Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations

Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly periods ended March 31, 2021, and March 31, 2020. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the Table of Contents.

References to our “2020 Form 10-K” refer to our Form 10-K for the year ended December 31, 2020, which has been filed with the SEC and is available on its website (www.sec.gov) and on our website (www.key.com/ir).

Terminology

Throughout this discussion, references to “Key,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers to KeyCorp’s subsidiary bank, KeyBank National Association.

We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.

• We use the phrase continuing operations in this document to mean all of our businesses other than our government-guaranteed and private education lending business, which has been accounted for as discontinued operations since 2009.

• We engage in capital markets activities primarily through business conducted by our Commercial Bank segment*.* These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).

• For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHC’s total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. Banking regulators evaluate a component of Tier 1 capital, known as Common Equity Tier 1, under the Regulatory Capital Rules. The “Capital” section of this report under the heading “Capital adequacy” provides more information on total capital, Tier 1 capital, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how these measures are calculated.

The acronyms and abbreviations identified below are used in the Management’s Discussion & Analysis of Financial Condition & Results of Operations as well as in the Notes to Consolidated Financial Statements (Unaudited). You may find it helpful to refer back to this page as you read this report.

ABO: Accumulated benefit obligation. ALCO: Asset/Liability Management Committee. ALLL: Allowance for loan and lease losses. A/LM: Asset/liability management. AML: Anti-money laundering. AOCI: Accumulated other comprehensive income (loss). APBO: Accumulated postretirement benefit obligation. ARRC: Alternative Reference Rates Committee. ASC: Accounting Standards Codification. ASU: Accounting Standards Update. ATMs: Automated teller machines. Austin: Austin Capital Management, Ltd. BSA: Bank Secrecy Act. BHCA: Bank Holding Company Act of 1956, as amended. BHCs: Bank holding companies. Board: KeyCorp Board of Directors. CAPM: Capital Asset Pricing Model. CCAR: Comprehensive Capital Analysis and Review. Cain Brothers: Cain Brothers & Company, LLC. CECL: Current Expected Credit Losses. CFPB: Consumer Financial Protection Bureau, also known as the Bureau of Consumer Financial Protection. CFTC: Commodities Futures Trading Commission. CMBS: Commercial mortgage-backed securities. CMO: Collateralized mortgage obligation. Common Shares: KeyCorp common shares, $1 par value. CVA: Credit Valuation Adjustment. DCF: Discounted cash flow. DIF: Deposit Insurance Fund of the FDIC. Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. EAD: Exposure at default. EBITDA: Earnings before interest, taxes, depreciation, and amortization. EPS: Earnings per share. ERISA: Employee Retirement Income Security Act of 1974. ERM: Enterprise risk management. EVE: Economic value of equity. FASB: Financial Accounting Standards Board. FDIA: Federal Deposit Insurance Act, as amended. FDIC: Federal Deposit Insurance Corporation. Federal Reserve: Board of Governors of the Federal Reserve System. FHLB: Federal Home Loan Bank of Cincinnati. FHLMC: Federal Home Loan Mortgage Corporation. FICO: Fair Isaac Corporation. FINRA: Financial Industry Regulatory Authority. First Niagara: First Niagara Financial Group, Inc. FNMA: Federal National Mortgage Association. FSOC: Financial Stability Oversight Council. FVA: Fair value of employee benefit plan assets. GAAP: U.S. generally accepted accounting principles.			GNMA: Government National Mortgage Association. HelloWallet: HelloWallet, LLC. HTC: Historic tax credit. IRS: Internal Revenue Service. ISDA: International Swaps and Derivatives Association. KBCM: KeyBanc Capital Markets, Inc. KCC: Key Capital Corporation. KCDC: Key Community Development Corporation. KEF: Key Equipment Finance. KIBS: Key Insurance & Benefits Services, Inc. LCR: Liquidity coverage ratio. LGD: Loss given default. LIBOR: London Interbank Offered Rate. LIHTC: Low-income housing tax credit. LTV: Loan-to-value. Moody’s: Moody’s Investor Services, Inc. MRM: Market Risk Management group. MRC: Market Risk Committee. N/A: Not applicable. Nasdaq: The Nasdaq Stock Market LLC. NAV: Net asset value. NFA: National Futures Association. N/M: Not meaningful. NMTC: New market tax credit. NOW: Negotiable Order of Withdrawal. NPR: Notice of proposed rulemaking. NYSE: New York Stock Exchange. OCC: Office of the Comptroller of the Currency. OCI: Other comprehensive income (loss). OREO: Other real estate owned. PBO: Projected benefit obligation. PCCR: Purchased credit card relationship. PCD: Purchased credit deteriorated. PD: Probability of default. PPP: Paycheck Protection Program. S&P: Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. SEC: U.S. Securities & Exchange Commission. SIFIs: Systemically important financial institutions, including large, interconnected BHCs and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. SOFR: Secured Overnight Financing Rate. TCJ Act: Tax Cuts and Jobs Act. TDR: Troubled debt restructuring. TE: Taxable-equivalent. U.S. Treasury: United States Department of the Treasury. VaR: Value at risk. VEBA: Voluntary Employee Beneficiary Association. VIE: Variable interest entity.

Forward-looking statements

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

Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements.

There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause our actual results to differ from those described in forward-looking statements include, but are not limited to:

• our concentrated credit exposure in commercial and industrial loans;

• deterioration of commercial real estate market fundamentals;

• defaults by our loan counterparties or clients;

• adverse changes in credit quality trends;

• declining asset prices;

• deterioration of asset quality and an increase in credit losses due to the COVID-19 global pandemic;

• the decline in oil prices;

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

• changes in accounting policies, standards, and interpretations;

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

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

• negative outcomes from claims or litigation;

• failure or circumvention of our controls and procedures;

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

• increased operational risks resulting from the COVID-19 global pandemic;

• our participation in the Paycheck Protection Program;

• evolving capital and liquidity standards under applicable regulatory rules;

• disruption of the U.S. financial system;

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

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

• downgrades in our credit ratings or those of KeyBank;

• uncertainty in markets due to the COVID-19 global pandemic;

• a worsening of the U.S. economy due to financial, political or other shocks;

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

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

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

• the soundness of other financial institutions;

• economic disruption related to interest rate risk and market risk due to the COVID-19 global pandemic;

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

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

• increased competitive pressure;

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

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

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

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our 2020 Form 10-K and any subsequent reports filed with the SEC by Key, as well as our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov and on our website at www.key.com/ir.

Long-term financial targets

Our financial outlook and results of operations have been impacted by the economic fallout of the COVID-19 pandemic. Our long-term targets have not changed as we expect to continue to deliver positive operating leverage and strong financial returns as we emerge from this period of economic & financial stress.

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

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

Positive Operating Leverage

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

Our results for the first quarter of 2021 continue to reflect the hard work and dedication of our team and their commitment to serving our clients as we work through the ongoing pandemic. We achieved positive operating leverage compared to the year-ago quarter, and generated record first quarter revenue, up 19% from the year-ago quarter. This was driven by a record first quarter for investment banking & debt placement fees and continued strength in consumer mortgage fee income.

Moderate Risk Profile

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

We believe our strong risk management practices and disciplined underwriting continue to strengthen our credit quality. Net charge-offs to average loans decreased seven basis points, and nonperforming loans declined by $57 million from the prior quarter. Our provision for credit losses reflects a benefit from strong credit metrics and an improved outlook for the overall economy, credit migration, and loan production.

Financial Return

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

We have continued to maintain a strong level of capital. Return on average tangible common equity increased ~160 basis points from the prior quarter, to 18.2%. We ended the first quarter of 2021 with a Common Equity Tier 1 ratio of 9.9%, which is above our targeted range of 9.0% to 9.5%. We believe that this provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.

Selected financial data

Our financial performance for each of the last five quarters is summarized in Figure 1.

