation and is risk-weighted at 250%.

Fourth Quarter Results

Figure 35 shows our financial performance for each of the past eight quarters. Highlights of our results for the fourth quarter of 2019 are summarized below.

Earnings

Our fourth quarter net income from continuing operations attributable to Key common shareholders was $439 million, or $.45 per diluted Common Share, compared to $459 million, or $.45 per diluted Common Share, for the fourth quarter of 2018.

On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2019 was 1.27%, compared to 1.37% for the fourth quarter of 2018. The annualized return on average tangible common equity from continuing operations was 14.09% for the fourth quarter of 2019, compared to 16.40% for the year-ago quarter.

Net interest income

TE net interest income was $987 million for the fourth quarter of 2019, compared to TE net interest income of $1.0 billion for the fourth quarter of 2018. The decrease in net interest income reflects a lower net interest margin, driven by a decline in interest rates and slightly higher deposit costs. Additionally, purchase accounting accretion declined $8 million. These declines were partially offset by higher earning asset balances.

Noninterest income

Our noninterest income was $651 million for the fourth quarter of 2019, compared to $645 million for the year-ago quarter. The increase reflects higher operating lease income, as well as growth in corporate services income, driven by higher derivatives income. Investments made in Key's mortgage business continue to drive consumer mortgage income and mortgage servicing fees.

Noninterest expense

Our noninterest expense was $980 million for the fourth quarter of 2019, compared to $1.0 billion for the fourth quarter of 2018. The fourth quarter of 2019 included notable items of $22 million, which consist of a pension settlement charge of $18 million and professional fees related to a previously disclosed fraud loss of $4 million. The year-ago period included notable items of $41 million, which were efficiency-related expenses of $24 million and a pension settlement charge of $17 million. Excluding notable items, noninterest expense decreased by $13 million from the year-ago period, reflecting the successful implementation of Key's expense initiatives, which drove personnel expenses lower. These expenses were partially offset by Laurel Road acquisition expenses.

81

Provision for credit losses

Our provision for credit losses was $109 million for the fourth quarter of 2019, compared to $59 million for the fourth quarter of 2018. This increase was partially due to a pre-tax loss related to a previously disclosed fraud incident of $16 million. Our ALLL was $900 million, or .95% of total period-end loans, at December 31, 2019, compared to

.99% at December 31, 2018.

Net loan charge-offs for the fourth quarter of 2019 totaled $99 million, or .42% of average total loans. These results compare to $60 million, or .27%, for the fourth quarter of 2018. This increase was partially due to a previously disclosed fraud incident.

Income taxes

For the fourth quarter of 2019, we recorded a tax provision from continuing operations of $75 million, compared to a tax provision of $92 million for the fourth quarter of 2018. The provision included a tax benefit of $11 million related to the reversal of a valuation allowance against federal and state capital loss carryforwards acquired from First Niagara Financial Group utilized in the quarter. The effective tax rate for the fourth quarter of 2019 was 14.0%, compared to 15.9% for the same quarter one year ago.

Our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 (“Income Taxes”).

