filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control over Financial Reporting
We are responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with U.S. generally accepted accounting principles and include amounts which of necessity are based on management’s best estimates and judgments and give due consideration to materiality. We believe the financial statements and notes present fairly our financial position, results of operations and cash flows in all material respects.
We are responsible for establishing and maintaining a system of internal control that is designed to protect our assets and the integrity of our financial reporting as defined in the Securities Exchange Act of 1934, as amended. This corporate-wide system of controls includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements. All employees are required to comply with our code of ethics. We conduct an annual certification process to ensure that our employees meet this obligation. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, we believe our system provides reasonable assurance that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.
During 2022, the Audit Committee of the Board of Directors met regularly with Management, internal audit, and the independent registered public accounting firm, Ernst & Young LLP, to review the scope of their audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, the Corporation maintains a Disclosure Review Committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of the Corporation is properly reported to its Chief Executive Officer, Chief Financial Officer, General Auditor, and the Audit Committee of the Board of Directors in connection with the preparation and filing of periodic reports and the certification of those reports by the Chief Executive Officer and the Chief Financial Officer.
Management’s Assessment of Internal Control over Financial Reporting
Management assessed, with participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control and procedures over financial reporting using criteria described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that assessment, we believe we maintained an effective system of internal control over financial reporting as of December 31, 2022.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Corporation's internal control over financial reporting as of December 31, 2022, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their accompanying report dated February 22, 2023.
Christopher M. Gorman Donald R. Kimble
Chairman and Chief Executive Officer Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of KeyCorp
Opinion on Internal Control over Financial Reporting
We have audited KeyCorp’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, KeyCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of KeyCorp as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
KeyCorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on KeyCorp’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to KeyCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 | ||
| Cleveland, Ohio | ||
| February 22, 2023 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of KeyCorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of KeyCorp as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of KeyCorp at December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), KeyCorp’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of KeyCorp’s management. Our responsibility is to express an opinion on KeyCorp’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to KeyCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
| Allowance for Loan and Lease Losses | ||||||||
| Description of the matter | KeyCorp’s loan and lease portfolio totaled $119.4 billion as of December 31, 2022 and the associated ALLL was $1.3 billion. As discussed in Note 1 and 5 of the financial statements, the ALLL represents management’s current estimate of lifetime credit losses inherent in the loan portfolio at the balance sheet date. Management estimates the ALLL using relevant available information, from internal and external sources, relating to past events, current portfolio specific and economic conditions, and reasonable and supportable forecasts. The ALLL is the sum of (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii) qualitative (judgmental) reserves. Management estimates the quantitative reserves using probability of default / loss given default / exposure at default models (“loss forecasting models”), as well as other estimation methods for smaller loan portfolios. The ALLL also considers qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, and other relevant factors to reflect management’s best estimate of current expected credit losses. Auditing management’s ALLL was complex due to the loss forecasting models used to compute the quantitative reserve and involves a high degree of subjectivity and judgment in evaluating management’s determination of the economic forecast and qualitative factor adjustments to the ALLL described above. | |||||||
| How we addressed the matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the KeyCorp’s ALLL process, including controls over the appropriateness of the ALLL methodology, the development, operation and monitoring of loss forecasting models, the reliability and accuracy of data used in developing the ALLL estimate, and management’s review and approval process over the economic forecast, qualitative adjustments and overall ALLL results. With the assistance of EY specialists we tested management’s loss forecasting models including evaluating the conceptual soundness of model methodology, assessing model performance and governance, testing key modeling assumptions, including the reasonable and supportable forecast period, and independently recalculating model output. We also verified the underlying economic forecast data used to estimate the quantitative reserve was complete and accurate. To test the qualitative factor adjustments, among other procedures, we assessed management’s methodology and considered whether relevant risks were reflected in the models and whether adjustments to the model output were appropriate. We tested the completeness, accuracy and relevance of the underlying data used to estimate the qualitative adjustments. We evaluated whether qualitative adjustments were reasonable based on changes in economic conditions, the loan portfolio, management’s policies and procedures, and lending personnel. For example, we evaluated the reasonableness of qualitative adjustments (or lack thereof) for concentrations of credit by independently comparing to loan portfolio information. We also assessed whether qualitative adjustments were consistent with publicly available information (e.g. macroeconomic data). Further, we performed an independent search for the existence of new or contrary information relating to risks impacting the qualitative factor adjustments to validate that management’s considerations are appropriate. Additionally, we evaluated whether the overall ALLL, inclusive of qualitative factor adjustments, appropriately reflects losses expected in the loan and lease portfolio by comparing to peer bank data. |
| ||
| We have served as KeyCorp’s auditor since 1994. | ||
| Cleveland, Ohio | ||
| February 22, 2023 |
Consolidated Balance Sheets
| December 31, | ||||||||
| Dollars in millions, except per share data | 2022 | 2021 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 887 | $ | 913 | ||||
| Short-term investments | 2,432 | 11,010 | ||||||
| Trading account assets | 829 | 701 | ||||||
| Securities available for sale | 39,117 | 45,364 | ||||||
| Held-to-maturity securities (fair value: $8,113 and $7,665) | 8,710 | 7,539 | ||||||
| Other investments | 1,308 | 639 | ||||||
| Loans, net of unearned income of $368 and $373 | 119,394 | 101,854 | ||||||
| Allowance for loan and lease losses | (1,337) | (1,061) | ||||||
| Net loans | 118,057 | 100,793 | ||||||
| Loans held for sale (a) | 963 | 2,729 | ||||||
| Premises and equipment | 636 | 681 | ||||||
| Goodwill | 2,752 | 2,693 | ||||||
| Other intangible assets | 94 | 130 | ||||||
| Corporate-owned life insurance | 4,369 | 4,327 | ||||||
| Accrued income and other assets | 9,223 | 8,265 | ||||||
| Discontinued assets | 436 | 562 | ||||||
| Total assets | $ | 189,813 | $ | 186,346 | ||||
| LIABILITIES | ||||||||
| Deposits in domestic offices: | ||||||||
| NOW and money market deposit accounts | $ | 86,707 | $ | 89,207 | ||||
| Savings deposits | 7,681 | 7,503 | ||||||
| Certificates of deposit ($100,000 or more) | 1,708 | 1,705 | ||||||
| Other time deposits | 5,665 | 2,153 | ||||||
| Total interest-bearing deposits | 101,761 | 100,568 | ||||||
| Noninterest-bearing deposits | 40,834 | 52,004 | ||||||
| Total deposits | 142,595 | 152,572 | ||||||
| Federal funds purchased and securities sold under repurchase agreements | 4,077 | 173 | ||||||
| Bank notes and other short-term borrowings | 5,386 | 588 | ||||||
| Accrued expense and other liabilities | 4,994 | 3,548 | ||||||
| Long-term debt | 19,307 | 12,042 | ||||||
| Total liabilities | 176,359 | 168,923 | ||||||
| EQUITY | ||||||||
| Preferred stock | 2,500 | 1,900 | ||||||
| Common Shares, $1 par value; authorized 2,100,000,000 and 2,100,000,000 shares; issued 1,256,702,081 and 1,256,702,081 shares | 1,257 | 1,257 | ||||||
| Capital surplus | 6,286 | 6,278 | ||||||
| Retained earnings | 15,616 | 14,553 | ||||||
| Treasury stock, at cost (323,377,500 and 327,852,311 shares) | (5,910) | (5,979) | ||||||
| Accumulated other comprehensive income (loss) | (6,295) | (586) | ||||||
| Total equity | 13,454 | 17,423 | ||||||
| Total liabilities and equity | $ | 189,813 | $ | 186,346 | ||||
(a)Total loans held for sale include Real estate — residential mortgage loans held for sale at fair value of $24 million at December 31, 2022, and $281 million at December 31, 2021.
See Notes to Consolidated Financial Statements
Consolidated Statements of Income
| Year ended December 31, | |||||||||||
| Dollars in millions, except per share amounts | 2022 | 2021 | 2020 | ||||||||
| INTEREST INCOME | |||||||||||
| Loans | $ | 4,241 | $ | 3,532 | $ | 3,866 | |||||
| Loans held for sale | 56 | 50 | 69 | ||||||||
| Securities available for sale | 752 | 546 | 484 | ||||||||
| Held-to-maturity securities | 213 | 185 | 222 | ||||||||
| Trading account assets | 31 | 19 | 20 | ||||||||
| Short-term investments | 97 | 28 | 18 | ||||||||
| Other investments | 22 | 7 | 6 | ||||||||
| Total interest income | 5,412 | 4,367 | 4,685 | ||||||||
| INTEREST EXPENSE | |||||||||||
| Deposits | 279 | 67 | 347 | ||||||||
| Federal funds purchased and securities sold under repurchase agreements | 41 | — | 6 | ||||||||
| Bank notes and other short-term borrowings | 90 | 8 | 12 | ||||||||
| Long-term debt | 475 | 221 | 286 | ||||||||
| Total interest expense | 885 | 296 | 651 | ||||||||
| NET INTEREST INCOME | 4,527 | 4,071 | 4,034 | ||||||||
| Provision for credit losses | 502 | (418) | 1,021 | ||||||||
| Net interest income after provision for credit losses | 4,025 | 4,489 | 3,013 | ||||||||
| NONINTEREST INCOME | |||||||||||
| Trust and investment services income | 526 | 530 | 507 | ||||||||
| Investment banking and debt placement fees | 638 | 937 | 661 | ||||||||
| Service charges on deposit accounts | 350 | 337 | 311 | ||||||||
| Operating lease income and other leasing gains | 103 | 148 | 167 | ||||||||
| Corporate services income | 372 | 288 | 213 | ||||||||
| Cards and payments income | 341 | 415 | 368 | ||||||||
| Corporate-owned life insurance income | 132 | 128 | 139 | ||||||||
| Consumer mortgage income | 58 | 131 | 176 | ||||||||
| Commercial mortgage servicing fees | 167 | 160 | 80 | ||||||||
| Other income(a) | 31 | 120 | 30 | ||||||||
| Total noninterest income | 2,718 | 3,194 | 2,652 | ||||||||
| NONINTEREST EXPENSE | |||||||||||
| Personnel | 2,566 | 2,561 | 2,336 | ||||||||
| Net occupancy | 295 | 300 | 298 | ||||||||
| Computer processing | 314 | 284 | 232 | ||||||||
| Business services and professional fees | 212 | 227 | 196 | ||||||||
| Equipment | 92 | 100 | 100 | ||||||||
| Operating lease expense | 101 | 126 | 138 | ||||||||
| Marketing | 123 | 126 | 97 | ||||||||
| Other expense | 707 | 705 | 712 | ||||||||
| Total noninterest expense | 4,410 | 4,429 | 4,109 | ||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 2,333 | 3,254 | 1,556 | ||||||||
| Income taxes | 422 | 642 | 227 | ||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS | 1,911 | 2,612 | 1,329 | ||||||||
| Income (loss) from discontinued operations | 6 | 13 | 14 | ||||||||
| NET INCOME (LOSS) | 1,917 | 2,625 | 1,343 | ||||||||
| Less: Net income (loss) attributable to noncontrolling interests | — | — | — | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO KEY | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||
| Income (loss) from continuing operations attributable to Key common shareholders | $ | 1,793 | $ | 2,506 | $ | 1,223 | |||||
| Net income (loss) attributable to Key common shareholders | 1,799 | 2,519 | 1,237 | ||||||||
| Per Common Share: | |||||||||||
| Income (loss) from continuing operations attributable to Key common shareholders | $ | 1.94 | $ | 2.64 | $ | 1.26 | |||||
| Income (loss) from discontinued operations, net of taxes | .01 | .01 | .01 | ||||||||
| Net income (loss) attributable to Key common shareholders (b) | 1.94 | 2.65 | 1.28 | ||||||||
| Per Common Share — assuming dilution: | |||||||||||
| Income (loss) from continuing operations attributable to Key common shareholders | $ | 1.92 | $ | 2.62 | $ | 1.26 | |||||
| Income (loss) from discontinued operations, net of taxes | .01 | .01 | .01 | ||||||||
| Net income (loss) attributable to Key common shareholders (b) | 1.93 | 2.63 | 1.27 | ||||||||
| Weighted-average Common Shares outstanding (000) | 924,363 | 947,065 | 967,783 | ||||||||
| Effect of convertible preferred stock | — | — | — | ||||||||
| Effect of Common Share options and other stock awards | 8,696 | 10,349 | 7,024 | ||||||||
| Weighted-average Common Shares and potential Common Shares outstanding (000)(c) | 933,059 | 957,414 | 974,807 |
(a)Net securities gains (losses) totaled $(9) million for the year ended December 31, 2022, $7 million for the year ended December 31, 2021, and $4 million for the year ended December 31, 2020. For 2022, 2021, and 2020, we did not have any impairment losses related to securities.
(b)EPS may not foot due to rounding.
(c)Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
| Year ended December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| Net income (loss) | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Net unrealized gains (losses) on securities available for sale, net of income taxes of $1,415, $306, and $(143) | (4,492) | (970) | 452 | ||||||||
| Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $382, $122, and $(72) | (1,212) | (388) | 226 | ||||||||
| Net pension and postretirement benefit costs, net of income taxes of $1, $(11), and $(9) | (5) | 34 | 34 | ||||||||
| Total other comprehensive income (loss), net of tax | (5,709) | (1,324) | 712 | ||||||||
| Comprehensive income (loss) attributable to Key | $ | (3,792) | $ | 1,301 | $ | 2,055 | |||||
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Equity
| Key Shareholders’ Equity | ||||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | Preferred Shares Outstanding (000) | Common Shares Outstanding (000) | Preferred Stock | Common Shares | Capital Surplus | Retained Earnings | Treasury Stock, at Cost | Accumulated Other Comprehensive Income (Loss) | Total Shareholder’s Equity | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | 1,396 | 977,189 | $ | 1,900 | $ | 1,257 | $ | 6,295 | $ | 12,469 | $ | (4,909) | $ | 26 | $ | 17,038 | ||||||||||||||||
| Cumulative effect from changes in accounting principle (a) | (230) | (230) | ||||||||||||||||||||||||||||||
| Net income (loss) | 1,343 | 1,343 | ||||||||||||||||||||||||||||||
| Other reclassification of AOCI | (2) | (2) | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 712 | 712 | ||||||||||||||||||||||||||||||
| Deferred compensation | 4 | 4 | ||||||||||||||||||||||||||||||
| Cash dividends declared | ||||||||||||||||||||||||||||||||
| Common Shares ($.74 per share) | (723) | (723) | ||||||||||||||||||||||||||||||
| Series D Preferred Stock ($50.00 per depositary share) | (26) | (26) | ||||||||||||||||||||||||||||||
| Series E Preferred Stock ($1.531252 per depositary share) | (31) | (31) | ||||||||||||||||||||||||||||||
| Series F Preferred Stock ($1.4125 per depositary share) | (24) | (24) | ||||||||||||||||||||||||||||||
| Series G Preferred Stock ($.1.406252 per depositary share) | (25) | (25) | ||||||||||||||||||||||||||||||
| Open market Common Share repurchases | (7,151) | (134) | (134) | |||||||||||||||||||||||||||||
| Employee equity compensation program Common Share repurchases | (1,823) | (18) | (36) | (54) | ||||||||||||||||||||||||||||
| Common shares reissued (returned) for stock options and other employee benefit plans | 7,558 | 133 | 133 | |||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | 1,396 | 975,773 | $ | 1,900 | $ | 1,257 | $ | 6,281 | $ | 12,751 | $ | (4,946) | $ | 738 | $ | 17,981 | ||||||||||||||||
| Net income (loss) | 2,625 | 2,625 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (1,324) | (1,324) | ||||||||||||||||||||||||||||||
| Deferred compensation | 9 | 9 | ||||||||||||||||||||||||||||||
| Cash dividends declared | ||||||||||||||||||||||||||||||||
| Common Shares ($.75 per share) | (717) | (717) | ||||||||||||||||||||||||||||||
| Series D Preferred Stock ($50.00 per depositary share) | (26) | (26) | ||||||||||||||||||||||||||||||
| Series E Preferred Stock ($1.531252 per depositary share) | (31) | (31) | ||||||||||||||||||||||||||||||
| Series F Preferred Stock ($1.4125 per depositary share) | (25) | (25) | ||||||||||||||||||||||||||||||
| Series G Preferred Stock ($1.406252 per depositary share) | (24) | (24) | ||||||||||||||||||||||||||||||
| Open market Common Share repurchases | (27,346) | (559) | (559) | |||||||||||||||||||||||||||||
| Employee equity compensation program Common Share repurchases | (1,611) | — | (32) | (32) | ||||||||||||||||||||||||||||
| Common Shares reissued (returned) for stock options and other employee benefit plans | 8,061 | (12) | 143 | 131 | ||||||||||||||||||||||||||||
| Common Share repurchases under ASR program (b) | (26,027) | — | (585) | (585) | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | 1,396 | 928,850 | $ | 1,900 | $ | 1,257 | $ | 6,278 | $ | 14,553 | $ | (5,979) | $ | (586) | $ | 17,423 | ||||||||||||||||
| Net income (loss) | 1,917 | 1,917 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (5,709) | (5,709) | ||||||||||||||||||||||||||||||
| Deferred compensation | (6) | (6) | ||||||||||||||||||||||||||||||
| Cash dividends declared | ||||||||||||||||||||||||||||||||
| Common Shares ($.79 per share) | (736) | (736) | ||||||||||||||||||||||||||||||
| Series D Preferred Stock ($50.00 per depositary share) | (26) | (26) | ||||||||||||||||||||||||||||||
| Series E Preferred Stock ($1.531252 per depositary share) | (31) | (31) | ||||||||||||||||||||||||||||||
| Series F Preferred Stock ($1.4125 per depositary share) | (24) | (24) | ||||||||||||||||||||||||||||||
| Series G Preferred Stock ($1.406252 per depositary share) | (25) | (25) | ||||||||||||||||||||||||||||||
| Series H Preferred Stock ( $.477917 per depositary share) | (12) | (12) | ||||||||||||||||||||||||||||||
| Open market Common Share repurchases | — | — | ||||||||||||||||||||||||||||||
| Employee equity compensation program Common Share repurchases | (1,736) | (44) | (44) | |||||||||||||||||||||||||||||
| Common Shares reissued (returned) for stock options and other employee benefit plans | 6,211 | 24 | 113 | 137 | ||||||||||||||||||||||||||||
| Issuance of Series H Preferred stock | 600 | 600 | (10) | 590 | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | 1,996 | 933,325 | $ | 2,500 | $ | 1,257 | $ | 6,286 | $ | 15,616 | $ | (5,910) | $ | (6,295) | $ | 13,454 | ||||||||||||||||
(a) Includes the impact of implementing ASU 2016-13.
(b) See Note 24 (“Shareholders' Equity”) for additional detail regarding ASR program.
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
| Year ended December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Provision for credit losses | 502 | (418) | 1,021 | ||||||||
| Depreciation and amortization expense, net | 137 | 32 | 111 | ||||||||
| Accretion of acquired loans | 27 | 24 | 28 | ||||||||
| Increase in cash surrender value of corporate-owned life insurance | (113) | (113) | (119) | ||||||||
| Stock-based compensation expense | 120 | 104 | 101 | ||||||||
| Deferred income taxes (benefit) | (27) | 146 | (191) | ||||||||
| Proceeds from sales of loans held for sale | 12,496 | 16,114 | 14,076 | ||||||||
| Originations of loans held for sale, net of repayments | (10,684) | (16,497) | (13,856) | ||||||||
| Net losses (gains) from sale of loans held for sale | (151) | (282) | (233) | ||||||||
| Net losses (gains) on leased equipment | 7 | (12) | (21) | ||||||||
| Net securities losses (gains) | (9) | (7) | (4) | ||||||||
| Net losses (gains) on sales of fixed assets | (7) | 18 | 5 | ||||||||
| Net decrease (increase) in trading account assets | (128) | 34 | 305 | ||||||||
| Other operating activities, net | 382 | (615) | (893) | ||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 4,469 | 1,153 | 1,673 | ||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchases of intangible assets via acquisitions | (12) | — | — | ||||||||
| Cash received (used) in acquisitions, net of cash acquired | (58) | (29) | — | ||||||||
| Net decrease (increase) in short-term investments, excluding acquisitions | 8,578 | 5,184 | (14,922) | ||||||||
| Purchases of securities available for sale | (4,473) | (28,190) | (15,619) | ||||||||
| Proceeds from sales of securities available for sale | — | 1,375 | 583 | ||||||||
| Proceeds from prepayments and maturities of securities available for sale | 4,545 | 7,623 | 9,923 | ||||||||
| Proceeds from prepayments and maturities of held-to-maturity securities | 2,291 | 2,889 | 2,493 | ||||||||
| Purchases of held-to-maturity securities | (3,670) | (3) | (17) | ||||||||
| Purchases of other investments | (667) | (55) | (134) | ||||||||
| Proceeds from sales of other investments | 17 | 41 | 101 | ||||||||
| Proceeds from prepayments and maturities of other investments | 15 | 26 | 15 | ||||||||
| Net decrease (increase) in loans, excluding acquisitions, sales, and transfers | (17,649) | (4,276) | (7,358) | ||||||||
| Proceeds from sales of portfolio loans | 157 | 337 | 211 | ||||||||
| Proceeds from corporate-owned life insurance | 72 | 72 | 66 | ||||||||
| Purchases of premises, equipment, and software | (96) | (66) | (63) | ||||||||
| Proceeds from sales of premises and equipment | 16 | 4 | — | ||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (10,934) | (15,068) | (24,721) | ||||||||
| FINANCING ACTIVITIES | |||||||||||
| Net increase (decrease) in deposits, excluding acquisitions | (9,977) | 17,290 | 23,412 | ||||||||
| Net increase (decrease) in short-term borrowings | 8,702 | (218) | (113) | ||||||||
| Net proceeds from issuance of long-term debt | 16,596 | 1,203 | 3,607 | ||||||||
| Payments on long-term debt | (8,580) | (2,566) | (2,508) | ||||||||
| Issuance of preferred shares | 590 | — | — | ||||||||
| Open market common share repurchases | — | (559) | (134) | ||||||||
| Employee equity compensation program Common Share repurchases | (44) | (32) | (36) | ||||||||
| Common share purchases under ASR program | — | (585) | — | ||||||||
| Net proceeds from reissuance of Common Shares | 6 | 27 | 8 | ||||||||
| Cash dividends paid | (854) | (823) | (829) | ||||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 6,439 | 13,737 | 23,407 | ||||||||
| NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS | (26) | (178) | 359 | ||||||||
| CASH AND DUE FROM BANKS AT BEGINNING OF YEAR | 913 | 1,091 | 732 | ||||||||
| CASH AND DUE FROM BANKS AT END OF YEAR | $ | 887 | $ | 913 | $ | 1,091 | |||||
| Additional disclosures relative to cash flows: | |||||||||||
| Interest paid | $ | 601 | $ | 363 | $ | 731 | |||||
| Income taxes paid | 292 | 277 | 241 | ||||||||
| Noncash items: | |||||||||||
| Reduction of secured borrowing and related collateral | $ | 9 | $ | 9 | $ | 7 | |||||
| Loans transferred to portfolio from held for sale | 105 | 87 | 75 | ||||||||
| Loans transferred to held for sale from portfolio | — | 3,403 | 310 | ||||||||
| Loans transferred to other real estate owned | 6 | 4 | 96 | ||||||||
| CMBS risk retentions | 12 | 28 | 40 | ||||||||
| ABS risk retentions | 8 | 11 | 19 | ||||||||
| Securities received as consideration | — | 2,825 | — |
See Notes to Consolidated Financial Statements.
1. Summary of Significant Accounting Policies
Organization
We are one of the nation’s largest bank-based financial services companies, providing deposit, lending, cash management, and investment services to individuals and small and medium-sized businesses through our subsidiary, KeyBank. We also provide a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications, and derivatives to middle market companies in selected industries throughout the United States through our subsidiary, KBCM. As of December 31, 2022, KeyBank operated 972 full-service retail banking branches and 1,265 ATMs in 15 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two major business segments, Consumer Bank and Commercial Bank, is included in Note 25 (“Business Segment Reporting”).
Use of Estimates
Our accounting policies conform to US GAAP and prevailing practices within the financial services industry. We must make certain estimates and judgments when determining the amounts presented in our consolidated financial statements and the related notes. If these estimates prove to be inaccurate, actual results could differ from those reported.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts related to derivative valuations and reserves have been reclassified from Other Income to Corporate Services Income to conform to current reporting practices.
The consolidated financial statements also include the accounts of any voting rights entities in which we have a controlling financial interest and certain VIEs. In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly affect 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). See Note 13 (“Variable Interest Entities”) for information on our involvement with VIEs.
We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at fair value or a cost measurement alternative. Investments held by our registered broker-dealer and investment company subsidiaries (principal investing entities and Real Estate Capital line of business) are carried at fair value.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users or filed with the SEC.
Cash and Cash Equivalents
Cash and due from banks are considered “cash and cash equivalents” for financial reporting purposes. We do not consider cash on deposit with the Federal Reserve to be restricted.
Loans
Loans held in portfolio, which management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs and unamortized premiums and discounts. We defer certain nonrefundable loan origination and
commitment fees, and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield.
Accrued interest on loans is included in "other assets" on the balance sheet and is excluded from the calculation of the allowance for credit losses due to our charge-off policy to reverse accrued interest on nonperforming loans against interest income in a timely manner.
Sales-type leases are carried at the aggregate of the lease receivable, estimated unguaranteed residual values, and deferred initial direct fees and costs if certain criteria are met. Direct financing leases are carried at the aggregate of the lease receivable, estimated unguaranteed residual values, and deferred initial direct fees and costs, less unearned income. Unearned income on direct financing leases is amortized over the lease terms using a method approximating the interest method that produces a constant rate of return. Deferred initial direct fees and costs for both sales-type and direct financing leases are amortized over the lease terms as an adjustment to the yield.
Expected credit losses on net investments in leases, including any unguaranteed residual asset, are included in the ALLL. Net gains or losses on sales of lease residuals are included in “other income” or “other expense” on the income statement. Additional information pertaining to the value of lease residuals is provided in Note 10 (“Leases”).
Loans Held for Sale
Loans held for sale generally include certain residential and commercial mortgage loans, other commercial loans, and student loans. Loans are initially classified as held for sale when they are individually identified as being available for immediate sale and a formal plan exists to sell them. Loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value. Fair value is determined based on available market data for similar assets. When a loan is originated as held-for-sale, origination fees and costs are deferred but not amortized. Upon sale of the loans, deferred origination fees and costs are recognized as part of the calculated gain or loss on sale. Our commercial loans (including commercial mortgage and non-mortgage loans) and student loans, which we originated and intend to sell, are carried at the lower of aggregate cost or fair value. Subsequent declines in fair value for loans held for sale are recognized as a charge to “other income” on the income statement. Consumer real estate - residential mortgages loans have been elected to be carried at fair value. Subsequent increases and decreases in fair value for loans elected to be measured at fair value are recorded to “consumer mortgage income” on the income statement. Additional information regarding fair value measurements associated with our loans held for sale is provided in Note 6 (“Fair Value Measurements”).
We may transfer certain loans to held for sale at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a reduction in the ALLL. When a loan is transferred into the held for sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. We may also transfer loans from held for sale to the loan portfolio held for investment. If a loan held for sale for which fair value accounting was elected is transferred to held for investment, it will continue to be accounted for at fair value in the loan portfolio.
Nonperforming Loans
Nonperforming loans are loans for which we do not accrue interest income, and include both commercial and consumer loans and leases and nonaccruing TDR loans. Nonperforming loans do not include loans held for sale. Once a loan is designated nonaccrual, the interest accrued but not collected is reversed against interest income, and payments subsequently received are applied to principal until qualifying for return to accrual.
We generally classify commercial loans as nonperforming and stop accruing interest (i.e., designate the loan “nonaccrual”) when the borrower’s principal or interest payment is 90 days past due unless the loan is well-secured and in the process of collection. Commercial loans are also placed on nonaccrual status when payment is not past due but we have serious doubts about the borrower’s ability to comply with existing repayment terms. Once a loan is designated nonaccrual (and as a result assessed for impairment), the interest accrued but not collected is reversed against loan interest income, and payments subsequently received are applied to principal. Commercial loans are typically charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due.
We classify consumer loans as nonperforming and stop accruing interest when the borrower’s payment is 120 days past due, unless the loan is well-secured and in the process of collection. Any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. Secured loans that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are designated as nonperforming and TDRs. Our charge-off policy for most consumer loans takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to net realizable value when payment is 180 days past due. Credit card loans and similar unsecured products continue to accrue interest until the account is charged off at 180 days past due.
Commercial and consumer loans may be returned to accrual status if we are reasonably assured that all contractually due principal and interest are collectible and the borrower has demonstrated a sustained period (generally six months) of repayment performance under the contracted terms of the loan and applicable regulation.
Purchased Loans
Purchased performing loans that do not have evidence of deterioration in credit quality at acquisition are recorded at fair value at the acquisition date. Any premium or discount associated with purchased performing loans is recognized as interest income based on the effective yield method of amortization for term loans or the straight-line method of amortization for revolving loans. The methods utilized to estimate the required ALLL for purchased performing loans is similar to originated loans.
Purchased loans that have experienced a more-than-insignificant deterioration in credit quality since origination are deemed PCD loans. PCD loans are initially recorded at fair value along with an allowance for credit losses determined using the same methodology as originated loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit losses.
Allowance for Loan and Lease Losses
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of
Credit Losses on Financial Instruments, which replaces the incurred-loss methodology that recognized losses when
a probable threshold was met with an expected-loss methodology, specifically, recognizing current expected credit
losses for the remaining life of the asset at the time of origination or acquisition. We estimate the ALLL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The ALLL is measured on a collective (pool) basis when similar risk characteristics exist. Our portfolio segments include commercial and consumer. Each of these two segments comprises multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes, and the manner in which we monitor and assess credit risk. The commercial segment is composed of commercial and industrial, commercial real estate, and commercial lease financing loan classes. The consumer lending segment is composed of residential mortgage, home equity, consumer direct, credit card, student lending and consumer indirect loan classes.