Figure 1. Selected Financial Data

			2021						2020
dollars in millions, except per share amounts			First						Fourth			Third			Second			First
FOR THE PERIOD
Interest income			$	1,087					$	1,125		$	1,119		$	1,190		$	1,251
Interest expense			82						90			119			172			270
Net interest income			1,005						1,035			1,000			1,018			981
Provision for credit losses			(93)						20			160			482			359
Noninterest income			738						802			681			692			477
Noninterest expense			1,071						1,128			1,037			1,013			931
Income (loss) from continuing operations before income taxes			765						689			484			215			168
Income (loss) from continuing operations attributable to Key			618						575			424			185			145
Income (loss) from discontinued operations, net of taxes			4						7			4			2			1
Net income (loss) attributable to Key			622						582			428			187			146
Income (loss) from continuing operations attributable to Key common shareholders			591						549			397			159			118
Income (loss) from discontinued operations, net of taxes			4						7			4			2			1
Net income (loss) attributable to Key common shareholders			595						556			401			161			119
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders			$	.61					$	.57		$	.41		$	.16		$	.12
Income (loss) from discontinued operations, net of taxes			—						.01			—			—			—
Net income (loss) attributable to Key common shareholders (a)			.62						.57			.41			.17			.12
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution			.61						.56			.41			.16			.12
Income (loss) from discontinued operations, net of taxes — assuming dilution			—						.01			—			—			—
Net income (loss) attributable to Key common shareholders — assuming dilution (a)			.61						.57			.41			.17			.12
Cash dividends paid			.185						.185			.185			.185			.185
Book value at period end			16.22						16.53			16.25			16.07			15.95
Tangible book value at period end			13.30						13.61			13.32			13.12			12.98
Weighted-average common shares outstanding (000)			964,878						967,987			967,804			967,147			967,446
Weighted-average common shares and potential common shares outstanding (000) (b)			974,297						976,460			973,988			972,141			976,110
AT PERIOD END
Loans			$	100,926					$	101,185		$	103,081		$	106,159		$	103,198
Earning assets			160,810						155,469			155,585			156,177			141,333
Total assets			176,203						170,336			170,540			171,192			156,197
Deposits			142,183						135,282			136,746			135,513			115,304
Long-term debt			12,499						13,709			12,685			13,734			13,732
Key common shareholders’ equity			15,734						16,081			15,822			15,642			15,511
Key shareholders’ equity			17,634						17,981			17,722			17,542			17,411
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets			1.44		%				1.35		%	1.00		%	.45		%	.40		%
Return on average common equity			14.98						13.65			9.98			4.05			3.10
Return on average tangible common equity (c)			18.25						16.61			12.19			4.96			3.82
Net interest margin (TE)			2.61						2.70			2.62			2.76			3.01
Cash efficiency ratio (c)			60.3						60.3			60.6			57.9			62.3
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets			1.45		%				1.36		%	1.00		%	.46		%	.40		%
Return on average common equity			15.08						13.82			10.08			4.10			3.12
Return on average tangible common equity (c)			18.37						16.82			12.31			5.02			3.86
Net interest margin (TE)			2.60						2.69			2.62			2.76			3.00
Loan-to-deposit (d)			73.1						76.5			77.2			80.4			92.1
CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets			10.0		%				10.6		%	10.4		%	10.2		%	11.1		%
Key common shareholders’ equity to assets			9.0						9.5			9.3			9.2			10.0
Tangible common equity to tangible assets (c)			7.5						7.9			7.8			7.6			8.3
Common Equity Tier 1			9.9						9.7			9.5			9.1			8.9
Tier 1 risk-based capital			11.3						11.1			10.9			10.5			10.2
Total risk-based capital			13.4						13.4			13.3			12.8			12.2
Leverage			8.9						8.9			8.7			8.8			9.8
TRUST ASSETS
Assets under management			$	45,218					$	44,140		$	41,312		$	39,722		$	36,189
OTHER DATA
Average full-time-equivalent employees			17,086						17,029			17,097			16,646			16,529
Branches			1,068						1,073			1,077			1,077			1,082

(a)EPS may not foot due to rounding.

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

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

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

Strategic developments

The first quarter of 2021 was a strong start to the year and positions us to grow and deliver on our commitments to all of our stakeholders. We have remained committed to supporting our employees, our communities, and our clients throughout the pandemic. Providing value to all stakeholders creates the foundation to deliver sustainable long-term performance. The corporate governance processes that we have in place allow us to oversee any changes and new requirements that may occur across our geographic footprint. Our actions and results during the first quarter of 2021 reflect our response to the current environment and support our corporate strategy described in the “Introduction” section under the “Corporate strategy” heading on page 45 of our 2020 Form 10-K.

• Our business resiliency plans remained in effect and we maintained our operational effectiveness across the entire organization. The health and safety of our clients, employees, and communities in which we operate have continued to be our top priority. Nearly every branch has been open for business and continues to follow guidelines on how to minimize physical contact with our clients and between our employees. Our return-to-office protocols, which began in the second quarter of 2020, continued during the first quarter of 2021. This plan is flexible as the ongoing pandemic changes and may impact the communities in which our employees and clients operate differently.

• We are committed to playing a critical role in providing capital and assistance to our clients and supporting broader initiatives to strengthen our economy. We continue to support our clients through SBA-guaranteed loans to small businesses, payment deferrals, hardship support, borrower assistance programs, and forbearance options to help provide a bridge for individuals and businesses through these uncertain times.

• On February 25, 2021, we acquired AQN Strategies, a client-focused analytics firm with deep expertise in the financial services industry. This acquisition aligns to Key’s relationship strategy and underscores our commitment to a data-driven approach to grow our business.

• On March 30, 2021, we unveiled Laurel Road for Doctors, a national digital bank tailored to physicians and dentists with products and services informed by their needs. With Laurel Road for Doctors, we continue to expand targeted client relationships by bringing together a full set of solutions, expertise, and services to drive value for healthcare professionals.

• Credit quality is also playing a critical role in this environment. Our risk profile and strategy is different than the one we had leading up to, and during, the 2007-2009 financial crisis. We have significantly reduced our exposure to high-risk sectors and industries and have positioned Key to perform well through all phases of the business cycle, including highly stressed environments. Our moderate risk profile will continue to inform our credit decisions and the way we underwrite loans.

• Capital and liquidity continued to be clear strengths for us during the first quarter of 2021. Our strong capital position allows us to continue to execute against each of our capital priorities of organic growth, dividends, and share repurchases. During the first quarter we repurchased $135 million of common shares, and the Board of Directors approved a common share dividend of $.185 per Common Share.

Demographics

The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint and through our Laurel Road digital brand by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, student loan refinancing, mortgage and home equity, credit card, treasury services, and business advisory services. In addition, wealth management and investment services are offered to assist non-profit and high-net-worth clients with their banking, trust, portfolio management, life insurance, charitable giving, and related needs.

The Commercial Bank is an aggregation of our Institutional and Commercial operating segments. The Commercial operating segment is a full-service corporate bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. The Commercial operating segment is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. The Institutional operating segment delivers a broad suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance.

Supervision and regulation

The following discussion provides a summary of recent regulatory developments and should be read in conjunction with the disclosure included in our 2020 Form 10-K under the heading “Supervision and Regulation” in Item 1. Business and under the heading “II. Compliance Risk” in Item 1A. Risk Factors.

Regulatory capital requirements

The final rule to implement the Basel III international capital framework (“Basel III”) was effective January 1, 2015, with a multi-year transition period (“Regulatory Capital Rules”). As of April 1, 2020, the Regulatory Capital Rules were fully phased-in for Key. The Basel III capital framework and the U.S. implementation of the Basel III capital framework are discussed in more detail in Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation — Regulatory capital requirements.”

Under the Regulatory Capital Rules, standardized approach banking organizations, such as KeyCorp and KeyBank, are required to meet the minimum capital and leverage ratios set forth in Figure 2 below. At March 31, 2021, KeyCorp’s ratios under the fully phased-in Regulatory Capital Rules are set forth in Figure 2.

Figure 2. Minimum Capital Ratios and KeyCorp Ratios Under the Regulatory Capital Rules

Ratios (including stress capital buffer)			Regulatory Minimum Requirement			Stress Capital Buffer (b)			Regulatory Minimum With Stress Capital Buffer			KeyCorp March 31, 2021 (c)
Common Equity Tier 1			4.5		%	2.5		%	7.0		%	9.9		%
Tier 1 Capital			6.0			2.5			8.5			11.3
Total Capital			8.0			2.5			10.5			13.4
Leverage (a)			4.0			N/A			4.0			8.9

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

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

(c)Ratios reflect the five-year transition of CECL impacts on regulatory ratios.

Revised prompt corrective action framework

The federal prompt corrective action (“PCA”) framework under the FDIA groups FDIC-insured depository institutions into one of five prompt corrective action capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In addition to implementing the Basel III capital framework in the United States, the Regulatory Capital Rules also revised the PCA capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank, with an effective date of January 1, 2015. The revised PCA framework table in Figure 3 identifies the capital category thresholds for a “well capitalized” and an “adequately capitalized” institution under the PCA Framework.

Figure 3. "Well Capitalized" and "Adequately Capitalized" Capital Category Ratios under Revised PCA Framework

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

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

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

As of March 31, 2021, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements necessary to be considered “well capitalized” for purposes of the PCA framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the PCA framework is intended to serve a limited supervisory function. Moreover, it is important to note that the PCA framework does not apply to BHCs, like KeyCorp.

Recent regulatory capital-related developments

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements - Recent regulatory capital-related developments” for a discussion of recent regulatory capital-related developments.

Capital planning and stress testing

On January 19, 2021, the Federal Reserve issued a final rule to make conforming changes to the capital planning, regulatory reporting, and stress capital buffer requirements for firms subject to Category IV standards (including KeyCorp) to make these requirements consistent with the tailored regulatory framework for large banking organizations that the Federal Reserve adopted in an October 2019 rulemaking. The final rule revises the elements of the capital plan that Category IV firms are required to submit to the Federal Reserve and makes related changes to regulatory reporting requirements. Also, the final rule updates the frequency for calculating the stress capital buffer for these firms. In addition, the final rule makes certain clarifying changes to the stress testing rules applicable to all large banking organizations.