82

Figure 35. Selected Quarterly Financial Data

	2019 Quarters												2018 Quarters
dollars in millions, except per share amounts	Fourth			Third			Second			First			Fourth			Third			Second			First
FOR THE PERIOD
Interest income	$	1,285		$	1,317		$	1,329		$	1,304		$	1,297		$	1,239		$	1,205		$	1,137
Interest expense	306			345			348			327			297			253			226			193
Net interest income	979			972			981			977			1,000			986			979			944
Provision for credit losses	109			200			74			62			59			62			64			61
Noninterest income	651			650			622			536			645			609			660			601
Noninterest expense	980			939			1,019			963			1,012			964			993			1,006
Income (loss) from continuing operations before income taxes	541			483			510			488			574			569			582			478
Income (loss) from continuing operations attributable to Key	466			413			423			406			482			482			479			416
Income (loss) from discontinued operations, net of taxes	3			3			2			1			2			—			3			2
Net income (loss) attributable to Key	469			416			425			407			484			482			482			418
Income (loss) from continuing operations attributable to Key common shareholders	439			383			403			386			459			468			464			402
Income (loss) from discontinued operations, net of taxes	3			3			2			1			2			—			3			2
Net income (loss) attributable to Key common shareholders	442			386			405			387			461			468			467			404
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.45		$	.39		$	.40		$	.38		$	.45		$	.45		$	.44		$	.38
Income (loss) from discontinued operations, net of taxes	—			—			—			—			—			—			—			—
Net income (loss) attributable to Key common shareholders (a)	.45			.39			.40			.38			.45			.45			.44			.38
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	.45			.38			.40			.38			.45			.45			.44			.38
Income (loss) from discontinued operations, net of taxes — assuming dilution	—			—			—			—			—			—			—			—
Net income (loss) attributable to Key common shareholders — assuming dilution (a)	.45			.39			.40			.38			.45			.45			.44			.38
Cash dividends paid	.185			.185			.17			.17			.17			.17			.12			.105
Book value at period end	15.54			15.44			15.07			14.31			13.90			13.33			13.29			13.07
Tangible book value at period end	12.56			12.48			12.12			11.55			11.14			10.59			10.59			10.35
Weighted-average Common Shares outstanding (000)	973,450			988,319			999,163			1,006,717			1,018,614			1,036,479			1,052,652			1,056,037
Weighted-average Common Shares and potential Common Shares outstanding (000) (b)	984,361			998,328			1,007,964			1,016,504			1,030,417			1,049,976			1,065,793			1,071,786
AT PERIOD END
Loans	$	94,646		$	92,760		$	91,937		$	90,178		$	89,552		$	89,268		$	88,222		$	88,089
Earning assets	130,807			132,160			130,213			127,296			125,803			125,007			123,472			122,961
Total assets	144,988			146,691			144,545			141,515			139,613			138,805			137,792			137,049
Deposits	111,870			111,649			109,946			108,175			107,309			105,780			104,548			104,751
Long-term debt	12,448			14,470			14,312			14,168			13,732			13,849			13,853			13,749
Key common shareholders’ equity	15,138			15,216			15,069			14,474			14,145			13,758			14,075			13,919
Key shareholders’ equity	17,038			17,116			16,969			15,924			15,595			15,208			15,100			14,944
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets	1.27		%	1.14		%	1.19		%	1.18		%	1.37		%	1.40		%	1.41		%	1.25		%
Return on average common equity	11.40			9.99			10.94			10.98			13.07			13.36			13.29			11.76
Return on average tangible common equity (c)	14.09			12.38			13.69			13.69			16.40			16.81			16.73			14.89
Net interest margin (TE)	2.98			3.00			3.06			3.13			3.16			3.18			3.19			3.15
Cash efficiency ratio (c)	58.7			56.0			61.9			61.9			59.9			58.7			58.8			62.9
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets	1.27		%	1.14		%	1.19		%	1.17		%	1.37		%	1.39		%	1.40		%	1.24		%
Return on average common equity	11.48			10.07			11.00			11.01			13.13			13.36			13.37			11.82
Return on average tangible common equity (c)	14.19			12.48			13.75			13.72			16.47			16.81			16.84			14.97
Net interest margin (TE)	2.97			2.98			3.05			3.12			3.14			3.16			3.17			3.13
Loan to deposit (d)	86.6			85.3			86.1			86.1			85.6			87.0			86.9			86.9
CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets	11.75		%	11.67		%	11.74		%	11.25		%	11.17		%	10.96		%	10.96		%	10.90		%
Key common shareholders’ equity to assets	10.47			10.40			10.46			10.25			10.15			9.93			10.21			10.16
Tangible common equity to tangible assets (c)	8.64			8.58			8.59			8.43			8.30			8.05			8.32			8.22
Common Equity Tier 1	9.44			9.48			9.57			9.81			9.93			9.95			10.13			9.99
Tier 1 risk-based capital	10.86			10.91			11.01			10.94			11.08			11.11			10.95			10.82
Total risk-based capital	12.79			12.90			13.03			12.98			12.89			12.99			12.83			12.73
Leverage	9.88			9.93			10.00			9.89			9.89			10.03			9.87			9.76
TRUST ASSETS
Assets under management	$	40,833		$	39,416		$	38,942		$	38,742		$	36,775		$	40,575		$	39,663		$	39,003
OTHER DATA
Average full-time-equivalent employees	16,537			16,898			17,206			17,554			17,664			18,150			18,376			18,540
Branches	1,098			1,101			1,102			1,158			1,159			1,166			1,177			1,192

(a) EPS may not foot due to rounding.

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

(c) See Figure 36 entitled “Selected Quarterly GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity,” and “cash efficiency.” The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(d) Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits.