The ALLL represents our current estimate of lifetime credit losses inherent in our loan portfolio at the balance sheet date. In determining the ALLL, we estimate expected future losses for the loan's entire contractual term adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications.
The ALLL is the sum of three components: (i) asset specific/ individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii) qualitative (judgmental) reserves.
Asset Specific / Individual Component
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. We have elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any costs to sell, when foreclosure is not probable, when repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.
Individual reserves are determined as follows:
-
For commercial non-accruing loans greater than or equal to a defined dollar threshold, individual reserves are determined based on an analysis of the present value of the loan's expected future cash flows or the fair value of the collateral less costs to sell.
-
For commercial non-accruing loans below the defined dollar threshold, an established LGD percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.
-
The population of individually assessed consumer loans includes loans deemed collateral dependent, in addition to all TDRs. The expected loss for these loans is estimated based on the present value of the loan's expected future cash flows, except in instances where the loan is collateral dependent, in which case the loan is written down based on the collateral's fair market value less costs to sell.
Quantitative Component
We use a non-DCF factor-based approach to estimate expected credit losses that include component PD/LGD/EAD
models as well as less complex estimation methods for smaller loan portfolios.
-
PD: This component model is used to estimate the likelihood that a borrower will cease making payments as agreed. The major contributors to this are the borrower credit attributes and macro-economic trends. The objective of the PD model is to produce default likelihood forecasts based on the observed loan-level information and projected paths of macroeconomic variables.
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LGD: This component model is used to estimate the loss on a loan once a loan is in default.
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EAD: Estimates the loan balance at the time the borrower stops making payments. For all term loans, an amortization based formulaic approach is used for account level EAD estimates. We calculate EAD using a portfolio specific method in each of our revolving product portfolios. For line products that are unconditionally cancellable, the balances will either use a paydown curve or be held flat through the life of the loan.
Qualitative Component
The ALLL also includes identified qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, and other relevant factors to ensure the ALLL reflects our best estimate of current expected credit losses. While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of individual or collective reserves. Such qualitative factors may include:
-
The nature and volume of the institution’s financial assets;
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The existence, growth, and effect of any concentrations of credit;
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The volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets;
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The value of the underlying collateral for loans that are not collateral dependent;
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The institution’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;
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The quality of the institution’s credit review function;
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The experience, ability, and depth of the institution’s lending, investment, collection, and other relevant management and staff;
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The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters; and
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Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets.
Liability for Credit Losses on Lending-Related Commitments
The liability for credit losses on lending-related commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. Expected credit losses are estimated over the contractual period in which we are exposed to credit risk via a contractual obligation unless that obligation is unconditionally cancellable by us. The liability for credit losses on lending-related commitments is
adjusted as a provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated useful life. Consistent with our estimation process on our loan and lease portfolio, we use a non-DCF factor-based approach to estimate expected credit losses that include component PD/LGD/EAD models as well as less complex estimation methods for smaller portfolios.
Allowance for Credit Losses on Other Financial Assets
The allowance for credit losses on other financial assets, such as other receivables and servicing advances, is
determined based on historical loss information and other available indicators. If such information does not indicate
any expected credit losses, Key may estimate the allowance for credit losses on other financial assets to be zero or
close to zero.
Fair Value Measurements
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market. Therefore, fair value represents an exit price at the measurement date. We value our assets and liabilities based on the principal or most advantageous market where each would be sold (in the case of assets) or transferred (in the case of liabilities). In the absence of observable market transactions, we consider liquidity valuation adjustments to reflect the uncertainty in pricing the instruments.
Valuation inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on our own information or assessment of assumptions used by other market participants in pricing the asset or liability. Our unobservable inputs are based on the best and most current information available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for Level 2 assets and liabilities are based on one or a combination of the following factors: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the measurement. Assets and liabilities may transfer between levels based on the observable and unobservable inputs used at the valuation date.
Assets and liabilities are recorded at fair value on a recurring or nonrecurring basis. Nonrecurring fair value adjustments are typically recorded as a result of the application of lower of cost or fair value accounting; or impairment. At a minimum, we conduct our valuations quarterly.
Additional information regarding fair value measurements and disclosures is provided in Note 6 (“Fair Value Measurements”).
Short-Term Investments
Short-term investments consist of segregated, interest-bearing deposits due from banks, the Federal Reserve, and certain non-U.S. banks as well as reverse repurchase agreements and United States Treasury Bills with an original maturity of three months or less.
Trading Account Assets
Trading account assets are debt and equity securities, as well as commercial loans, that we purchase and hold but intend to sell in the near term. These assets are reported at fair value. Realized and unrealized gains and losses on trading account assets are reported in “other income” on the income statement.
Securities
Securities available for sale. Debt securities that we intend to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs, or other factors are classified as available-for-sale and reported at fair value. Realized gains and losses resulting from sales of securities using the specific identification method, are included in “other income” on the income statement. Unrealized holding gains are recorded through other comprehensive income. Unrealized losses in fair value below the amortized cost basis are assessed to determine whether the impairment gets recorded through other comprehensive income or through earnings using a valuation allowance.
For available-for-sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value in “other income” on the income statement. For debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, the nature of the security, the underlying collateral, and the financial condition of the issuers, among other factors. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for available-for-sale securities is recognized in other comprehensive income.
Changes in the allowance for available-for-sale securities are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for available-for-sale securities when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.
“Other securities” held in the available-for-sale portfolio consist of convertible preferred stock of privately held companies. For additional information, refer to Note 7 (“Securities”).
Held-to-maturity securities. Debt securities that we have the intent and ability to hold until maturity are classified as held-to-maturity and are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.
The held-to-maturity portfolio is classified by the following major security types: agency residential collateralized mortgage obligations, agency residential mortgage-backed securities, agency commercial mortgage-backed securities, asset backed securities, and other. “Other securities” held in the held-to-maturity portfolio consist of foreign bonds and capital securities. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type. The estimate of expected losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. We do not measure expected credit losses on held-to-maturity securities in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero.
All of our mortgage-backed securities are issued by U.S. government-sponsored enterprises or GNMA, are highly rated by major rating agencies and have a long history of no credit losses. Our asset backed securities consist primarily of senior notes from the sale and securitization of our indirect auto portfolio. Other securities are comprised of State of Israel bonds denominated and paid in U.S. dollars. Israel bonds have a long history of no credit losses. Additionally, as of December 31, 2022, the State of Israel's credit rating is "stable" or “positive” among Fitch, Moody's, and S&P (A+, A1, AA-).
Other Investments
Other investments include equity and mezzanine instruments as well as other types of investments that generally are carried at the alternative cost method. The alternative cost method results in these investments being recorded at cost, less any impairment, plus or minus changes resulting from observable market transactions. Adjustments are
included in “other income” on the income statement. At each reporting period, we assess if these investments continue to qualify for this measurement alternative.
Derivatives and Hedging
All derivatives are recognized on the balance sheet at fair value in “accrued income and other assets” or “accrued expense and other liabilities.” The net increase or decrease in derivatives is included in “other operating activities, net” within the statement of cash flows. Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the derivative has been designated and qualifies as part of a hedge relationship, and on the type of hedge relationship. For derivatives that are not in a hedge relationship, any gain or loss, as well as any premium paid or received, is recognized immediately in earnings in “corporate services income” or “other income” on the income statement, depending whether the derivative is for customer accommodation or risk management, respectively. A derivative that is designated and qualifies as a hedging instrument must be designated as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. Changes in the fair value of a hedging instrument are reflected in the same income statement line as the earnings effect of the change in fair value of the hedged item attributable to the hedged risk.
A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities, and commitments caused by changes in interest rates or other economic factors. The change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item attributable to the hedged risk.
A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest rates or other economic factors. The gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet and reclassified to earnings in the same period in which the hedged transaction affects earnings (e.g., when we incur variable-rate interest on debt, earn variable-rate interest on loans, or sell commercial real estate loans).
A net investment hedge is used to hedge the exposure of changes in the carrying value of investments as a result of changes in the related foreign exchange rates. The gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The amount in AOCI is reclassified into income when the hedged transaction affects earnings (e.g., when we dispose or liquidate a foreign subsidiary).
Hedge “effectiveness” is determined by the extent to which changes in the fair value of a derivative instrument offset changes in the fair value, cash flows, or carrying value attributable to the risk being hedged. If the relationship between the change in the fair value of the derivative instrument and the change in the hedged item falls within a range considered to be the industry norm, the hedge is considered “highly effective” and qualifies for hedge accounting. A hedge is “ineffective” if the relationship between the changes falls outside the acceptable range. In that case, hedge accounting is discontinued on a prospective basis. Hedge effectiveness is tested at least quarterly.
We take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities. Derivative assets and derivative liabilities are recorded within “accrued income and other assets” and “accrued expense and other liabilities,” respectively.
Additional information regarding the accounting for derivatives is provided in Note 8 (“Derivatives and Hedging Activities”).
Loan Sales and Securitizations
We sell and at times may securitize loans and other financial assets. We recognize the sale and securitization of loans or other financial assets when the transferred assets are legally isolated from our creditors and the appropriate accounting criteria are met. When we securitize loans or other financial assets, we may retain a portion of the securities issued, including senior interests, subordinated interests, interest-only strips, servicing rights, and other interests, all of which are considered retained interests in the transferred assets. The interests are initially measured at fair value which is based on independent third party market prices or market prices for similar assets.
If market prices are not available, fair value is estimated based on the present value of expected future cash flows using assumptions as to discount rates, interest rates, prepayment speeds, and credit losses. Loans sold or securitized are removed from the balance sheet and a net gain or loss is recorded depending on the fair value of the loans sold and the retained interests at the date of sale. The net gain or loss is recognized in “other income,” “consumer mortgage income,” or “investment banking and debt placement fees” at the time of sale.
Servicing Assets
We service commercial real estate and residential mortgage loans. Servicing assets and liabilities purchased or retained are initially measured at fair value and are recorded as a component of “accrued income and other assets” on the balance sheet. When no ready market value (such as quoted market prices, or prices based on sales or purchases of similar assets) is available to determine the fair value of servicing assets, fair value is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation is based on a number of assumptions, including the market cost of servicing, the discount rate, the prepayment rate, and the default rate.
We account for our servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income and recorded in either “consumer mortgage income” or “commercial mortgage servicing fees” on the income statement.
Servicing assets are evaluated quarterly for possible impairment. This process involves stratifying the assets based upon one or more predominant risk characteristics and determining the fair value of each class. The characteristics may include financial asset type, size, interest rate, date of origination, term and geographic location. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced by recording a charge to income in the amount of such excess and establishing a valuation reserve allowance. If impairment is determined to be other-than-temporary, a direct write-off of the carrying amount would be recorded. Additional information pertaining to servicing assets is included in Note 9 (“Mortgage Servicing Assets”).
Leases
For leases where Key is the lessee that have initial terms greater than one year, right-of-use assets and corresponding lease liabilities are reported on the balance sheet. Leases with an initial term of less than one year are not recorded on the balance sheet. Our leases where Key is the lessee are primarily classified as operating leases. Operating lease expense is recognized in "net occupancy" and "equipment" on a straight-line basis over the lease term. For additional information, see Note 10 (“Leases”).
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. We determine depreciation of premises and equipment using the straight-line method over the estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or terms of the leases. Premises and equipment are evaluated for impairment whenever events or circumstances indicate that the carrying value of the asset may not be recoverable.
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Goodwill is assigned to reporting units as of the acquisition date based on the expected benefit to such reporting unit from the synergies of the business combination. Goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment, at least annually as of October 1, or when indicators of impairment exist.
We may elect to perform a qualitative analysis to determine whether or not it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. When conducting a qualitative analysis, we evaluate both internal and external factors, including recent performance, updated projections, stock prices and economic conditions. If we elect to bypass this qualitative analysis, or conclude via qualitative analysis that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, a quantitative goodwill impairment test is performed. If the fair value is less than the carrying value, an impairment charge is recorded for the difference.
Beginning January 1, 2021, the amount of capital being allocated to our reporting units as a proxy for the carrying value is based on a combination of regulatory and economic equity. Fair values are estimated using a 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 reporting units 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 different levels of risk. A sensitivity analysis is typically performed on key assumptions, such as the discount rates and cost savings estimates.
Other intangible assets with finite lives are amortized on either an accelerated or straight-line basis. We monitor for impairment indicators for goodwill and other intangible assets on a quarterly basis. Additional information pertaining to goodwill and other intangible assets is included in Note 12 (“Goodwill and Other Intangible Assets”).
Business Combinations
We account for our business combinations using the acquisition method of accounting. Under this accounting method, the acquired company’s assets and liabilities are recorded at fair value at the date of acquisition, except as provided for by the applicable accounting guidance, and the results of operations of the acquired company are combined with Key’s results from the date of acquisition forward. Acquisition costs are expensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including identifiable intangible assets) is recorded as goodwill. Our accounting policy for intangible assets is summarized in this note under the heading “Goodwill and Other Intangible Assets.”
Additional information regarding acquisitions is provided in Note 15 (“Acquisitions and Discontinued Operations”).
Securities Financing Activities
We enter into repurchase agreements to finance overnight customer sweep deposits. We also enter into repurchase and reverse repurchase agreements to settle other securities obligations. We account for these securities financing agreements as collateralized financing transactions. Repurchase and reverse repurchase agreements are recorded on the balance sheet at the amounts that the securities will be subsequently sold or repurchased. Securities borrowed transactions are recorded on the balance sheet at the amounts of cash collateral advanced. While our securities financing agreements incorporate a right of set off, the assets and liabilities are reported on a gross basis. Reverse repurchase agreements and securities borrowed transactions are included in “short-term investments” on the balance sheet; repurchase agreements are included in “federal funds purchased and securities sold under repurchase agreements.” Fees received in connection with these transactions are recorded in interest income; fees paid are recorded in interest expense.
Additional information regarding securities financing activities is included in Note 16 (“Securities Financing Activities”).
Contingencies and Guarantees
We recognize liabilities for the fair value of our obligations under certain guarantees issued. These liabilities are included in “accrued expense and other liabilities” on the balance sheet. If we receive a fee for a guarantee requiring liability recognition, the amount of the fee represents the initial fair value of the “stand ready” obligation. If there is no fee, the fair value of the stand ready obligation is determined using expected present value measurement techniques, unless observable transactions for comparable guarantees are available. The subsequent accounting for these stand ready obligations depends on the nature of the underlying guarantees. We account for our release from risk under a particular guarantee when the guarantee expires or is settled, or by a systematic and rational amortization method, depending on the risk profile of the guarantee. Contingent aspects of certain guarantees are assessed a reserve under CECL if required.
Contingent liabilities may result from litigation, claims and assessments, loss or damage to Key. We recognize liabilities from contingencies when a loss is probable and can be reasonably estimated.
Additional information regarding contingencies and guarantees is included in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”).
Revenue Recognition
We recognize revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. Our principal source of revenue is interest income from loans and investments. We also earn noninterest income from various banking and financial services offered through both the Commercial and Consumer banks.
Interest Income. The largest source of revenue for us is interest income. Interest income is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan agreements or securities contracts.
Noninterest Income. We earn noninterest income through a variety of financial and transaction services provided to commercial and consumer clients. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Trust and Investment Services Income. Trust and investment services revenues include brokerage commissions trust and asset management commissions.
Revenue from trade execution and brokerage services is earned through commissions from trade execution on behalf of clients. Revenue from these transactions is recognized at the trade date. Any ongoing service fees are recognized on a monthly basis as services are performed.
Trust and asset management services include asset custody and investment management services provided to individual and institutional customers. Revenue is recognized monthly based on a minimum annual fee, and the market value of assets in custody. Additional fees are recognized for transactional activity at a point in time.
Investment Banking and Debt Placement Fees. Investment banking and debt placement fees consist of syndication fees, debt and equity underwriting fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. Revenues for these services are recorded at a point in time, upon completion of a contractually identified transaction, or when an advisory opinion is provided. Investment banking and debt placement costs are reported on a gross basis within other expense on the income statement.
Service Charges on Deposit Accounts. Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees. Certain reward costs are netted within revenues from service charges on deposits.
Corporate Services Income. Corporate services income includes various ancillary service revenue including letter of credit fees, loan fees, certain non-hedging derivatives gains and losses, and certain capital market fees. Revenue from these fees is recorded in a manner that reflects the timing of when transactions occur, and as services are provided.
Cards and Payments Income. Cards and payments income consists of debit card, consumer and commercial credit card, and merchant services income. Revenue sources include interchange fees from credit and debit cards processed through card association networks, merchant services, and other card related services. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. Interchange fees are recognized as transactions occur. Certain card network costs and reward costs are netted within interchange revenues. Merchant services income represents account management fees and transaction fees charged to merchants for the processing of card association network transactions. Merchant services revenue is recognized as transactions occur, or as services are performed.
Corporate-Owned Life Insurance Income. Income from corporate-owned life insurance primarily represents changes in the cash surrender value of life insurance policies held on certain key employees. Revenue is recognized in each period based on the change in the cash surrender value during the period.
Stock-Based Compensation
Stock-based compensation is measured using the fair value method of accounting on the grant date. The measured cost is recognized over the period during which the recipient is required to provide service in exchange for the award. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest. Compensation expense related to awards granted to employees is recorded in “personnel expense” on the Consolidated Statements of Income while compensation expense related to awards granted to directors is recorded in “other expense.”
We recognize compensation expense for stock-based, mandatory deferred incentive compensation awards using the accelerated method of amortization over a period of approximately 5 years (the current year performance period and a four-year vesting period, which generally starts in the first quarter following the performance period).
We estimate the fair value of options granted using the Black-Scholes option-pricing model, as further described in Note 17 (“Stock-Based Compensation”). Employee stock options typically become exercisable at the rate of 25% per year, beginning one year after the grant date. Options expire no later than 10 years after their grant date. We recognize stock-based compensation expense for stock options with graded vesting using an accelerated method of amortization.
We use shares repurchased under our annual capital plan submitted to our regulators (treasury shares) for share issuances under all stock-based compensation programs.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between financial statement asset and liability amounts and their respective tax bases, and are measured using enacted tax laws and rates that are expected to apply in the periods in which the deferred tax assets or liabilities are expected to be realized. Deferred tax assets are also recorded for any tax attributes, such as tax credit and net operating loss carryforwards. The net balance of deferred tax assets and liabilities is reported in “Accrued income and other assets” or “Accrued expense and other liabilities” in the consolidated balance sheets, as appropriate. Subsequent changes in the tax laws require adjustment to these assets and liabilities with the cumulative effect included in the provision for income taxes for the period in which the change is enacted. A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized.
Earnings Per Share
Basic net income per common share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared (distributed earnings) and participation rights in undistributed earnings. Distributed and undistributed earnings are allocated between common and participating security shareholders based on their respective rights to receive dividends. Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities (e.g., nonvested service-based restricted stock units). Undistributed net losses are not allocated to nonvested restricted shareholders, as these shareholders do not have a contractual obligation to fund the incurred losses. Net income attributable to common shares is then divided by the weighted-average number of common shares outstanding during the period.
Diluted net income per common share is calculated using the more dilutive of either the treasury method or the two-class method. The dilutive calculation considers the potential dilutive effect of common stock equivalents determined under the treasury stock method. Common stock equivalents include stock options and service- and performance-based restricted stock and stock units granted under our stock plans. Net income attributable to common shares is then divided by the total of weighted-average number of common shares and common stock equivalents outstanding during the period.
Accounting Guidance Adopted in 2022
| Standard | Date of Adoption | Description | Effect on Financial Statements or Other Significant Matters | ||||||||
| ASU 2020-04 and ASU 2021-01 — Reference Rate Reform (Topic 848) | March 12, 2020 through December 31, 2024 | London Interbank Offered Rate (LIBOR), a reference rate presumed to capture bank funding costs, is being phased out and will no longer be published. This transition to alternate rates will impact, among other things, contracts that reference LIBOR. This ASU provides relief from cumbersome accounting consequences for certain qualifying contract modifications undertaken as a result of reference rate reform. | Key has established an enterprise-wide program to identify and address all LIBOR related matters. We have elected to apply certain optional expedients for contract modifications and hedging relationships to derivative instruments impacted by the market-wide discounting transition. These optional expedients remove the requirement to remeasure contract modifications or dedesignate hedging relationships due to reference rate reform. We plan to elect any optional expedients for contract modifications and hedging relationships to any other financial instruments falling under the scope of reference rate reform. | ||||||||
| ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) | January 1, 2022 | The ASU simplifies the accounting for convertible debt instruments by eliminating the legacy accounting models for convertible instruments with beneficial conversion features or cash conversion features. The guidance also amends the guidance used to determine if a freestanding financial instrument or an embedded feature qualifies for a scope exception from derivative accounting. For freestanding financial instruments and embedded features that have all the characteristics of a derivative instrument and are potentially settled in an entity’s own stock, the guidance simplifies the settlement assessment that entities are required to perform. Also, this update now requires the use of the if-converted method for all convertible instruments and includes the effect of potential share settlement in diluted EPS if the effect is more dilutive. The new guidance also makes clarifications to the EPS calculation. Further, the ASU expands disclosure requirements. The guidance should be applied on a modified retrospective or retrospective basis. | The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. |
Accounting Guidance Adopted in 2023
| Standard | Date of Adoption | Description | Effect on Financial Statements or Other Significant Matters | ||||||||
| ASU 2021-08, Business Combinations (Topic 805) | January 1, 2023 Early adoption is permitted. | At the acquisition date, an acquirer must account for any acquired revenue contracts in accordance with Topic 606 as if it had originated the contracts (i.e. measure contract assets and liabilities, generally consistent with acquiree's financial statements). The guidance should be applied on a prospective basis. | The adoption of this guidance did not have a material impact on Key’s financial condition or results of operations. | ||||||||
| ASU 2022-01, Derivatives and Hedging (Topic 815) | January 1, 2023 Early adoption is permitted. | This guidance allows entities to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets. It also allows multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. If a breach is anticipated, an entity is required to partially or fully dedesignate a hedged layer or layers until a breach is no longer anticipated. There are additional requirements and enhanced disclosures related to basis adjustments. The guidance should be applied on a prospective, retrospective or modified retrospective basis depending on the amendment. | The adoption of this guidance did not have a material impact on Key’s financial condition or results of operations. | ||||||||
| ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) | January 1, 2023 Early adoption is permitted. | The amendments eliminate current Troubled Debt Restructuring (TDR) guidance and instead require entities to apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or is a continuation of an existing loan. Entities must disclose current-period gross write-offs on an amortized cost basis by credit quality indicator and class of financing receivable by year of origination. The guidance should be applied on a prospective basis except for amendments related to recognition and measurement of TDRs, where a modified retrospective transition method is optional. | The adoption of this guidance did not have a material impact on Key's financial condition or results of operations. |
2. Earnings Per Common Share
Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each Common Share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each Common Share outstanding during the reporting periods adjusted to include the effects of potentially dilutive Common Shares. Potentially dilutive Common Shares include stock options and other
stock-based awards. Potentially dilutive Common Shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.
Our basic and diluted earnings per Common Share are calculated as follows:
| Year ended December 31, | |||||||||||
| Dollars in millions, except per share amounts | 2022 | 2021 | 2020 | ||||||||
| EARNINGS | |||||||||||
| Income (loss) from continuing operations | $ | 1,911 | $ | 2,612 | $ | 1,329 | |||||
| Less: Net income (loss) attributable to noncontrolling interests | — | — | — | ||||||||
| Income (loss) from continuing operations attributable to Key | 1,911 | 2,612 | 1,329 | ||||||||
| Less: Dividends on preferred stock | 118 | 106 | 106 | ||||||||
| Income (loss) from continuing operations attributable to Key common shareholders | 1,793 | 2,506 | 1,223 | ||||||||
| Income (loss) from discontinued operations, net of taxes | 6 | 13 | 14 | ||||||||
| Net income (loss) attributable to Key common shareholders | $ | 1,799 | $ | 2,519 | $ | 1,237 | |||||
| WEIGHTED-AVERAGE COMMON SHARES | |||||||||||
| Weighted-average Common Shares outstanding (000) | 924,363 | 947,065 | 967,783 | ||||||||
| Effect of common share options and other stock awards | 8,696 | 10,349 | 7,024 | ||||||||
| Weighted-average common shares and potential Common Shares outstanding (000) (a) | 933,059 | 957,414 | 974,807 | ||||||||
| EARNINGS PER COMMON SHARE | |||||||||||
| Income (loss) from continuing operations attributable to Key common shareholders | $ | 1.94 | $ | 2.64 | $ | 1.26 | |||||
| Income (loss) from discontinued operations, net of taxes | .01 | .01 | .01 | ||||||||
| Net income (loss) attributable to Key common shareholders (b) | 1.94 | 2.65 | 1.28 | ||||||||
| Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution | 1.92 | 2.62 | 1.26 | ||||||||
| Income (loss) from discontinued operations, net of taxes — assuming dilution | .01 | .01 | .01 | ||||||||
| Net income (loss) attributable to Key common shareholders — assuming dilution (b) | 1.93 | 2.63 | 1.27 |
(a)Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
(b)EPS may not foot due to rounding.
3. Restrictions on Cash, Dividends, and Lending Activities
Capital distributions from KeyBank and other subsidiaries are our principal source of cash flows for paying dividends on our common and preferred shares, servicing our debt, and financing corporate operations. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the previous two calendar years and for the current year, up to the date the dividend is declared.
During 2022, KeyBank paid $475 million in dividends to KeyCorp. At January 1, 2023, KeyBank had regulatory capacity to pay $2.3 billion in dividends to KeyCorp without prior regulatory approval. At December 31, 2022, KeyCorp held $3.2 billion in cash and short-term investments, which can be used to pay dividends to shareholders, service debt, and finance corporate operations.
4. Loan Portfolio
Loan Portfolio by Portfolio Segment and Class of Financing Receivable (a)
| December 31, | ||||||||
| Dollars in millions | 2022 | 2021 | ||||||
| Commercial and industrial (b) | $ | 59,647 | $ | 50,525 | ||||
| Commercial real estate: | ||||||||
| Commercial mortgage | 16,352 | 14,244 | ||||||
| Construction | 2,530 | 1,996 | ||||||
| Total commercial real estate loans | 18,882 | 16,240 | ||||||
| Commercial lease financing (c) | 3,936 | 4,071 | ||||||
| Total commercial loans | 82,465 | 70,836 | ||||||
| Residential — prime loans: | ||||||||
| Real estate — residential mortgage | 21,401 | 15,756 | ||||||
| Home equity loans | 7,951 | 8,467 | ||||||
| Total residential — prime loans | 29,352 | 24,223 | ||||||
| Consumer direct loans | 6,508 | 5,753 | ||||||
| Credit cards | 1,026 | 972 | ||||||
| Consumer indirect loans | 43 | 70 | ||||||
| Total consumer loans | 36,929 | 31,018 | ||||||
| Total loans (d) | $ | 119,394 | $ | 101,854 | ||||
(a)Accrued interest of $417 million and $198 million at December 31, 2022, and December 31, 2021, respectively, is presented in "Accrued income and other assets" on the Consolidated Balance Sheets and is excluded from the amortized cost basis disclosed in this table.
(b)Loan balances include $172 million and $139 million of commercial credit card balances at December 31, 2022, and December 31, 2021, respectively.
(c)Commercial lease financing includes receivables of $8 million and $16 million held as collateral for secured borrowings at December 31, 2022, and December 31, 2021, 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”).
(d)Total loans exclude loans of $434 million at December 31, 2022, and $567 million at December 31, 2021, related to the discontinued operations of the education lending business.
5. Asset Quality
ALLL
We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 ("Basis of Presentation and Accounting Policies") under the heading "Allowance for Loan and Lease Losses" of this report.
The ALLL at December 31, 2022, represents our current estimate of lifetime credit losses inherent in the loan portfolio at that date. The changes in the ALLL by loan category for the periods indicated are as follows:
Twelve Months Ended December 31, 2022:
| Dollars in millions | December 31, 2021 | Provision | Charge-offs | Recoveries | December 31, 2022 | |||||||||||||||||||||||||||
| Commercial and Industrial | $ | 445 | $ | 259 | $ | (153) | $ | 50 | $ | 601 | ||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||||||
| Real estate — commercial mortgage | 182 | 39 | (23) | 5 | 203 | |||||||||||||||||||||||||||
| Real estate — construction | 29 | (2) | — | 1 | 28 | |||||||||||||||||||||||||||
| Total commercial real estate loans | 211 | 37 | (23) | 6 | 231 | |||||||||||||||||||||||||||
| Commercial lease financing | 32 | (2) | (2) | 4 | 32 | |||||||||||||||||||||||||||
| Total commercial loans | 688 | 294 | (178) | 60 | 864 | |||||||||||||||||||||||||||
| Real estate — residential mortgage | 95 | 94 | 2 | 5 | 196 | |||||||||||||||||||||||||||
| Home equity loans | 110 | (14) | (1) | 3 | 98 | |||||||||||||||||||||||||||
| Consumer direct loans | 105 | 32 | (34) | 8 | 111 | |||||||||||||||||||||||||||
| Credit cards | 61 | 29 | (30) | 6 | 66 | |||||||||||||||||||||||||||
| Consumer indirect loans | 2 | 2 | (4) | 2 | 2 | |||||||||||||||||||||||||||
| Total consumer loans | 373 | 143 | (67) | 24 | 473 | |||||||||||||||||||||||||||
| Total ALLL — continuing operations | 1,061 | 437 | (a) | (245) | 84 | 1,337 | ||||||||||||||||||||||||||
| Discontinued operations | 28 | (3) | (6) | 2 | 21 | |||||||||||||||||||||||||||
| Total ALLL — including discontinued operations | $ | 1,089 | $ | 434 | $ | (251) | $ | 86 | $ | 1,358 | ||||||||||||||||||||||
(a)Excludes a provision related to reserves on lending-related commitments of $65 million.