Due to the economic uncertainty caused by the COVID-19 pandemic, the Federal Reserve placed temporary restrictions on capital distributions by BHCs having more than $100 billion in total consolidated assets (including KeyCorp), that are in addition to limitations on capital distributions that apply under the Regulatory Capital Rules. On June 25, 2020, the Federal Reserve stated that for the third quarter of 2020, BHCs with more than $100 billion in total assets are prohibited from (i) making share repurchases (other than share repurchase relating to issuances of common stock for employee stock ownership plans); and (ii) paying common stock dividends that exceed the amount paid in the second quarter of 2020 or exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters unless otherwise specified by the Federal Reserve. The Federal Reserve continued these restriction on dividends and share repurchases by large BHCs for the fourth quarter of 2020 in an announcement made on September 17, 2020.

On December 18, 2020, the Federal Reserve stated that because of the ongoing economic uncertainty, it was extending its limits on capital distributions by BHCs with more than $100 billion in total assets into the first quarter of 2021, with certain modifications. The Federal Reserve noted that these firms (i) are prohibited from increasing their common stock dividends to an amount greater than the amount paid in the second quarter of 2020; and (ii) are prohibited from paying common stock dividends and making share repurchase that, in the aggregate, exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters. The Federal Reserve further indicated that it was extending the time period for the Federal Reserve to notify firms whether their stress capital buffer requirements will be recalculated until March 31, 2021.

On March 25, 2021, the Federal Reserve said that it was continuing into the second quarter of 2021 the restrictions on dividends and share repurchases for BHCs with more than $100 billion in total assets that it announced on December 18, 2020, and indicated that it was extending the time period for the Federal Reserve to notify firms whether their stress capital buffer requirements will be recalculated until June 30, 2021. The Federal Reserve also announced that these temporary restrictions on BHC dividends and share repurchases will end for most firms after June 30, 2021. Firms subject to the Federal Reserve’s supervisory stress test in 2021 with capital levels above those required by the stress test will no longer by subject to the temporary additional restrictions after that date while firms with capital levels below those required by the stress test will remain subject to the restrictions.

For BHCs that are on a two-year stress test cycle and are not subject to the Federal Reserve’s supervisory stress test in 2021 (including KeyCorp), the temporary additional restrictions on dividends and share repurchases will end after June 30, 2021. Beginning on July 1, 2021, these firms will be allowed to make capital distributions that are consistent with the Regulatory Capital Rules, inclusive of the stress capital buffer requirement based on the firm’s June 2020 stress test. In August 2020, the Federal Reserve confirmed that KeyCorp’s required stress capital buffer, based on its June 2020 stress test, is 2.5%, which is the minimum buffer requirement for firms the size of KeyCorp.

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements - Capital planning and stress testing” for an overview of capital planning and stress testing requirements.

Liquidity requirements

See Item. 1 Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements - Liquidity requirements” for a discussion of liquidity requirements, including the Liquidity Coverage Rules.

Volcker Rule

The Volcker Rule is discussed in detail in Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Other Regulatory Developments - Volcker Rule.”

Community Reinvestment Act

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Other Regulatory Developments - Community Reinvestment Act” for a discussion of recent developments concerning the Community Reinvestment Act.

Supervision and governance

On February 26, 2021, the Federal Reserve issued supervisory guidance describing the key attributes of effective boards of directors of large financial institutions, including BHCs with $100 billion or more in total consolidated assets. This supervisory guidance adopts a principles-based approach to describe attributes of effective boards of directors and provides illustrative examples of effective practices. The Federal Reserve indicated that it intends to use the board effectiveness guidance in informing its assessment of governance and controls at all firms subject to the large financial institution rating system (“LFI Rating System”) (including KeyCorp).

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Other Regulatory Developments - Supervision and governance” for a discussion of other recent supervision and governance-related developments, including a discussion of the LFI Rating System.

Regulatory developments concerning COVID-19

On March 30, 2021, President Biden signed into law the PPP Extension Act, which extends the deadline for submitting loan applications under this program from March 31, 2021, to May 31, 2021. KeyBank participates as a lender in the PPP, which provides SBA-guaranteed loans to small businesses.

On March 31, 2021, the CFPB announced that it is rescinding seven policy statements issued in 2020, which provided financial institutions with temporary regulatory flexibility in complying with various consumer protection laws when they are working with customers affected by the COVID-19 pandemic. The CFPB indicated that, with these rescissions, it intends to exercise the full scope of its supervision and enforcement authority provided by the Dodd-Frank Act.

The CFPB issued a compliance bulletin on April 1, 2021, urging mortgage servicers to take proactive measures to prevent avoidable foreclosures. The CFPB indicated that it will be closely monitoring how servicers engage with borrowers and will consider a servicer’s effectiveness in helping borrowers when it evaluates a servicer’s compliance with mortgage servicing rules.

On April 5, 2021, the CFPB requested public comment on a proposal that would amend the CFPB’s mortgage servicing rules to help ensure that borrowers affected by the COVID-19 pandemic have an opportunity to be evaluated for loss mitigation before the initiation of foreclosure proceedings. Among other things, the proposal (i) would establish a temporary COVID-19 emergency pre-foreclosure review period that would generally prohibit servicers from commencing a foreclosure action involving a borrower’s principal residence until after December 31, 2021; (ii) would permit servicers to offer certain streamlined loan modification options based on the evaluation of an incomplete application; and (iii) would revise the early intervention and reasonable diligence obligations of servicers to ensure that they communicate timely and accurate information to borrowers about their loss mitigation options. Certain requirements would apply only until August 31, 2022. Comments on the proposal are due by May 10, 2021.

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - Other Regulatory Developments - Regulatory developments concerning COVID-19” for a discussion of other recent regulatory developments relating to the COVID-19 pandemic.

Results of Operations

Earnings overview

The following chart provides a reconciliation of net income from continuing operations attributable to Key common shareholders for the three months ended March 31, 2020, to the three months ended March 31, 2021 (dollars in millions):

Net interest income

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

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

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

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

• interest rate fluctuations and competitive conditions within the marketplace;

• asset quality; and

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

To make it easier to compare both the results across several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “TE basis” (i.e., as if all income were taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $126, an amount that, if taxed at the statutory federal income tax rate of 21%, would yield $100.

Figure 4 shows the various components of our balance sheet that affect interest income and expense and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of TE net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing annualized TE net interest income by average earning assets.

TE net interest income was $1.0 billion for the first quarter of 2021, compared to TE net interest income of $989 million for the first quarter of 2020. The increase in net interest income reflects higher earning asset balances and loan fees partially offset by a lower net interest margin. The net interest margin was impacted by lower interest rates and a change in balance sheet mix, including elevated levels of liquidity.

Average loans were $100.7 billion for the first quarter of 2021, an increase of $4.6 billion compared to the first quarter of 2020. Commercial loans increased $2.2 billion, reflecting Key’s participation in the PPP partially offset by decreased utilization versus the year-ago period. Consumer loans increased $2.4 billion, driven by strength from Laurel Road and Key's consumer mortgage business.

Average deposits totaled $137.7 billion for the first quarter of 2021, an increase of $27.4 billion compared to the year-ago quarter, reflecting growth from consumer and commercial relationships, partially offset by a decline in time deposits as a result of lower interest rates.

Figure 4. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates and Components of Net Interest Income Changes from Continuing Operations

			Three months ended March 31, 2021												Three months ended March 31, 2020												Change in Net interest income due to
dollars in millions			Average Balance			Interest (a)			Yield/ Rate (a)						Average Balance			Interest (a)			Yield/ Rate (a)						Volume			Yield/Rate			Total
ASSETS
Loans (b), (c)
Commercial and industrial (d)			$	52,581		$	453		3.48		%				$	49,466		$	508		4.13		%				$	31		$	(86)		$	(55)
Real estate — commercial mortgage			12,658			114			3.67						13,548			155			4.60						(10)			(31)			(41)
Real estate — construction			2,048			19			3.75						1,666			20			4.75						4			(5)			(1)
Commercial lease financing			4,142			31			2.99						4,565			39			3.39						(3)			(5)			(8)
Total commercial loans			71,429			617			3.50						69,245			722			4.19						22			(127)			(105)
Real estate — residential mortgage			9,699			76			3.12						7,215			68			3.75						21			(13)			8
Home equity loans			9,282			85			3.73						10,155			113			4.49						(9)			(19)			(28)
Consumer direct loans			4,817			56			4.72						3,709			54			5.91						14			(12)			2
Credit cards			933			24			10.45						1,082			31			11.50						(4)			(3)			(7)
Consumer indirect loans			4,568			37			3.30						4,768			46			3.86						(2)			(7)			(9)
Total consumer loans			29,299			278			3.84						26,929			312			4.66						20			(54)			(34)
Total loans			100,728			895			3.60						96,174			1,034			4.32						42			(181)			(139)
Loans held for sale			1,531			11			2.89						1,885			19			3.99						(3)			(5)			(8)
Securities available for sale (b), (e)			30,039			130			1.76						21,172			129			2.49						45			(44)			1
Held-to-maturity securities (b)			7,188			45			2.53						9,820			62			2.51						(16)			(1)			(17)
Trading account assets			848			5			2.15						1,065			8			2.95						(1)			(2)			(3)
Short-term investments			16,510			5			.13						1,764			6			1.42						9			(10)			(1)
Other investments (e)			614			2			1.40						614			1			.40						—			1			1
Total earning assets			157,458			1,094			2.81						132,494			1,259			3.82						76			(242)			(166)
Allowance for loan and lease losses			(1,623)												(1,097)
Accrued income and other assets			16,398												14,831
Discontinued assets			686												838
Total assets			$	172,919											$	147,066
LIABILITIES
NOW and money market deposit accounts			$	81,439		10			.05						$	66,721		112			.67						20			(122)			(102)
Savings deposits			6,203			1			.03						4,655			1			.05						—			—			—
Certificates of deposit ($100,000 or more)			2,571			6			.96						6,310			34			2.20						(14)			(14)			(28)
Other time deposits			2,902			4			.57						4,901			22			1.81						(7)			(11)			(18)
Total interest-bearing deposits			93,115			21			.09						82,587			169			.82						(1)			(147)			(148)
Federal funds purchased and securities sold under repurchase agreements			243			—			.04						2,002			6			1.17						(3)			(3)			(6)
Bank notes and other short-term borrowings			878			1			.64						1,401			5			1.58						(1)			(3)			(4)
Long-term debt (f), (g)			12,831			60			1.93						12,443			90			2.96						3			(33)			(30)
Total interest-bearing liabilities			107,067			82			.31						98,433			270			1.10						(2)			(186)			(188)
Noninterest-bearing deposits			44,625												27,741
Accrued expense and other liabilities			2,772												2,838
Discontinued liabilities (g)			686												838
Total liabilities			155,150												129,850
EQUITY
Key shareholders’ equity			17,769												17,216
Noncontrolling interests			—												—
Total equity			17,769												17,216
Total liabilities and equity			$	172,919											$	147,066
Interest rate spread (TE)									2.50		%										2.72		%
Net interest income (TE) and net interest margin (TE)						1,012			2.61		%							989			3.01		%				$	78		$	(56)		22
TE adjustment (b)						7												8
Net interest income, GAAP basis						$	1,005											$	981