83

Figure 36. Selected Quarterly GAAP to Non-GAAP Reconciliations

		2019 Quarters												2018 Quarters
dollars in millions		Fourth			Third			Second			First			Fourth			Third			Second			First
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP)		$	17,038		$	17,116		$	16,969		$	15,924		$	15,595		$	15,208		$	15,100		$	14,944
Less:	Intangible assets (a)	2,910			2,928			2,952			2,804			2,818			2,838			2,858			2,902
	Preferred Stock (b)	1,856			1,856			1,856			1,421			1,421			1,421			1,009			1,009
	Tangible common equity (non-GAAP)	$	12,272		$	12,332		$	12,161		$	11,699		$	11,356		$	10,949		$	11,233		$	11,033
Total assets (GAAP)		$	144,988		$	146,691		$	144,545		$	141,515		$	139,613		$	138,805		$	137,792		$	137,049
Less:	Intangible assets (a)	2,910			2,928			2,952			2,804			2,818			2,838			2,858			2,902
	Tangible assets (non-GAAP)	$	142,078		$	143,763		$	141,593		$	138,711		$	136,795		$	135,967		$	134,934		$	134,147
Tangible common equity to tangible assets ratio (non-GAAP)		8.64		%	8.58		%	8.59		%	8.43		%	8.30		%	8.05		%	8.32		%	8.22		%
Average tangible common equity
Average Key shareholders’ equity (GAAP)		$	17,178		$	17,113		$	16,531		$	15,702		$	15,384		$	15,210		$	15,032		$	14,889
Less:	Intangible assets (average) (c)	2,919			2,942			2,959			2,813			2,828			2,848			2,883			2,916
	Preferred Stock (average)	1,900			1,900			1,762			1,450			1,450			1,316			1,025			1,025
	Average tangible common equity (non-GAAP)	$	12,359		$	12,271		$	11,810		$	11,439		$	11,106		$	11,046		$	11,124		$	10,948
Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)		$	439		$	383		$	403		$	386		$	459		$	468		$	464		$	402
Average tangible common equity (non-GAAP)		12,359			12,271			11,810			11,439			11,106			11,046			11,124			10,948
Return on average tangible common equity from continuing operations (non-GAAP)		14.09		%	12.38		%	13.69		%	13.69		%	16.40		%	16.81		%	16.73		%	14.89		%
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)		$	442		$	386		$	405		$	387		$	461		$	468		$	467		$	404
Average tangible common equity (non-GAAP)		12,359			12,271			11,810			11,439			11,106			11,046			11,124			10,948
Return on average tangible common equity consolidated (non-GAAP)		14.19		%	14.19		%	14.19		%	14.19		%	14.19		%	14.19		%	14.19		%	14.97		%
Cash efficiency ratio
Noninterest expense (GAAP)		$	980		$	939		$	1,019		$	963		$	1,012		$	964		$	993		$	1,006
Less:	Intangible asset amortization (GAAP)	19			26			22			22			22			23			25			29
	Adjusted noninterest expense (non-GAAP)	$	961		$	913		$	997		$	941		$	990		$	941		$	968		$	977
Net interest income (GAAP)		$	979		$	972		$	981		$	977		$	1,000		$	986		$	979		$	944
Plus:	TE adjustment	8			8			8			8			8			7			8			8
	Noninterest income (GAAP)	651			650			622			536			645			609			660			601
	Total TE revenue (non-GAAP)	$	1,638		$	1,630		$	1,611		$	1,521		$	1,653		$	1,602		$	1,647		$	1,553
Cash efficiency ratio (non-GAAP)		58.7		%	56.0		%	61.9		%	61.9		%	59.9		%	58.7		%	58.8		%	62.9		%

(a) For the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, intangible assets exclude $7 million, $9 million, $10 million, and $12 million, respectively, of period-end purchased credit card relationships. For the three months ended December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018, intangible assets exclude $14 million, $17 million, $20 million, and $23 million, respectively, of period-end purchased credit card relationships.

(b) Net of capital surplus.

(c) For the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, average intangible assets exclude $8 million, $9 million, $11 million, and $13 million, respectively, of average purchased credit card relationships. For the three months ended December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018, average intangible assets exclude $15 million, $18 million, $21 million, and $24 million, respectively, of average purchased credit card relationships.

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. The following is a description of our current critical accounting policies.

Allowance for loan and lease losses

The ALLL is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses incurred in the loan portfolio. In determining the ALLL, 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, concentrations of credit, collateral values, and the amounts and timing of expected future cash flows. For all commercial and consumer TDRs, regardless of size, as well as all other impaired commercial loans with 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.