Twelve Months Ended December 31, 2021:
| Dollars in millions | December 31, 2020 | Provision | Charge-offs | Recoveries | December 31, 2021 | ||||||||||||||||||
| Commercial and Industrial | $ | 678 | $ | (142) | $ | (174) | $ | 83 | $ | 445 | |||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Real estate — commercial mortgage | 327 | (114) | (40) | 9 | 182 | ||||||||||||||||||
| Real estate — construction | 47 | (18) | — | — | 29 | ||||||||||||||||||
| Total commercial real estate loans | 374 | (132) | (40) | 9 | 211 | ||||||||||||||||||
| Commercial lease financing | 47 | (16) | (6) | 7 | 32 | ||||||||||||||||||
| Total commercial loans | 1,099 | (290) | (220) | 99 | 688 | ||||||||||||||||||
| Real estate — residential mortgage | 102 | (12) | 2 | 3 | 95 | ||||||||||||||||||
| Home equity loans | 171 | (57) | (9) | 5 | 110 | ||||||||||||||||||
| Consumer direct loans | 128 | (2) | (29) | 8 | 105 | ||||||||||||||||||
| Credit cards | 87 | (7) | (27) | 8 | 61 | ||||||||||||||||||
| Consumer indirect loans | 39 | (13) | (39) | 15 | 2 | ||||||||||||||||||
| Total consumer loans | 527 | (91) | (102) | 39 | 373 | ||||||||||||||||||
| Total ALLL — continuing operations | 1,626 | (381) | (a) | (322) | 138 | 1,061 | |||||||||||||||||
| Discontinued operations | 36 | (6) | (4) | 2 | 28 | ||||||||||||||||||
| Total ALLL — including discontinued operations | $ | 1,662 | $ | (387) | $ | (326) | $ | 140 | $ | 1,089 | |||||||||||||
(a)Excludes a credit related to reserves on lending-related commitments of $37 million.
Twelve Months Ended December 31, 2020
| Dollars in millions | December 31, 2019 | Impact of ASC 326 Adoption | January 1, 2020 | Provision | Charge-offs | Recoveries | December 31, 2020 | |||||||||||||||||||
| Commercial and industrial | $ | 551 | $ | (141) | $ | 410 | $ | 585 | $ | (351) | $ | 34 | $ | 678 | ||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||
| Real estate — commercial mortgage | 143 | 16 | 159 | 184 | (19) | 3 | 327 | |||||||||||||||||||
| Real estate — construction | 22 | (7) | 15 | 32 | — | — | 47 | |||||||||||||||||||
| Total commercial real estate loans | 165 | 9 | 174 | 216 | (19) | 3 | 374 | |||||||||||||||||||
| Commercial lease financing | 35 | 8 | 43 | 38 | (35) | 1 | 47 | |||||||||||||||||||
| Total commercial loans | 751 | (124) | 627 | 839 | (405) | 38 | 1,099 | |||||||||||||||||||
| Real estate — residential mortgage | 7 | 77 | 84 | 19 | (2) | 1 | 102 | |||||||||||||||||||
| Home equity loans | 31 | 147 | 178 | (3) | (11) | 7 | 171 | |||||||||||||||||||
| Consumer direct loans | 34 | 63 | 97 | 61 | (37) | 7 | 128 | |||||||||||||||||||
| Credit cards | 47 | 35 | 82 | 36 | (39) | 8 | 87 | |||||||||||||||||||
| Consumer indirect loans | 30 | 6 | 36 | 13 | (28) | 18 | 39 | |||||||||||||||||||
| Total consumer loans | 149 | 328 | 477 | 126 | (117) | 41 | 527 | |||||||||||||||||||
| Total ALLL — continuing operations | 900 | 204 | 1,104 | 965 | (a) | (522) | 79 | 1,626 | ||||||||||||||||||
| Discontinued operations | 10 | 31 | 41 | (5) | (5) | 5 | 36 | |||||||||||||||||||
| Total ALLL — including discontinued operations | $ | 910 | $ | 235 | $ | 1,145 | $ | 960 | $ | (527) | $ | 84 | $ | 1,662 | ||||||||||||
(a)Excludes a provision related to reserves on lending-related commitments of $56 million.
As described in Note 1 ("Basis of Presentation and Accounting Policies"), we estimate the ALLL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. In our estimation of expected credit losses, we use a two year reasonable and supportable period across all products. Following this two year period in which supportable forecasts can be generated, for all modeled loan portfolios, we revert expected credit losses to a level that is consistent with our historical information by reverting the macroeconomic variables (model inputs) to their long run average. We revert to historical loss rates for less complex estimation methods for smaller portfolios. A 20 year fixed length look back period is used to calculate the long run average of the macroeconomic variables. A four quarter reversion period is used where the macroeconomic variables linearly revert to their long run average following the two year reasonable and supportable period.
We develop our reasonable and supportable forecasts using relevant data including, but not limited to, changes in economic output, unemployment rates, property values, and other factors associated with the credit losses on financial assets. Some macroeconomic variables apply to all portfolio segments, while others are more portfolio specific. The following table discloses key macroeconomic variables for each loan portfolio.
| Segment | Portfolio | Key Macroeconomic Variables (a) | ||||||
| Commercial | Commercial and industrial | BBB corporate bond rate (spread), fixed investment, business bankruptcies, GDP, industrial production, and unemployment rate, Producer Price Index | ||||||
| Commercial real estate | Property & real estate price indices, unemployment rate, business bankruptcies, GDP, SOFR | |||||||
| Commercial lease financing | BBB corporate bond rate (spread), GDP, and unemployment rate | |||||||
| Consumer | Real estate — residential mortgage | GDP, home price index, unemployment rate, and 30 year mortgage rate | ||||||
| Home equity | Home price index, unemployment rate, and 30 year mortgage rate | |||||||
| Consumer direct | Unemployment rate and U.S. household income | |||||||
| Consumer indirect | Unemployment rate | |||||||
| Credit cards | Unemployment rate and U.S. household income | |||||||
| Discontinued operations | Unemployment rate |
(a)Variables include all transformations and interactions with other risk drivers. Additionally, variables may have varying impacts at different points in the economic cycle.
In addition to macroeconomic drivers, portfolio attributes such as remaining term, outstanding balance, risk ratings, utilization, FICO, LTV, and delinquency also drive ALLL changes. Our ALLL models were designed to capture the correlation between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes and macroeconomic variables in isolation may not be indicative of past or future performance.
Economic Outlook
As of December 31, 2022, the outlook is for slow, but positive economic growth over the forecasting horizon. Unemployment is increasing modestly, as job growth moderates, but remains at relatively low levels from an historical perspective. Inflation in the United States is starting to ease as the restrictive monetary policy and higher interest rates are making an impact. Asset prices, including residential and commercial real estate values, are expected to come under pressure. We utilized the Moody’s November 2022 Consensus forecast as our baseline forecast to estimate our expected credit losses as of December 31, 2022. We determined such forecast to be a reasonable view of the outlook for the economy given all available information at year end.
The baseline scenario reflects slow economic growth over the next two years in markets in which we operate. U.S. GDP is expected to contract by 0.1% annualized rate in the fourth quarter of 2022, but grow at an annual rate of approximately 0.4% and 1.4% for 2023 and 2024, respectively. The national unemployment rate forecast is 3.7% in the fourth quarter of 2022, and is expected to increase gradually to 4.5% in the fourth quarter of 2023 and throughout 2024 due to labor supply constraints. The U.S. Consumer Price Index (CPI) annualized rate is expected to decrease to 3.9% in 2023 and further decline to 2.5% in 2024. The national home price index is expected to decline approximately 5% over 2023 and then grow 3% over 2024.
To the extent we identified credit risk considerations that were not captured by the third-party economic forecast, we addressed the risk through management’s qualitative adjustments to the ALLL.
Commercial Loan Portfolio
The commercial ALLL increased by $176 million, or 25.6%, from December 31, 2021, through December 31, 2022. The increase is driven by the change in the economic outlook and loan growth. Asset quality remained strong as of December 31, 2022.
The declining economic outlook primarily contributed to the reserve increase year-over-year. The economic environment was impacted by interest rate increases, lower commercial real estate values, and expectations of lower GDP growth in the second half of the year. As a result, such factors led to a higher commercial reserve at December 31, 2022, than the prior year. In addition, Key’s strong loan growth in 2022 was a contributing factor to the reserve change.
Consumer Loan Portfolio
The consumer ALLL increased $100 million, or 26.8%, from December 31, 2021, through December 31, 2022. The overall increase in the allowance is primarily driven by loan growth and economic forecast changes, partly offset by reductions in qualitative reserves as pandemic-related pressures ease.
Reserve levels reflect the overall declining economic outlook year-over-year. The most meaningful change to the economic forecast is the deterioration in the home price index outlook and elevated interest rates, which contribute to reserve increases for both the residential mortgage and home equity segments. In addition, deterioration in the unemployment rate outlook impacts all consumer portfolios. As it relates to the changes in the ALLL due to portfolio factors, increases are largely driven by targeted growth in the residential mortgage portfolio.
Credit Risk Profile
The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the loan risk rating grades assigned for the commercial loan portfolios and the refreshed FICO score assigned for the consumer loan portfolios. The internal risk grades assigned to loans follow our definitions of Pass and Criticized, which are consistent with published definitions of regulatory risk classifications. Loans with a pass rating represent those loans not classified on our rating scale for credits, as minimal credit risk has been identified. Criticized loans are those loans that either have a potential weakness deserving management's close attention or have a well-defined weakness that may put full collection of contractual cash flows at risk. Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay its debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the tables below at the dates indicated.
Most extensions of credit are subject to loan scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically re-evaluated thereafter. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk in the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category and Vintage (a)
| As of December 31, 2022 | Term Loans | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term Loans Amortized Cost Basis | ||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year and Internal Risk Rating | |||||||||||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
| Commercial and Industrial | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| Pass | $ | 11,580 | $ | 8,636 | $ | 3,540 | $ | 2,839 | $ | 1,787 | $ | 3,307 | $ | 25,565 | $ | 138 | $ | 57,392 | |||||||||||
| Criticized (Accruing) | 40 | 357 | 131 | 160 | 227 | 205 | 936 | 25 | 2,081 | ||||||||||||||||||||
| Criticized (Nonaccruing) | 34 | 2 | 5 | 4 | 22 | 20 | 87 | — | 174 | ||||||||||||||||||||
| Total commercial and industrial | 11,654 | 8,995 | 3,676 | 3,003 | 2,036 | 3,532 | 26,588 | 163 | 59,647 | ||||||||||||||||||||
| Real estate — commercial mortgage | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| Pass | 4,786 | 3,817 | 992 | 1,853 | 788 | 2,578 | 1,068 | 67 | 15,949 | ||||||||||||||||||||
| Criticized (Accruing) | 6 | 13 | 20 | 48 | 73 | 175 | 47 | — | 382 | ||||||||||||||||||||
| Criticized (Nonaccruing) | — | — | 1 | 1 | 1 | 15 | 3 | — | 21 | ||||||||||||||||||||
| Total real estate — commercial mortgage | 4,792 | 3,830 | 1,013 | 1,902 | 862 | 2,768 | 1,118 | 67 | 16,352 | ||||||||||||||||||||
| Real estate — construction | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| Pass | 698 | 895 | 445 | 262 | 107 | 48 | 1 | — | 2,456 | ||||||||||||||||||||
| Criticized (Accruing) | 5 | 1 | 5 | 32 | 25 | 4 | — | 2 | 74 | ||||||||||||||||||||
| Criticized (Nonaccruing) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Total real estate — construction | 703 | 896 | 450 | 294 | 132 | 52 | 1 | 2 | 2,530 | ||||||||||||||||||||
| Commercial lease financing | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| Pass | 1,039 | 743 | 509 | 467 | 174 | 947 | — | — | 3,879 | ||||||||||||||||||||
| Criticized (Accruing) | 15 | 1 | 9 | 12 | 9 | 10 | — | — | 56 | ||||||||||||||||||||
| Criticized (Nonaccruing) | — | — | — | — | — | 1 | — | — | 1 | ||||||||||||||||||||
| Total commercial lease financing | 1,054 | 744 | 518 | 479 | 183 | 958 | — | — | 3,936 | ||||||||||||||||||||
| Total commercial loans | $ | 18,203 | $ | 14,465 | $ | 5,657 | $ | 5,678 | $ | 3,213 | $ | 7,310 | $ | 27,707 | $ | 232 | $ | 82,465 | |||||||||||
(a)Accrued interest of $314 million, presented in “Accrued income and other assets” on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in this table.
Consumer Credit Exposure
Credit Risk Profile by FICO Score and Vintage (a)
| As of December 31, 2022 | Term Loans | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term Loans Amortized Cost Basis | ||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year and FICO Score | |||||||||||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||||||||
| Real estate — residential mortgage | |||||||||||||||||||||||||||||
| FICO Score: | |||||||||||||||||||||||||||||
| 750 and above | $ | 5,205 | $ | 8,702 | $ | 2,584 | $ | 636 | $ | 64 | $ | 978 | $ | — | $ | — | $ | 18,169 | |||||||||||
| 660 to 749 | 1,286 | 919 | 282 | 106 | 28 | 260 | — | — | 2,881 | ||||||||||||||||||||
| Less than 660 | 41 | 42 | 17 | 14 | 15 | 130 | — | — | 259 | ||||||||||||||||||||
| No Score | 62 | 1 | 1 | 1 | 1 | 25 | 1 | — | 92 | ||||||||||||||||||||
| Total real estate — residential mortgage | 6,594 | 9,664 | 2,884 | 757 | 108 | 1,393 | 1 | — | 21,401 | ||||||||||||||||||||
| Home equity loans | |||||||||||||||||||||||||||||
| FICO Score: | |||||||||||||||||||||||||||||
| 750 and above | 146 | 1,044 | 736 | 207 | 74 | 617 | 2,238 | 398 | 5,460 | ||||||||||||||||||||
| 660 to 749 | 83 | 291 | 194 | 79 | 32 | 187 | 974 | 126 | 1,966 | ||||||||||||||||||||
| Less than 660 | 11 | 31 | 25 | 17 | 10 | 81 | 300 | 37 | 512 | ||||||||||||||||||||
| No Score | 7 | — | — | — | — | 2 | 4 | — | 13 | ||||||||||||||||||||
| Total home equity loans | 247 | 1,366 | 955 | 303 | 116 | 887 | 3,516 | 561 | 7,951 | ||||||||||||||||||||
| Consumer direct loans | |||||||||||||||||||||||||||||
| FICO Score: | |||||||||||||||||||||||||||||
| 750 and above | 1,291 | 1,632 | 811 | 351 | 45 | 97 | 102 | — | 4,329 | ||||||||||||||||||||
| 660 to 749 | 526 | 434 | 229 | 120 | 26 | 41 | 206 | — | 1,582 | ||||||||||||||||||||
| Less than 660 | 58 | 63 | 32 | 23 | 7 | 9 | 57 | — | 249 | ||||||||||||||||||||
| No Score | 59 | 32 | 22 | 11 | 9 | 22 | 193 | — | 348 | ||||||||||||||||||||
| Total consumer direct loans | 1,934 | 2,161 | 1,094 | 505 | 87 | 169 | 558 | — | 6,508 | ||||||||||||||||||||
| Credit cards | |||||||||||||||||||||||||||||
| FICO Score: | |||||||||||||||||||||||||||||
| 750 and above | — | — | — | — | — | — | 524 | — | 524 | ||||||||||||||||||||
| 660 to 749 | — | — | — | — | — | — | 402 | — | 402 | ||||||||||||||||||||
| Less than 660 | — | — | — | — | — | — | 99 | — | 99 | ||||||||||||||||||||
| No Score | — | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||
| Total credit cards | — | — | — | — | — | — | 1,026 | — | 1,026 | ||||||||||||||||||||
| Consumer indirect loans | |||||||||||||||||||||||||||||
| FICO Score: | |||||||||||||||||||||||||||||
| 750 and above | — | 2 | — | — | — | 19 | — | — | 21 | ||||||||||||||||||||
| 660 to 749 | — | — | — | — | — | 15 | — | — | 15 | ||||||||||||||||||||
| Less than 660 | — | — | — | — | — | 7 | — | — | 7 | ||||||||||||||||||||
| No Score | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Total consumer indirect loans | — | 2 | — | — | — | 41 | — | — | 43 | ||||||||||||||||||||
| Total consumer loans | $ | 8,775 | $ | 13,193 | $ | 4,933 | $ | 1,565 | $ | 311 | $ | 2,490 | $ | 5,101 | $ | 561 | $ | 36,929 | |||||||||||
(a)Accrued interest of $103 million, presented in “Accrued income and other assets” on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in this table.
Nonperforming and Past Due Loans
Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans”.
The following aging analysis of past due and current loans as of December 31, 2022, and December 31, 2021, provides further information regarding Key’s credit exposure.
Aging Analysis of Loan Portfolio(a)
| December 31, 2022 | Current | 30-59 Days Past Due (b) | 60-89 Days Past Due (b) | 90 and Greater Days Past Due (b) | Non-performing Loans | Total Past Due and Non-performing Loans | Total Loans (c) | ||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| LOAN TYPE | |||||||||||||||||||||||
| Commercial and industrial | $ | 59,366 | $ | 43 | $ | 33 | $ | 31 | $ | 174 | $ | 281 | $ | 59,647 | |||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Commercial mortgage | 16,305 | 16 | 2 | 8 | 21 | 47 | 16,352 | ||||||||||||||||
| Construction | 2,530 | — | — | — | — | — | 2,530 | ||||||||||||||||
| Total commercial real estate loans | 18,835 | 16 | 2 | 8 | 21 | 47 | 18,882 | ||||||||||||||||
| Commercial lease financing | 3,928 | 3 | 1 | 3 | 1 | 8 | 3,936 | ||||||||||||||||
| Total commercial loans | $ | 82,129 | $ | 62 | $ | 36 | $ | 42 | $ | 196 | $ | 336 | $ | 82,465 | |||||||||
| Real estate — residential mortgage | $ | 21,307 | $ | 13 | $ | 3 | $ | 1 | $ | 77 | $ | 94 | $ | 21,401 | |||||||||
| Home equity loans | 7,804 | 27 | 8 | 5 | 107 | 147 | 7,951 | ||||||||||||||||
| Consumer direct loans | 6,478 | 15 | 7 | 5 | 3 | 30 | 6,508 | ||||||||||||||||
| Credit cards | 1,007 | 5 | 4 | 7 | 3 | 19 | 1,026 | ||||||||||||||||
| Consumer indirect loans | 42 | — | — | — | 1 | 1 | 43 | ||||||||||||||||
| Total consumer loans | $ | 36,638 | $ | 60 | $ | 22 | $ | 18 | $ | 191 | $ | 291 | $ | 36,929 | |||||||||
| Total loans | $ | 118,767 | $ | 122 | $ | 58 | $ | 60 | $ | 387 | $ | 627 | $ | 119,394 | |||||||||
(a)Amounts in table represent amortized cost and exclude loans held for sale.
(b)Accrued interest of $417 million presented in “Accrued income and other assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in this table.
(c)Net of unearned income, net of deferred fees and costs, and unamortized discounts and premiums.
| December 31, 2021 | Current | 30-59 Days Past Due (b) | 60-89 Days Past Due (b) | 90 and Greater Days Past Due (b) | Non-performing Loans | Total Past Due and Non-performing Loans | Total Loans (c) | |||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||
| LOAN TYPE | ||||||||||||||||||||||||||
| Commercial and industrial | $ | 50,226 | $ | 19 | $ | 49 | $ | 40 | $ | 191 | $ | 299 | $ | 50,525 | ||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||
| Commercial mortgage | 14,174 | 10 | 9 | 7 | 44 | 70 | 14,244 | |||||||||||||||||||
| Construction | 1,978 | — | 17 | 1 | — | 18 | 1,996 | |||||||||||||||||||
| Total commercial real estate loans | 16,152 | 10 | 26 | 8 | 44 | 88 | 16,240 | |||||||||||||||||||
| Commercial lease financing | 4,061 | 6 | — | — | 4 | 10 | 4,071 | |||||||||||||||||||
| Total commercial loans | $ | 70,439 | $ | 35 | $ | 75 | $ | 48 | $ | 239 | $ | 397 | $ | 70,836 | ||||||||||||
| Real estate — residential mortgage | $ | 15,669 | $ | 7 | $ | 3 | $ | 5 | $ | 72 | $ | 87 | $ | 15,756 | ||||||||||||
| Home equity loans | 8,299 | 21 | 6 | 6 | 135 | 168 | 8,467 | |||||||||||||||||||
| Consumer direct loans | 5,736 | 8 | 2 | 3 | 4 | 17 | 5,753 | |||||||||||||||||||
| Credit cards | 956 | 4 | 3 | 6 | 3 | 16 | 972 | |||||||||||||||||||
| Consumer indirect loans | 68 | 1 | — | — | 1 | 2 | 70 | |||||||||||||||||||
| Total consumer loans | $ | 30,728 | $ | 41 | $ | 14 | $ | 20 | $ | 215 | $ | 290 | $ | 31,018 | ||||||||||||
| Total loans | $ | 101,167 | $ | 76 | $ | 89 | $ | 68 | $ | 454 | $ | 687 | $ | 101,854 | ||||||||||||
(a)Amounts in table represent amortized cost and exclude loans held for sale.
(b)Accrued interest of $198 million presented in “Accrued income and other assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in this table.
(c)Net of unearned income, net of deferred fees and costs, and unamortized discounts and premiums.
At December 31, 2022, the carrying amount of our commercial nonperforming loans outstanding represented 55% of their original contractual amount owed, total nonperforming loans outstanding represented 69% of their original contractual amount owed, and nonperforming assets in total were carried at 77% of their original contractual amount owed.
Nonperforming loans reduced expected interest income by $17 million, $17 million, and $27 million for each of the twelve months ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively.
The amortized cost basis of nonperforming loans on nonaccrual status for which there is no related allowance for credit losses was $277 million at December 31, 2022.
Collateral-dependent Financial Assets
We classify financial assets as collateral-dependent when our borrower is experiencing financial difficulty, and we expect repayment to be provided substantially through the operation or sale of the collateral. Our commercial loans have collateral that includes cash, accounts receivable, inventory, commercial machinery, commercial properties, commercial real estate construction projects, enterprise value, and stock or ownership interests in the borrowing entity. When appropriate we also consider the enterprise value of the borrower as a repayment source for collateral-dependent loans. Our consumer loans have collateral that includes residential real estate, automobiles, boats, and RVs.
There were no significant changes in the extent to which collateral secures our collateral-dependent financial assets during 2022.
TDRs
We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs.
Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs were $10 million and $15 million at December 31, 2022, and December 31, 2021, respectively.
The consumer TDR other concession category in the table below primarily includes those borrowers’ debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed. At December 31, 2022, and December 31, 2021, the recorded investment of consumer residential mortgage loans in the process of foreclosure was approximately $156 million and $104 million, respectively.
The following table shows the post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs that occurred during the periods indicated:
| December 31, | ||||||||||||||
| Dollars in millions | 2022 | 2021 | ||||||||||||
| Commercial loans: | ||||||||||||||
| Extension of Maturity Date | $ | 36 | $ | — | ||||||||||
| Payment or Covenant Modification/Deferment | — | 7 | ||||||||||||
| Total | $ | 36 | $ | 7 | ||||||||||
| Consumer loans: | ||||||||||||||
| Interest rate reduction | $ | 13 | $ | 7 | ||||||||||
| Other | 20 | 19 | ||||||||||||
| Total | $ | 33 | $ | 26 | ||||||||||
| Total TDRs | $ | 69 | $ | 33 |
The following table summarizes the change in the post-modification outstanding recorded investment of our accruing and nonaccruing TDRs during the periods indicated:
| December 31, | ||||||||||||||
| Dollars in millions | 2022 | 2021 | ||||||||||||
| Balance at beginning of the period | $ | 220 | $ | 363 | ||||||||||
| Additions | 79 | 103 | ||||||||||||
| Payments | (45) | (217) | ||||||||||||
| Charge-offs | (18) | (29) | ||||||||||||
| Balance at end of period | $ | 236 | $ | 220 | ||||||||||
A further breakdown of TDRs included in nonperforming loans by loan category for the periods indicated are as follows:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Number of Loans | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | Number of Loans | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | ||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| LOAN TYPE | |||||||||||||||||||||||
| Nonperforming: | |||||||||||||||||||||||
| Commercial and industrial | 27 | $ | 60 | $ | 45 | 36 | $ | 30 | $ | 14 | |||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Real estate — commercial mortgage | 4 | 50 | 13 | 3 | 50 | 25 | |||||||||||||||||
| Total commercial real estate loans | 4 | 50 | 13 | 3 | 50 | 25 | |||||||||||||||||
| Total commercial loans | 31 | 110 | 58 | 39 | 80 | 39 | |||||||||||||||||
| Real estate — residential mortgage | 238 | 30 | 27 | 220 | 26 | 24 | |||||||||||||||||
| Home equity loans | 468 | 32 | 28 | 531 | 36 | 31 | |||||||||||||||||
| Consumer direct loans | 156 | 2 | 2 | 207 | 3 | 2 | |||||||||||||||||
| Credit cards | 331 | 2 | 2 | 360 | 2 | 2 | |||||||||||||||||
| Consumer indirect loans | 16 | 2 | 1 | 23 | 1 | 1 | |||||||||||||||||
| Total consumer loans | 1,209 | 68 | 60 | 1,341 | 68 | 60 | |||||||||||||||||
| Total nonperforming TDRs | 1,240 | 178 | 118 | 1,380 | 148 | 99 | |||||||||||||||||
| Prior-year accruing: (a) | |||||||||||||||||||||||
| Commercial and industrial | 19 | — | — | 11 | — | — | |||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Real estate — commercial mortgage | — | — | — | 1 | — | — | |||||||||||||||||
| Total commercial loans | 19 | — | — | 12 | — | — | |||||||||||||||||
| Real estate — residential mortgage | 425 | 41 | 35 | 455 | 39 | 33 | |||||||||||||||||
| Home equity loans | 1,547 | 96 | 73 | 1,628 | 97 | 75 | |||||||||||||||||
| Consumer direct loans | 272 | 4 | 3 | 236 | 5 | 3 | |||||||||||||||||
| Credit cards | 607 | 4 | 2 | 579 | 4 | 2 | |||||||||||||||||
| Consumer indirect loans | 95 | 11 | 5 | 139 | 15 | 8 | |||||||||||||||||
| Total consumer loans | 2,946 | 156 | 118 | 3,037 | 160 | 121 | |||||||||||||||||
| Total prior-year accruing TDRs | 2,965 | 156 | 118 | 3,049 | 160 | 121 | |||||||||||||||||
| Total TDRs | 4,205 | $ | 334 | $ | 236 | 4,429 | $ | 308 | $ | 220 | |||||||||||||
(a)All TDRs that were restructured prior to January 1, 2022, and January 1, 2021, are fully accruing.
Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During 2022, there were twelve commercial loan TDRs and 191 consumer loan TDRs with a combined recorded investment of $12 million that experienced payment defaults after modifications resulting in TDR status during 2021. During 2021, there were seven commercial loan TDRs and 131 consumer loan TDRs with a combined recorded investment of $5 million that experienced payment defaults after modifications resulting in TDR status during 2020.
Liability for Credit Losses on Off Balance Sheet Exposures
The liability for credit losses inherent in unfunded lending-related commitments, such as letters of credit and unfunded loan commitments, and certain financial guarantees is included in “accrued expense and other liabilities” on the balance sheet.
Changes in the liability for credit losses on off balance sheet exposures are summarized as follows:
| Twelve Months Ended December 31, | ||||||||||||||
| Dollars in millions | 2022 | 2021 | ||||||||||||
| Balance at beginning of period | $ | 160 | $ | 197 | ||||||||||
| Provision (credit) for losses on off balance sheet exposures | 65 | (37) | ||||||||||||
| Balance at end of period | $ | 225 | $ | 160 | ||||||||||
6. Fair Value Measurements
In accordance with GAAP, Key measures certain assets and liabilities at fair value. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. For more information on the valuation techniques used to measure classes of assets and liabilities reported at fair value on a recurring basis as well as the classification of each in the valuation hierarchy, refer to Note 1 ("Basis of Presentation and Accounting Policies") under the heading "Fair Value Measurements" of this report. The following tables present assets and liabilities measured at fair value on a recurring basis at December 31, 2022, and December 31, 2021.