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

(b)Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 21% for the three months ended March 31, 2021, and March 31, 2020.

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

(d)Commercial and industrial average balances include $126 million and $145 million of assets from commercial credit cards for the three months ended March 31, 2021, and March 31, 2020, respectively.

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

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

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

Provision for credit losses

Key’s provision for credit losses was a net benefit of $93 million, including a $207 million reserve release for the three months ended March 31, 2021, compared to an expense of $359 million for the three months ended March 31, 2020. The reserve release was largely driven by expected improvement in the economic outlook.

Noninterest income

As shown in Figure 5, noninterest income was $738 million, and represented 42% of total revenue for the first quarter of 2021, compared to $477 million, representing 33% of total revenue, for the year-ago quarter.

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

Figure 5. Noninterest Income

(a)Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, commercial mortgage servicing fees, and other income. See the "Consolidated Statements of Income" in Item 1. Financial Statements of this report.

Trust and investment services income

Trust and investment services income consists of brokerage commissions, trust and asset management fees, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 6. For the three months ended March 31, 2021, trust and investment services income remained constant compared to the same period one year ago. This was primarily due to an increase in trust and asset management fees partially related to higher levels of assets under management offset by decreased commercial brokerage income.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At March 31, 2021, our bank, trust, and registered investment advisory subsidiaries had assets under management of $45.2 billion, compared to $36.2 billion at March 31, 2020. Assets under management were up, as shown in Figure 6, due to increased portfolio yields.

Figure 6. Assets Under Management

in millions			March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Assets under management by investment type:
Equity			$	29,071		$	27,384		$	24,851		$	23,303		$	20,421
Securities lending			155			131			130			171			188
Fixed income			11,865			12,130			11,767			11,318			10,911
Money market			4,127			4,495			4,564			4,930			4,669
Total assets under management			$	45,218		$	44,140		$	41,312		$	39,722		$	36,189

Investment banking and debt placement fees

Investment banking and debt placement fees consists of syndication fees, debt and equity financing fees, financial adviser fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees for the three months ended March 31, 2021, increased $46 million, or 39.7%, from the year-ago quarter. This increase was primarily driven by higher gains on the sales of commercial mortgages, and increased debt and equity underwriting fees.

Service charges on deposit accounts

Service charges on deposit accounts decreased $11 million, or 13.1%, for the three months ended March 31, 2021, compared to the same period one year ago. This decrease was primarily driven by elevated balances reducing fee assessments and higher fee waivers related to the ongoing COVID-19 pandemic.

Cards and payments income

Cards and payments income, which consists of debit card, prepaid card, consumer and commercial credit card, and merchant services income, increased $39 million, or 59.1%, for the three months ended March 31, 2021, compared to the same period one year ago. This increase was primarily driven by increased prepaid card activity due to state support program activity.

Other noninterest income

Other noninterest income includes operating lease income and other leasing gains, corporate services income,

corporate-owned life insurance income, consumer mortgage income, commercial mortgage servicing fees, and other income. Other noninterest income for the three months ended March 31, 2021, increased $187 million, or 239.7%, from the year-ago quarter, primarily due to higher consumer mortgage income driven by strong loan originations and related fees.

Noninterest expense

As shown in Figure 7, noninterest expense was $1.1 billion for the first quarter of 2021, compared to $931 million for the first quarter of 2020.

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

Figure 7. Noninterest Expense

(a)Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expense, net, and other expense. See the "Consolidated Statements of Income" in Item 1. Financial Statements of this report.

Personnel

Personnel expense, the largest category of our noninterest expense, increased by $109 million, or 21.2%, for the three months ended March 31, 2021, compared to the same period one year ago. The activity reflected higher incentive and stock-based compensation, attributed to an increase in revenue from stock performance and an increase in employee benefits compared to the year ago quarter.

Net occupancy

Net occupancy expense remained constant for the first quarter of 2021, compared to the same period one year ago.

Other noninterest expense

Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expense, and other miscellaneous expense categories. Other noninterest expense for the three months ended March 31, 2021, increased $7 million, or 2.9%, from the year-ago quarter, primarily due to payments-related expense from increased prepaid card activity partially offset by a decrease in other real estate owned expenses.

Income taxes

We recorded tax expense of $147 million for the first quarter of 2021 and $23 million for the first quarter of 2020.

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

Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived is included in Note 14 (“Income Taxes”) beginning on page 158 of our 2020 Form 10-K.

Business Segment Results

This section summarizes the financial performance of our two major business segments (operating segments): Consumer Bank and Commercial Bank. Note 20 (“Business Segment Reporting”) describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments. For more information on the segment imperatives and market and business overview, see “Business Segment Results” beginning on page 54 of our 2020 Form 10-K. Dollars in the charts are presented in millions.

Consumer Bank

Summary of operations

• Net income attributable to Key of $217 million for the first quarter of 2021, compared to $103 million for the year-ago quarter

• Taxable-equivalent net interest income increased by $26 million, or 4.5%, compared to the first quarter of 2020, driven by strong balance sheet growth and fees related to PPP loans, partially offset by the lower interest rate environment

• Average loans and leases increased $6.1 billion, or 18.3%, driven by benefit from the PPP, as well as growth from Laurel Road and consumer mortgage

• Average deposits increased $11.9 billion, or 16.3%, from the first quarter of 2020. This was driven by consumer stimulus payments and relationship growth

• Provision for credit losses decreased $159 million compared to the first quarter of 2020. The provision for credit losses was a net benefit and was driven by expected improvements in economic conditions and continued strength in client credit quality

• Noninterest income increased $28 million, or 12.2%, from the year ago quarter, due to higher trust and investment services income, and strength in consumer mortgage income

• Noninterest expense increased $62 million, or 11.5%, from the year ago quarter, driven by higher variable compensation from significantly favorable revenue and higher variable expenses related to higher loan volumes

Commercial Bank

Summary of operations

• Net income attributable to Key of $383 million for the first quarter of 2021, compared to $66 million for the year-ago quarter

• Taxable-equivalent net interest income decreased by $10 million, compared to the first quarter of 2020, as the lower interest rate environment offset fees related to PPP loans

• Average loan and lease balances decreased $1.2 billion, compared to the first quarter of 2020 as lower utilization offset PPP loans

• Average deposit balances increased $15.5 billion, or 42.4%, compared to the first quarter of 2020, driven by growth in targeted relationships and the impact of government programs

• Provision for credit losses decreased $289 million compared to the first quarter of 2020. The provision for credit losses was a net benefit and was driven by expected improvements in economic conditions

• Noninterest income increased $227 million, from the year-ago quarter, driven by favorable market-related adjustments to customer derivatives compared to detriments in 2020, increased investment banking client activity, and higher cards and payments income related to prepaid card revenue

• Noninterest expense increased by $81 million, or 22.4%, from the first quarter of 2020, driven by higher variable compensation from significantly favorable revenue and elevated variable expenses related to prepaid card

Financial Condition

Loans and loans held for sale

Figure 8. Breakdown of Loans at March 31, 2021

(a)Other consumer loans include Consumer direct loans, Credit cards, and Consumer indirect loans. See Note 3 (“Loan Portfolio”) in Item 1. Financial Statements of this report.