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Our loss estimates include an assessment of internal and external influences on credit quality that may not be fully reflective of the historical loss, risk-rating, or other indicative data. The ALLL is sensitive to a variety of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The ALLL is also sensitive to a variety of external factors, such as the general health of the economy, as evidenced by volatility in commodity prices, changes in real estate demand and values, interest rates, unemployment rates, bankruptcy filings, fluctuations in the GDP, and the effects of weather and natural disasters such as droughts, floods and hurricanes. Management considers these variables and all other available information when establishing the final level of the ALLL. These variables and others may result in actual loan losses that differ from the originally estimated amounts.

Since our loss rates are applied to large pools of loans, even minor changes in the level of estimated losses can significantly affect management’s determination of the appropriate ALLL 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, 2019, would indicate the need for a $27 million increase in the ALLL. The same increase in estimated losses for the commercial loan portfolio would result in a $68 million increase in the ALLL. Such adjustments to the ALLL can materially affect financial results. Following the above examples, a $27 million increase in the consumer loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately $20 million, or $.02 per Common Share; a $68 million increase in the commercial loan portfolio allowance would have reduced earnings on an after-tax basis by approximately $52 million, or $.05 per Common Share.

Our accounting policy related to the ALLL is disclosed in Note 1 under the heading “Allowance for Loan and Lease Losses.” As described in Note 1, (“Summary of Significant Accounting Policies”), on January 1, 2020, we adopted ASC 326, Financial Instruments — Credit Losses, and as such, an expected credit loss methodology, specifically current expected credit losses for the remaining life of our loans and leases, will be used to estimate the appropriate level of the ALLL.

Valuation methodologies

Fair value measurements

We measure or monitor many of our assets and liabilities on a fair value basis. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price), in an orderly transaction between market participants at the measurement date under current market conditions. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third-party investor under current market conditions. The value to us if the asset or liability were held to maturity is not included in the fair value estimates.

A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model based techniques that use significant assumptions not observable in the market, but observable based on our specific data (Level 3 valuations). Unobservable assumptions reflect our estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

The selection and weighting of the various fair value techniques may result in a fair value higher or lower than carrying value. Considerable judgment may be involved in determining the amount that is most representative of fair value.

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For assets and liabilities recorded at fair value, our policy is to maximize the use of observable inputs

and minimize the use of unobservable inputs when developing fair value measurements for those items where there

is an active market. In certain cases, when market observable inputs for model-based valuation techniques may not

be readily available, we are required to make judgments about assumptions market participants would use

in estimating the fair value of the financial instrument. The models used to determine fair value adjustments are

regularly evaluated by management for relevance under current facts and circumstances.

Changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary measure of

accounting. Fair value is used on a nonrecurring basis to measure certain assets or liabilities (including held-to-maturity securities, commercial loans held for sale, and OREO) for impairment or for disclosure purposes in accordance with current accounting guidance.

Impairment analysis also relates to long-lived assets, goodwill, and core deposit and other intangible assets. An

impairment loss is recognized if the carrying amount of the asset is not likely to be recoverable and exceeds its fair

value. In determining the fair value, management uses models and applies the techniques and assumptions

previously discussed.

See Note 1 under the heading “Fair Value Measurements” and Note 6 (“Fair Value Measurements”) for a detailed discussion of determining fair value, including pricing validation processes.

Goodwill

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.” Although accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required, Key chose to utilize the quantitative approach in 2019.

The quantitative approach is a two step goodwill impairment test. The first step in goodwill impairment testing is to determine the fair value of each reporting unit. 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. Fair values are estimated using an equal combination of market and income approaches. The market approach incorporates comparable public company multiples along with data related to recent merger and acquisition activity. The income approach consists of discounted cash flow modeling that utilizes internal forecasts and various other inputs and assumptions. A multi-year internal forecast is prepared for each reporting unit and a terminal growth rate is estimated for each one based on market expectations of inflation and economic conditions in the financial services industry. Earnings projections for each reporting unit are adjusted for after tax cost savings expected to be realized by a market participant. The discount rate applied to our cash flows is derived from the CAPM. The buildup to the discount rate includes a risk-free rate, 5-year adjusted beta based on peer companies, a market equity risk premium, a size premium and a company specific risk premium. The discount rates differ between our reporting units as they have varying levels of risk. A sensitivity analysis is typically performed on key assumptions, such as the discount rates and cost savings estimates.

If the fair value determined in step 1 is greater than the carrying value, then the reporting unit's goodwill is deemed not to be impaired. If the fair value is less than the carrying value, then the second step is performed, which measures the amount of impairment by comparing the carrying amount of goodwill to its implied fair value. The second step of the goodwill impairment test was not required in 2019. Effective January 1, 2020, upon the adoption of ASU 2017-04, the second step of the goodwill impairment test was eliminated.

We continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly. Additional information is provided in Note 12 (“Goodwill and Other Intangible Assets”).

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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. Additional information relating to our use of derivatives is included in Note 1 under the heading “Derivatives and Hedging,” and Note 8 (“Derivatives and Hedging Activities”).

Contingent liabilities, guarantees and income taxes

Note 22 (“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 22 (“Commitments, Contingent Liabilities, and Guarantees”) 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, 2019.

It is not always clear how the Internal Revenue Code and various state tax laws apply to transactions that we undertake. In the normal course of business, we may record tax benefits and then have those benefits contested by the IRS or state tax authorities. We have provided tax reserves that we believe are adequate to absorb potential adjustments that such challenges may necessitate. However, if our judgment later proves to be inaccurate, the tax reserves may need to be adjusted, which could have an adverse effect on our results of operations and capital.

Additionally, we conduct quarterly assessments that determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes a history of pretax income, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax liabilities. These assessments are subjective and may change. Based on these criteria, and all available positive and negative evidence, we establish a valuation allowance for deferred tax assets when we are unable to conclude it is more likely than not that they will be realized. 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 1 (“Summary of Significant Accounting Policies”) and Note 14 (“Income Taxes”).

During 2019, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.

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Accounting and reporting developments

Accounting guidance pending adoption at December 31, 2019

Standard	Required Adoption	Description	Effect on Financial Statements or Other Significant Matters
ASU 2019-12, Simplifying the Accounting for Income Taxes	January 1, 2021 Early adoption is permitted	This ASU simplifies the accounting for income taxes by removing certain exceptions to the existing guidance, such as exceptions related to the incremental approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss and the recognition of deferred tax liabilities when a foreign subsidiary becomes an equity method investment and when a foreign equity method investment becomes a subsidiary. Along with general improvements, it adds simplifications related to franchise taxes, the tax basis of goodwill and the method for recognizing an enacted change in tax laws. The guidance also specifies that an entity is not required to allocate the consolidated amount of certain tax expense to a legal entity not subject to tax in its own separate financial statements. The guidance should be applied on either a retrospective, modified retrospective or prospective basis depending on the amendment.	The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
ASU 2020-01, Clarifying the Interactions between Topic 321,Investments—Equity Securities; Topic 323, Investments— Equity Method and Joint Ventures; and Topic 815, Derivatives and Hedging	January 1, 2021 Early adoption is permitted	This guidance clarifies that when applying the measurement alternative in Topic 321, companies should consider certain observable transactions that require the application or discontinuance of the equity method under Topic 323. It also clarifies that companies should not consider whether the underlying securities in certain forward contracts and purchased options would be accounted for under the equity method or fair value option when determining the method of accounting for those contracts. This guidance should be applied on a prospective basis.	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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European Sovereign and Non-Sovereign Debt Exposures

Our total European sovereign and non-sovereign debt exposure is presented in Figure 37.

Figure 37. European Sovereign and Non-Sovereign Debt Exposures

December 31, 2019	Short- and Long-  Term Commercial  Total (a)		Foreign Exchange and Derivatives with Collateral (b)		Net  Exposure
in millions
France:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		—		—
Non-sovereign non-financial institutions	$	2	—		$	2
Total	2		—		2
Germany:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		—		—
Non-sovereign non-financial institutions	38		—		38
Total	38		—		38
Italy:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		—		—
Non-sovereign non-financial institutions	4		—		4
Total	4		—		4
Luxembourg:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		—		—
Non-sovereign non-financial institutions	8		—		8
Total	8		—		8
Switzerland:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		—		—
Non-sovereign non-financial institutions	—		—		—
Total	—		—		—
United Kingdom:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		$	282	282
Non-sovereign non-financial institutions	1		—		1
Total	1		282		283
Total Europe:
Sovereigns	—		—		—
Non-sovereign financial institutions	—		282		282
Non-sovereign non-financial institutions	53		—		53
Total	$	53	$	282	$	335

(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.

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 66 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 35 contained in the “Fourth Quarter Results” section in the MD&A.