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||
| ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||||||||||||||||
| Trading account assets: | ||||||||||||||||||||||||||
| U.S. Treasury, agencies and corporations | $ | — | $ | 698 | $ | — | $ | 698 | $ | — | $ | 530 | $ | — | $ | 530 | ||||||||||
| States and political subdivisions | — | 33 | — | 33 | — | 96 | — | 96 | ||||||||||||||||||
| Other mortgage-backed securities | — | 84 | — | 84 | — | 44 | — | 44 | ||||||||||||||||||
| Other securities | — | — | — | — | — | 13 | — | 13 | ||||||||||||||||||
| Total trading account securities | — | 815 | — | 815 | — | 683 | — | 683 | ||||||||||||||||||
| Commercial loans | — | 14 | — | 14 | — | 18 | — | 18 | ||||||||||||||||||
| Total trading account assets | — | 829 | — | 829 | — | 701 | — | 701 | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| U.S. Treasury, agencies and corporations | — | 9,415 | — | 9,415 | — | 9,472 | — | 9,472 | ||||||||||||||||||
| States and political subdivisions | — | — | — | — | — | — | — | — | ||||||||||||||||||
| Agency residential collateralized mortgage obligations | — | 16,433 | — | 16,433 | — | 21,119 | — | 21,119 | ||||||||||||||||||
| Agency residential mortgage-backed securities | — | 3,920 | — | 3,920 | — | 5,122 | — | 5,122 | ||||||||||||||||||
| Agency commercial mortgage-backed securities | — | 9,349 | — | 9,349 | — | 9,651 | — | 9,651 | ||||||||||||||||||
| Other securities | — | — | — | — | — | — | — | — | ||||||||||||||||||
| Total securities available for sale | $ | — | $ | 39,117 | $ | — | $ | 39,117 | $ | — | $ | 45,364 | $ | — | $ | 45,364 | ||||||||||
| Other investments: | ||||||||||||||||||||||||||
| Principal investments: | ||||||||||||||||||||||||||
| Direct | $ | — | $ | — | $ | 1 | $ | 1 | $ | — | $ | — | $ | 1 | $ | 1 | ||||||||||
| Indirect (measured at NAV) (a) | — | — | — | 34 | — | — | — | 45 | ||||||||||||||||||
| Total principal investments | — | — | 1 | 35 | — | — | 1 | 46 | ||||||||||||||||||
| Equity investments: | ||||||||||||||||||||||||||
| Direct | 4 | — | 2 | 6 | 24 | — | 9 | 33 | ||||||||||||||||||
| Direct (measured at NAV) (a) | — | — | — | 32 | — | — | — | 21 | ||||||||||||||||||
| Indirect (measured at NAV) (a) | — | — | — | 4 | — | — | — | 5 | ||||||||||||||||||
| Total equity investments | 4 | — | 2 | 42 | 24 | — | 9 | 59 | ||||||||||||||||||
| Total other investments | 4 | — | 3 | 77 | 24 | — | 10 | 105 | ||||||||||||||||||
| Loans, net of unearned income (residential) | — | — | 9 | 9 | — | — | 11 | 11 | ||||||||||||||||||
| Loans held for sale (residential) | — | 24 | — | 24 | — | 281 | — | 281 | ||||||||||||||||||
| Derivative assets: | ||||||||||||||||||||||||||
| Interest rate | — | 301 | 2 | 303 | — | 774 | 33 | 807 | ||||||||||||||||||
| Foreign exchange | 112 | 24 | — | 136 | 71 | 10 | — | 81 | ||||||||||||||||||
| Commodity | — | 1,328 | — | 1,328 | — | 1,330 | — | 1,330 | ||||||||||||||||||
| Credit | — | — | 1 | 1 | — | — | 1 | 1 | ||||||||||||||||||
| Other | — | 13 | — | 13 | — | 22 | 5 | 27 | ||||||||||||||||||
| Derivative assets | 112 | 1,666 | 3 | 1,781 | 71 | 2,136 | 39 | 2,246 | ||||||||||||||||||
| Netting adjustments (b) | — | — | — | (757) | — | — | — | (284) | ||||||||||||||||||
| Total derivative assets | 112 | 1,666 | 3 | 1,024 | 71 | 2,136 | 39 | 1,962 | ||||||||||||||||||
| Total assets on a recurring basis at fair value | $ | 116 | $ | 41,636 | $ | 15 | $ | 41,080 | $ | 95 | $ | 48,482 | $ | 60 | $ | 48,424 | ||||||||||
| LIABILITIES MEASURED ON A RECURRING BASIS | ||||||||||||||||||||||||||
| Bank notes and other short-term borrowings: | ||||||||||||||||||||||||||
| Short positions | $ | 126 | $ | 509 | $ | — | $ | 635 | $ | 75 | $ | 513 | $ | — | $ | 588 | ||||||||||
| Derivative liabilities: | ||||||||||||||||||||||||||
| Interest rate | — | 1,307 | — | 1,307 | — | 253 | — | 253 | ||||||||||||||||||
| Foreign exchange | 107 | 24 | — | 131 | 66 | 10 | — | 76 | ||||||||||||||||||
| Commodity | — | 1,304 | — | 1,304 | — | 1,335 | — | 1,335 | ||||||||||||||||||
| Credit | — | — | 3 | 3 | — | 5 | 7 | 12 | ||||||||||||||||||
| Other | — | 5 | — | 5 | — | 11 | — | 11 | ||||||||||||||||||
| Derivative liabilities | 107 | 2,640 | 3 | 2,750 | 66 | 1,614 | 7 | 1,687 | ||||||||||||||||||
| Netting adjustments (b) | — | — | — | (1,262) | — | — | — | (1,526) | ||||||||||||||||||
| Total derivative liabilities | 107 | 2,640 | 3 | 1,488 | 66 | 1,614 | 7 | 161 | ||||||||||||||||||
| Total liabilities on a recurring basis at fair value | $ | 233 | $ | 3,149 | $ | 3 | $ | 2,123 | $ | 141 | $ | 2,127 | $ | 7 | $ | 749 | ||||||||||
(a)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheet.
(b)Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
Qualitative Disclosures of Valuation Techniques
The following table describes the valuation techniques and significant inputs used to measure the classes of assets and liabilities reported at fair value on a recurring basis, as well as the classification of each within the valuation hierarchy.
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Securities (includes trading account assets securities available for sale, and U.S. Treasury Bills classified as short-term investments) | Fair value of level 1 securities is determined by: • Quoted market prices available in an active market for identical securities. This includes exchange-traded equity securities. Fair value of level 2 securities is determined by: • Pricing models (either by a third party pricing service or internally). Inputs include: yields, benchmark securities, bids, offers, actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets, spread tables, matrices, high-grade scales, and option-adjusted spreads. • Observable market prices of similar securities. Fair value of level 3 securities is determined by: • Internally developed valuation techniques, principally discounted cash flow methods (income approach). • Revenue multiples of comparable public companies (market approach). For level 3 securities, increases (decreases) in the discount rate and marketability discount used in the discounted cash flow models would have resulted in lower (higher) fair value measurements. Higher volatility factors would have further magnified changes in fair value. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices. We regularly validate the pricing methodologies of valuations derived from a third-party pricing service to ensure the fair value determination is consistent with applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we: •review documentation received from our third-party pricing service regarding the inputs used in its valuations and determine a level assessment for each category of securities; •substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and •substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings. | Level 1, 2, and 3 (primarily Level 2) | ||||||
| Commercial loans (trading account assets) | Fair value is based on: • Observable market price spreads for similar loans. Valuations reflect prices within the bid-ask spread that are most representative of fair value. | Level 2 | ||||||
| Principal investments (direct) | Direct principal investments consist of equity and debt instruments of private companies made by our principal investing entities. Fair value is determined using: • Operating performance and market multiples of comparable businesses • Other unique facts and circumstances related to each individual investment Direct principal investments are accounted for as investment companies in accordance with the applicable accounting guidance, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. We are in the process of winding down our direct principal investment portfolio. As of December 31, 2022, the balance is less than $1 million. | Level 3 |
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Principal investments (indirect) | Indirect principal investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values and qualify for the practical expedient to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). Indirect principal investments are also accounted for as investment companies, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings. Under the provisions of the Volcker Rule, we are required to dispose or conform our indirect investments to the requirements of the statute by no later than July 21, 2023. As of December 31, 2022, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. | NAV |
The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at December 31, 2022, as well as financial support provided for the years ended December 31, 2022, and December 31, 2021.
| Financial support provided | ||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||
| Dollars in millions | Fair Value | Unfunded Commitments | Funded Commitments | Funded Other | Funded Commitments | Funded Other | ||||||||||||||||||||||||||||||||
| INVESTMENT TYPE | ||||||||||||||||||||||||||||||||||||||
| Direct investments | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Indirect investments (a) | 34 | 9 | — | — | 4 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 35 | $ | 9 | $ | — | $ | — | $ | 4 | $ | — | ||||||||||||||||||||||||||
(a)Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. At December 31, 2022, no significant liquidation of the underlying investments has been communicated to Key. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Other direct equity investments | Fair value is determined using: • Discounted cash flows • Operating performance and market/exit multiples of comparable businesses • Other unique facts and circumstances related to each individual investment For level 3 securities, increases in the discount rate applied in the discounted cash flow models would negatively affect the fair value. Increases in valuation multiples of comparable companies would positively affect the fair value. Level 1 investments reflect the quoted market prices of the investments available in an active market. | Level 1 and 3 | ||||||
| Other direct and indirect equity investments (NAV) | Certain direct and indirect investments do not have readily determinable fair values and qualify for the practical expedient in the accounting guidance that allows us to estimate fair value based upon net asset value per share. | NAV | ||||||
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Loans held for sale and held for investment (residential) | Residential mortgage loans held for sale are accounted for at fair value. Fair values are based on: • Quoted market prices, where available • Prices for other traded mortgage loans with similar characteristics • Purchase commitments and bid information received from market participants Prices are adjusted as necessary to include: • The embedded servicing value in the loans • The specific characteristics of certain loans that are priced based on the pricing of similar loans. (These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans.) Residential loans held for investment: Certain residential loans held for sale contain salability exceptions that make them unable to be sold into the performing loan sales market. Loans in this category are transferred to the held to maturity loan portfolio and are included in “Loans, net of unearned income” on the balance sheet. This type of loan is classified as level 3 in the valuation hierarchy as transaction details regarding sales of this type of loan are often unavailable. Fair value is based upon: • Unobservable bid information from brokers and investors Higher (lower) unobservable bid information would have resulted in higher (lower) fair value measurements. | Level 1, 2 and 3 (primarily level 2) | ||||||
| Derivatives | Exchange-traded derivatives are valued using quoted prices in active markets and, therefore, are classified as Level 1 instruments. The majority of our derivative positions are Level 2 and are valued using internally developed models based on market convention and observable market inputs. These derivative contracts include interest rate swaps, certain options, floors, cross currency swaps, credit default swaps, and forward mortgage loan sale commitments. Significant inputs used in the valuation models include: • LIBOR, SOFR and Overnight Index Swap (OIS) curves, index pricing curves, foreign currency curves • Volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity) We have customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, including: • Credit spreads and interest rates The unobservable internally derived assumptions include: • Loss given default • Internal risk assessments of customers The fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, for sold risk participation agreements, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations. (For purchased risk participation agreements, higher loss probabilities and lower credit ratings would positively affect the fair value.) | Level 1, 2, and 3 (primarily level 2) |
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Derivatives (continued) | We use interest rate lock commitments for our residential mortgage business, which are classified as Level 3 instruments. The significant components of the valuation model include: • Interest rates observable in the market • Investor supplied prices for similar loans and securities • The probability of the loan closing (i.e. the "pull-through" amount, a significant unobservable input). Increases (decreases) in the probability of the loan closing would have resulted in higher (lower) fair value measurements. Valuation of residential mortgage forward sale commitments utilizes observable market prices of comparable commitments and mortgage securities (Level 2). The fair values of our derivatives include a credit valuation adjustment related to both counterparty and our own creditworthiness. The credit component considers master netting and collateral agreements and is determined by the individual counterparty based on potential future exposures, expected recovery rates, and market-implied probabilities of default. | Level 1, 2, and 3 (primarily level 2) | ||||||
| Liability for short positions | This includes fixed income securities held by our broker dealer in its trading inventory. Fair value of level 1 securities is determined by: • Quoted market prices available in an active market for identical securities Fair value of level 2 securities is determined by: • Observable market prices of similar securities • Market activity, spreads, credit ratings and interest rates for each security type | Level 1 and 2 |
We also make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:
-
the amount of time since the last relevant valuation;
-
whether there is an actual trade or relevant external quote available at the measurement date; and
-
volatility associated with the primary pricing components.
Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of our Level 3 financial instruments measured at fair value on a recurring basis for the years ended December 31, 2022, and December 31, 2021.
| Dollars in millions | Beginning of Period Balance | Gains (Losses) included in comprehensive income | Gains (Losses) Included in Earnings | Purchases | Sales | Settlements | Transfers Other | Transfers into Level 3 | Transfers out of Level 3 | End of Period Balance | Unrealized Gains (Losses) Included in Earnings | ||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||||||||||||||||||||||||||
| Other securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct | 1 | — | — | — | — | — | — | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||
| Equity investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct | 9 | — | (3) | (c) | — | (4) | — | — | — | — | 2 | (3) | |||||||||||||||||||||||||||||||||||
| Loans held for sale (residential) | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Loans held for investment (residential) | 11 | — | (3) | — | (1) | — | 2 | — | — | 9 | — | ||||||||||||||||||||||||||||||||||||
| Derivative instruments (b) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate | 33 | — | (72) | (d) | 2 | (2) | — | — | 33 | (e) | 8 | (e) | 2 | — | |||||||||||||||||||||||||||||||||
| Credit | (6) | — | 4 | (d) | — | — | — | — | — | — | (2) | — | |||||||||||||||||||||||||||||||||||
| Other (a) | 5 | — | — | — | — | — | (5) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Dollars in millions | Beginning of Period Balance | Gains (Losses) included in comprehensive income | Gains (Losses) Included in Earnings | Purchases | Sales | Settlements | Transfers Other | Transfers into Level 3 | Transfers out of Level 3 | End of Period Balance | Unrealized Gains (Losses) Included in Earnings | ||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||||||||||||||||||||||||||
| Other securities | $ | 13 | $ | 9 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (22) | $ | — | $ | — | |||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct | 1 | — | — | — | — | — | — | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||
| Equity investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Direct | 13 | (1) | (c) | — | — | (3) | 9 | (1) | |||||||||||||||||||||||||||||||||||||||
| Loans held for sale (residential) | — | — | — | — | (1) | — | 1 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Loans held for investment (residential) | 11 | — | — | — | (3) | — | 1 | — | — | 11 | — | ||||||||||||||||||||||||||||||||||||
| Derivative instruments (b) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate | 56 | (24) | (d) | 3 | (12) | — | 28 | (e) | (17) | (e) | 33 | ||||||||||||||||||||||||||||||||||||
| Credit | (10) | — | 3 | (d) | 1 | — | $ | — | — | — | (6) | — | |||||||||||||||||||||||||||||||||||
| Other (a) | 32 | — | (3) | — | — | — | (24) | — | — | 5 | — | ||||||||||||||||||||||||||||||||||||
(a)Amounts represent Level 3 interest rate lock commitments.
(b)Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.
(c)Realized and unrealized gains and losses on principal investments are reported in “other income” on the income statement. Realized and unrealized losses on equity investments are reported in “other income” on the income statement.
(d)Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.
(e)Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2022, and December 31, 2021.
The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2022, and December 31, 2021:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Dollars in millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||
| ASSETS MEASURED ON A NONRECURRING BASIS | ||||||||||||||||||||||||||
| Collateral-dependent loans | $ | — | $ | — | $ | 17 | $ | 17 | $ | — | $ | — | $ | 28 | $ | 28 | ||||||||||
| Accrued income and other assets | — | — | 14 | 14 | — | — | 80 | 80 | ||||||||||||||||||
| Total assets on a nonrecurring basis at fair value | $ | — | $ | — | $ | 31 | $ | 31 | $ | — | $ | — | $ | 108 | $ | 108 | ||||||||||
Qualitative Disclosures of Valuation Techniques
The following table describes the valuation techniques and significant inputs used to measure the significant classes of assets and liabilities reported at fair value on a nonrecurring basis, as well as the classification of each within the valuation hierarchy.
| Asset/liability class | Valuation technique | Valuation hierarchy classification(s) | ||||||
| Collateral-dependent loans | When a loan is collateral-dependent, the fair value of the loan is determined based on the fair value of the underlying collateral. | Level 3 | ||||||
| Commercial loans and student loans held for sale | Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans and student loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Valuation inputs include: • Non-binding bids for the respective loans or similar loans • Recent sales transactions • Internal models that emulate recent securitizations | Level 2 and 3 | ||||||
| Direct financing leases and operating lease assets held for sale | Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, including: • Swap rates and bond ratings • Our own assumptions about the exit market for the leases • Details about the individual leases in the portfolio Leases for which we receive a current nonbinding bid, and for which the sale is considered probable, may be classified as Level 2. Valuations of lease and operating lease assets held for sale that employ our own assumptions are classified as Level 3 assets. The inputs based on our own assumptions include changes in the value of leased items and internal credit ratings. | Level 2 and 3 | ||||||
| OREO, other repossessed personal properties, and right-of-use assets(a) | OREO, other repossessed properties, and right-of-use assets are valued based on: • Appraisals and third-party price opinions, less estimated selling costs Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. | Level 2 and 3 | ||||||
| LIHTC, HTC, and NMTC investments(a) | Valuation of LIHTC, HTC and NMTC involves measuring the present value of future tax benefits and comparing that value against the current carrying value of the investment. Expected future tax benefits are discounted to their present value using discounted cash flow modeling that incorporates an appropriate risk premium. LIHTC and HTC investments are impaired when it is more likely than not that the carrying amount of the investment will not be realized. | Level 3 | ||||||
| Other equity investments | We have other investments in equity securities that do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share. We have elected to measure these securities at cost less impairment plus or minus adjustments due to observable orderly transactions. Impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. At each reporting period, we assess if these investments continue to qualify for this measurement alternative. At December 31, 2022, and December 31, 2021, the carrying amount of equity investments recorded under this method was $249 million and $173 million, respectively. No impairment was recorded for the year ended December 31, 2022. | Level 3 | ||||||
| Mortgage Servicing Rights(a) | Refer to Note 9 (“Mortgage Servicing Assets”). | Level 3 |
(a)Asset classes included in “Accrued income and other assets” on the Consolidated Balance Sheets
Quantitative Information about Level 3 Fair Value Measurements
The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at December 31, 2022, and December 31, 2021, along with the valuation techniques used, are shown in the following table:
| Level 3 Asset (Liability) | Valuation Technique | Significant Unobservable Input | Range (Weighted-Average) (b), (c) | |||||||||||||||||
| Dollars in millions | December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||
| Recurring | ||||||||||||||||||||
| Loans, net of unearned income (residential) | $ | 9 | $ | 11 | Market comparable pricing | Comparability factor | 61.00%-86.58% (72.21%) | 64.50 - 97.30% (94.24%) | ||||||||||||
| Derivative instruments: | ||||||||||||||||||||
| Interest rate | 2 | 33 | Discounted cash flows | Probability of default | .02 - 100% (8.00%) | .02 - 100% (8.88%) | ||||||||||||||
| Loss given default | 0 - 1 (.49) | 0 - 1 (.50) | ||||||||||||||||||
| Insignificant level 3 assets, net of liabilities(d) | 1 | 9 | ||||||||||||||||||
| Nonrecurring | ||||||||||||||||||||
| Collateral dependent loans | 17 | 28 | Fair value of underlying collateral | Discount Rate | 0 - 85.00% (34.00%) | 0 - 10.00% (8.00%) | ||||||||||||||
| Accrued income and other assets:(e) | ||||||||||||||||||||
| OREO and other assets | 14 | 13 | Appraised value | Appraised value | N/M | N/M |
(a)Principal investments, direct is excluded from this table as the balance at December 31, 2022, is insignificant (less than $1 million).
(b)The weighted average of significant unobservable inputs is calculated using a weighting relative to fair value.
(c)For significant unobservable inputs with no range, a single figure is reported to denote the single quantitative factor used.
(d)Represents the aggregate amount of level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes certain equity investments and certain financial derivative assets and liabilities.
(e)No mortgage services assets required fair value adjustments as of December 31, 2022. Excludes $67 million pertaining to mortgage servicing assets measured at fair value as of December 31, 2021. Refer to Note 9 (“Mortgage Servicing Assets”) for significant unobservable inputs pertaining to these assets.
Fair Value Disclosures of Financial Instruments
The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at December 31, 2022, and December 31, 2021, are shown in the following table. Assets and liabilities are further arranged by measurement category.
| December 31, 2022 | ||||||||||||||||||||||||||
| Fair Value | ||||||||||||||||||||||||||
| Dollars in millions | Carrying Amount | Level 1 | Level 2 | Level 3 | Measured at NAV | Netting Adjustment | Total | |||||||||||||||||||
| ASSETS (by measurement category) | ||||||||||||||||||||||||||
| Fair value - net income | ||||||||||||||||||||||||||
| Trading account assets (b) | $ | 829 | $ | — | $ | 829 | $ | — | $ | — | $ | — | $ | 829 | ||||||||||||
| Other investments (b) | 1,308 | 4 | — | 1,234 | 70 | — | 1,308 | |||||||||||||||||||
| Loans, net of unearned income (residential) (d) | 9 | — | — | 9 | — | — | 9 | |||||||||||||||||||
| Loans held for sale (residential) (b) | 24 | — | 24 | — | — | — | 24 | |||||||||||||||||||
| Derivative assets - trading (b) | 927 | 112 | 1,552 | 3 | — | (740) | (f) | 927 | ||||||||||||||||||
| Fair value - OCI | ||||||||||||||||||||||||||
| Securities available for sale (b) | 39,117 | — | 39,117 | — | — | — | 39,117 | |||||||||||||||||||
| Derivative assets - hedging (b) (g) | 97 | — | 114 | — | — | (17) | (f) | 97 | ||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||||
| Held-to-maturity securities (c) | 8,710 | — | 8,113 | — | — | — | 8,113 | |||||||||||||||||||
| Loans, net of unearned income (d) | 118,048 | — | — | 112,590 | — | — | 112,590 | |||||||||||||||||||
| Loans held for sale (b) | 939 | — | — | 939 | — | — | 939 | |||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Cash and short-term investments (a) | 3,319 | 3,319 | — | — | — | — | 3,319 | |||||||||||||||||||
| LIABILITIES (by measurement category) | ||||||||||||||||||||||||||
| Fair value - net income | ||||||||||||||||||||||||||
| Derivative liabilities - trading (b) | $ | 1,485 | $ | 107 | $ | 2,637 | $ | 3 | $ | — | $ | (1,262) | (f) | $ | 1,485 | |||||||||||
| Fair value - OCI | ||||||||||||||||||||||||||
| Derivative liabilities - hedging (b) (g) | 3 | — | 3 | — | — | — | (f) | 3 | ||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||||
| Time deposits (e) | 7,373 | — | 7,392 | — | — | — | 7,392 | |||||||||||||||||||
| Short-term borrowings (a) | 9,463 | 126 | 9,337 | — | — | — | 9,463 | |||||||||||||||||||
| Long-term debt (e) | 19,307 | 12,196 | 6,685 | — | — | — | 18,881 | |||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Deposits with no stated maturity (a) | 135,222 | — | 135,222 | — | — | — | 135,222 |
| December 31, 2021 | ||||||||||||||||||||||||||
| Fair Value | ||||||||||||||||||||||||||
| Dollars in millions | Carrying Amount | Level 1 | Level 2 | Level 3 | Measured at NAV | Netting Adjustment | Total | |||||||||||||||||||
| ASSETS (by measurement category) | ||||||||||||||||||||||||||
| Fair value - net income | ||||||||||||||||||||||||||
| Trading account assets (b) | $ | 701 | $ | — | $ | 701 | $ | — | $ | — | $ | — | $ | 701 | ||||||||||||
| Other investments (b) | 639 | 24 | — | 543 | 72 | — | 639 | |||||||||||||||||||
| Loans, net of unearned income (residential) (d) | 11 | — | — | 11 | — | — | 11 | |||||||||||||||||||
| Loans held for sale (residential) (b) | 281 | — | 281 | — | — | — | 281 | |||||||||||||||||||
| Derivative assets - trading (b) | 1,887 | 71 | 2,096 | 40 | — | (320) | (f) | 1,887 | ||||||||||||||||||
| Fair value - OCI | ||||||||||||||||||||||||||
| Securities available for sale (b) | 45,364 | — | 45,364 | — | — | — | 45,364 | |||||||||||||||||||
| Derivative assets - hedging (b) (g) | 75 | — | 39 | — | — | 36 | (f) | 75 | ||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||||
| Held-to-maturity securities (c) | 7,539 | — | 7,665 | — | — | — | 7,665 | |||||||||||||||||||
| Loans, net of unearned income (d) | 100,782 | — | — | 100,428 | — | — | 100,428 | |||||||||||||||||||
| Loans held for sale (b) | 2,448 | — | — | 2,448 | — | — | 2,448 | |||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Cash and short-term investments (a) | 11,923 | 11,923 | — | — | — | — | 11,923 | |||||||||||||||||||
| LIABILITIES (by measurement category) | ||||||||||||||||||||||||||
| Fair value - net income | ||||||||||||||||||||||||||
| Derivative liabilities - trading (b) | $ | 157 | $ | 66 | $ | 1,610 | $ | 7 | $ | — | $ | (1,526) | (f) | $ | 157 | |||||||||||
| Fair value - OCI | ||||||||||||||||||||||||||
| Derivative liabilities - hedging (b) (g) | 4 | — | 4 | — | — | — | (f) | 4 | ||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||||
| Time deposits (e) | 3,858 | — | 3,866 | — | — | — | 3,866 | |||||||||||||||||||
| Short-term borrowings (a) | 761 | 75 | 686 | — | — | — | 761 | |||||||||||||||||||
| Long-term debt (e) | 12,042 | 11,813 | $ | 705 | — | — | — | 12,518 | ||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Deposits with no stated maturity (a) | 148,714 | — | 148,714 | — | — | — | 148,714 |
Valuation Methods and Assumptions
(a)Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.
(b)Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” in this Note. Investments accounted for under the cost method (or cost less impairment adjusted for observable price changes for certain equity investments) are classified as Level 3 assets. These investments are not actively traded in an open market as sales for these types of investments are rare. The carrying amount of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary (or due to observable orderly transactions of the same issuer for equity investments eligible for the cost less impairment measurement alternative). These adjustments are included in “other income” on the income statement.
(c)Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure that they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.
(d)The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.
(e)Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.
(f)Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
(g)Derivative assets-hedging and derivative liabilities-hedging includes both cash flow and fair value hedges. Additional information regarding our accounting policies for cash flow and fair value hedges is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging.”
We determine fair value based on assumptions pertaining to the factors that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2022 and 2021, the fair values of our loan portfolios generally remained stable, primarily due to sustained liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.
Discontinued assets - education lending business**.** Our discontinued assets include government-guaranteed and private education loans originated through our education lending business that was discontinued in September 2009. This portfolio consists of loans recorded at carrying value with appropriate valuation reserves and loans recorded at fair value. All of these loans were excluded from the table above as follows:
-
Loans at carrying value, net of allowance, of $434 million ($357 million at fair value) at December 31, 2022, and $567 million ($486 million at fair value) at December 31, 2021; and
-
Loans at fair value of $1 million at December 31, 2022, and $2 million at December 31, 2021.
These loans are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.
Short-term financial instruments. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.
7. Securities
The amortized cost, unrealized gains and losses, and approximate fair value of our securities available for sale and held-to-maturity securities are presented in the following tables. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change.
| 2022 | 2021 | ||||||||||||||||||||||||||||
| December 31, Dollars in millions | Amortized Cost (a) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost**(a)** | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||
| SECURITIES AVAILABLE FOR SALE | |||||||||||||||||||||||||||||
| U.S. Treasury, agencies, and corporations | $ | 10,044 | $ | — | $ | 629 | $ | 9,415 | $ | 9,573 | $ | — | $ | 101 | $ | 9,472 | |||||||||||||
| Agency residential collateralized mortgage obligations | 20,180 | — | 3,747 | 16,433 | 21,430 | 99 | 410 | 21,119 | |||||||||||||||||||||
| Agency residential mortgage-backed securities | 4,616 | — | 696 | 3,920 | 5,137 | 37 | 52 | 5,122 | |||||||||||||||||||||
| Agency commercial mortgage-backed securities | 10,712 | 2 | 1,365 | 9,349 | 9,753 | 188 | 290 | 9,651 | |||||||||||||||||||||
| Other securities | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total securities available for sale | $ | 45,552 | $ | 2 | $ | 6,437 | $ | 39,117 | $ | 45,893 | $ | 324 | $ | 853 | $ | 45,364 | |||||||||||||
| HELD-TO-MATURITY SECURITIES | |||||||||||||||||||||||||||||
| Agency residential collateralized mortgage obligations | $ | 4,586 | $ | 5 | $ | 283 | $ | 4,308 | $ | 2,196 | $ | 33 | $ | — | $ | 2,229 | |||||||||||||
| Agency residential mortgage-backed securities | 181 | — | 16 | 165 | 164 | 6 | — | 170 | |||||||||||||||||||||
| Agency commercial mortgage-backed securities | 2,522 | 1 | 208 | 2,315 | 2,678 | 118 | — | 2,796 | |||||||||||||||||||||
| Asset-backed securities(b) | 1,407 | — | 96 | 1,311 | 2,485 | — | 31 | 2,454 | |||||||||||||||||||||
| Other securities | 14 | — | — | 14 | 16 | — | — | 16 | |||||||||||||||||||||
| Total held-to-maturity securities | $ | 8,710 | $ | 6 | $ | 603 | $ | 8,113 | $ | 7,539 | $ | 157 | $ | 31 | $ | 7,665 | |||||||||||||
(a)Amortized cost amounts exclude accrued interest receivable which is recorded within “other assets” on the balance sheet. At December 31, 2022, accrued interest receivable on available for sale securities and held-to-maturity securities totaled $67 million and $88 million, respectively. At December 31, 2021, accrued interest receivable on available for sale securities and held-to-maturity securities totaled $59 million and $15 million, respectively.
(b)Includes $1.4 billion of securities as of December 31, 2022, and $2.5 billion of securities as of December 31, 2021, related to the purchase of senior notes from a securitization collateralized by sold indirect auto loans.
The following table summarizes securities in an unrealized loss position for which an allowance for credit losses has not been recorded as of December 31, 2022, and December 31, 2021:
| Duration of Unrealized Loss Position | ||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||
| Dollars in millions | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| U.S. Treasury, agencies, and corporations | $ | 494 | $ | 48 | $ | 8,920 | $ | 581 | $ | 9,414 | $ | 629 | ||||||||||||||
| Agency residential collateralized mortgage obligations | 3,114 | 377 | 13,317 | 3,370 | 16,431 | 3,747 | ||||||||||||||||||||
| Agency residential mortgage-backed securities | 579 | 31 | 3,338 | 665 | 3,917 | 696 | ||||||||||||||||||||
| Agency commercial mortgage-backed securities | 4,511 | 282 | 4,791 | 1,083 | 9,302 | 1,365 | ||||||||||||||||||||
| Held-to-maturity securities: | ||||||||||||||||||||||||||
| Agency residential collateralized mortgage obligations | 2,659 | 178 | 726 | 105 | 3,385 | 283 | ||||||||||||||||||||
| Agency residential mortgage-backed securities | 165 | 16 | — | — | 165 | 16 | ||||||||||||||||||||
| Agency commercial mortgage-backed securities | 2,243 | 208 | — | — | 2,243 | 208 | ||||||||||||||||||||
| Asset-backed securities | 1 | — | 1,309 | 96 | 1,310 | 96 | ||||||||||||||||||||
| Other securities | 10 | — | (a) | 4 | — | 14 | — | |||||||||||||||||||
| Total securities in an unrealized loss position | $ | 13,776 | $ | 1,140 | $ | 32,405 | $ | 5,900 | $ | 46,181 | $ | 7,040 | ||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||
| U.S. Treasury, agencies, and corporations | $ | 9,078 | $ | 98 | $ | 243 | $ | 3 | $ | 9,321 | $ | 101 | ||||||||||||||
| Agency residential collateralized mortgage obligations | 12,603 | 315 | 1,255 | 95 | 13,858 | 410 | ||||||||||||||||||||
| Agency residential mortgage-backed securities | 3,793 | 49 | 178 | 3 | 3,971 | 52 | ||||||||||||||||||||
| Agency commercial mortgage-backed securities | 1,645 | 75 | 3,834 | 215 | 5,479 | 290 | ||||||||||||||||||||
| Held-to-maturity securities: | ||||||||||||||||||||||||||
| Agency residential collateralized mortgage obligations | 96 | — | (b) | — | — | 96 | — | |||||||||||||||||||
| Asset-backed securities | 2,450 | 31 | 1 | — | (b) | 2,451 | 31 | |||||||||||||||||||
| Other securities | 15 | — | (b) | — | — | 15 | — | |||||||||||||||||||
| Total securities in an unrealized loss position | $ | 29,680 | $ | 568 | $ | 5,511 | $ | 316 | $ | 35,191 | $ | 884 | ||||||||||||||
(a)At December 31, 2022, gross unrealized losses totaled less than $1 million for other securities held to maturity with a loss duration of less than 12 months.