At March 31, 2021, total loans outstanding from continuing operations were $100.9 billion, compared to $101.2 billion at December 31, 2020. For more information on balance sheet carrying value, see Note 1 (“Summary of Significant Accounting Policies”) under the headings “Loans” and “Loans Held for Sale” starting on page 100 of our 2020 Form 10-K.

COVID-19 Hardship Relief Programs

In response to the COVID-19 pandemic, beginning in March 2020, we began providing relief and flexibility to our customers through a variety of solutions, including fee waivers, short-term loan modifications, and payment deferrals as well as the suspension of vehicle repossessions and home foreclosures. While the solutions for our commercial borrowers are individually negotiated and tailored to each borrower’s specific facts and circumstances, the most commonly offered relief measures included temporary covenant waivers and/or deferrals of principal and/or interest payments for up to 90 days. We have also granted short-term loan modifications for our consumer loan customers through extensions, deferrals, and forbearance.

The following table provides a summary of portfolio loans and leases as of March 31, 2021, and December 31, 2020, that have received a payment deferral or forbearance as part of our COVID-19 hardship relief programs:

Figure 9. Loans and Leases COVID-19 Hardship Relief

						Outstanding Balance of Loans and Leases
March 31, 2021
dollars in millions						Completed Relief			In Active Relief			Total that have Received Payment Relief
Commercial Loans						$	2,716		$	129		$	2,844
Consumer Loans						1,204			255			1,459
Total Portfolio Loans and Leases						$	3,920		$	384		$	4,304
December 31, 2020
dollars in millions						Completed Relief			In Active Relief			Total that have Received Payment Relief
Commercial Loans						$	2,899		$	181		$	3,079
Consumer Loans						1,179			394			1,572
Total Portfolio Loans and Leases						$	4,077		$	575		$	4,652

The total outstanding balance of commercial loans in active relief as of March 31, 2021, represented 0.2% of the commercial loan portfolio and the total outstanding balance of consumer loans in active relief as of March 31, 2021, represented 0.9% of the consumer loan portfolio.

Under the CARES Act as well as banking regulator interagency guidance, certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S. GAAP. For COVID-19 related loan modifications which occurred from March 1, 2020, through March 31, 2021, and met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies or were otherwise considered to be short term in nature, we have elected to suspend TDR accounting for such loan modifications. Additionally, loans qualifying for these modifications are not required to be reported as delinquent, nonaccrual, impaired, or criticized solely as a result of a COVID-19 loan modification. Refer to Note 4 (“Asset Quality”) under the headings “TDRs” and “Nonperforming and Past Due Loans.”

For loans that receive a payment deferral or forbearance under these hardship relief programs, we continue to accrue interest and recognize interest income during the period of the deferral. Depending on the terms of each program, all or a portion of this accrued interest may be paid directly by the borrower (either during the relief period, at the end of the relief period, or at maturity of the loan) or added to the customer’s outstanding balance. For certain programs, the maturity date of the loan may also be extended by the number of payments deferred. Interest income will continue to be accrued at the original contractual interest rate unless that rate is concurrently modified upon entering the relief program (in which case, the modified rate would be used to recognize interest).

Commercial loan portfolio

Commercial loans outstanding were $71.4 billion at March 31, 2021, a decrease of $0.6 billion, or .8%, compared to December 31, 2020, driven by lower commercial and industrial utilization rates, partly offset by an increase in PPP funding.

As a result of the current economic environment, our commercial loan portfolio is going through active portfolio surveillance. We are conducting ongoing portfolio reviews on our commercial loans with any risk rating migrations being closely monitored. We have centralized internal reporting on enterprise-wide relief initiatives, as well as following any potential relief initiatives that may come in the future. We established a pandemic watchlist and are performing ongoing reviews of commercial clients that are likely to be impacted by COVID-19. These clients represent a small portion of the overall portfolio and are diversified by type and geography. Figure 10 summarizes our commercial portfolios that are at risk of being impacted by the COVID-19 pandemic as of March 31, 2021, and December 31, 2020.

Figure 10. Select Commercial Portfolio Focus Areas

dollars in millions			Outstanding as of March 31, 2021			Percentage of total loans as of March 31, 2021			Outstanding as of December 31, 2020			Percentage of total loans as of December 31, 2020
Consumer behavior (a)			$	5,112		5.1		%	$	5,083		5.0		%
Education			1,557			1.5			1,541			1.5
Sports			664			.7			690			.7
Restaurants			368			.4			400			.4
Retail commercial real estate (b)			396			.4			525			.5
Nondurable retail (c)			595			.6			638			.6
Travel/Tourism (d)			2,440			2.4			2,523			2.5
Hotels			767			.8			784			.8
Leveraged lending (e)			1,674			1.7			1,700			1.7
Oil and gas			1,792			1.8			1,992			2.0
Upstream (reserve based)			1,141			1.1			1,263			1.2
Midstream			389			.4			468			.5
Downstream			58			.1			98			.1

(a)Consumer behavior includes restaurants, sports, entertainment and leisure, services, education, etc.

(b)Retail commercial real estate is mainly composed of regional malls, strip centers (unanchored) and lifestyle centers.

(c)Nondurable retail includes direct lending to retailers including apparel, hobby shops, nursery garden centers, cosmetics, and gas stations with convenience stores.

(d)Travel/Tourism includes hotels, tours, and air/water/rail leasing.

(e)Leveraged lending exposures have total debt to EBITDA greater than four times or senior debt to EBITDA greater than three times and meet the purpose test (the new debt finances a buyout, acquisition, or capital distribution).

Figure 11 provides our commercial loan portfolios by industry classification at March 31, 2021, and December 31, 2020.

Figure 11. Commercial Loans by Industry

March 31, 2021			Commercial and industrial						Commercial real estate						Commercial lease financing						Total commercial loans						Percent of total
dollars in millions
Industry classification:
Agriculture			$	958					$	129					$	97					$	1,184					1.7		%
Automotive			1,672						509						17						2,198						3.1
Business products			1,561						128						43						1,732						2.4
Business services			3,942						218						204						4,364						6.1
Chemicals			761						32						29						822						1.2
Commercial real estate			5,591						10,353						11						15,955						22.3
Construction materials and contractors			2,606						263						228						3,097						4.3
Consumer discretionary			3,744						489						258						4,491						6.3
Consumer services			5,883						906						490						7,279						10.2
Equipment			1,339						84						131						1,554						2.2
Finance			5,770						93						357						6,220						8.7
Healthcare			3,945						1,351						292						5,588						7.8
Metals and mining			1,076						51						25						1,152						1.6
Oil and gas			1,742						41						55						1,838						2.6
Public exposure			2,475						14						696						3,185						4.5
Technology			748						18						169						935						1.3
Transportation			1,431						130						603						2,164						3.0
Utilities			5,269						—						394						5,663						7.9
Other			1,973						15						5						1,993						2.8
Total			$	52,486					$	14,824					$	4,104					$	71,414					100.0		%
December 31, 2020			Commercial and industrial						Commercial real estate						Commercial lease financing						Total commercial loans						Percent of total
dollars in millions
Industry classification:
Agriculture			$	1,002					$	148					$	97					$	1,247					1.7		%
Automotive			1,863						510						19						2,392						3.3
Business products			1,523						117						45						1,685						2.3
Business services			4,098						221						202						4,521						6.3
Chemicals			700						30						34						764						1.1
Commercial real estate			5,966						10,187						11						16,164						22.5
Construction materials and contractors			2,571						271						233						3,075						4.3
Consumer discretionary			3,832						404						371						4,607						6.4
Consumer services			6,123						900						525						7,548						10.5
Equipment			1,447						84						120						1,651						2.3
Finance			6,190						92						396						6,678						9.3
Healthcare			4,348						1,396						306						6,050						8.4
Metals and mining			1,074						56						29						1,159						1.6
Oil and gas			1,928						43						62						2,033						2.8
Public exposure			2,332						25						709						3,066						4.3
Technology			741						20						191						952						1.2
Transportation			1,434						144						631						2,209						3.1
Utilities			5,239						1						397						5,637						7.8
Other			496						25						21						542						.8
Total			$	52,907					$	14,674					$	4,399					$	71,980					100.0		%

Commercial and industrial. Commercial and industrial loans are the largest component of our loan portfolio, representing 52% of our total loan portfolio at March 31, 2021, and 52% at December 31, 2020. This portfolio is approximately 71% variable rate and consists of loans originated primarily to large corporate, middle market, and small business clients.

Commercial and industrial loans totaled $52.5 billion at March 31, 2021, a decrease of $0.4 billion, or 0.8%, compared to December 31, 2020. The decline was broad-based and spread across most industry categories, reflecting continued declines in commercial line utilization rates, mostly offset by over $2 billion of additional lending related to the PPP during the first quarter of 2021.

Commercial real estate loans. Our commercial real estate portfolio includes both mortgage and construction loans and is conducted through two primary sources: our 15-state banking franchise, and KeyBank Real Estate Capital, a national line of business within the Commercial Bank that cultivates relationships with owners of commercial real estate located both within and beyond the branch system. Nonowner-occupied properties, generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties, represented 79% of total commercial real estate loans outstanding at March 31, 2021. Construction loans, which provide a stream of

funding for properties not fully leased at origination to support debt service payments over the term of the contract or project, represented 14% of commercial real estate loans at period end.

