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

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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.

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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.

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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.

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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		%

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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.

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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”).

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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.

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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.