(b)At December 31, 2021, gross unrealized losses totaled less than $1 million for other securities held to maturity and agency residential collateralized mortgage obligations held-to-maturity with a loss duration of less than 12 months. At December 31, 2021, gross unrealized losses totaled less than $1 million for asset backed securities held to maturity with a loss duration greater than 12 months or longer.
Based on our evaluation at December 31, 2022, an allowance for credit losses has not been recorded nor have unrealized losses been recognized into income. The issuers of the securities are of high credit quality and have a history of no credit losses, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely attributed to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments.
At December 31, 2022, securities available-for-sale and held-to-maturity securities totaling $12.9 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. CMOs, other mortgage-backed securities, and asset-backed securities in the available for sale portfolio and held-to-maturity portfolio are presented based on their expected average lives. The remaining securities, in both the available-for-sale and held-to-maturity portfolios, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
| Securities Available for Sale | Held-to-Maturity Securities | ||||||||||||||||||||||
| December 31, 2022 | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| Due in one year or less | $ | 1,259 | $ | 1,215 | $ | 20 | $ | 21 | |||||||||||||||
| Due after one through five years | 16,044 | 14,780 | 4,834 | 4,517 | |||||||||||||||||||
| Due after five through ten years | 21,682 | 17,970 | 3,004 | 2,775 | |||||||||||||||||||
| Due after ten years | 6,567 | 5,152 | 852 | 800 | |||||||||||||||||||
| Total | $ | 45,552 | $ | 39,117 | $ | 8,710 | $ | 8,113 | |||||||||||||||
8. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. The primary derivatives that we use are interest rate swaps, caps, floors, forwards and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in our loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. As further discussed in this note:
-
interest rate risk is the risk that the EVE or net interest income will be adversely affected by fluctuations in interest rates;
-
credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms; and
-
foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument.
At December 31, 2022, after taking into account the effects of bilateral collateral and master netting agreements, we had $97 million of derivative assets and $3 million of derivative liabilities that relate to contracts entered into for hedging purposes. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $927 million and derivative liabilities of $1.5 billion that were not designated as hedging instruments. These positions are primarily comprised of derivative contracts entered into for client accommodation purposes.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging.”
Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance sheet instruments and the associated interest rates tied to each instrument. In addition, differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities cause net interest income and the EVE to fluctuate. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to manage net interest income and EVE to within our stated risk tolerances. The primary derivative instruments used to manage interest rate risk are interest rate swaps.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
We designate interest rate floors as cash flow hedges. Interest rate floors also reduce the potential adverse effect of interest rate decreases on future interest income. We receive interest payments when the strike price specified in the contracts falls below a reference rate in exchange for an upfront premium.
We designate certain “pay fixed/receive variable” interest rate swaps as fair value hedges. These swaps convert certain fixed-rate securities into floating rate securities. The swaps reduce the potential adverse effects from higher interest rates on valuations and future interest income.
We designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans and certain student loans originated through our Laurel Road digital lending business. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.
Derivatives Not Designated in Hedge Relationships
We may enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of derivatives hedging risks on an economic basis at December 31, 2022, was not significant.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit protection through default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, including situations where there is a forecasted sale of loans. We purchase credit default swaps to reduce the credit risk associated with the debt securities held in our trading portfolio.
We also enter into derivative contracts for other purposes, including:
-
interest rate swap, cap, and floor contracts entered into generally to accommodate the needs of commercial loan clients;
-
energy and base metal swap and option contracts entered into to accommodate the needs of clients;
-
foreign exchange forward and option contracts entered into primarily to accommodate the needs of clients; and
-
futures contracts and positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above.
Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross and net basis as of December 31, 2022, and December 31, 2021. The change in the notional amounts of these derivatives by type from December 31, 2021, to December 31, 2022, indicates the volume of our derivative transaction activity during 2022. The notional amounts are not affected by bilateral collateral and master netting agreements. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, we do not adjust those derivative assets and liabilities with counterparties. Securities collateral related to legally enforceable master netting agreements is not offset on the balance sheet. Our derivative instruments are included in “accrued income and other assets” or “accrued expenses and other liabilities” on the Consolidated Balance Sheets, as indicated in the following table:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Fair Value (a) | Fair Value (a) | ||||||||||||||||||||||
| Dollars in millions | Notional Amount | Derivative Assets | Derivative Liabilities | Notional Amount | Derivative Assets | Derivative Liabilities | |||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate | $ | 41,200 | $ | 114 | $ | 3 | $ | 38,654 | $ | 39 | $ | 4 | |||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate | 80,772 | 189 | 1,304 | 72,088 | 768 | 249 | |||||||||||||||||
| Foreign exchange | 9,507 | 136 | 131 | 9,073 | 81 | 76 | |||||||||||||||||
| Commodity | 16,176 | 1,328 | 1,304 | 14,151 | 1,330 | 1,335 | |||||||||||||||||
| Credit | 95 | 1 | 3 | 465 | 1 | 12 | |||||||||||||||||
| Other (b) | 940 | 13 | 5 | 3,330 | 27 | 11 | |||||||||||||||||
| Total derivatives not designated as hedging instruments: | 107,490 | 1,667 | 2,747 | 99,107 | 2,207 | 1,683 | |||||||||||||||||
| Total | 148,690 | 1,781 | 2,750 | 137,761 | 2,246 | 1,687 | |||||||||||||||||
| Netting adjustments (c) | — | (757) | (1,262) | — | (284) | (1,526) | |||||||||||||||||
| Net derivatives in the balance sheet | 148,690 | 1,024 | 1,488 | 137,761 | 1,962 | 161 | |||||||||||||||||
| Other collateral (d) | — | — | (5) | — | (1) | — | |||||||||||||||||
| Net derivative amounts | $ | 148,690 | $ | 1,024 | $ | 1,483 | $ | 137,761 | $ | 1,961 | $ | 161 | |||||||||||
(a)We take into account bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. As a result, we could have derivative contracts with negative fair values included in derivative assets and contracts with positive fair values included in derivative liabilities.
(b)Other derivatives include interest rate lock commitments related to our residential mortgage banking activities, forward sales commitments related to our residential mortgage banking activities, forward purchase and sales contracts consisting of contractual commitments associated with “to be announced” securities and when-issued securities, and other customized derivative contracts.
(c)Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.
(d)Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.
Fair value hedges. During the year ended December 31, 2022, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness.
The following tables summarize the amounts that were recorded on the balance sheet as of December 31, 2022 and December 31, 2021, related to cumulative basis adjustments for fair value hedges.
| December 31, 2022 | |||||||||||
| Dollars in millions | Balance sheet line item in which the hedge item is included | Carrying amount of hedged item**(a)** | Hedge accounting basis adjustment | ||||||||
| Interest rate contracts | Long-term debt(b) | $ | 10,411 | $ | (552) | ||||||
| Interest rate contracts | Securities available for sale(c) | 405 | 48 | ||||||||
| December 31, 2021 | |||||||||||
| Dollars in millions | Balance sheet line item in which the hedge item is included | Carrying amount of hedged item (a) | Hedge accounting basis adjustment | ||||||||
| Interest rate contracts | Long-term debt(b) | $ | 7,553 | $ | 138 | ||||||
| Interest rate contracts | Securities available for sale(c) | 6,280 | 134 | ||||||||
(a)The carrying amount represents the portion of the asset or liability designated as the hedged item.
(b)Basis adjustments related to de-designated hedges that no longer qualify as fair value hedges reduced the hedge accounting basis adjustment by $6 million and $7 million at December 31, 2022 and December 31, 2021, respectively.
(c)These amounts are designated as fair value hedges under the last-of-layer method. The carrying amount represents the amortized costs basis of the prepayable financial assets used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2022 and December 31, 2021 the amortized cost of the closed portfolios used in these hedging relationships was $708 million and $7.7 billion, respectively.
Cash flow hedges. During the year ended December 31, 2022, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness.
Considering the interest rates, yield curves, and notional amounts as of December 31, 2022, we expect to reclassify an estimated $665 million of after-tax net losses on derivative instruments designated as cash flow hedges from AOCI to income during the next 12 months. In addition, we expect to reclassify approximately $3 million of pre-tax net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. These reclassified amounts could differ from actual amounts recognized due to changes in interest rates hedge de-designations and the addition of other hedges subsequent to December 31, 2022. As of December 31, 2022, the maximum length of time over which we hedge forecasted transactions is 5.01 years.
The following tables summarize the effect of fair value and cash flow hedge accounting on the income statement for the years ended December 31, 2022, December 31, 2021, and December 31, 2020.
| Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships | |||||||||||||||||||||||
| Dollars in millions | Interest expense – long-term debt | Interest income – loans | Interest Income - securities | Investment banking and debt placement fees | |||||||||||||||||||
| Twelve Months Ended December 31, 2022 | |||||||||||||||||||||||
| Total amounts presented in the consolidated statement of income | $ | (475) | $ | 4,241 | $ | 752 | $ | 638 | |||||||||||||||
| Net gains (losses) on fair value hedging relationships | |||||||||||||||||||||||
| Interest contracts | |||||||||||||||||||||||
| Recognized on hedged items | 690 | — | (339) | — | |||||||||||||||||||
| Recognized on derivatives designated as hedging instruments | (697) | — | 350 | — | |||||||||||||||||||
| Net income (expense) recognized on fair value hedges | $ | (7) | $ | — | $ | 11 | $ | — | |||||||||||||||
| Net gain (loss) on cash flow hedging relationships | |||||||||||||||||||||||
| Realized gains (losses) (pre-tax) reclassified from AOCI into net income | |||||||||||||||||||||||
| Interest contracts | $ | (3) | $ | (146) | $ | — | $ | 9 | |||||||||||||||
| Net income (expense) recognized on cash flow hedges | $ | (3) | $ | (146) | $ | — | $ | 9 | |||||||||||||||
| Twelve Months Ended December 31, 2021 | |||||||||||||||||||||||
| Total amounts presented in the consolidated statement of income | $ | (221) | $ | 3,532 | $ | 546 | $ | 937 | |||||||||||||||
| Net gains (losses) on fair value hedging relationships | |||||||||||||||||||||||
| Interest contracts | |||||||||||||||||||||||
| Recognized on hedged items | 276 | — | (113) | — | |||||||||||||||||||
| Recognized on derivatives designated as hedging instruments | (150) | — | 113 | — | |||||||||||||||||||
| Net income (expense) recognized on fair value hedges | $ | 126 | $ | — | $ | — | $ | — | |||||||||||||||
| Net gain (loss) on cash flow hedging relationships | |||||||||||||||||||||||
| Realized gains (losses) (pre-tax) reclassified from AOCI into net income | |||||||||||||||||||||||
| Interest contracts | $ | (4) | $ | 329 | $ | — | $ | 4 | |||||||||||||||
| Net income (expense) recognized on cash flow hedges | $ | (4) | $ | 329 | $ | — | $ | — | |||||||||||||||
| Twelve Months Ended December 31, 2020 | |||||||||||||||||||||||
| Total amounts presented in the consolidated statement of income | $ | (286) | $ | 3,866 | $ | 484 | $ | 661 | |||||||||||||||
| Net gains (losses) on fair value hedging relationships | |||||||||||||||||||||||
| Interest contracts | |||||||||||||||||||||||
| Recognized on hedged items | (177) | — | — | — | |||||||||||||||||||
| Recognized on derivatives designated as hedging instruments | 305 | — | — | — | |||||||||||||||||||
| Net income (expense) recognized on fair value hedges | $ | 128 | $ | — | $ | — | $ | — | |||||||||||||||
| Net gain (loss) on cash flow hedging relationships | |||||||||||||||||||||||
| Realized gains (losses) (pre-tax) reclassified from AOCI into net income | |||||||||||||||||||||||
| Interest contracts | $ | (4) | $ | 319 | $ | — | $ | — | |||||||||||||||
| Net income (expense) recognized on cash flow hedges | $ | (4) | $ | 319 | $ | — | $ | — | |||||||||||||||
Net investment hedges. We previously entered into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments in foreign subsidiaries as a result of changes in the related foreign exchange rates. We had no activity in net investment hedges for the years ended December 31, 2022, December 31, 2021, and December 31, 2020.
The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, and where they are recorded on the income statement. The table includes net gains (losses) recognized in OCI during the period and net gains (losses) reclassified from AOCI into income during the current period.
| Dollars in millions | Net Gains (Losses) Recognized in OCI | Income Statement Location of Net Gains (Losses) Reclassified From OCI Into Income | Net Gains (Losses) Reclassified From OCI Into Income | Net Gains (Losses) Recognized in Other Income | ||||||||||
| Twelve Months Ended December 31, 2022 | ||||||||||||||
| Cash Flow Hedges | ||||||||||||||
| Interest rate | $ | (1,660) | Interest income — Loans | $ | (146) | $ | — | |||||||
| Interest rate | 7 | Interest expense — Long-term debt | (3) | — | ||||||||||
| Interest rate | 11 | Investment banking and debt placement fees | 9 | — | ||||||||||
| Total | $ | (1,642) | $ | (140) | $ | — | ||||||||
| Twelve Months Ended December 31, 2021 | ||||||||||||||
| Cash Flow Hedges | ||||||||||||||
| Interest rate | $ | (307) | Interest income — Loans | $ | 329 | $ | — | |||||||
| Interest rate | 2 | Interest expense — Long-term debt | (4) | — | ||||||||||
| Interest rate | 10 | Investment banking and debt placement fees | 4 | — | ||||||||||
| Total | $ | (295) | $ | 329 | $ | — | ||||||||
| Twelve Months Ended December 31, 2020 | ||||||||||||||
| Cash Flow Hedges | ||||||||||||||
| Interest rate | $ | 628 | Interest income — Loans | $ | 319 | $ | — | |||||||
| Interest rate | (5) | Interest expense — Long-term debt | (4) | — | ||||||||||
| Interest rate | (9) | Investment banking and debt placement fees | — | — | ||||||||||
| Total | $ | 614 | $ | 315 | $ | — | ||||||||
Nonhedging instruments.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, and where they are recorded on the income statement.
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, Dollars in millions | Corporate services income | Consumer mortgage income | Other income | Total | Corporate services income | Consumer mortgage income | Other income | Total | Corporate services income | Consumer mortgage income | Other income | Total | ||||||||||||||||||||||||||||||||
| NET GAINS (LOSSES) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest rate | $ | 57 | $ | — | $ | 6 | $ | 63 | $ | 30 | $ | — | $ | 2 | $ | 32 | $ | 32 | $ | — | $ | (10) | $ | 22 | ||||||||||||||||||||
| Foreign exchange | 52 | — | — | 52 | 47 | — | — | 47 | 41 | — | — | 41 | ||||||||||||||||||||||||||||||||
| Commodity | 23 | — | — | 23 | 14 | — | — | 14 | 19 | — | — | 19 | ||||||||||||||||||||||||||||||||
| Credit | (1) | — | (39) | (40) | 4 | — | (36) | (32) | (4) | — | (29) | (33) | ||||||||||||||||||||||||||||||||
| Other | — | 4 | (2) | 2 | — | 13 | (7) | 6 | — | 19 | 19 | 38 | ||||||||||||||||||||||||||||||||
| Total net gains (losses) | $ | 131 | $ | 4 | $ | (35) | $ | 100 | $ | 95 | $ | 13 | $ | (41) | $ | 67 | $ | 88 | $ | 19 | $ | (20) | $ | 87 | ||||||||||||||||||||
Counterparty Credit Risk
We use several means to mitigate and manage exposure to credit risk on derivative contracts. We enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with standard ISDA documentation, central clearing rules, and other related agreements. We hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises, or GNMA. Cash collateral netted against derivative assets on the balance sheet totaled $10 million at December 31, 2022, and $100 million at December 31, 2021. The cash collateral netted against derivative liabilities totaled $626 million at December 31, 2022, and $1.1 billion at December 31, 2021.
The following table summarizes the fair value of our derivative assets by type at the dates indicated. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
| December 31, Dollars in millions | 2022 | 2021 | ||||||
| Interest rate | $ | 136 | $ | 696 | ||||
| Foreign exchange | 67 | 31 | ||||||
| Commodity | 820 | 1,108 | ||||||
| Credit | — | — | ||||||
| Other | 11 | 27 | ||||||
| Derivative assets before collateral | 1,034 | 1,862 | ||||||
| Plus (Less): Related collateral | (10) | 100 | ||||||
| Total derivative assets | $ | 1,024 | $ | 1,962 | ||||
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions are primarily high dollar volume. We enter into bilateral collateral and master netting agreements with these counterparties. We clear certain types of derivative transactions with these counterparties, whereby central clearing organizations become the counterparties to our derivative contracts. In addition, we enter into derivative contracts through swap execution facilities. Swap clearing and swap execution facilities reduce our exposure to counterparty credit risk. At December 31, 2022, we had gross exposure of $355 million to broker-dealers and banks. We had net exposure of $213 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $212 million after considering $1 million of additional collateral held in the form of securities.
We enter into transactions using master netting agreements with clients to accommodate their business needs. In most cases, we mitigate our credit exposure by cross-collateralizing these transactions to the underlying loan collateral. For transactions that are not clearable, we mitigate our market risk by buying and selling U.S. Treasuries and Eurodollar futures or entering into offsetting positions. Due to the cross-collateralization to the underlying loan, we typically do not exchange cash or marketable securities collateral in connection with these transactions. To address the risk of default associated with these contracts, we have established a CVA reserve (included in “accrued income and other assets”) in the amount of $3 million at December 31, 2022. The CVA is calculated from potential future exposures, expected recovery rates, and market-implied probabilities of default. At December 31, 2022, we had gross exposure of $968 million to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $812 million on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve.
Credit Derivatives
We are a buyer and, under limited circumstances, may be a seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations as well as exposures to debt securities. Our credit derivative portfolio was in a net liability position of $2 million as of December 31, 2022, and $11 million as of December 31, 2021.
Our credit derivative portfolio may consist of the following:
-
Single-name credit default swap: A bilateral contract whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (the “reference entity”) in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, identified in the credit derivative contract.
-
Traded credit default swap index: Represents a position on a basket or portfolio of reference entities.
-
Risk participation agreement: A transaction in which the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participant’s credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterparty’s percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the
seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the swap agreement.
The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at December 31, 2022, and December 31, 2021. The notional amount represents the amount that the seller could be required to pay. The payment/performance risk shown in the table represents a weighted average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are implied from observed credit indices in the credit default swap market, which are mapped to reference entities based on Key’s internal risk rating.
| 2022 | 2021 | ||||||||||||||||||||||
| December 31, Dollars in millions | Notional Amount | Average Term (Years) | Payment / Performance Risk | Notional Amount | Average Term (Years) | Payment / Performance Risk | |||||||||||||||||
| Other | $ | 1 | 15.17 | 5.10 | % | $ | 149 | 13.86 | 3.15 | % | |||||||||||||
| Total credit derivatives sold | $ | 1 | — | — | $ | 149 | — | — | |||||||||||||||
Credit Risk Contingent Features
We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At December 31, 2022, KeyBank’s rating was “A3” with Moody’s and “A-” with S&P, and KeyCorp’s rating was “Baa1” with Moody’s and “BBB+” with S&P. As of December 31, 2022, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $612 million, which includes $243 million in derivative assets, $1.3 billion in derivative liabilities and associated collateral posted. We had $534 million in cash and securities collateral posted to cover those positions as of December 31, 2022. There were no derivative contracts with credit risk contingent features held by KeyCorp at December 31, 2022.
The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of December 31, 2022, and December 31, 2021. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of December 31, 2022, and December 31, 2021, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required at December 31, 2022, or December 31, 2021. For more information about the credit ratings for KeyBank and KeyCorp, see the discussion under the heading “Factors affecting liquidity” in the section entitled “Liquidity risk management” in Item 7 of this report.
| December 31, Dollars in millions | 2022 | 2021 | |||||||||||||||
| Moody’s | S&P | Moody’s | S&P | ||||||||||||||
| KeyBank’s long-term senior unsecured credit ratings | A3 | A- | A3 | A- | |||||||||||||
| One rating downgrade | $ | 1 | $ | 1 | $ | 3 | $ | 3 | |||||||||
| Two rating downgrades | 1 | 1 | 3 | 3 | |||||||||||||
| Three rating downgrades | 1 | 1 | 3 | 3 |
KeyBank’s long-term senior unsecured credit rating was three ratings above noninvestment grade at Moody’s and S&P as of December 31, 2022, and December 31, 2021. If KeyBank’s ratings had been downgraded below investment grade as of December 31, 2022, and December 31, 2021, payments of up to $2 million and $4 million, respectively, would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorp’s ratings had been downgraded below investment grade as of December 31, 2022, and December 31, 2021, no payments would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.
9. Mortgage Servicing Assets
We originate and periodically sell commercial and residential mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets.”
Commercial
Changes in the carrying amount of commercial mortgage servicing assets are summarized as follows:
| Year ended December 31, Dollars in millions | 2022 | 2021 | ||||||
| Balance at beginning of period | $ | 634 | $ | 578 | ||||
| Servicing retained from loan sales | 106 | 128 | ||||||
| Purchases | 38 | 29 | ||||||
| Amortization | (125) | (120) | ||||||
| Temporary recoveries (impairments) | — | 19 | ||||||
| Balance at end of period | $ | 653 | $ | 634 | ||||
| Fair value at end of period | $ | 997 | $ | 789 | ||||
The fair value of commercial mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to determine fair value our commercial mortgage servicing assets at December 31, 2022, and December 31, 2021, along with the valuation techniques, are shown in the following table:
| dollars in millions | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Valuation Technique | Significant Unobservable Input | Range | Weighted-Average | Range | Weighted-Average | ||||||||||||||||||
| Discounted cash flow | Expected defaults | 0.97 | % | 2.00 | % | 1.07 | % | 1.00 | % | 2.00 | % | 1.13 | % | ||||||||||
| Residual cash flows discount rate | 8.54 | % | 10.02 | % | 9.48 | % | 7.92 | % | 10.49 | % | 9.44 | % | |||||||||||
| Escrow earn rate | 5.09 | % | 5.21 | % | 5.17 | % | 1.34 | % | 1.74 | % | 1.34 | % | |||||||||||
| Loan assumption rate | — | % | 1.41 | % | 1.12 | % | — | % | 1.69 | % | 1.37 | % | |||||||||||
If these economic assumptions change or prove incorrect, the fair value of commercial mortgage servicing assets may also change. Expected credit losses, escrow earn rates, and discount rates are critical to the valuation of commercial mortgage servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the commercial mortgage loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earn rates would cause a decrease in the fair value of our commercial mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our commercial mortgage servicing assets. Prepayment activity on commercial serviced loans does not significantly impact the valuation of our commercial mortgage servicing assets. Unlike residential mortgages, commercial mortgages experience significantly lower prepayments due to certain contractual restrictions impacting the borrower’s ability to prepay the mortgage.
The amortization of commercial mortgage servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of commercial servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to contractual fee income. The contractual fee income from servicing commercial mortgage loans totaled $292 million for the year ended December 31, 2022, $264 million for the year ended December 31, 2021, and $214 million for the year ended December 31, 2020. This fee income was partially offset by $125 million of amortization for the year ended December 31, 2022, $120 million for the year ended December 31, 2021, and $117 million for the year ended December 31, 2020. Both the contractual fee income and the amortization are recorded, net, in “commercial mortgage servicing fees” on the income statement.
Residential
Changes in the carrying amount of residential mortgage servicing assets are summarized as follows:
| Dollars in millions | 2022 | 2021 | ||||||
| Balance at beginning of period | $ | 93 | $ | 58 | ||||
| Servicing retained from loan sales | 23 | 43 | ||||||
| Purchases | — | — | ||||||
| Amortization | (11) | (18) | ||||||
| Temporary recoveries (impairments) | 1 | 10 | ||||||
| Balance at end of period | $ | 106 | $ | 93 | ||||
| Fair value at end of period | $ | 130 | $ | 97 | ||||
The fair value of residential mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our residential mortgage servicing assets at December 31, 2022 and December 31, 2021, along with the valuation techniques, are shown in the following table:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Valuation Technique | Significant Unobservable Input | Range | Weighted-Average | Range | Weighted-Average | ||||||||||||||||||
| Discounted cash flow | Prepayment speed | 6.10 | % | 41.34 | % | 7.20 | % | 9.65 | % | 49.17 | % | 10.97 | % | ||||||||||
| Discount rate | 7.50 | % | 8.50 | % | 7.53 | % | 7.50 | % | 11.50 | % | 7.53 | % | |||||||||||
| Servicing cost | $ | 62.00 | $ | 4,375 | $ | 67.05 | $ | 62.00 | $ | 8,075 | $ | 66.94 |
If these economic assumptions change or prove incorrect, the fair value of residential mortgage servicing assets may also change. Prepayment speed, discount rates, and servicing cost are critical to the valuation of residential mortgage servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the residential mortgage loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. An increase in the prepayment speed would cause a decrease in the fair value of our residential mortgage servicing assets. An increase in the assigned discount rates and servicing cost assumptions would cause a decrease in the fair value of our residential mortgage servicing assets.
The amortization of residential mortgage servicing assets for December 31, 2022, as shown in the table above, is recorded as a reduction to contractual fee income. The contractual fee income from servicing residential mortgage loans totaled $35 million for the year ended December 31, 2022, $42 million for the year ended December 31, 2021, and $34 million for the year ended December 31, 2020. This fee income was offset by $11 million of amortization for the year ended December 31, 2022, $18 million for the year ended December 31, 2021, and $14 million for the year ended December 31, 2020. Both the contractual fee income and the amortization are recorded, net, in “consumer mortgage income” on the income statement.
10. Leases
As a lessee, we enter into leases of land, buildings, and equipment. Our real estate leases primarily relate to bank branches and office space. The leases of equipment principally relate to technology assets for data processing and data storage. As a lessor, we primarily provide financing through our equipment leasing business.
Lessee
Our leases are classified as either operating or financing and have remaining terms ranging from 1 to 20 years with the exception of certain ground leases that have terms over 30 years. For leases with initial terms greater than one year, a lease liability, measured as the present value of unpaid lease payments, and a corresponding right-of-use asset for the right to use the leased properties are reported on the balance sheet. Lease payments are discounted using Key’s incremental borrowing rate, consistent with what Key would pay to borrow on a collateralized basis over a term similar to each lease. Leases with an initial term of less than one year are not recorded on the balance sheet. The related expense is recognized on a straight-line basis over the lease term.
Certain leases contain options to extend the lease term for up to five years. Some leases give us the option to terminate, for a penalty or at the lessor's discretion. Leases with variable payments are primarily based on adjustments for inflation over the term of the lease based on a contractually defined index. Certain ATM leases include variable payments based on volume of transactions.
Operating lease expense is recognized in "net occupancy" and "equipment" on the income statement. The components of lease expense are summarized as follows:
| Dollars in millions | December 31, 2022 | December 31, 2021 | |||||||||
| Operating lease cost | $ | 128 | $ | 133 | |||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | 1 | 2 | |||||||||
| Interest on lease liabilities | — | — | |||||||||
| Variable lease cost | 24 | 22 | |||||||||
| Total lease cost (a) | $ | 153 | $ | 157 | |||||||
(a)Short-term lease cost was less than $1 million for both the twelve months ended December 31, 2022, and December 31, 2021
Cash flows related to leases are summarized as follows:
| Dollars in millions | December 31, 2022 | December 31, 2021 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 139 | $ | 141 | |||||||
| Financing cash flows from finance leases | 1 | 2 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: (a) | |||||||||||
| Operating leases | $ | 46 | $ | 85 | |||||||
(a)There were no right-of-use assets obtained in exchange for finance lease obligations for either the twelve months ended December 31, 2022 or December 31, 2021.
Additional balance sheet information related to leases is summarized as follows:
| Dollars in millions | Balance sheet classification | December 31, 2022 | December 31, 2021 | ||||||||
| Operating lease assets | Accrued income and other assets | $ | 525 | $ | 595 | ||||||
| Operating lease liabilities | Accrued expense and other liabilities | 601 | 676 | ||||||||
| Finance leases: | |||||||||||
| Property and equipment, gross | Premises and equipment | $ | 18 | $ | 18 | ||||||
| Accumulated depreciation | Premises and equipment | (14) | (13) | ||||||||
| Property and equipment, net | 4 | 5 | |||||||||
| Finance lease liabilities | Long-term debt | 6 | 7 | ||||||||
Information pertaining to the lease term and weighted-average discount rate is summarized as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Weighted-average remaining lease term: | ||||||||
| Operating leases | 6.1 | 6.56 | ||||||
| Finance leases | 4.53 | 5.33 | ||||||
| Weighted-average discount rate: | ||||||||
| Operating leases | 2.78 | % | 2.78 | % | ||||
| Finance leases | 4.54 | % | 4.50 | % | ||||
Maturities of lease liabilities are summarized as follows:
| Dollars in millions | Operating Leases | Finance Leases | Total | ||||||||
| 2023 | $ | 134 | $ | 2 | $ | 136 | |||||
| 2024 | 123 | 2 | 125 | ||||||||
| 2025 | 104 | 1 | 105 | ||||||||
| 2026 | 87 | — | 87 | ||||||||
| 2027 | 72 | — | 72 | ||||||||
| Thereafter | 137 | 2 | 139 | ||||||||
| Total lease payments | $ | 657 | $ | 7 | $ | 664 | |||||
| Less imputed interest | 56 | 1 | 57 | ||||||||
| Total | $ | 601 | $ | 6 | $ | 607 | |||||
Lessor Equipment Leasing
Leases may have fixed or floating rate terms. Variable payments are based on an index or other specified rate and are included in rental payments. Certain leases contain an option to extend the lease term or the option to terminate at the discretion of the lessee. Under certain conditions, lease agreements may also contain the option for a lessee to purchase the underlying asset.