At March 31, 2021, commercial real estate loans totaled $14.8 billion, which includes $12.7 billion of mortgage loans and $2.1 billion of construction loans. Compared to December 31, 2020, this portfolio increased $150 million, or 1.0%. The growth reflects an increase in construction loans as the impact of COVID-19 resulted in a decline in retail, office and hospitality lending. However, we continue to focus primarily on owners of completed and stabilized commercial real estate in accordance with our relationship strategy.

As shown in Figure 12, our commercial real estate loan portfolio includes various property types and geographic

locations of the underlying collateral. These loans include commercial mortgage and construction loans in both

Consumer Bank and Commercial Bank.

Figure 12. Commercial Real Estate Loans

			Geographic Region																					Total			Percent of Total			Construction			Commercial Mortgage
dollars in millions			West			Southwest			Central			Midwest			Southeast			Northeast			National
March 31, 2021
Nonowner-occupied:
Retail properties			$	119		$	15		$	127		$	120		$	71		$	434		$	125		$	1,011		6.8		%	$	55		$	956
Multifamily properties			658			271			988			820			1,348			1,493			161			5,739			38.7			1,559			4,180
Health facilities			87			49			81			87			170			479			293			1,246			8.4			106			1,140
Office buildings			287			—			272			144			230			597			131			1,661			11.2			43			1,618
Warehouses			53			30			66			18			66			268			120			621			4.2			65			556
Manufacturing facilities			41			—			28			20			40			34			47			210			1.4			15			195
Hotels/Motels			75			—			19			—			12			110			91			307			2.1			19			288
Residential properties			—			—			—			3			—			47			—			50			.4			—			50
Land and development			18			5			—			2			5			28			—			58			.4			35			23
Other			125			21			6			99			67			241			305			864			5.8			65			799
Total nonowner-occupied			1,463			391			1,587			1,313			2,009			3,731			1,273			11,767			79.4			1,962			9,805
Owner-occupied			960			1			277			488			60			1,271			—			3,057			20.6			160			2,897
Total			$	2,423		$	392		$	1,864		$	1,801		$	2,069		$	5,002		$	1,273		14,824			100.0		%	$	2,122		$	12,702
Nonperforming loans			$	1		—			—			$	8		$	4		$	23		$	29		$	65		N/M			$	—		$	65
Accruing loans past due 90 days or more			1			—			—			1			3			21			—			26			N/M			—			26
Accruing loans past due 30 through 89 days			5			$	—		$	12		3			—			20			—			40			N/M			10			30
December 31, 2020
Nonowner-occupied:
Retail properties			$	119		$	15		$	129		$	122		$	72		$	448		$	122		$	1,027		6.8		%	$	54		$	973
Multifamily properties			685			228			875			800			1,284			1,493			229			5,594			38.1			1,442			4,152
Health facilities			83			53			85			87			170			487			338			1,303			8.7			91			1,212
Office buildings			276			—			253			142			193			628			147			1,639			11.2			48			1,591
Warehouses			54			31			66			40			52			259			161			663			4.6			74			589
Manufacturing facilities			42			—			28			15			40			34			43			202			1.3			10			192
Hotels/Motels			76			—			19			—			12			107			91			305			2.1			18			287
Residential properties			—			—			—			3			—			53			—			56			.4			—			56
Land and development			15			5			—			2			5			28			—			55			.4			33			22
Other			108			22			6			93			69			245			279			822			6.4			65			757
Total nonowner-occupied			1,458			354			1,461			1,304			1,897			3,782			1,410			11,666			80.0			1,835			9,831
Owner-occupied			870			4			275			499			63			1,297			—			3,008			20.0			152			2,856
Total			$	2,328		$	358		$	1,736		$	1,803		$	1,960		$	5,079		$	1,410		$	14,674		100.0		%	$	1,987		$	12,687
Nonperforming loans			$	1		—			—			$	7		$	6		$	44		$	44		$	103		N/M			$	2		$	85
Accruing loans past due 90 days or more			—			—			—			1			—			22			—			22			N/M			1			12
Accruing loans past due 30 through 89 days			3			—			—			2			3			7			—			14			N/M			2			14

West –			Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming
Southwest –			Arizona, Nevada, and New Mexico
Central –			Arkansas, Colorado, Oklahoma, Texas, and Utah
Midwest –			Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin
Southeast –			Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington D.C., and West Virginia
Northeast –			Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont
National –			Accounts in three or more regions

Consumer loan portfolio

Consumer loans outstanding as of March 31, 2021 totaled $29.5 billion, an increase of $0.3 billion, or 1.1%, from December 31, 2020, driven by growth from the consumer mortgage business and Laurel Road, partly offset by the runoff of indirect auto loans.

The home equity portfolio is comprised of loans originated by our Consumer Bank within our 15-state footprint and is the largest segment of our consumer loan portfolio, representing 31% of consumer loans outstanding at March 31, 2021.

We held the first lien position for approximately 68% of the home equity portfolio at March 31, 2021, and 66% at December 31, 2020. For loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent FICO scores as well as updated loan-to-value ratios. This information is used in establishing the ALLL. Our methodology is described in Note 1 (“Basis of Presentation and Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” of this report.

Figure 13. Consumer Loans by State

in millions			Real estate — residential mortgage			Home equity loans			Consumer direct loans			Credit cards			Consumer indirect loans			Total
March 31, 2021
New York			$	1,150		$	2,545		$	586		$	323		$	642		$	5,246
Ohio			732			1,362			476			201			856			3,627
Washington			2,141			1,237			227			80			18			3,703
Pennsylvania			290			642			261			49			481			1,723
California			807			13			332			3			17			1,172
Texas			84			7			263			3			9			366
Colorado			899			317			145			28			5			1,394
Connecticut			881			345			91			23			124			1,464
Oregon			756			767			98			39			3			1,663
Florida			364			57			250			12			29			712
Other			2,196			1,866			2,133			148			2,099			8,442
Total			$	10,300		$	9,158		$	4,862		$	909		$	4,283		$	29,512
December 31, 2020
New York			$	1,164		$	2,553		$	593		$	353		$	731		$	5,394
Ohio			698			1,375			479			217			957			3,726
Washington			1,835			1,300			236			86			20			3,477
Pennsylvania			286			648			255			52			539			1,780
California			516			14			303			4			19			856
Texas			74			7			241			3			10			335
Colorado			828			345			140			30			6			1,349
Connecticut			914			352			87			25			141			1,519
Oregon			720			782			97			41			4			1,644
Massachusetts			239			48			103			5			460			855
Other			2,024			1,936			2,180			173			1,957			8,270
Total			$	9,298		$	9,360		$	4,714		$	989		$	4,844		$	29,205

Figure 14 summarizes our loan sales for the first three months of 2021 and all of 2020.

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

in millions			Commercial			Commercial Real Estate			Commercial Lease Financing			Residential Real Estate			Consumer Direct			Total
2021
First quarter			$	124		$	1,930		$	156		$	1,129		$	—		$	3,339
Total			$	124		$	1,930		$	156		$	1,129		$	—		$	3,339
2020
Fourth quarter			$	197		$	2,412		$	135		$	1,256		$	—		$	4,000
Third quarter			163			1,999			67			1,235			208			3,672
Second quarter			82			2,661			47			925			—			3,715
First quarter			55			2,022			81			546			—			2,704
Total			$	497		$	9,094		$	330		$	3,962		$	208		$	14,091

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

Figure 15. Loans Administered or Serviced

in millions			March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Commercial real estate loans			$	386,908		$	371,016		$	380,110		$	357,509		$	354,919
Residential mortgage			8,838			8,311			7,670			6,922			6,405
Education loans			489			516			540			567			594
Commercial lease financing			1,371			1,359			1,273			1,126			1,029
Commercial loans			695			684			652			623			614
Consumer direct			1,109			1,711			1,966			1,710			1,999
Total			$	399,410		$	383,597		$	392,211		$	368,457		$	365,560

In the event of default by a borrower, we are subject to recourse with respect to approximately $6.0 billion of the $399.4 billion of loans administered or serviced at March 31, 2021. Additional information about this recourse arrangement is included in Note 17 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with FNMA.”

We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as “Consumer mortgage income” and “Commercial mortgage servicing fees”) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing loans. Additional information about our mortgage servicing assets is included in Note 8 (“Mortgage Servicing Assets”).

Securities

Our securities portfolio totaled $40.8 billion at March 31, 2021, compared to $35.2 billion at December 31, 2020. Available-for-sale securities were $33.9 billion at March 31, 2021, compared to $27.6 billion at December 31, 2020. Held-to-maturity securities were $6.9 billion at March 31, 2021, and $7.6 billion at December 31, 2020.

As shown in Figure 16, all of our mortgage-backed securities, which include both securities available-for-sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at amortized cost for the held-to-maturity portfolio. For more information about these securities, see Note 1 (“Basis of Presentation and Accounting Policies”), Note 5 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques,” and Note 6 (“Securities”).

Figure 16. Mortgage-Backed Securities by Issuer

in millions			March 31, 2021			December 31, 2020
FHLMC			$	8,969		$	8,782
FNMA			15,414			13,213
GNMA			11,442			12,109
Total (a)			$	35,825		$	34,104

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

Securities available for sale

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

Figure 17 shows the composition, yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 6 (“Securities”).