	Page Number
Management’s Annual Report on Internal Control over Financial Reporting	91
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	92
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm	93
Consolidated Balance Sheets	95
Consolidated Statements of Income	96
Consolidated Statements of Comprehensive Income	97
Consolidated Statements of Changes in Equity	98
Consolidated Statements of Cash Flows	99
Notes to Consolidated Financial Statements	100
Note 1. Summary of Significant Accounting Policies	100
Note 2. Earnings Per Common Share	113
Note 3. Restrictions on Cash, Dividends and Lending Activities	114
Note 4. Loan Portfolio	114
Note 5. Asset Quality	114
Note 6. Fair Value Measurements	122
Note 7. Securities	132
Note 8. Derivatives and Hedging Activities	134
Note 9. Mortgage Servicing Assets	141
Note 10. Leases	143
Note 11. Premises and Equipment	145
Note 12. Goodwill and Other Intangible Assets	145
Note 13. Variable Interest Entities	146
Note 14. Income Taxes	148
Note 15. Acquisitions, Divestiture, and Discontinued Operations	151
Note 16. Securities Financing Activities	151
Note 17. Stock-Based Compensation	152
Note 18. Employee Benefits	155
Note 19. Short-Term Borrowings	162
Note 20. Long-Term Debt	163
Note 21. Trust Preferred Securities Issued by Unconsolidated Subsidiaries	164
Note 22. Commitments, Contingent Liabilities, and Guarantees	165
Note 23. Accumulated Other Comprehensive Income	168
Note 24. Shareholders’ Equity	169
Note 25. Business Segment Reporting	170
Note 26. Condensed Financial Information of the Parent Company	173
Note 27. Revenue from Contracts with Customers	174

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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 include amounts which of necessity are based on management’s best estimates and judgments and give due consideration to materiality. 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 as defined in the Securities Exchange Act of 1934, as amended. This corporate-wide system of controls includes 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 Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements. 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.

During 2019, the Audit Committee of the Board of Directors met regularly with Management, internal audit, and the independent registered public accounting firm, Ernst & Young LLP, to review the scope of their audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, the Corporation maintains a Disclosure Review Committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of the Corporation is properly reported to its Chief Executive Officer, Chief Financial Officer, General Auditor, and the Audit Committee of the Board of Directors in connection with the preparation and filing of periodic reports and the certification of those reports by the Chief Executive Officer and the Chief Financial Officer.

Management’s Assessment of Internal Control over Financial Reporting

Management assessed, with participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, 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, 2019.

Because of 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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Corporation's internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their accompanying report dated February 26, 2020.

Beth E. Mooney

Chairman and Chief Executive Officer

Donald R. Kimble

Chief Financial Officer

91

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

on Internal Control over Financial Reporting

Opinion on Internal Control over Financial Reporting

We have audited KeyCorp’s internal control over financial reporting as of December 31, 2019, 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). In our opinion, KeyCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of KeyCorp as of December 31, 2019 and 2018, 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, 2019, and the related notes of KeyCorp and our report dated February 26, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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 financial statements. Our responsibility is to express an opinion on KeyCorp’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to KeyCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

Cleveland, Ohio

February 26, 2020

92

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

To the Shareholders and the Board of Directors of KeyCorp

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of KeyCorp (the Company) as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, 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 26, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

93

	Allowance for Loan and Lease Losses
Description of the matter	The Company’s loan and lease portfolio totaled $94.6 billion as of December 31, 2019 and the associated allowance for loan and lease losses (ALLL) was $900 million. As discussed in Note 1 and 5 of the financial statements, the ALLL represents management’s estimate of incurred credit losses inherent in the loan portfolio at the balance sheet date. Management estimates the ALLL by applying expected loss rates derived from a statistical analysis of historical default and loss severity experience to existing loans with similar characteristics. The ALLL also considers adjustments to reflect management’s assessment of qualitative factors that may not be measured in the statistical analysis of expected losses, including external factors, along with Company and portfolio specific factors. Auditing management’s ALLL is complex and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination of the qualitative external, Company and portfolio specific factor adjustments to the ALLL described above.
How we addressed the matter in our audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s ALLL process, including controls over the appropriateness of the ALLL methodology, the reliability and accuracy of data used to support qualitative factor adjustments to the ALLL, and management’s review and approval process over qualitative factor adjustments to the ALLL. To test the qualitative factor adjustments, our audit procedures included, among others, assessing management’s methodology and considering whether relevant risks were reflected in the modeled provision and whether adjustments to modeled calculations were appropriate. We tested the underlying data used to estimate the qualitative adjustments to determine whether it was accurate, complete and relevant. We evaluated whether qualitative adjustments were reasonable based on changes in the loan portfolio and changes in management’s policies, procedures and lending personnel. For example, we evaluated concentrations of credit by testing the completeness and accuracy of underlying source data utilized by management and independently comparing concentrations to loan portfolio information. We also assessed whether qualitative adjustments were consistent with publicly available information (e.g. macroeconomic and peer bank data). Further, we performed an independent search for the existence of new or contrary information relating to risks impacting the qualitative factor adjustments to validate that management’s considerations are appropriate.