Interest income from sales-type and direct financing leases is recognized in "interest income — loans" on the statement of income. Income related to operating leases is recognized in “operating lease income and other leasing gains” on the income statement. The components of equipment leasing income are summarized in the table below:
| Dollars in millions | December 31, 2022 | December 31, 2021 | ||||||||||||
| Sales-type and direct financing leases | ||||||||||||||
| Interest income on lease receivable | $ | 64 | $ | 75 | ||||||||||
| Interest income related to accretion of unguaranteed residual asset | 15 | 16 | ||||||||||||
| Total sales-type and direct financing lease income | 79 | 91 | ||||||||||||
| Operating leases | ||||||||||||||
| Operating lease income related to lease payments | 105 | 127 | ||||||||||||
| Other operating leasing gains and (losses) | (2) | 21 | ||||||||||||
| Total operating lease income and other leasing gains | 103 | 148 | ||||||||||||
| Total lease income | $ | 182 | $ | 239 | ||||||||||
Equipment leasing receivables relate to sales-type and direct financing leases. The composition of the net investment in sales-type and direct financing leases is as follows:
| Dollars in millions | December 31, 2022 | December 31, 2021 | |||||||||
| Lease receivables | $ | 3,170 | $ | 3,205 | |||||||
| Unearned income | (253) | (193) | |||||||||
| Unguaranteed residual value | 472 | 450 | |||||||||
| Deferred fees and costs | 5 | 14 | |||||||||
| Net investment in sales-type and direct financing leases | $ | 3,394 | $ | 3,476 | |||||||
The residual value component of a lease represents the fair value of the leased asset at the end of the lease term. We rely on industry data, historical experience, independent appraisals and the experience of the equipment leasing asset management team to value lease residuals. Relationships with a number of equipment vendors give the asset management team insight into the life cycle of the leased equipment, pending product upgrades and competing products. Key assesses net investments in leases, including residual values, for impairment and recognizes any impairment losses in accordance with the impairment guidance for financial instruments. The carrying amount of residual assets covered by residual value guarantees at December 31, 2022, and December 31, 2021, was $270 million and $255 million, respectively.
At December 31, 2022, minimum future lease payments to be received for sales-type and direct financing leases are as follows:
| Dollars in millions | Sales-type and direct financing lease payments | ||||
| 2023 | $ | 902 | |||
| 2024 | 689 | ||||
| 2025 | 486 | ||||
| 2026 | 388 | ||||
| 2027 | 246 | ||||
| Thereafter | 499 | ||||
| Total lease payments | $ | 3,211 | |||
At December 31, 2022, minimum future lease payments to be received for operating leases are as follows:
| Dollars in millions | Operating lease payments | ||||
| 2023 | $ | 80 | |||
| 2024 | 67 | ||||
| 2025 | 55 | ||||
| 2026 | 39 | ||||
| 2027 | 26 | ||||
| Thereafter | 50 | ||||
| Total lease payments | $ | 318 | |||
The carrying amount of operating lease assets at December 31, 2022 and December 31, 2021, was $505 million and $740 million, respectively.
11. Premises and Equipment
Premises and Equipment
Premises and equipment at December 31, 2022, and December 31, 2021, consisted of the following:
| December 31, | |||||||||||
| Dollars in millions | Useful life (in years) | 2022 | 2021 | ||||||||
| Land | Indefinite | $ | 114 | $ | 118 | ||||||
| Buildings and improvements | 15-40 | 696 | 680 | ||||||||
| Leasehold improvements | 1-15 | 615 | 616 | ||||||||
| Furniture and equipment | 2-15 | 824 | 814 | ||||||||
| Capitalized building leases | 1-14 (a) | 18 | 19 | ||||||||
| Construction in process | N/A | 41 | 70 | ||||||||
| Total premises and equipment | 2,308 | 2,317 | |||||||||
| Less: Accumulated depreciation and amortization | (1,672) | (1,636) | |||||||||
| Premises and equipment, net | $ | 636 | $ | 681 | |||||||
(a)Capitalized building and equipment leases are amortized over the lesser of the useful life of asset or lease term.
Depreciation and amortization expense related to premises and equipment for the years ended December 31, 2022, December 31, 2021, and December 31, 2020 was $96 million, $107 million, and $115 million, respectively. This includes amortization of assets under capital leases.
Software
Eligible costs related to computer software developed or obtained for internal use that add functionality, improve efficiency or extend the useful life of a system are capitalized. Amortization of capitalized software begins when it is ready for its intended use, which is after all substantial testing is completed. Capitalized costs are amortized using the straight-line or accelerated method over its useful life. Balances are included in “Accrued income and other assets”.
Key had capitalized software assets, including internally-developed and purchased software and costs associated with certain cloud computing arrangements of $447 million and $321 million and related accumulated amortization of $163 million and $86 million as of December 31, 2022, and December 31, 2021, respectively. This includes in-process software that has not started amortizing. Amortization expense related to internal-use software for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, was $77 million, $66 million, and $49 million, respectively.
12. Goodwill and Other Intangible Assets
Our annual goodwill impairment testing is performed as of October 1 each year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Additional information pertaining to our accounting policy for goodwill and other intangible assets is summarized in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Goodwill and Other Intangible Assets.”
For our annual test, we conducted a qualitative test as of October 1, 2022. We evaluated numerous factors including economic trends, market capitalization, financial condition, industry performance and internal projections. We concluded goodwill was not impaired.
Changes in the carrying amount of goodwill by reporting segment are presented in the following table:
| Dollars in millions | Consumer Bank | Commercial Bank | Total | ||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | 1,752 | $ | 912 | $ | 2,664 | |||||
| AQN Strategies acquisition | 9 | — | 9 | ||||||||
| XUP acquisition measurement period adjustment | — | 20 | 20 | ||||||||
| BALANCE AT DECEMBER 31, 2021 | 1,761 | 932 | 2,693 | ||||||||
| XUP acquisition measurement period adjustment | — | 1 | 1 | ||||||||
| GradFin acquisition | 58 | — | 58 | ||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | 1,819 | $ | 933 | $ | 2,752 | |||||
Additional information regarding recent acquisitions is provided in Note 15 (“Acquisitions and Discontinued Operations”).
As of December 31, 2022, we expect goodwill in the amount of $432 million to be deductible for tax purposes in future periods.
There were no accumulated impairment losses related to any of Key’s reporting units at December 31, 2022, December 31, 2021, and December 31, 2020.
The following table shows the gross carrying amount and the accumulated amortization of intangible assets subject to amortization:
| 2022 | 2021 | ||||||||||||||||
| December 31, Dollars in millions | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||
| Core deposit intangibles | $ | 355 | $ | 303 | $ | 355 | $ | 275 | |||||||||
| PCCR intangibles | 16 | 14 | 16 | 13 | |||||||||||||
| Other intangible assets | 84 | 44 | 82 | 35 | |||||||||||||
| Total | $ | 455 | $ | 361 | $ | 453 | $ | 323 | |||||||||
The following table presents estimated intangible asset amortization expense for the next five years.
| Estimated | |||||||||||||||||
| Dollars in millions | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||
| Intangible asset amortization expense | $ | 39 | $ | 28 | $ | 19 | $ | 7 | $ | 1 |
13. Variable Interest Entities
A VIE is a partnership, limited liability company, trust, or other legal entity that meets any one of the following criteria:
-
The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.
-
The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.
-
The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.
-
The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.
Our significant VIEs are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, even
though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.
LIHTC investments. Through KCDC, we have made investments directly and indirectly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive residual returns. As we are not the primary beneficiary of these investments, we do not consolidate them.
Through KCIC, formed as a wholly-owned subsidiary of KeyBank National Association, we create funds that hold interests in LIHTC investments. KCIC is the managing member of the fund. We have determined that we are not the primary beneficiary of the fund because although we have the power to direct the activities that most significantly influence its economic performance, we do not have benefits that could potentially be deemed significant to the fund. Therefore, we do not consolidate the fund.
Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. We had $1.9 billion and $1.6 billion of investments in LIHTC operating partnerships at December 31, 2022, and December 31, 2021, respectively. These investments are recorded in “accrued income and other assets” on our Consolidated Balance Sheets. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss is remote. For all legally binding unfunded equity commitments, we increase our recognized investment and recognize a liability. As of December 31, 2022, and December 31, 2021, we had liabilities of $957 million and $675 million, respectively, related to investments in qualified affordable housing projects, which are recorded in “accrued expense and other liabilities” on our Consolidated Balance Sheets. We continue to invest in these LIHTC operating partnerships.
The assets and liabilities presented in the table below convey the size of KCDC’s direct and indirect investments at December 31, 2022, and December 31, 2021. As these investments represent unconsolidated VIEs, the assets and liabilities of the investments themselves are not recorded on our Consolidated Balance Sheets.
| Unconsolidated VIEs | |||||||||||
| Dollars in millions | Total Assets | Total Liabilities | Maximum Exposure to Loss | ||||||||
| December 31, 2022 | |||||||||||
| LIHTC investments | $ | 8,227 | $ | 3,091 | $ | 2,370 | |||||
| December 31, 2021 | |||||||||||
| LIHTC investments | $ | 7,839 | $ | 3,252 | $ | 1,985 |
We amortize our LIHTC investments over the period that we expect to receive the tax benefits. In 2022, we recognized $190 million of amortization and $187 million of tax credits associated with these investments within “income taxes” on our income statement. In 2021, we recognized $192 million of amortization and $184 million of tax credits associated with these investments within “income taxes” on our income statement.
Principal investments. Through our principal investing entity, KCC, we have made investments in private equity funds engaged in venture- and growth-oriented investing. As a limited partner to these funds, KCC records these investments at fair value and receives distributions from the funds in accordance with the funds’ partnership agreements. We are not the primary beneficiary of these investments as we do not hold the power to direct the activities that most significantly affect the funds’ economic performance. Such power rests with the funds’ general partners. In addition, we neither have the obligation to absorb the funds’ expected losses nor the right to receive their residual returns. Our voting rights are also disproportionate to our economic interests, and substantially all of the funds’ activities are conducted on behalf of investors with disproportionately few voting rights. Because we are not the primary beneficiary of these investments, we do not consolidate them.
Our maximum exposure to loss associated with indirect principal investments consists of the investments’ fair value plus any unfunded equity commitments. The fair value of our indirect principal investments totaled $34 million and $45 million at December 31, 2022, and December 31, 2021, respectively. These investments are recorded in “other investments” on our Consolidated Balance Sheets. Additional information on indirect principal investments is
provided in Note 6 (“Fair Value Measurements”). The table below reflects the size of the private equity funds in which KCC was invested as well as our maximum exposure to loss in connection with these investments at December 31, 2022.
| Unconsolidated VIEs | |||||||||||
| Dollars in millions | Total Assets | Total Liabilities | Maximum Exposure to Loss | ||||||||
| December 31, 2022 | |||||||||||
| Indirect investments | $ | 6,636 | $ | 90 | $ | 43 | |||||
| December 31, 2021 | |||||||||||
| Indirect investments | $ | 8,437 | $ | 178 | $ | 57 |
Through our principal investing entities, we have formed and funded operating entities that provide management and other related services to our investment company funds, which directly invest in portfolio companies. In return for providing services to our direct investment funds, these entities’ receive a minority equity interest in the funds. This minority equity ownership is recorded at fair value on the entities’ financial statements. Additional information on our direct principal investments is provided in Note 6 (“Fair Value Measurements”). While other equity investors manage the daily operations of these entities, we retain the power, through voting rights, to direct the activities of the entities that most significantly impact their economic performance. In addition, we have the obligation to absorb losses and the right to receive residual returns that could potentially be significant to these entities. As a result, we have determined that we are the primary beneficiary of these funds and have consolidated them since formation. The entities had no liabilities at December 31, 2022, and December 31, 2021, and other equity investors have no recourse to our general credit.
Other unconsolidated VIEs. We are involved with other various entities in the normal course of business which we have determined to be VIEs. We have determined that we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact their economic performance or hold a variable interest that could potentially be significant. The table below shows our assets and liabilities associated with these unconsolidated VIEs at December 31, 2022, and December 31, 2021. These assets are recorded in “accrued income and other assets,” “other investments,” “securities available for sale,” “held-to-maturity securities,” and “loans, net of unearned income” on our Consolidated Balance Sheets. These liabilities are recorded in “accrued expenses and other liabilities” on our Consolidated Balance Sheets. Of the total balance as of December 31, 2022, $1.4 billion related to the purchase of senior notes from a securitization collateralized by sold indirect auto loans. In addition, where we only have a lending arrangement in the normal course of business with unconsolidated VIEs we present the balances related to the lending arrangements in Note 5 (“Asset Quality”).
| Other unconsolidated VIEs | ||||||||
| Dollars in millions | Total Assets | Total Liabilities | ||||||
| December 31, 2022 | ||||||||
| Other unconsolidated VIEs | $ | 1,798 | $ | 1 | ||||
| December 31, 2021 | ||||||||
| Other unconsolidated VIEs | $ | 2,827 | $ | 1 |
14. Income Taxes
Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.
| Year ended December 31, Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| Currently payable: | |||||||||||
| Federal | $ | 368 | $ | 423 | $ | 336 | |||||
| State | 80 | 73 | 83 | ||||||||
| Total currently payable | $ | 448 | $ | 496 | $ | 419 | |||||
| Deferred: | |||||||||||
| Federal | $ | (14) | $ | 119 | $ | (156) | |||||
| State | (12) | 27 | (36) | ||||||||
| Total deferred | (26) | 146 | (192) | ||||||||
| Total income tax (benefit) expense (a) | $ | 422 | $ | 642 | $ | 227 | |||||
(a)There was income tax (benefit) expense on securities transactions of $2 million in 2022, $(2) million in 2021, and $1 million in 2020. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These non-income taxes, which are recorded in “noninterest expense” on the income statement, totaled $33 million in 2022, $33 million in 2021, and $30 million in 2020.
Significant components of our deferred tax assets and liabilities included in “accrued income and other assets” on our Consolidated Balance Sheets, are as follows:
| December 31, Dollars in millions | 2022 | 2021 | ||||||
| Allowance for loan and lease losses | $ | 380 | $ | 296 | ||||
| Employee benefits | 187 | 203 | ||||||
| Net unrealized securities losses | 1,959 | 102 | ||||||
| Federal net operating losses and credits | 4 | 6 | ||||||
| Non-tax accruals | 61 | 73 | ||||||
| Operating lease liabilities(a) | 149 | 165 | ||||||
| State net operating losses and credits | 1 | 1 | ||||||
| Partnership investments | 90 | 82 | ||||||
| Other | 164 | 184 | ||||||
| Gross deferred tax assets | 2,995 | 1,112 | ||||||
| Less: Valuation Allowance | 11 | 12 | ||||||
| Total deferred tax assets | $ | 2,984 | $ | 1,100 | ||||
| Leasing transactions | $ | 521 | $ | 521 | ||||
| State taxes | 86 | 28 | ||||||
| Operating lease right-of-use assets (a) | 130 | 145 | ||||||
| Goodwill | 139 | 121 | ||||||
| Other | 86 | 96 | ||||||
| Total deferred tax liabilities | 962 | 911 | ||||||
| Net deferred tax assets (liabilities) (b) | $ | 2,022 | $ | 189 | ||||
(a)A separate deferred tax asset and liability is recognized for each operating lease item resulting from the adoption of ASC 842 in 2019.
(b)From continuing operations.
We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change.
At December 31, 2022, we had net capital loss carryforwards of $11 million for which we have recorded $11 million of valuation allowances. The capital loss carryforward if not utilized, will expire in 2025. Realization of this tax benefit is dependent upon Key's ability to generate sufficient capital gain in an appropriate tax year to offset the capital loss carryforward. Currently, generation of sufficient gain income is uncertain.
At December 31, 2022, we had federal net operating loss carryforwards of $14 million and federal credit carryforwards of $1 million. The federal net operating loss carryforwards are from prior acquisitions by First Niagara and are subject to annual limitations under the tax code and, if not utilized, will expire in the years beginning 2027. The federal credit carryforward consists of general business credits which expire in 2027, under the Internal Revenue Code. We currently expect to fully utilize these losses and credits.
We had state net operating loss carryforwards of $18 million, resulting in a net state deferred tax asset of $1 million.
The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:
| Year ended December 31, Dollars in millions | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||
| Income (loss) before income taxes times 21% statutory federal tax rate | $ | 490 | 21.0 | % | $ | 683 | 21.0 | % | $ | 327 | 21.0 | % | ||||||||||||||
| Amortization of tax-advantaged investments | 149 | 6.4 | 151 | 4.6 | 150 | 9.7 | ||||||||||||||||||||
| Tax-exempt interest income | (28) | (1.2) | (26) | (.8) | (28) | (1.8) | ||||||||||||||||||||
| Corporate-owned life insurance income | (28) | (1.2) | (27) | (.8) | (29) | (1.9) | ||||||||||||||||||||
| State income tax, net of federal tax benefit | 53 | 2.3 | 79 | 2.4 | 37 | 2.4 | ||||||||||||||||||||
| Tax credits | (204) | (8.8) | (218) | (6.7) | (218) | (14.0) | ||||||||||||||||||||
| Other | (10) | (.4) | — | — | (12) | (.8) | ||||||||||||||||||||
| Total income tax expense (benefit) | $ | 422 | 18.1 | % | $ | 642 | 19.7 | % | $ | 227 | 14.6 | % | ||||||||||||||
Liability for Unrecognized Tax Benefits
The change in our liability for unrecognized tax benefits is as follows:
| Year ended December 31, Dollars in millions | 2022 | 2021 | ||||||
| Balance at beginning of year | $ | 50 | $ | 58 | ||||
| Increase for other tax positions of prior years | 4 | — | ||||||
| Decrease for payments and settlements | — | — | ||||||
| Decrease related to tax positions taken in prior years | (14) | (8) | ||||||
| Balance at end of year | $ | 40 | $ | 50 | ||||
Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $40 million at December 31, 2022, and $50 million at December 31, 2021. It is reasonably possible that the balance of unrecognized tax benefits could decrease in the next twelve months due to examinations by various tax authorities or the expiration of statutes of limitations.
As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest benefit of $1.5 million, $0.1 million, and $0.2 million in 2022, 2021, and 2020, respectively. We did not recover any state tax penalties in 2022, 2021, or 2020. At December 31, 2022, we had no accrued interest payable, compared to $2 million at December 31, 2021. There was no liability for accrued state tax penalties at December 31, 2022, and December 31, 2021.
There were no unrecognized tax benefits presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, at December 31, 2022 and December 31, 2021, respectively.
We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2016, and 2019 and forward. Currently, we are under IRS audit for tax year 2016. We are not subject to income tax examinations by other tax authorities for years prior to 2014.
Pre-1988 Bank Reserves acquired in a business combination
Retained earnings of KeyBank included approximately $92 million of allocated bad debt deductions for which no income taxes have been recorded. Under current federal law, these reserves are subject to recapture into taxable income if KeyBank, or any successor, fails to maintain its bank status under the Internal Revenue Code or makes non-dividend distributions or distributions greater than its accumulated earnings and profits. No deferred tax liability has been established as these events are not expected to occur in the foreseeable future.
15. Acquisitions and Discontinued Operations
Acquisitions
XUP Payments. On November 19, 2021, KeyBank acquired XUP Payments, a B2B focused digital platform. The acquisition was accounted for as a business combination. As a result of the acquisition, we recognized goodwill of $20.6 million and no separately identified intangible assets were recorded. Other acquired assets and liabilities of XUP were immaterial. The valuation was final as of March 31, 2022.
GradFin. On May 2, 2022, KeyBank acquired GradFin, a public service loan forgiveness counseling provider. The acquisition was accounted for as a business combination. Consideration paid totaled $72 million consisting of $62 million in cash and $10 million in contingent consideration. As a result of the acquisition, we recognized goodwill of $58 million and other intangible assets of $12 million, with remaining assets acquired consisting primarily of cash. Other acquired assets and liabilities of GradFin were immaterial. The valuation was final as of September 30, 2022.
Discontinued operations
Discontinued operations includes our government-guaranteed and private education lending business. At December 31, 2022, and December 31, 2021, approximately $434 million and $567 million, respectively, of education loans are included in discontinued assets on our Consolidated Balance Sheets. Net interest income after provision for credit losses for this business is not material and is included in income (loss) from discontinued operations, net of taxes on the consolidated statements of income.
16. Securities Financing Activities
The following table summarizes our securities financing agreements at December 31, 2022, and December 31, 2021:
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Dollars in millions | Gross Amount Presented in Balance Sheet | Netting Adjustments (a) | Collateral (b) | Net Amounts | Gross Amount Presented in Balance Sheet | Netting Adjustments (a) | Collateral (b) | Net Amounts | |||||||||||||||||||||
| Offsetting of financial assets: | |||||||||||||||||||||||||||||
| Reverse repurchase agreements | $ | 8 | $ | (8) | $ | — | $ | — | $ | 11 | $ | (6) | $ | (5) | $ | — | |||||||||||||
| Securities borrowed | — | — | — | — | 500 | — | (500) | — | |||||||||||||||||||||
| Total | $ | 8 | $ | (8) | $ | — | $ | — | $ | 511 | $ | (6) | $ | (505) | $ | — | |||||||||||||
| Offsetting of financial liabilities: | |||||||||||||||||||||||||||||
| Repurchase agreements (c) | $ | 71 | $ | (8) | $ | (63) | $ | — | $ | 173 | $ | (6) | $ | (167) | $ | — | |||||||||||||
| Total | $ | 71 | $ | (8) | $ | (63) | $ | — | $ | 173 | $ | (6) | $ | (167) | $ | — | |||||||||||||
(a)Netting adjustments take into account the impact of master netting agreements that allow us to settle with a single counterparty on a net basis.
(b)These adjustments take into account the impact of bilateral collateral agreements that allow us to offset the net positions with the related collateral. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(c)Repurchase agreements are collateralized by mortgaged-backed agency securities and are contracted on an overnight or continuous basis.
As of December 31, 2022, the carrying amount of assets pledged as collateral against repurchase agreements totaled $110 million. Assets pledged as collateral are reported in “available for sale” and “held-to-maturity” securities on the Consolidated Balance Sheets. At December 31, 2022, the liabilities associated with collateral pledged were solely comprised of customer sweep financing activity and had a carrying value of $63 million. The collateral pledged under customer sweep repurchase agreements is posted to a third-party custodian and cannot be sold or repledged by the secured party. The risk related to a decline in the market value of collateral pledged is minimal given the collateral's high credit quality and the overnight duration of the repurchase agreements.
Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we received from counterparties and either request additional collateral or return a portion of the collateral based on the value of those securities. We generally hold collateral in the form of highly rated securities issued by the U.S. Treasury and fixed income securities. In addition, we may need to provide collateral to counterparties under our repurchase agreements. With the exception of collateral pledged against customer sweep repurchase agreements, the collateral we pledge and receive can generally be sold or repledged by the secured parties.
17. Stock-Based Compensation
We maintain several stock-based compensation plans, which are described below. Total compensation expense for these plans was $120 million for 2022, $104 million for 2021, and $101 million for 2020. The total income tax benefit recognized in the income statement for these plans was $29 million for 2022, $25 million for 2021, and $24 million for 2020.
Our compensation plans allow us to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, or other awards which may be denominated or payable in or valued by reference to our Common Shares or other factors, discounted stock purchases, and deferred compensation to eligible employees and directors. At December 31, 2022, we had 22,313,039 Common Shares available for future grant under our compensation plans. In accordance with a resolution adopted by the Compensation and
Organization Committee of KeyCorp’s Board of Directors, we may not grant options to purchase Common Shares, restricted stock or other shares under any long-term compensation plan in an aggregate amount that exceeds 6% of our outstanding Common Shares in any rolling three-year period.
Stock Options
Stock options granted to employees generally become exercisable at the rate of 25% per year. No option granted by KeyCorp will be exercisable less than one year after, or expire later than ten years from, the grant date. The exercise price is 100-110% of the closing price of our Common Shares on the grant date (or the prior business day if the grant date is not a business day).
We determine the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to determine the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. Because of these differences, the Black-Scholes model does not precisely value an employee stock option, but it is commonly used for this purpose. The model assumes that the estimated fair value of an option is amortized as compensation expense over the option’s vesting period.
The Black-Scholes model requires several assumptions, which we developed and update based on historical trends and current market observations. Our determination of the fair value of options is only as accurate as the underlying assumptions. The assumptions pertaining to options issued during 2022, 2021, and 2020 are shown in the following table.
| Year ended December 31, | 2022 | 2021 | 2020 | ||||||||
| Average option life | 6.5 years | 6.6 years | 6.5 years | ||||||||
| Future dividend yield | 3.01 | % | 3.88 | % | 3.90 | % | |||||
| Historical share price volatility | .341 | .335 | .267 | ||||||||
| Weighted-average risk-free interest rate | 2.0 | % | 0.8 | % | 1.3 | % |
In 2019, shareholders approved the 2019 Equity Compensation Plan, under which 71,600,000 shares may be issued as equity awards. The Compensation and Organization Committee has authority to approve all stock option grants but may delegate some of its authority to grant awards from time to time. The committee has delegated to our Chief Executive Officer the authority to grant equity awards, including stock options, to any employee who is not designated an “officer” for purposes of Section 16 of the Exchange Act. No more than 3,000,000 Common Shares may be issued under this authority.
The following table summarizes activity, pricing and other information for our stock options for the year ended December 31, 2022:
| Number of Options | Weighted-Average Exercise Price Per Option | Weighted-Average Remaining Life (in years) | Aggregate Intrinsic Value**(a)** | |||||||||||
| Outstanding at December 31, 2021 | 4,587,632 | $ | 16.23 | 5.1 | $ | 32 | ||||||||
| Granted | 408,297 | 28.50 | ||||||||||||
| Exercised | (484,521) | 12.83 | ||||||||||||
| Lapsed or canceled | (15,076) | 15.65 | ||||||||||||
| Outstanding at December 31, 2022 | 4,496,332 | $ | 17.71 | 4.8 | $ | 8 | ||||||||
| Expected to vest | 1,184,816 | 22.46 | 7.7 | — | ||||||||||
| Exercisable at December 31, 2022 | 3,246,175 | $ | 15.84 | 3.7 | $ | 8 |
(a)The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option.
The weighted-average grant-date fair value of options was $5.78 for options granted during 2022, $3.38 for options granted during 2021, and $2.96 for options granted during 2020. Stock option exercises numbered 484,521 in 2022, 2,319,438 in 2021, and 821,916 in 2020. The aggregate intrinsic value of exercised options was $5 million for 2022, $22 million for 2021, and $5 million for 2020. As of December 31, 2022, unrecognized compensation cost related to nonvested options under the plans totaled $1 million. We expect to recognize this cost over a weighted-average period of 2.3 years.
Cash received from options exercised was $6 million, $27 million, and $8 million in 2022, 2021, and 2020, respectively. The actual tax benefit realized for the tax deductions from options exercised was less than $1 million in 2022 and $1 million in 2021.
Long-Term Incentive Compensation Program
Our Long-Term Incentive Compensation Program (the “Program”) rewards senior executives and other employees critical to our long-term financial success. Awards are granted annually in a variety of forms:
-
deferred cash payments that generally vest and are payable at the rate of 25% per year;
-
time-lapsed (service condition) restricted stock units payable in stock, which generally vest at the rate of 25% per year;
-
performance units payable in stock, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels and the service condition is met; and
-
performance units payable in cash, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels and the service condition is met.
During 2022, 30,055 performance units vested that were payable in stock and 2,224,127 performance units vested that were payable in cash. The total fair value of the performance units that vested in stock and cash during 2022 totaled $1 million and $55 million, respectively. During 2021, no performance units vested that were payable in stock and 1,278,629 performance units vested that were payable in cash. The payable in cash fair value of the performance units totaled $23 million.
The following table summarizes activity and pricing information for the nonvested shares in the Program for the year ended December 31, 2022.
| Vesting Contingent on Service Conditions | Vesting Contingent on Performance and Service Conditions - Payable in Stock | Vesting Contingent on Performance and Service Conditions - Payable in Cash | ||||||||||||||||||||||||
| Number of Nonvested Shares | Weighted- Average Grant-Date Fair Value | Number of Nonvested Shares | Weighted- Average Grant-Date Fair Value | Number of Nonvested Shares | Weighted- Average Grant-Date Fair Value | |||||||||||||||||||||
| Outstanding at December 31, 2021 | 12,000,384 | $ | 19.00 | 88,386 | $ | 18.47 | 5,080,523 | $ | 23.18 | |||||||||||||||||
| Granted | 5,087,882 | 25.91 | — | — | 2,100,203 | 17.30 | ||||||||||||||||||||
| Vested | (4,635,749) | 19.13 | (30,055) | 17.37 | (2,224,127) | 24.64 | ||||||||||||||||||||
| Forfeited | (527,732) | 22.44 | — | — | (48,803) | 19.29 | ||||||||||||||||||||
| Outstanding at December 31, 2022 | 11,924,785 | $ | 21.56 | 58,331 | $ | 19.02 | 4,907,796 | $ | 17.42 | |||||||||||||||||
The compensation cost of time-lapsed and performance-based restricted stock or unit awards granted under the Program is calculated using the closing trading price of our Common Shares on the grant date (or the prior business day if the grant date is not a business day).
Unlike time-lapsed and performance-based restricted stock or units, we do not pay dividends during the vesting period for performance shares or units that may become payable in excess of targeted performance.