Figure 17. Securities Available for Sale

dollars in millions			U.S. Treasury, Agencies, and Corporations			States and Political Subdivisions			Agency Residential Collateralized Mortgage Obligations (a)			Agency Residential Mortgage-backed Securities (a)			Agency Commercial Mortgage-backed Securities (a)			Other Securities			Total			Weighted-Average Yield (b)
March 31, 2021
Remaining maturity:
One year or less			$	—		—			$	878		$	3		—			$	22		$	903		1.14		%
After one through five years			4,901			—			10,550			2,664			$	3,118		—			21,233			1.55
After five through ten years			—			—			2,804			1,357			4,236			—			8,397			1.79
After ten years			—			—			217			2			3,171			—			3,390			1.46
Fair value			$	4,901		—			$	14,449		$	4,026		$	10,525		$	22		$	33,923		—
Amortized cost			$	4,914		—			$	14,419		$	4,018		$	10,644		$	8		$	34,003		1.59		%
Weighted-average yield (b)			.29		%	—			1.68		%	1.66		%	2.05		%	.05		%	1.59		%	—
Weighted-average maturity			3.0 years			— years			3.8 years			4.8 years			8.1 years			.7 years			5.1 years			—
December 31, 2020
Fair value			$	1,000		—			$	14,273		$	2,164		$	10,106		$	13		$	27,556		—
Amortized cost			1,000			—			14,001			2,094			9,707			8			26,810			2.09		%

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

(b)Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate of 21%.

Held-to-maturity securities

Federal agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance is comprised of foreign bonds and asset-backed securities. Figure 18 shows the composition, yields, and remaining maturities of these securities.

Figure 18. Held-to-Maturity Securities

dollars in millions			Agency Residential Collateralized Mortgage Obligations (a)			Agency Residential Mortgage-backed Securities (a)			Agency Commercial Mortgage-backed Securities (a)			Asset-backed securities			Other Securities			Total			Weighted-Average Yield (b)
March 31, 2021
Remaining maturity:
One year or less			$	78		—			—			$	2		$	4		$	84		2.18		%
After one through five years			2,495			$	205		$	1,877		14			12			4,603			2.40
After five through ten years			739			33			1,398			—			—			2,170			2.62
After ten years			—			—			—			—			—			—			—
Amortized cost			$	3,312		$	238		$	3,275		$	16		$	16		$	6,857		2.46		%
Fair value			$	3,419		$	247		$	3,461		$	16		$	16		$	7,159		—
Weighted-average yield (b)			2.11		%	2.50		%	2.82		%	1.76		%	2.63		%	2.46		%	—
Weighted-average maturity			3.8 years			4.4 years			4.9 years			2.9 years			2.8 years			4.3 years			—
December 31, 2020
Amortized cost			$	3,775		$	271		$	3,515		19			$	15		$	7,595		2.46		%
Fair value			3,899			285			3,805			19			15			8,023			—

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

(b)Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate of 21%.

Deposits and other sources of funds

Figure 19. Breakdown of Deposits at March 31, 2021

Deposits are our primary source of funding. At March 31, 2021, our deposits totaled $142.2 billion, an increase of $6.9 billion compared to December 31, 2020. The increase was driven by existing relationships and targeted strategic growth of commercial clients, as well as growth from consumer stimulus payments and lower consumer spending.

Wholesale funds, consisting of short-term borrowings and long-term debt, totaled $13.5 billion at March 31, 2021, compared to $14.7 billion at December 31, 2020. Strong deposit growth and elevated levels of liquidity resulted in less reliance on wholesale funds to support the growth in the balance sheet.

Capital

The objective of capital management is to maintain capital levels consistent with our risk appetite and of a sufficient amount to operate under a wide range of economic conditions. We have identified three primary uses of capital:

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

2. Maintaining or increasing our Common Share dividend; and

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

The following sections discuss certain ways we have deployed our capital. For further information, see the Consolidated Statements of Changes in Equity and Note 19 (“Shareholders' Equity”).

(a)Common Share repurchases which were suspended during the first quarter of 2020 in response to the COVID-19 pandemic have resumed in the first quarter of 2021.

(b)The dividend payout ratio for the first and second quarters of 2020 was impacted by lower EPS which was impacted by the economic fallout from the COVID-19 pandemic.

Dividends

Consistent with our 2020 capital plan, we paid a quarterly dividend of $.185 per Common Share for the first quarter of 2021. Further information regarding the capital planning process and CCAR is included under the heading “Capital planning and stress testing” in the “Supervision and Regulation” section beginning on page 15 of our 2020 Form 10-K.

Common shares outstanding

Our Common Shares are traded on the NYSE under the symbol KEY with 31,754 holders of record at March 31, 2021. Our book value per Common Share was $16.22 based on 972.6 million shares outstanding at March 31, 2021, compared to $16.53 per Common Share based on 975.8 million shares outstanding at December 31, 2020. At March 31, 2021, our tangible book value per Common Share was $13.30, compared to $13.61 per Common Share at December 31, 2020.

Figure 20 shows activities that caused the change in outstanding Common Shares over the past five quarters.

Figure 20. Changes in Common Shares Outstanding

			2021						2020
in thousands			First						Fourth			Third			Second			First
Shares outstanding at beginning of period			975,773						976,205			975,947			975,319			977,189
Open market repurchases and return of shares under employee compensation plans			(9,277)						(1,092)			(1)			(19)			(7,862)
Shares issued under employee compensation plans (net of cancellations)			6,091						660			259			647			5,992
Shares outstanding at end of period			972,587						975,773			976,205			975,947			975,319

As shown above, Common Shares outstanding decreased by 3.2 million shares during the first quarter of 2021.

At March 31, 2021, we had 284.1 million treasury shares, compared to 280.9 million treasury shares at December 31, 2020. Going forward we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.

Information on repurchases of Common Shares by KeyCorp is included in Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this report.

Capital adequacy

Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remained in excess of regulatory requirements at March 31, 2021. Our capital and liquidity levels are intended to position us to weather an adverse operating environment while continuing to serve our clients’ needs, as well as to meet the Regulatory Capital Rules described in Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation.” Our shareholders’ equity to assets ratio was 10.01% at March 31, 2021, compared to 10.56% at December 31, 2020. Our tangible common equity to tangible assets ratio was 7.46% at March 31, 2021, compared to 7.93% at December 31, 2020. See the section entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity.” The minimum capital and leverage ratios under the Regulatory Capital Rules together with the ratios of KeyCorp at March 31, 2021, are set forth in the “Supervision and regulation — Regulatory capital requirements” section in Item 2 of this report.

Figure 21 represents the details of our regulatory capital positions at March 31, 2021, and December 31, 2020, under the Regulatory Capital Rules. Information regarding the regulatory capital ratios of KeyCorp’s banking subsidiaries is presented annually, with the most recent information included in Note 24 (“Shareholders' Equity”) beginning on page 177 of our 2020 Form 10-K.

Figure 21. Capital Components and Risk-Weighted Assets

			dollars in millions			March 31, 2021			December 31, 2020
COMMON EQUITY TIER 1
Key shareholders’ equity (GAAP)						$	17,634		$	17,981
Less:			Preferred Stock (a)			1,856			1,856
Add:			CECL phase-in (b)			322			375
			Common Equity Tier 1 capital before adjustments and deductions			16,100			16,500
Less:			Goodwill, net of deferred taxes			2,564			2,560
			Intangible assets, net of deferred taxes			138			151
			Deferred tax assets			11			1
			Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes			158			583
			Accumulated gains (losses) on cash flow hedges, net of deferred taxes			248			460
			Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes			(303)			(306)
			Total Common Equity Tier 1 capital			$	13,284		$	13,051
TIER 1 CAPITAL
Common Equity Tier 1						$	13,284		$	13,051
Additional Tier 1 capital instruments and related surplus						1,856			1,856
Less:			Deductions			—			—
			Total Tier 1 capital			15,140			14,907
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus						1,658			1,657
Allowance for losses on loans and liability for losses on lending-related commitments (c)						1,254			1,412
Less:			Deductions			—			—
			Total Tier 2 capital			2,912			3,069
			Total risk-based capital			$	18,052		$	17,976
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet						$	102,878		$	103,604
Risk-weighted off-balance sheet exposure						29,392			29,240
Market risk-equivalent assets						2,046			1,354
Gross risk-weighted assets						134,316			134,198
Less:			Excess allowance for loan and lease losses			—			—
			Net risk-weighted assets			$	134,316		$	134,198
AVERAGE QUARTERLY TOTAL ASSETS						$	170,220		$	166,771
CAPITAL RATIOS
Tier 1 risk-based capital						11.27		%	11.11		%
Total risk-based capital						13.44		%	13.40		%
Leverage (d)						8.89		%	8.94		%
Common Equity Tier 1						9.89		%	9.73		%

(a)Net of capital surplus.

(b)Amount reflects our decision to adopt the CECL transitional provision.