We have served as KeyCorp’s auditor since 1994.

Cleveland, Ohio

February 26, 2020

94

Consolidated Balance Sheets

December 31,
in millions, except per share data	2019			2018
ASSETS
Cash and due from banks	$	732		$	678
Short-term investments	1,272			2,562
Trading account assets	1,040			849
Securities available for sale	21,843			19,428
Held-to-maturity securities (fair value: $10,116 and $11,122)	10,067			11,519
Other investments	605			666
Loans, net of unearned income of $603 and $678	94,646			89,552
Allowance for loan and lease losses	(900		)	(883		)
Net loans	93,746			88,669
Loans held for sale (a)	1,334			1,227
Premises and equipment	814			882
Goodwill	2,664			2,516
Other intangible assets	253			316
Corporate-owned life insurance	4,233			4,171
Accrued income and other assets	5,494			5,030
Discontinued assets	891			1,100
Total assets	$	144,988		$	139,613
LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	66,714		$	59,918
Savings deposits	4,651			4,854
Certificates of deposit ($100,000 or more)	6,598			7,913
Other time deposits	5,054			5,332
Total interest-bearing deposits	83,017			78,017
Noninterest-bearing deposits	28,853			29,292
Total deposits	111,870			107,309
Federal funds purchased and securities sold under repurchase agreements	387			319
Bank notes and other short-term borrowings	705			544
Accrued expense and other liabilities	2,540			2,113
Long-term debt	12,448			13,732
Total liabilities	127,950			124,017
EQUITY
Preferred stock	1,900			1,450
Common Shares, $1 par value; authorized 2,100,000,000 and 1,400,000,000 shares; issued 1,256,702,081 and 1,256,702,081 shares	1,257			1,257
Capital surplus	6,295			6,331
Retained earnings	12,469			11,556
Treasury stock, at cost (279,513,530 and 237,198,944 shares)	(4,909		)	(4,181		)
Accumulated other comprehensive income (loss)	26			(818		)
Key shareholders’ equity	17,038			15,595
Noncontrolling interests	—			1
Total equity	17,038			15,596
Total liabilities and equity	$	144,988		$	139,613

(a) Total loans held for sale include Real estate — residential mortgage loans held for sale at fair value of $140 million at December 31, 2019, and $54 million at December 31, 2018.

See notes to Consolidated Financial Statements

95

Consolidated Statements of Income

Year ended December 31,
dollars in millions, except per share amounts	2019		2018		2017
INTEREST INCOME
Loans	$	4,267	$	4,023	$	3,677
Loans held for sale	63		66		52
Securities available for sale	537		409		369
Held-to-maturity securities	262		284		222
Trading account assets	32		29		27
Short-term investments	61		46		26
Other investments	13		21		17
Total interest income	5,235		4,878		4,390
INTEREST EXPENSE
Deposits	853		517		278
Federal funds purchased and securities sold under repurchase agreements	2		11		1
Bank notes and other short-term borrowings	17		21		15
Long-term debt	454		420		319
Total interest expense	1,326		969		613
NET INTEREST INCOME	3,909		3,909		3,777
Provision for credit losses	445		246		229
Net interest income after provision for credit losses	3,464		3,663		3,548
NONINTEREST INCOME
Trust and investment services income	475		499		535
Investment banking and debt placement fees	630		650		603
Service charges on deposit accounts	337		349		357
Operating lease income and other leasing gains	162		89		96
Corporate services income	236		233		219
Cards and payments income	275		270		287
Corporate-owned life insurance income	136		137		131
Consumer mortgage income	46		30		26
Mortgage servicing fees	94		82		71
Other income(a)	68		176		153
Total noninterest income	2,459		2,515		2,478
NONINTEREST EXPENSE
Personnel	2,250		2,309		2,278
Net occupancy	293		308		331
Computer processing	214		210		225
Business services and professional fees	186		184		192
Equipment	100		105		114
Operating lease expense	123		120		92
Marketing	96		102		120
FDIC assessment	31		72		82
Intangible asset amortization	89		99		95
OREO expense, net	13		6		11
Other expense	506		460		558
Total noninterest expense	3,901		3,975		4,098
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2,022		2,203		1,928
Income taxes	314		344		637
INCOME (LOSS) FROM CONTINUING OPERATIONS	1,708		1,859		1,291
Income (loss) from discontinued operations	9		7		7
NET INCOME (LOSS)	1,717		1,866		1,298
Less: Net income (loss) attributable to noncontrolling interests	—		—		2
NET INCOME (LOSS) ATTRIBUTABLE TO KEY	$	1,717	$	1,866	$	1,296
Income (loss) from continuing operations attributable to Key common shareholders	$	1,611	$	1,793	$	1,219
Net income (loss) attributable to Key common shareholders	1,620		1,800		1,226
Per Common Share:
Income (loss) from continuing operations attributable to Key common shareholders	$	1.62	$	1.72	$	1.13
Income (loss) from discontinued operations, net of taxes	.01		.01		.01
Net income (loss) attributable to Key common shareholders (b)	1.63		1.73		1.14
Per Common Share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders	$	1.61	$	1.70	$	1.12
Income (loss) from discontinued operations, net of taxes	.01		.01		.01
Net income (loss) attributable to Key common shareholders (b)	1.62		1.71		1.13
Cash dividends declared per Common Share	$	.71	$	.565	$	.38
Weighted-average Common Shares outstanding (000)	992,091		1,040,890		1,072,078
Effect of convertible preferred stock	—		—		—
Effect of Common Share options and other stock awards	10,163		13,792		16,515
Weighted-average Common Shares and potential Common Shares outstanding (000)(c)	1,002,254		1,054,682		1,088,593