The weighted-average grant-date fair value of awards granted under the Program was $23.39 during 2022, $20.06 during 2021, and $18.68 during 2020. As of December 31, 2022, unrecognized compensation cost related to nonvested shares under the Program totaled $101 million. We expect to recognize this cost over a weighted-average period of 2.4 years. The total fair value of shares vested was $144 million in 2022, $105 million in 2021, and $89 million in 2020.
Deferred Compensation and Other Restricted Stock Awards
Our deferred compensation arrangements include voluntary and mandatory deferral programs for Common Shares awarded to certain employees and directors. Mandatory deferred incentive awards vest at the rate of 25% per year beginning one year after the deferral date. Deferrals under the voluntary programs are immediately vested.
We also may grant, upon approval by the Compensation and Organization Committee (or our Chief Executive Officer with respect to their delegated authority), other time-lapsed restricted stock or unit awards under various programs to recognize outstanding performance.
The following table summarizes activity and pricing information for the nonvested shares granted under our deferred compensation plans and these other restricted stock or unit award programs for the year ended December 31, 2022.
| Number of Nonvested Shares | Weighted-Average Grant-Date Fair Value | |||||||
| Outstanding at December 31, 2021 | 2,948,957 | $ | 18.65 | |||||
| Granted | 1,255,209 | 20.11 | ||||||
| Vested | (1,128,325) | 18.57 | ||||||
| Forfeited | (52,870) | 16.96 | ||||||
| Outstanding at December 31, 2022 | 3,022,971 | $ | 18.82 | |||||
The weighted-average grant-date fair value of awards granted was $20.11 during 2022, $21.25 during 2021, and $16.22 during 2020. As of December 31, 2022, unrecognized compensation cost related to nonvested shares granted under our deferred compensation plans and the other restricted stock or unit award programs totaled $21 million. We expect to recognize this cost over a weighted-average period of 2.6 years. The total fair value of shares vested was $21 million in 2022, $16 million in 2021, and $18 million in 2020.
Discounted Stock Purchase Plan
Our Discounted Stock Purchase Plan provides employees the opportunity to purchase our Common Shares at a 10% discount through payroll deductions. Purchases are limited to $10,000 in any month and $50,000 in any calendar year, and are immediately vested. To accommodate employee purchases, we issue treasury shares on or around the fifteenth day of the month following the month employee payments are received. We issued 422,844 Common Shares at a weighted-average cost to employees of $17.46 during 2022, 335,951 Common Shares at a weighted-average cost to employees of $19.28 during 2021, and 500,508 Common Shares at a weighted-average cost to employees of $11.76 during 2020.
Information pertaining to our method of accounting for stock-based compensation is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Stock-Based Compensation.”
18. Employee Benefits
Pension Plans
Key maintains a cash balance pension plan and other defined benefit plans. These plans are frozen and closed to new employees. We continue to credit participants’ existing account balances for interest until they receive their plan benefits. Plans provide benefits based upon length of service and compensation levels.
Key utilizes its fiscal year-end as the measurement date for its pension and other postretirement employee benefit plans. Actuarial gains and losses are deferred and amortized over the future service periods of active employees. We determine the expected return on plan assets using a calculated market-related value of plan assets. Gain or loss amounts in AOCI are only amortized to the extent that they exceed 10% of the greater of the market-related value or the projected benefit obligation.
Pre-tax AOCI not yet recognized as net pension cost was $385 million at December 31, 2022, and $381 million at December 31, 2021, consisting entirely of net unrecognized losses.
During 2022, 2021, and 2020, we recognized a settlement loss for lump sum payments made under certain pension plans. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement loss as reflected in the following table.
The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
| Year ended December 31, Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| Interest cost on PBO | $ | 27 | $ | 25 | $ | 34 | |||||
| Expected return on plan assets | (27) | (28) | (38) | ||||||||
| Amortization of losses | 15 | 18 | 17 | ||||||||
| Settlement loss | 12 | 9 | 9 | ||||||||
| Net pension cost | $ | 27 | $ | 24 | $ | 22 | |||||
| Other changes in plan assets and benefit obligations recognized in OCI: | |||||||||||
| Net (gain) loss | $ | 31 | $ | (19) | $ | (18) | |||||
| Amortization of gains | (27) | (27) | (26) | ||||||||
| Total recognized in comprehensive income | $ | 4 | $ | (46) | $ | (44) | |||||
| Total recognized in net pension cost and comprehensive income | $ | 31 | $ | (22) | $ | (22) | |||||
The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2022, and December 31, 2021.
The following table summarizes changes in the PBO related to our pension plans. Actuarial gains in 2022 were primarily driven by an increase in discount rate.
| Year ended December 31, Dollars in millions | 2022 | 2021 | ||||||
| PBO at beginning of year | $ | 1,156 | $ | 1,248 | ||||
| Interest cost | 27 | 25 | ||||||
| Actuarial losses (gains) | (133) | (31) | ||||||
| Benefit payments | (85) | (86) | ||||||
| PBO at end of year | $ | 965 | $ | 1,156 | ||||
The following table summarizes changes in the FVA.
| Year ended December 31, Dollars in millions | 2022 | 2021 | ||||||
| FVA at beginning of year | $ | 1,096 | $ | 1,153 | ||||
| Actual return on plan assets | (138) | 16 | ||||||
| Employer contributions | 13 | 13 | ||||||
| Benefit payments | (85) | (86) | ||||||
| FVA at end of year | $ | 886 | $ | 1,096 | ||||
The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2022, and December 31, 2021.
| December 31, Dollars in millions | 2022 | 2021 | ||||||
| Funded status (a) | $ | (78) | $ | (60) | ||||
| Net prepaid pension cost recognized consists of: | ||||||||
| Noncurrent assets | $ | 58 | $ | 106 | ||||
| Current liabilities | (13) | (14) | ||||||
| Noncurrent liabilities | (123) | (152) | ||||||
| Net prepaid pension cost recognized (b) | $ | (78) | $ | (60) | ||||
(a)The shortage of the FVA under the PBO.
(b)Represents the accrued benefit liability of the pension plans.
At December 31, 2022, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2023. We also do not expect to make any significant discretionary contributions during 2023.
At December 31, 2022, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2023 — $92 million; 2024— $90 million; 2025 — $88 million; 2026 — $85 million; 2027 — $82 million and $368 million in the aggregate from 2028 through 2032.
The ABO for all of our pension plans was $965 million at December 31, 2022, and $1.2 billion at December 31, 2021. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:
| December 31, | 2022 | 2021 | ||||||||||||
| Dollars in millions | Cash Balance Pension Plan | Other Defined Benefit Plans | Cash Balance Pension Plan | Other Defined Benefit Plans | ||||||||||
| PBO | $ | 828 | $ | 137 | $ | 991 | $ | 166 | ||||||
| ABO | 828 | 137 | 991 | 166 | ||||||||||
| Fair value of plan assets | 886 | — | 1,096 | — |
To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.
| December 31, | 2022 | 2021 | ||||||
| Discount rate | 4.85 | % | 2.43 | % | ||||
| Compensation increase rate | N/A | N/A | ||||||
| Weighted-average interest crediting rate | 3.97 | % | 1.90 | % |
To determine net pension cost, we assumed the following weighted-average rates.
| Year ended December 31, | 2022 | 2021 | 2020 | ||||||||
| Discount rate | 2.43 | % | 2.05 | % | 2.89 | % | |||||
| Compensation increase rate | N/A | N/A | N/A | ||||||||
| Expected return on plan assets | 2.75 | % | 2.75 | % | 3.75 | % |
We estimate that we will recognize $12 million in net pension cost for 2023.
We estimate that a 25 basis point increase or decrease in the expected return on plan assets would change our net pension cost for 2023 by approximately $2 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2023 by approximately $2 million.
The expected return on plan assets is determined by considering a number of factors, the most significant of which are:
-
Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible, and other securities, and forecasted returns that are modeled under various economic scenarios.
-
Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 4.5% for 2022, 2.75% for 2021 and 3.75% for 2020. We deemed a rate of 4.50% to be appropriate in estimating 2022 pension cost.
The investment objectives of the pension fund are developed to reflect the characteristics of the plan, such as pension formulas, cash lump sum distribution features, and the liability profiles of the plan’s participants. An executive oversight committee reviews the plan’s investment performance at least quarterly, and compares performance against appropriate market indices. The pension fund’s investment objectives are to balance total return objectives with a continued management of plan liabilities, and to minimize the mismatch between assets and liabilities. The following table shows the asset target allocations prescribed by the pension fund’s investment policies based on the plan’s funded status at December 31, 2022.
| Target Allocation | |||||
| Asset Class | 2022 | ||||
| Global equity | 16 | % | |||
| Fixed income | 84 | ||||
| Total | 100 | % | |||
Investments consist of mutual funds, collective investment funds, insurance investments and other assets that invest in underlying assets in accordance with the target asset allocations shown above.
Although the pension funds’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.
The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Mutual funds. Exchange-traded mutual funds listed or traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1
because quoted prices for identical securities in active markets are available. Non exchange-traded mutual funds are classified as Level 2.
Collective investment funds. Investments in collective investment funds are valued using the net asset value practical expedient and are not classified within the fair value hierarchy. Fair value is determined based on Key’s proportionate share of total net assets in the fund.
Insurance investment contracts and pooled separate accounts. Deposits under insurance investment contracts and pooled separate accounts with insurance companies do not have readily determinable fair values and are valued using a methodology that is consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.
Other assets. Other assets include an investment in a multi-strategy investment fund and an investment in a limited partnership. These investments do not have readily determinable fair values and are valued using a methodology consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.
The following tables show the fair values of our pension plan assets by asset class at December 31, 2022, and December 31, 2021.
| December 31, 2022 | ||||||||||||||
| Dollars in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| ASSET CLASS | ||||||||||||||
| Mutual funds: | ||||||||||||||
| Fixed income — U.S. | $ | — | $ | 359 | $ | — | $ | 359 | ||||||
| Collective investment funds (measured at NAV) (a) | — | — | — | 507 | ||||||||||
| Insurance investment contracts and pooled separate accounts (measured at NAV) (a) | — | — | — | 20 | ||||||||||
| Other assets (measured at NAV) (a) | — | — | — | — | ||||||||||
| Total net assets at fair value | $ | — | $ | 359 | $ | — | $ | 886 | ||||||
(a)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
| December 31, 2021 | ||||||||||||||
| Dollars in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| ASSET CLASS | ||||||||||||||
| Mutual funds: | ||||||||||||||
| Fixed income — U.S. | $ | — | $ | 454 | $ | — | $ | 454 | ||||||
| Collective investment funds (measured at NAV) (a) | — | — | — | 622 | ||||||||||
| Insurance investment contracts and pooled separate accounts (measured at NAV) (a) | — | — | — | 19 | ||||||||||
| Other assets (measured at NAV) (a) | — | — | — | 1 | ||||||||||
| Total net assets at fair value | $ | — | $ | 454 | $ | — | $ | 1,096 | ||||||
(a)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
Other Postretirement Benefit Plans
We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan.
The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.
| December 31, | ||||||||
| Dollars in millions | 2022 | 2021 | ||||||
| Net unrecognized losses (gains) | $ | (9) | $ | (9) | ||||
| Net unrecognized prior service credit | (12) | (14) | ||||||
| Total unrecognized AOCI | $ | (21) | $ | (23) | ||||
The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
| December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| Interest cost on APBO | $ | 2 | $ | 2 | $ | 2 | |||||
| Expected return on plan assets | (2) | (2) | (2) | ||||||||
| Amortization of prior service credit | (1) | (1) | (1) | ||||||||
| Amortization of gains | (1) | (1) | — | ||||||||
| Net postretirement benefit | $ | (2) | $ | (2) | $ | (1) | |||||
| Other changes in plan assets and benefit obligations recognized in OCI: | |||||||||||
| Net (gain) loss | $ | 1 | $ | 1 | $ | 1 | |||||
| Amortization of prior service credit | 1 | 1 | — | ||||||||
| Total recognized in comprehensive income | $ | 2 | $ | 2 | $ | 1 | |||||
| Total recognized in net postretirement benefit cost and comprehensive income | $ | — | $ | — | $ | — | |||||
The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2022, and December 31, 2021.
The following table summarizes changes in the APBO. Actuarial losses are a result of asset performance.
| Year ended December 31, | ||||||||
| Dollars in millions | 2022 | 2021 | ||||||
| APBO at beginning of year | $ | 57 | $ | 52 | ||||
| Service cost | — | — | ||||||
| Interest cost | 2 | 2 | ||||||
| Plan participants’ contributions | 1 | 2 | ||||||
| Actuarial losses (gains) | (5) | 11 | ||||||
| Benefit payments | (15) | (10) | ||||||
| Plan amendments | — | — | ||||||
| APBO at end of year | $ | 40 | $ | 57 | ||||
The following table summarizes changes in FVA.
| Year ended December 31, | ||||||||
| Dollars in millions | 2022 | 2021 | ||||||
| FVA at beginning of year | $ | 57 | $ | 52 | ||||
| Employer contributions | — | — | ||||||
| Plan participants’ contributions | 1 | 2 | ||||||
| Benefit payments | (15) | (10) | ||||||
| Actual return on plan assets | (3) | 13 | ||||||
| FVA at end of year | $ | 40 | $ | 57 | ||||
The postretirement plans were fully funded at December 31, 2022, and December 31, 2021. Therefore, no liabilities were recognized on our Consolidated Balance Sheets.
There are no regulations that require contributions to the VEBA trust that funds our retiree healthcare plan, so there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trust, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2023, if any, will be minimal.
At December 31, 2022, we expect to pay the benefits from other postretirement plans as follows: 2023 — $5 million; 2024 — $5 million; 2025 — $5 million; 2026 — $5 million; 2027 — $4 million; and $20 million in the aggregate from 2028 through 2032.
To determine the APBO, we assumed discount rates of 4.5% at December 31, 2022, and 4.5% at December 31, 2021.
To determine net postretirement benefit cost, we assumed the following weighted-average rates.
| Year ended December 31, | 2022 | 2021 | 2020 | ||||||||
| Discount rate | 4.50 | % | 4.50 | % | 4.50 | % | |||||
| Expected return on plan assets | 4.50 | 4.50 | 4.50 |
The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.
Assumed healthcare cost trend rates do not have a material impact on net postretirement benefit cost or obligations since the postretirement plan has cost-sharing provisions and benefit limitations.
We expect to recognize a $2 million credit in net postretirement benefit cost for 2023.
We estimate the expected returns on plan assets for the VEBA trust much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trust are to obtain a market rate of return, take into consideration the safety and/or risk of the investment, and to diversify the portfolio in order to satisfy the trust’s anticipated liquidity requirements. The following table shows the asset target allocations prescribed by the trust’s investment policy.
| Target Allocation | |||||
| Asset Class | 2022 | ||||
| U.S. equity securities | 64 | % | |||
| International equity securities | 16 | ||||
| Fixed income securities | 20 | ||||
| Total | 100 | % | |||
Investments consist of mutual funds, collective investment funds and other assets that invest in underlying assets in accordance with the target asset allocations shown above. Exchange-traded mutual funds are valued using quoted prices and, therefore, are classified as Level 1. Investments in collective investment funds are valued using the Net Asset Value practical expedient and are not classified within the fair value hierarchy.
The following tables show the fair values of our postretirement plan assets by asset class at December 31, 2022, and December 31, 2021.
| December 31, 2022 | ||||||||||||||
| Dollars in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| ASSET CLASS | ||||||||||||||
| Mutual funds: | ||||||||||||||
| Equity — U.S. | $ | 24 | $ | — | $ | — | $ | 24 | ||||||
| Equity — International | 7 | — | — | 7 | ||||||||||
| Fixed income — U.S. | 8 | — | — | 8 | ||||||||||
| Collective investment funds: | ||||||||||||||
| Equity — U.S.(a) | — | — | — | — | ||||||||||
| Other assets (measured at NAV)(a) | — | — | — | 1 | ||||||||||
| Total net assets at fair value | $ | 39 | $ | — | $ | — | $ | 40 | ||||||
(a)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
| December 31, 2021 | ||||||||||||||
| Dollars in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| ASSET CLASS | ||||||||||||||
| Mutual funds: | ||||||||||||||
| Equity — U.S. | $ | 21 | $ | — | $ | — | $ | 21 | ||||||
| Equity — International | 10 | — | — | 10 | ||||||||||
| Fixed income — U.S. | 7 | — | — | 7 | ||||||||||
| Fixed income — International | — | — | — | 1 | ||||||||||
| Collective investment funds: | ||||||||||||||
| Equity — U.S. (a) | — | — | — | 17 | ||||||||||
| Other assets (measured at NAV) | — | — | — | 1 | ||||||||||
| Total net assets at fair value | $ | 38 | $ | — | $ | — | $ | 57 | ||||||
(a)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage that is “actuarially equivalent” to the benefits under Medicare Part D. Based on our application of the relevant regulatory formula, we determined that the prescription drug coverage related to our retiree healthcare benefit plan is not actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2022, and December 31, 2021, we did not receive federal subsidies.
Employee 401(k) Savings Plan
A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1% to 100% of eligible compensation, with up to 6% being eligible for matching contributions in 2022. The plan also permits us to provide a discretionary annual profit sharing contribution to eligible employees who have at least one year of service. We did not accrue a profit sharing contribution for 2022. We made contributions of 1% for both 2021 and 2020, on eligible compensation for employees eligible on the last business day of the respective plan years. We also maintain a deferred savings plan that provides certain employees with benefits they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $82 million in 2022, $119 million in 2021, and $106 million in 2020.
19. Short-Term Borrowings
Selected financial information pertaining to the components of our short-term borrowings is as follows:
| December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| FEDERAL FUNDS PURCHASED | |||||||||||
| Balance at year end | $ | 4,006 | $ | — | $ | — | |||||
| Average during the year | 1,490 | — | 455 | ||||||||
| Maximum month-end balance | 5,872 | — | 2,285 | ||||||||
| Weighted-average rate during the year (a) | 2.04 | % | — | % | 1.24 | % | |||||
| Weighted-average rate at December 31 (a) | 4.18 | — | — | ||||||||
| SECURITIES SOLD UNDER REPURCHASE AGREEMENTS | |||||||||||
| Balance at year end | $ | 71 | $ | 173 | $ | 220 | |||||
| Average during the year | 617 | 239 | 215 | ||||||||
| Maximum month-end balance | 1,090 | 281 | 267 | ||||||||
| Weighted-average rate during the year (a) | 1.66 | % | .02 | % | .11 | % | |||||
| Weighted-average rate at December 31 (a) | 3.74 | .01 | .04 | ||||||||
| OTHER SHORT-TERM BORROWINGS | |||||||||||
| Balance at year end | $ | 5,386 | $ | 588 | $ | 759 | |||||
| Average during the year | 2,963 | 770 | 1,452 | ||||||||
| Maximum month-end balance | 11,372 | 897 | 4,606 | ||||||||
| Weighted-average rate during the year (a) | 1.82 | % | 1.08 | % | 0.85 | % | |||||
| Weighted-average rate at December 31 (a) | .50 | 1.97 | .60 |
(a)Rates exclude the effects of interest rate swaps and caps, which modify the repricing characteristics of certain short-term borrowings. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).
As described below and in Note 20 (“Long-Term Debt”), KeyCorp and KeyBank have a number of programs and facilities that support our short-term financing needs. Certain subsidiaries maintain credit facilities with third parties, which provide alternative sources of funding. KeyCorp is the guarantor of some of the third-party facilities.
Short-term credit facilities. We maintain cash on deposit in our Federal Reserve account, which has reduced our need to obtain funds through various short-term unsecured money market products. This account, which was maintained at $2.2 billion at December 31, 2022, and the unpledged securities in our investment portfolio provide a buffer to address unexpected short-term liquidity needs. We also have secured borrowing facilities at the FHLB and the Federal Reserve Bank of Cleveland to satisfy short-term liquidity requirements. As of December 31, 2022, our unused secured borrowing capacity was $33.8 billion at the Federal Reserve Bank of Cleveland and $6.7 billion at the FHLB.
20. Long-Term Debt
The following table presents the components of our long-term debt, net of unamortized discounts and adjustments related to hedging with derivative financial instruments. We use interest rate swaps and caps, which modify the repricing characteristics of certain long-term debt, to manage interest rate risk. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).
| December 31, | ||||||||
| Dollars in millions | 2022 | 2021 | ||||||
| Senior medium-term notes due through 2033 (a) | $ | 3,789 | $ | 2,820 | ||||
| 3.017% Subordinated notes due 2028 (b) | 162 | 162 | ||||||
| 6.875% Subordinated notes due 2029 (b) | 99 | 107 | ||||||
| 7.75% Subordinated notes due 2029 (b) | 112 | 139 | ||||||
| Other subordinated notes (b)(d) | 77 | 75 | ||||||
| Total parent company | 4,239 | 3,303 | ||||||
| Senior medium-term notes due through 2039 (e) | 6,411 | 6,582 | ||||||
| 4.39% Senior remarketable notes due 2027 (f) | 191 | 242 | ||||||
| 3.40% Subordinated notes due 2026 (g) | 555 | 602 | ||||||
| 6.95% Subordinated notes due 2028 (g) | 281 | 299 | ||||||
| 3.90% Subordinated notes due 2029 (g) | 327 | 376 | ||||||
| 4.90% Subordinated notes due 2032 (g) | 685 | — | ||||||
| Secured borrowing due through 2025 (h) | 6 | 13 | ||||||
| Federal Home Loan Bank advances due through 2038 (i) | 6,594 | 604 | ||||||
| Investment Fund Financing due through 2052 (j) | 10 | 10 | ||||||
| Key Govt Finance, Inc. Other Long Term Debt-ASR | 2 | 3 | ||||||
| Obligations under Capital Leases due through 2032 (k) | 6 | 8 | ||||||
| Total subsidiaries | 15,068 | 8,739 | ||||||
| Total long-term debt | $ | 19,307 | $ | 12,042 | ||||
(a)Senior medium-term notes had a weighted-average interest rate of 2.3134% at December 31, 2022, and 3.2213% at December 31, 2021. These notes had fixed interest rates at December 31, 2022, and December 31, 2021. These notes may not be redeemed prior to their maturity dates.
(b)See Note 21 (“Trust Preferred Securities Issued by Unconsolidated Subsidiaries”) for a description of these notes.
(c)The First Niagara subordinated debt had a weighted-average interest rate of 7.25% at December 31, 2021. This holding matured on December 15, 2021.
(d)The First Niagara variable rate trust preferred securities had a weighted-average interest rate of 6.16% at December 31, 2022, and 1.68% at December 31, 2021. These notes may be redeemed prior to their maturity dates.
(e)Senior medium-term notes had weighted-average interest rates of 5.96406% at December 31, 2022, and 2.116% at December 31, 2021. These notes are a combination of fixed and floating rates. These notes may not be redeemed prior to their maturity dates.
(f)The remarketable senior medium-term notes had a weighted-average interest rate of 4.39% at December 31, 2022, and 3.18% at December 31, 2021. These notes had fixed interest rates at December 31, 2022, and December 31, 2021. These notes may not be redeemed prior to their maturity dates.
(g)These notes are all obligations of KeyBank and may not be redeemed prior to their maturity dates.
(h)The secured borrowing had weighted-average interest rates of 4.445% at December 31, 2022, and 4.445% at December 31, 2021. This borrowing is collateralized by commercial lease financing receivables, and principal reductions are based on the cash payments received from the related receivables. Additional information pertaining to these commercial lease financing receivables is included in Note 4 (“Loan Portfolio”).
(i)Long-term advances from the Federal Home Loan Bank had a weighted-average interest rate of 4.48% at December 31, 2022, and 1.12% at December 31, 2021. These advances, which had fixed interest rates, were secured by real estate loans and securities totaling $6.6 billion at December 31, 2022, and $604 million at December 31, 2021.
(j)Investment Fund Financing had a weighted-average interest rate of 1.34% at December 31, 2022, and 1.34% at December 31, 2021.
(k)These are capital leases acquired in the First Niagara merger with a maturity range from March 2022 through October 2032.
At December 31, 2022, scheduled principal payments on long-term debt were as follows:
| Dollars in millions | Parent | Subsidiaries | Total | ||||||||
| 2023 | $ | — | $ | 3,958 | $ | 3,958 | |||||
| 2024 | — | 6,035 | 6,035 | ||||||||
| 2025 | 581 | 1,943 | 2,524 | ||||||||
| 2026 | 485 | 566 | 1,051 | ||||||||
| 2027 | 695 | 1,199 | 1,894 | ||||||||
| All subsequent years | 2,478 | 1,367 | 3,845 |
As described below, KeyBank and KeyCorp have a number of programs that support our long-term financing needs.
Global bank note program. On September 28, 2018, KeyBank updated its Bank Note Program authorizing the issuance of up to $20 billion of notes. Under the program, KeyBank is authorized to issue notes with original maturities of seven days or more for senior notes or five years or more for subordinated notes. Notes will be denominated in U.S. dollars. Amounts outstanding under the program and any prior bank note programs are classified as “long-term debt” on our Consolidated Balance Sheets.
In 2020, KeyBank issued the following notes under the 2018 Bank Note Program: on March 10, 2020, $700 million of 1.25% Senior Bank Notes due March 10, 2023; and on December 16, 2020, $750 million Fixed-to-Floating Rate Senior Bank Notes due January 3, 2024 and $350 million Floating Rate Senior Bank Notes due January 3, 2024.
In 2021, KeyBank issued the following notes under the 2018 Bank Note Program: on June 16, 2021, $800 million Fixed-to-Floating Rate Senior Bank Notes due June 14, 2024, and $400 million Floating Rate Senior Bank Notes due June 14, 2024.
On September 29, 2021, KeyBank updated its Bank Note Program authorizing the issuance of up to $20 billion of notes. Under the program, KeyBank is authorized to issue notes with original maturities of seven days or more for senior notes or five years or more for subordinated notes. Notes will be denominated in U.S. dollars. Amounts outstanding under the program and any prior bank note programs are classified as “long-term debt” on our Consolidated Balance Sheets.
On June 14, 2022, KeyBank completed the final remarketing of its Term Enhanced ReMarketable Securities, originally issued in 1998. In connection therewith, KeyBank issued $300 million Fixed Rate Senior Notes due December 14, 2027. Because this issuance was originally authorized under the Bank Note Program in existence in 1998, we would not consider this an issuance against capacity under our current Bank Note Program.
On August 8, 2022, KeyBank issued two notes under the Bank Note Program: $1.25 billion of 4.150% Fixed Rate Senior Bank Notes due August 8, 2025, and $750 million of 4.900% Fixed Rate Subordinated Bank Notes due August 8, 2032.
On November 15, 2022, under the Bank Note Program, KeyBank issued $1.0 billion of 5.850% Fixed Rate Senior Bank Notes due November 15, 2027.
As of December 31, 2022, $17.0 billion remained available for issuance under the Bank Note Program.
KeyCorp shelf registration, including Medium-Term Note Program**.** On June 9, 2020, KeyCorp updated its shelf registration statement on file with the SEC under rules that allow companies to register various types of debt and equity securities without limitations on the aggregate amounts available for issuance. KeyCorp also maintains a Medium-Term Note Program that permits KeyCorp to issue notes with original maturities of nine months or more.
On February 6, 2020, KeyCorp issued $800 million of 2.25% Senior Notes due April 6, 2027, under the Medium-Term Note Program.
On May 23, 2022, KeyCorp issued $600 million of 3.878% Fixed-to-Floating Senior Notes due May 23, 2025 and $750 million of 4.789% Fixed-to-Floating Senior Notes due June 1, 2033. The fixed rate periods for each issuance are effective through May 23, 2024, and June 1, 2032, respectively.
At December 31, 2022, KeyCorp had authorized and available for issuance up to $3.65 billion of additional debt securities under the Medium-Term Note Program.
Issuances of capital securities or preferred stock by KeyCorp must be approved by the Board and cannot be objected to by the Federal Reserve.
21. Trust Preferred Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the mandatorily redeemable trust preferred securities. The outstanding common stock of these business trusts is recorded in “Other Investments” on our Consolidated Balance Sheets. We unconditionally guarantee the following payments or distributions on behalf of the trusts:
-
required distributions on the trust preferred securities;
-
the redemption price when a capital security is redeemed; and
-
the amounts due if a trust is liquidated or terminated.
The Regulatory Capital Rules require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.
The trust preferred securities, common stock, and related debentures are summarized as follows:
| Dollars in millions | Trust Preferred Securities, Net of Discount (a) | Common Stock | Principal Amount of Debentures, Net of Discount (b) | Interest Rate of Trust Preferred Securities and Debentures (c) | Maturity of Trust Preferred Securities and Debentures | ||||||||||||
| December 31, 2022 | |||||||||||||||||
| KeyCorp Capital I | $ | 156 | $ | 6 | $ | 162 | 3.017 | % | 2028 | ||||||||
| KeyCorp Capital II | 95 | 4 | 99 | 6.875 | 2029 | ||||||||||||
| KeyCorp Capital III | 108 | 4 | 112 | 7.750 | 2029 | ||||||||||||
| HNC Statutory Trust III | 20 | 1 | 21 | 4.380 | 2035 | ||||||||||||
| Willow Grove Statutory Trust I | 20 | 1 | 21 | 4.062 | 2036 | ||||||||||||
| HNC Statutory Trust IV | 18 | 1 | 19 | 4.603 | 2037 | ||||||||||||
| Westbank Capital Trust II | 8 | — | 8 | 5.717 | 2034 | ||||||||||||
| Westbank Capital Trust III | 8 | — | 8 | 5.717 | 2034 | ||||||||||||
| Total | $ | 433 | $ | 17 | $ | 450 | 5.321 | % | — | ||||||||
| December 31, 2021 | $ | 466 | $ | 17 | $ | 483 | 4.271 | % | — | ||||||||
(a)The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include debt issuance costs and basis adjustments related to fair value hedges totaling $17 million at December 31, 2022, and $52 million at December 31, 2021. See Note 8 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.
(b)We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I, HNC Statutory Trust III, Willow Grove Statutory Trust I, HNC Statutory Trust IV, Westbank Capital Trust II, or Westbank Capital Trust III are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (i) the principal amount, plus any accrued but unpaid interest, or (ii) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points for KeyCorp Capital II or 25 basis points for KeyCorp Capital III or 50 basis points in the case of redemption upon either a tax or a capital treatment event for either KeyCorp Capital II or KeyCorp Capital III, plus any accrued but unpaid interest. The principal amount of certain debentures includes debt issuance costs and basis adjustments related to fair value hedges totaling $17 million at December 31, 2022, and $52 million at December 31, 2021. See Note 8 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in “long-term debt” on the balance sheet.
(c)The interest rates for the trust preferred securities issued by KeyCorp Capital II and KeyCorp Capital III are fixed. The trust preferred securities issued by KeyCorp Capital I have a floating interest rate, equal to three-month LIBOR plus 74 basis points, that reprices quarterly. The trust preferred securities issued by HNC Statutory Trust III have a floating interest rate, equal to three-month LIBOR plus 140 basis points, that reprices quarterly. The trust preferred securities issued by Willow Grove Statutory Trust I have a floating interest rate, equal to three-month LIBOR plus 131 basis points, that reprices quarterly. The trust preferred securities issued by HNC Statutory Trust IV have a floating interest rate, equal to three-month LIBOR plus 128 basis points, that reprices quarterly. The trust preferred securities issued by Westbank Capital Trust II and Westbank Capital Trust III each have a floating interest rate, equal to three-month LIBOR plus 219 basis points, that reprices quarterly. The total interest rates are weighted-average rates.
22. Commitments, Contingent Liabilities, and Guarantees
Commitments to Extend Credit or Funding
Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These agreements generally carry variable rates of interest and have fixed expiration dates or termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan, our aggregate outstanding commitments may significantly exceed our eventual cash outlay.
Loan commitments involve credit risk not reflected on our Consolidated Balance Sheets. We mitigate exposure to credit risk with internal controls that guide how we review and approve applications for credit, establish credit limits and, when necessary, demand collateral. In particular, we evaluate the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjust the allowance for credit losses on lending-related commitments. Additional information pertaining to this allowance is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Liability for Credit Losses on Lending-Related Commitments,” and in Note 5 (“Asset Quality”).
We also provide financial support to private equity investments, including existing direct portfolio companies and indirect private equity funds, to satisfy unfunded commitments. These unfunded commitments are not recorded on our Consolidated Balance Sheets. Additional information on principal investing commitments is provided in Note 6 (“Fair Value Measurements”). Other unfunded equity investment commitments at December 31, 2022, and December 31, 2021, related to tax credit investments and were primarily attributable to LIHTC investments. Unfunded tax credit investment commitments are recorded on our Consolidated Balance Sheets in “other liabilities.” Additional information on LIHTC commitments is provided in Note 13 (“Variable Interest Entities”).
The following table shows the remaining contractual amount of each class of commitment related to extending credit or funding principal investments as of December 31, 2022, and December 31, 2021. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.
| December 31, Dollars in millions | 2022 | 2021 | ||||||
| Loan commitments: | ||||||||
| Commercial and other | $ | 58,269 | $ | 54,614 | ||||
| Commercial real estate and construction | 4,037 | 3,180 | ||||||
| Home equity | 9,346 | 8,888 | ||||||
| Credit cards | 7,424 | 7,217 | ||||||
| Total loan commitments | 79,076 | 73,899 | ||||||
| Commercial letters of credit | 86 | 79 | ||||||
| Purchase card commitments | 875 | 771 | ||||||
| Principal investing commitments | 9 | 12 | ||||||
| Tax credit investment commitments | 958 | 679 | ||||||
| Total loan and other commitments | $ | 81,004 | $ | 75,440 | ||||
Legal Proceedings
Litigation. From time to time, in the ordinary course of business, we and our subsidiaries are subject to various litigation, investigations, and administrative proceedings. Private, civil litigation may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These matters may involve claims for substantial monetary relief. At times, these matters may present novel claims or legal theories. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We continually monitor and reassess the potential materiality of these litigation matters. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at December 31, 2022. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Contingencies and Guarantees.”
| December 31, 2022 | Maximum Potential Undiscounted Future Payments | Liability Recorded | ||||||
| Dollars in millions | ||||||||
| Financial guarantees: | ||||||||
| Standby letters of credit | $ | 4,960 | $ | 92 | ||||
| Recourse agreement with FNMA | 6,774 | 28 | ||||||
| Residential mortgage reserve | 3,302 | 13 | ||||||
| Written put options (a) | 3,695 | 243 | ||||||
| Total | $ | 18,731 | $ | 376 | ||||
(a)The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0% to 30% probability of payment), moderate (greater than 30% to 70% probability of payment), or high (greater than 70% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at December 31, 2022, is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk
to us as a loan. At December 31, 2022, our standby letters of credit had a remaining weighted-average life of 1.8 years, with remaining actual lives ranging from less than 1 year to as many as 11.9 years.
Recourse agreement with FNMA. At December 31, 2022, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.5 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $22.0 billion. The maximum potential amount of undiscounted future payments that we could be required to make under this program, as shown in the preceding table, is equal to approximately 31% of the principal balance of loans outstanding at December 31, 2022. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability in addition to the expected credit loss for the guarantee as described in Note 5 (“Asset Quality”).
Residential Mortgage Banking. We often originate and sell residential mortgage loans and retain the servicing rights. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC and through the issuance of GNMA mortgage backed securities. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.
As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans (including loans sold with servicing rights released) and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral.
At December 31, 2022, the unpaid principal balance outstanding of loans sold by us was $11.0 billion. The maximum potential amount of undiscounted future payments that we could be required to make under this program, as shown in the preceding table, is equal to approximately 30% of the principal balance of loans outstanding at December 31, 2022.
Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities on our Consolidated Balance Sheets, was $13 million at December 31, 2022.
Written put options. In the ordinary course of business, we “write” put options for clients that wish to mitigate their exposure to changes in interest rates and commodity prices. At December 31, 2022, our written put options had an average life of 1.8 years. These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark interest rate or commodity price is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, as further discussed in Note 8 (“Derivatives and Hedging Activities”). We mitigate our potential future payment obligations by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 8.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan and lease sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of these indemnities.
Intercompany guarantees. KeyCorp, KeyBank, and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.
23. Accumulated Other Comprehensive Income
Our changes in AOCI for the years ended December 31, 2022, and December 31, 2021, are as follows:
| Dollars in millions | Unrealized gains (losses) on securities available for sale | Unrealized gains (losses) on derivative financial instruments | Foreign currency translation adjustment | Net pension and postretirement benefit costs | Total | ||||||||||||
| Balance at December 31, 2020 | $ | 567 | $ | 476 | $ | — | $ | (305) | $ | 738 | |||||||
| Other comprehensive income before reclassification, net of income taxes | (965) | (137) | — | 14 | (1,088) | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) | (5) | (251) | — | 20 | (236) | ||||||||||||
| Net current-period other comprehensive income, net of income taxes | (970) | (388) | — | 34 | (1,324) | ||||||||||||
| Balance at December 31, 2021 | $ | (403) | $ | 88 | $ | — | $ | (271) | $ | (586) | |||||||
| Other comprehensive income before reclassification, net of income taxes | (4,492) | (1,319) | — | (25) | (5,836) | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) | — | 107 | — | 20 | 127 | ||||||||||||
| Net current-period other comprehensive income, net of income taxes | (4,492) | (1,212) | — | (5) | (5,709) | ||||||||||||
| Balance at December 31, 2022 | $ | (4,895) | $ | (1,124) | $ | — | $ | (276) | $ | (6,295) | |||||||
(a)See table below for details about these reclassifications.
Our reclassifications out of AOCI for the years ended December 31, 2022, and December 31, 2021, are as follows:
| Twelve Months Ended December 31, | Affected Line Item in the Consolidated Statement of Income | ||||||||||
| Dollars in millions | 2022 | 2021 | |||||||||
| Unrealized gains (losses) on available for sale securities | |||||||||||
| Realized gains | $ | — | $ | 7 | Other income | ||||||
| — | 7 | Income (loss) from continuing operations before income taxes | |||||||||
| — | 2 | Income taxes | |||||||||
| $ | — | $ | 5 | Income (loss) from continuing operations | |||||||
| Unrealized gains (losses) on derivative financial instruments | |||||||||||
| Interest rate | $ | (146) | $ | 329 | Interest income — Loans | ||||||
| Interest rate | (3) | (4) | Interest expense — Long-term debt | ||||||||
| Interest rate | 9 | 4 | Investment banking and debt placement fees | ||||||||
| (140) | 329 | Income (loss) from continuing operations before income taxes | |||||||||
| (33) | 78 | Income taxes | |||||||||
| $ | (107) | $ | 251 | Income (loss) from continuing operations | |||||||
| Net pension and postretirement benefit costs | |||||||||||
| Amortization of losses | $ | (15) | $ | (18) | Other expense | ||||||
| Settlement loss | (12) | (9) | Other expense | ||||||||
| Amortization of prior service credit | 1 | 1 | Other expense | ||||||||
| (26) | (26) | Income (loss) from continuing operations before income taxes | |||||||||
| (6) | (6) | Income taxes | |||||||||
| $ | (20) | $ | (20) | Income (loss) from continuing operations | |||||||
24. Shareholders' Equity
Comprehensive Capital Plan
As part of our previous 2021 capital plan, which was effective through the third quarter of 2022, the Board had authorized the repurchase of up to $1.5 billion of our Common Shares. In September 2022, the Board approved the extension of the previous authorization through the third quarter of 2023. As of December 31, 2022, approximately $790 million remained available for repurchase under the authorization.
During 2021, we repurchased a total of $1.1 billion of Common Share under our previous capital plan authorizations. Of the total common shares repurchased throughout 2021, $585 million were part of an ASR program entered into with Goldman Sachs & Co. LLC (Goldman Sachs) and $559 million were repurchased in the open market. In addition, $32 million in repurchase activity was related to employee equity compensation programs.
Under the ASR program, we made a cash payment of $585 million to Goldman Sachs and received an initial delivery of 23.6 million shares of our common stock from Goldman Sachs based on the then current market price of $19.87 as of September 10, 2021. As previously reported during the third quarter of 2021, there was a $117 million reduction to our capital surplus balance, which reflected the value of common stock held back by Goldman Sachs pending final settlement of the ASR program. On December 21, 2021, we received a final delivery of 2.5 million of our common shares from Goldman Sachs based on the volume-weighted average share price of our common stock during the term of the ASR agreement, less a discount, and other adjustments provided for by the agreement. The volume-weighted share price less discount totaled $22.48 for the total 26 million common shares purchased between the up front delivery and the final settlement.
During 2022, no common shares were repurchased under the previous or current authorization. Activity was limited to $44 million in repurchases related to employee equity compensation programs.
Consistent with our capital plan, the Board declared a quarterly dividend of $.195 per common share for the first three quarters in 2022. During the fourth quarter of 2022, the Board declared a dividend of $.205 per common share. These quarterly dividend payments brought our annual dividend to $.79 per common share for 2022.
Preferred Stock
The following table summarizes our preferred stock at December 31, 2022:
| Preferred stock series | Amount outstanding (in millions) | Shares authorized and outstanding | Par value | Liquidation preference | Ownership interest per depositary share | Liquidation preference per depositary share | 2022 dividends paid per depositary share | ||||||||||||||||
| Fixed-to-Floating Rate Perpetual Noncumulative Series D | $ | 525 | 21,000 | $ | 1 | $ | 25,000 | 1/25th | $ | 1,000 | $ | 50.00 | |||||||||||
| Fixed-to-Floating Rate Perpetual Noncumulative Series E | 500 | 500,000 | 1 | 1,000 | 1/40th | 25 | 1.531252 | ||||||||||||||||
| Fixed Rate Perpetual Noncumulative Series F | 425 | 425,000 | 1 | 1,000 | 1/40th | 25 | 1.412500 | ||||||||||||||||
| Fixed Rate Perpetual Noncumulative Series G | 450 | 450,000 | 1 | 1,000 | 1/40th | 25 | 1.406252 | ||||||||||||||||
| Fixed Rate Perpetual Noncumulative Series H | 600 | 600,000 | 1 | 1,000 | 1/40th | 25 | 0.477917 |
Capital Adequacy
KeyCorp and KeyBank (consolidated) must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate FDIC deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a “well capitalized” status affects how regulators evaluate applications for certain endeavors, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could make clients and potential investors less confident. As of December 31, 2022, KeyCorp and KeyBank (consolidated) met all regulatory capital requirements.
KeyBank (consolidated) qualified for the “well capitalized” prompt corrective action capital category at December 31, 2022, because its capital and leverage ratios exceeded the prescribed threshold ratios for that capital category and
it was not subject to any written agreement, order, or directive to meet and maintain a specific capital level for any capital measure. Since that date, we believe there has been no change in condition or event that has occurred that would cause the capital category for KeyBank (consolidated) to change.
BHCs are not assigned to any of the five prompt corrective action capital categories applicable to insured depository institutions. If, however, those categories applied to BHCs, we believe that KeyCorp would satisfy the criteria for a “well capitalized” institution at December 31, 2022, and since that date, we believe there has been no change in condition or event that has occurred that would cause such capital category to change.
Because the regulatory capital categories under the prompt corrective action regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyBank or KeyCorp.
At December 31, 2022, Key and KeyBank (consolidated) had regulatory capital in excess of all current minimum risk-based capital (including all adjustments for market risk) and leverage ratio requirements as shown in the following table.
| Actual | To Meet Minimum Capital Adequacy Requirements | To Qualify as Well Capitalized Under Federal Deposit Insurance Act | ||||||||||||||||||||||||
| Dollars in millions | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS | ||||||||||||||||||||||||||
| Key | $ | 20,776 | 12.79 | % | $ | 12,998 | 8.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 19,903 | 12.39 | 12,850 | 8.00 | $ | 16,063 | 10.00 | % | ||||||||||||||||||
| TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS | ||||||||||||||||||||||||||
| Key | $ | 17,225 | 10.60 | % | $ | 9,748 | 6.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 16,801 | 10.46 | 9,638 | 6.00 | $ | 12,850 | 8.00 | % | ||||||||||||||||||
| TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS | ||||||||||||||||||||||||||
| Key | $ | 17,225 | 8.88 | % | $ | 7,759 | 4.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 16,801 | 8.78 | 7,657 | 4.00 | $ | 9,572 | 5.00 | % | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS | ||||||||||||||||||||||||||
| Key | $ | 18,030 | 12.49 | % | $ | 11,552 | 8.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 17,211 | 12.21 | 11,274 | 8.00 | $ | 14,093 | 10.00 | % | ||||||||||||||||||
| TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS | ||||||||||||||||||||||||||
| Key | $ | 15,549 | 10.77 | % | $ | 8,664 | 6.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 15,143 | 10.75 | 8,456 | 6.00 | $ | 11,274 | 8.00 | % | ||||||||||||||||||
| TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS | ||||||||||||||||||||||||||
| Key | $ | 15,549 | 8.47 | % | $ | 7,344 | 4.00 | % | N/A | N/A | ||||||||||||||||
| KeyBank (consolidated) | 15,143 | 8.37 | 7,241 | 4.00 | $ | 9,051 | 5.00 | % |
25. Business Segment Reporting
The following is a description of the segments and their primary businesses at December 31, 2022.
Consumer Bank
The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint as well as healthcare professionals nationally through our Laurel Road digital brand by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, mortgage and home equity, student loan refinancing, credit card, treasury services, and business advisory services. In addition, wealth management and investment services are offered to assist institutional, non-profit, and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.
Commercial Bank
The Commercial Bank is an aggregation of our Institutional and Commercial operating segments. The Commercial operating segment is a full-service corporate bank focused principally on serving the borrowing, cash management, and capital markets needs of middle market clients within Key’s 15-state branch footprint. It is also a significant, national, commercial real estate lender and third-party servicer of commercial mortgage loans and a special servicer of CMBS. The Institutional operating segment operates nationally in providing lending, equipment financing, and banking products and services to large corporate and institutional clients. The industry coverage and product teams have established expertise in the following sectors: Consumer, Energy, Healthcare, Industrial, Public Sector, Real Estate, and Technology. The operating segment includes the KBCM platform which provides a broad suite of capital markets products and services including syndicated finance, debt and equity capital markets, derivatives, foreign exchange, financial advisory, and public finance. Additionally, KBCM provides fixed income and equity sales and trading services to investor clients.
Other
Other includes various corporate treasury activities such as management of our investment securities portfolio, long-term debt, short-term liquidity and funding activities, and balance sheet risk management, our principal investing unit, and various exit portfolios as well as reconciling items, which primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling items also include intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.
The table on the following page shows selected financial data for our major business segments for the years ended December 31, 2022, 2021, and 2020.
The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable to line of business results presented by other companies.
The selected financial data is based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
-
Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment, and/or repricing characteristics.
-
Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent that each line of business actually uses the services.
-
The consolidated provision for credit losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated ALLL. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.”
-
Capital is assigned to each line of business based on economic equity.
Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect enhanced alignment of expense base allocation drivers, changes in the risk profile of a particular business, or changes in our organizational structure.
| Year ended December 31, | Consumer Bank | Commercial Bank | |||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||||||||
| SUMMARY OF OPERATIONS | |||||||||||||||||||||||
| Net interest income (TE) | $ | 2,419 | $ | 2,359 | $ | 2,403 | $ | 1,867 | $ | 1,650 | $ | 1,725 | |||||||||||
| Noninterest income | 995 | 1,067 | 999 | 1,600 | 1,990 | 1,524 | |||||||||||||||||
| Total revenue (TE) (a) | 3,414 | 3,426 | 3,402 | 3,467 | 3,640 | 3,249 | |||||||||||||||||
| Provision for credit losses | 193 | (118) | 284 | 317 | (279) | 741 | |||||||||||||||||
| Depreciation and amortization expense | 87 | 84 | 77 | 113 | 134 | 144 | |||||||||||||||||
| Other noninterest expense | 2,618 | 2,307 | 2,185 | 1,621 | 1,731 | 1,606 | |||||||||||||||||
| Income (loss) from continuing operations before income taxes (TE) | 516 | 1,153 | 856 | 1,416 | 2,054 | 758 | |||||||||||||||||
| Allocated income taxes (benefit) and TE adjustments | 124 | 277 | 203 | 270 | 412 | 107 | |||||||||||||||||
| Income (loss) from continuing operations | 392 | 876 | 653 | 1,146 | 1,642 | 651 | |||||||||||||||||
| Income (loss) from discontinued operations, net of taxes | — | — | — | — | — | — | |||||||||||||||||
| Net income (loss) | 392 | 876 | 653 | 1,146 | 1,642 | 651 | |||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||
| Net income (loss) attributable to Key | $ | 392 | $ | 876 | $ | 653 | $ | 1,146 | $ | 1,642 | $ | 651 | |||||||||||
| AVERAGE BALANCES (b) | |||||||||||||||||||||||
| Loans and leases | $ | 41,315 | $ | 39,422 | $ | 37,842 | $ | 69,549 | $ | 60,486 | $ | 64,543 | |||||||||||
| Total assets (a) | 44,395 | 42,637 | 41,152 | 80,068 | 70,051 | 74,225 | |||||||||||||||||
| Deposits | 90,008 | 88,352 | 79,528 | 54,672 | 55,598 | 47,145 | |||||||||||||||||
| OTHER FINANCIAL DATA | |||||||||||||||||||||||
| Expenditures for additions to long-lived assets (a), (b) | $ | 52 | $ | 39 | $ | 40 | $ | 4 | $ | 12 | $ | 1 | |||||||||||
| Net loan charge-offs (b) | 83 | 126 | 135 | 84 | 81 | 308 | |||||||||||||||||
| Return on average allocated equity (b) | 11.13 | % | 24.54 | % | 18.97 | % | 12.59 | % | 19.22 | % | 12.99 | % | |||||||||||
| Return on average allocated equity | 11.13 | 24.54 | 18.97 | 12.59 | 19.22 | 12.99 | |||||||||||||||||
| Average full-time equivalent employees (c) | 8,041 | 8,000 | 8,186 | 2,454 | 2,370 | 2,291 |
| Year ended December 31, | Other | Key | |||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||||||||
| SUMMARY OF OPERATIONS | |||||||||||||||||||||||
| Net interest income (TE) | $ | 268 | $ | 89 | $ | (65) | $ | 4,554 | $ | 4,098 | $ | 4,063 | |||||||||||
| Noninterest income | 123 | 137 | 129 | 2,718 | 3,194 | 2,652 | |||||||||||||||||
| Total revenue (TE) (a) | 391 | 226 | 64 | 7,272 | 7,292 | 6,715 | |||||||||||||||||
| Provision for credit losses | (8) | (21) | (4) | 502 | (418) | 1,021 | |||||||||||||||||
| Depreciation and amortization expense | 71 | 80 | 82 | 271 | 298 | 303 | |||||||||||||||||
| Other noninterest expense | (100) | 93 | 15 | 4,139 | 4,131 | 3,806 | |||||||||||||||||
| Income (loss) from continuing operations before income taxes (TE) | 428 | 74 | (29) | 2,360 | 3,281 | 1,585 | |||||||||||||||||
| Allocated income taxes (benefit) and TE adjustments | 55 | (20) | (54) | 449 | 669 | 256 | |||||||||||||||||
| Income (loss) from continuing operations | 373 | 94 | 25 | 1,911 | 2,612 | 1,329 | |||||||||||||||||
| Income (loss) from discontinued operations, net of taxes | 6 | 13 | 14 | 6 | 13 | 14 | |||||||||||||||||
| Net income (loss) | 379 | 107 | 39 | 1,917 | 2,625 | 1,343 | |||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||
| Net income (loss) attributable to Key | $ | 379 | $ | 107 | $ | 39 | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||||||||
| AVERAGE BALANCES (b) | |||||||||||||||||||||||
| Loans and leases | $ | 438 | $ | 361 | $ | 304 | $ | 111,302 | $ | 100,269 | $ | 102,689 | |||||||||||
| Total assets (a) | 61,423 | 66,231 | 46,678 | 185,886 | 178,919 | 162,055 | |||||||||||||||||
| Deposits | 2,182 | 1,085 | 613 | 146,862 | 145,035 | 127,286 | |||||||||||||||||
| OTHER FINANCIAL DATA | |||||||||||||||||||||||
| Expenditures for additions to long-lived assets (a), (b) | $ | 198 | $ | 63 | $ | 120 | $ | 254 | $ | 114 | $ | 161 | |||||||||||
| Net loan charge-offs (b) | (6) | (23) | 1 | 161 | 184 | 444 | |||||||||||||||||
| Return on average allocated equity (b) | 17.74 | % | 1.69 | % | .27 | % | 12.97 | % | 14.79 | % | 7.54 | % | |||||||||||
| Return on average allocated equity | 18.02 | 1.93 | .42 | 13.01 | 14.86 | 7.62 | |||||||||||||||||
| Average full-time equivalent employees (c) | 7,165 | 6,604 | 6,349 | 17,660 | 16,974 | 16,826 |
(a)Substantially all revenue generated by our major business segments is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software, and goodwill held by our major business segments, are located in the United States.
(b)From continuing operations.
(c)The number of average full-time equivalent employees was not adjusted for discontinued operations.
26. Condensed Financial Information of the Parent Company
CONDENSED BALANCE SHEETS
| December 31, Dollars in millions | 2022 | 2021 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 3,146 | $ | 2,293 | ||||
| Short-term investments | 15 | 24 | ||||||
| Securities available for sale | — | — | ||||||
| Other investments | 78 | 77 | ||||||
| Loans to: | ||||||||
| Banks | 250 | 50 | ||||||
| Nonbank subsidiaries | 16 | 16 | ||||||
| Total loans | 266 | 66 | ||||||
| Investment in subsidiaries: | ||||||||
| Banks | 13,033 | 17,019 | ||||||
| Nonbank subsidiaries | 928 | 1,015 | ||||||
| Total investment in subsidiaries | 13,961 | 18,034 | ||||||
| Goodwill | 167 | 167 | ||||||
| Corporate-owned life insurance | 209 | 212 | ||||||
| Derivative assets | 111 | 76 | ||||||
| Accrued income and other assets | 248 | 309 | ||||||
| Total assets | $ | 18,201 | $ | 21,258 | ||||
| LIABILITIES | ||||||||
| Accrued expense and other liabilities | $ | 508 | $ | 532 | ||||
| Long-term debt due to: | ||||||||
| Subsidiaries | 450 | 483 | ||||||
| Unaffiliated companies | 3,789 | 2,820 | ||||||
| Total long-term debt | 4,239 | 3,303 | ||||||
| Total liabilities | 4,747 | 3,835 | ||||||
| SHAREHOLDERS’ EQUITY (a) | 13,454 | 17,423 | ||||||
| Total liabilities and shareholders’ equity | $ | 18,201 | $ | 21,258 | ||||
(a)See Key’s Consolidated Statements of Changes in Equity.
CONDENSED STATEMENTS OF INCOME
| Year ended December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| INCOME | |||||||||||
| Dividends from subsidiaries: | |||||||||||
| Bank subsidiaries | $ | 475 | $ | 1,925 | $ | 1,250 | |||||
| Nonbank subsidiaries | 100 | 50 | — | ||||||||
| Interest income from subsidiaries | 4 | 1 | 4 | ||||||||
| Other income | 7 | 36 | 8 | ||||||||
| Total income | 586 | 2,012 | 1,262 | ||||||||
| EXPENSE | |||||||||||
| Interest on long-term debt with subsidiary trusts | 19 | 13 | 18 | ||||||||
| Interest on other borrowed funds | 130 | 65 | 114 | ||||||||
| Personnel and other expense | 101 | 101 | 63 | ||||||||
| Total expense | 250 | 179 | 195 | ||||||||
| Income (loss) before income taxes and equity in net income (loss) less dividends from subsidiaries | 336 | 1,833 | 1,067 | ||||||||
| Income tax (expense) benefit | 60 | 38 | 38 | ||||||||
| Income (loss) before equity in net income (loss) less dividends from subsidiaries | 396 | 1,871 | 1,105 | ||||||||
| Equity in net income (loss) less dividends from subsidiaries | 1,521 | 754 | 238 | ||||||||
| NET INCOME (LOSS) | 1,917 | 2,625 | 1,343 | ||||||||
| Less: Net income attributable to noncontrolling interests | — | — | — | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO KEY | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||
.
CONDENSED STATEMENTS OF CASH FLOWS
| Year ended December 31, | |||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | ||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (loss) attributable to Key | $ | 1,917 | $ | 2,625 | $ | 1,343 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Deferred income taxes (benefit) | 6 | (22) | 2 | ||||||||
| Stock-based compensation expense | 117 | 9 | 11 | ||||||||
| Equity in net (income) loss less dividends from subsidiaries | (1,521) | (754) | (238) | ||||||||
| Net (increase) decrease in other assets | 23 | 13 | (66) | ||||||||
| Net increase (decrease) in other liabilities | (24) | 48 | 12 | ||||||||
| Other operating activities, net | (480) | (414) | 131 | ||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 38 | 1,505 | 1,195 | ||||||||
| INVESTING ACTIVITIES | |||||||||||
| Net (increase) decrease in securities available for sale and in short-term and other investments | (26) | (15) | (7) | ||||||||
| Proceeds from sales, prepayments and maturities of securities available for sale | — | — | — | ||||||||
| Net (increase) decrease in loans to subsidiaries | (200) | — | — | ||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (226) | (15) | (7) | ||||||||
| FINANCING ACTIVITIES | |||||||||||
| Net proceeds from issuance of long-term debt | 1,350 | — | 800 | ||||||||
| Payments on long-term debt | — | (997) | (1,003) | ||||||||
| Repurchase of Treasury Shares | (44) | (1,176) | (170) | ||||||||
| Net cash from the issuance (redemption) of Common Shares and preferred stock | 590 | — | — | ||||||||
| Cash dividends paid | (855) | (823) | (829) | ||||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 1,041 | (2,996) | (1,202) | ||||||||
| NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS | 853 | (1,506) | (14) | ||||||||
| CASH AND DUE FROM BANKS AT BEGINNING OF YEAR | 2,293 | 3,799 | 3,813 | ||||||||
| CASH AND DUE FROM BANKS AT END OF YEAR | $ | 3,146 | $ | 2,293 | $ | 3,799 | |||||
KeyCorp paid interest on borrowed funds totaling $137 million in 2022, $130 million in 2021, and $204 million in 2020.
27. Revenue from Contracts with Customers
The following table represents a disaggregation of revenue from contracts with customers, by line of business, for the twelve months ended December 31, 2022, and December 31, 2021:
| Year ended December 31, | 2022 | 2021 | |||||||||||||||||||||
| Dollars in millions | Consumer Bank | Commercial Bank | Total Contract Revenue | Consumer Bank | Commercial Bank | Total Contract Revenue | |||||||||||||||||
| NONINTEREST INCOME | |||||||||||||||||||||||
| Trust and investment services income | $ | 403 | $ | 69 | $ | 472 | $ | 417 | $ | 67 | $ | 484 | |||||||||||
| Investment banking and debt placement fees | — | 430 | 430 | — | 586 | 586 | |||||||||||||||||
| Services charges on deposit accounts | 211 | 139 | 350 | 201 | 136 | 337 | |||||||||||||||||
| Cards and payments income | 177 | 154 | 331 | 181 | 226 | 407 | |||||||||||||||||
| Other noninterest income | 11 | — | 11 | 7 | 2 | 9 | |||||||||||||||||
| Total revenue from contracts with customers | $ | 802 | $ | 792 | $ | 1,594 | $ | 806 | $ | 1,017 | $ | 1,823 | |||||||||||
| Other noninterest income (a) | $ | 1,001 | $ | 1,234 | |||||||||||||||||||
| Noninterest income from other segments (b) | 123 | 137 | |||||||||||||||||||||
| Total noninterest income | $ | 2,718 | $ | 3,194 | |||||||||||||||||||
(a)Noninterest income considered earned outside the scope of contracts with customers.
(b)Other includes other segments that consists of corporate treasury, our principal investing unit, and various exit portfolios as well as reconciling items which primarily represents the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations. Refer to Note 25 (“Business Segment Reporting”) for more information.
We had no material contract assets or contract liabilities for the twelve months ended December 31, 2022, and December 31, 2021.
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