(a) Net securities gains (losses) totaled $20 million for the year ended December 31, 2019, less than $1 million for the year ended December 31, 2018, and $1 million for the year ended December 31, 2017. For 2019, 2018, and 2017, 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.

96

Consolidated Statements of Comprehensive Income

Year ended December 31,
in millions	2019		2018			2017
Net income (loss)	$	1,717	$	1,866		$	1,298
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $(151), ($19), and $13	488		(62		)	(126		)
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $(93), $11, and ($19)	300		36			(72		)
Foreign currency translation adjustments, net of income taxes of $(4), $11, and $9	14		(23		)	12
Net pension and postretirement benefit costs, net of income taxes of $(13), $3, and $80	42		10			(52		)
Total other comprehensive income (loss), net of tax	844		(39		)	(238		)
Comprehensive income (loss)	2,561		1,827			1,060
Less: Comprehensive income attributable to noncontrolling interests	—		—			2
Comprehensive income (loss) attributable to Key	$	2,561	$	1,827		$	1,058

 

See Notes to Consolidated Financial Statements.

97

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, 2016	17,421		1,079,314		$	1,665		$	1,257	$	6,385		$	9,378		$	(2,904	)	$	(541	)	—
Net income (loss)													1,296									$	2
Other comprehensive income (loss)																			(238		)
Reclassification of tax effects in AOCI resulting from the new federal corporate income tax rate													141
Deferred compensation										16
Cash dividends declared
Common shares ($.38 per share)													(410		)
Series A Preferred Stock ($1.9375 per share)													(6		)
Series C Preferred Stock ($.539063 per share)													(7		)
Series D Preferred Stock ($50.00 per depositary share)													(26		)
Series E Preferred Stock ($1.544012 per depositary share)													(31		)
Open market Common Share repurchases			(36,140	)												(665		)
Employee equity compensation program Common Share repurchases			(3,520	)												(65		)
Series A Preferred Stock exchanged for Common Shares	(2,900	)	20,568		(290		)			(49		)				338
Redemption of Series C Preferred Stock	(14,000	)			(350		)
Common Shares reissued (returned) for stock options and other employee benefit plans			8,862							(17		)				146
Net contribution from (distribution to) noncontrolling interests																						—
BALANCE AT DECEMBER 31, 2017	521		1,069,084		1,025			1,257		6,335			10,335			(3,150		)	(779		)	2
Cumulative effect from changes in accounting principle (a)													(2		)
Other reclassification of AOCI													13
Net income (loss)													1,866									—
Other comprehensive income (loss)																			(39		)
Deferred compensation										21
Cash dividends declared
Common Shares ($.565 per share)													(590		)
Series D Preferred Stock ($50.00 per depositary share)													(26		)
Series E Preferred Stock ($1.531252 per depositary share)													(31		)
Series F Preferred Stock ($.529688 per depositary share)													(9		)
Issuance of Series F Preferred Stock	425				425					(13		)
Open market Common Share repurchases			(54,006	)												(1,098		)
Employee equity compensation program Common Share repurchases			(