(c)The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the institution’s standardized total risk-weighted assets (excluding its standardized market risk-weighted assets). The ALLL includes $33 million and $36 million of allowance classified as “discontinued assets” on the balance sheet at March 31, 2021, and December 31, 2020, respectively.

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

Risk Management

Overview

Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, compliance, operational, liquidity, market, reputation, strategic, and model risks. Our risk management activities are focused on ensuring that we properly identify, measure, and manage such risks across the entire enterprise to maintain safety and soundness, and to maximize profitability. There have been no significant changes in our Risk Management practices as described under the heading “Risk Management” beginning on page 72 of our 2020 Form 10-K.

Market risk management

Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, and volatilities will reduce Key’s income and the value of its portfolios. These factors influence prospective yields, values, or prices associated with the instrument. We are exposed to market risk both in our trading and nontrading activities, which include asset and liability management activities. Information regarding our fair value policies, procedures, and methodologies is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” on page 112 of our 2020 Form 10-K and Note 5 (“Fair Value Measurements”) in this report.

Trading market risk

Key incurs market risk as a result of trading activities that are used in support of client facilitation and hedging activities, principally within our investment banking and capital markets businesses. Key has exposures to a wide range of risk factors including interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading and hedging activities in the derivative and fixed income markets, including securitization positions exposures. At March 31, 2021, we did not have any re-securitization positions. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks including but not limited to credit risk and interest rate risk. The risks associated with these activities are mitigated in accordance with the Market Risk hedging policy. The majority of our positions are traded in active markets.

Market risk management is an integral part of Key’s risk culture. The Risk Committee of our Board provides oversight of trading market risks. The ERM Committee and the Market Risk Committee regularly review and discuss market risk reports prepared by our MRM that contain our market risk exposures and results of monitoring activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment. For more information regarding monitoring of trading positions and the activities related to the Market Risk Rule compliance, see ”Market Risk Management” beginning on page 73 of our 2020 Form 10-K.

VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to assess extreme conditions on market risk within our trading portfolios. The MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.

We use a historical simulation VaR model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions and other non-covered positions. We analyze market risk by portfolios and do not separately measure and monitor our portfolios by risk type. Historical scenarios are customized for specific positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level. For more information regarding our VaR model, its governance and assumptions, see ”Market Risk Management” on page 73 of our 2020 Form 10-K.

Actual losses for the total covered portfolios did not exceed aggregate daily VaR at any day during the quarter ended March 31, 2021. Actual losses for the total covered portfolios exceeded aggregate daily VaR at a 99% confidence level and one day holding period twice during the quarter ended March 31, 2020, due to market volatility related to COVID-19. The MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. We do not engage in correlation trading or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.

The aggregate VaR at the 99% confidence level with a one day holding period for all covered positions was $2.5 million at March 31, 2021, and $3.0 million at March 31, 2020. Figure 22 summarizes our VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended March 31, 2021, and March 31, 2020.

Figure 22. VaR for Significant Portfolios of Covered Positions

			2021															2020
			Three months ended March 31,															Three months ended March 31,
in millions			High			Low			Mean			March 31,						High			Low			Mean			March 31,
Trading account assets:
Fixed income			$	6.4		$	2.0		$	4.0		$	2.1					$	3.3		$	.5		$	1.2		$	2.6
Derivatives:
Interest rate			$	.6		.2			$	.4		$	.2					$	.3		.1			$	.1		$	.3

Stressed VaR is calculated by running the portfolios through a predetermined stress period which is approved by the Market Risk Committee and is calculated at the 99% confidence level using the same model and assumptions used for general VaR. The aggregate stressed VaR for all covered positions was $6.2 million at March 31, 2021, and $4.1 million at March 31, 2020. Figure 23 summarizes our stressed VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended March 31, 2021, and March 31, 2020.

Figure 23. Stressed VaR for Significant Portfolios of Covered Positions

			2021															2020
			Three months ended March 31,															Three months ended March 31,
in millions			High			Low			Mean			March 31,						High			Low			Mean			March 31,
Trading account assets:
Fixed income			$	6.6		$	2.0		$	4.5		$	5.5					$	5.1		$	2.2		$	3.8		$	3.7
Derivatives:
Interest rate			$	.6		$	.2		$	.4		$	.4					$	1.0		$	.1		$	.3		$	.2

Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset amount, which consists of a VaR component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on including the securitization positions. The aggregate market value of the securitization positions as defined by the Market Risk Rule was $33 million at March 31, 2021, all of which were mortgage-backed security positions. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors and is measured through a standardized approach. Market risk weighted assets, including the specific risk calculations, are run quarterly by the MRM in accordance with the Market Risk Rule, and approved by the Chief Market Risk Officer.

Nontrading market risk

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

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

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

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

• “Yield curve risk” is the exposure to nonparallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve.

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

The management of nontrading market risk is centralized within Corporate Treasury. The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and the ALCO review reports on the interest rate risk exposures described above. In addition, the ALCO reviews reports on stress tests and sensitivity analyses related to interest rate risk. These committees have various responsibilities related to managing nontrading market risk, including recommending, approving, and monitoring strategies that maintain risk positions within approved tolerance ranges. The A/LM policy provides the framework for the oversight and management of interest rate risk and is administered by the ALCO. The MRM, as the second line of defense, provides additional oversight.

LIBOR Transition

As disclosed in Item 1A. Risk Factors of our 2020 Form 10-K, LIBOR in its current form will generally not be available after 2021 for new contracts and will cease publishing all tenors entirely after June 30, 2023. For most products, the most likely replacement rate is expected to be SOFR, which has been recommended by the ARRC, although uncertainty remains as to whether new benchmarks may evolve and a different credit sensitive benchmark could instead become the market-accepted benchmark. The Federal Reserve and the OCC have encouraged financial institutions not to wait for the end of 2021 to make the transition away from LIBOR. We have established an enterprise wide program to identify and address all LIBOR transition issues. We are collaborating closely with regulators and industry groups on the transition and closely monitoring developments in industry practices related to LIBOR alternatives. The goals of our LIBOR transition program are to:

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

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

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

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

• Determine and execute system and process work to be operationally ready for SOFR or additional credit sensitive benchmarks; and

• Originate new loans using SOFR.

As part of the LIBOR transition program, we completed an initial risk assessment to help us identify the impact and risks associated with various products, systems, processes, and models. This risk assessment has assisted us in making necessary updates to our infrastructure and operational systems and processes to implement a replacement rate, and we are progressing on schedule to be operationally ready for SOFR. We have compiled an inventory of existing legal contracts that are impacted by the LIBOR transition. We are assessing the LIBOR fallback language in those contracts and are devising a strategy to address the LIBOR transition for those contracts. We have also focused on refining LIBOR fallback language in new legal contracts including requiring the use of robust fallback language. Our progress is well-paced, especially as many of the legacy contracts will be provided additional

time to remediate due to announcements by the ICE Benchmark Administration, the FCA-regulated and authorized administrator of LIBOR, that certain LIBOR tenors may continue until June 2023 for legacy contract purposes. In addition, we are on schedule with executing a strategy to address the LIBOR transition for contracts that must transition by the end of 2021. We expect to leverage recommendations made by the ARRC and ISDA that are tailored to our specific client segments.

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

Figure 24 presents the results of the simulation analysis at March 31, 2021, and March 31, 2020. At March 31, 2021, our simulated impact to changes in interest rates was modest. The exposure to declining rates has decreased from an elevated level at March 31, 2020 that was a result of a short term widening of the spread between the Fed Funds Target Rate and LIBOR. As LIBOR declined and the relationship between the two short term market rates normalized, the exposure to declining rates decreased. Exposure to declining rates remains nominal given the low level of market rates in comparison to the floor utilized in the scenario. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual, parallel 200 basis point increase or 200 basis point decrease in interest rates over the next 12 months would adversely affect net interest income over the same period by more than 5.5%. Current modeled exposure is within Board approved tolerances.

Figure 24. Simulated Change in Net Interest Income

			March 31, 2021												March 31, 2020
Basis point change assumption (short-term rates)			-200						+200						-200						200
Assumed floor in market rates (in basis points)			—						N/A						—						N/A
Tolerance level			-5.50			%			-5.50			%			-5.50			%			-5.50			%
Interest rate risk assessment			-2.89			%			4.75			%			-4.97			%			5.95			%

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

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

The results of additional assessments indicate that net interest income could increase or decrease from the base simulation results presented in Figure 24. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate changes and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. If fixed rate assets increase by $1 billion, or fixed rate liabilities decrease by $1 billion, then the benefit to rising rates would decrease by approximately 25 basis points. If the interest-bearing liquid deposit beta assumption increases or decreases by 5% (e.g., 40% to 45%), then the benefit to rising rates would decrease or increase by approximately 120 basis points.

Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. Corporate Treasury discretionary activities related to funding, investing, and hedging may

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

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

Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities, and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities, and off-balance sheet instruments, and comparing those amounts with the base case of the current interest rate environment. The interest rate shock scenarios are equal to the current Fed Target Rate capped at 200 basis points. In the current low rate environment, the declining shock scenario is reduced with a 100 basis point minimum. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines as of March 31, 2021.

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

Figure 25 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a “receive fixed/pay variable” interest rate swap. The volume, maturity, and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 7 (“Derivatives and Hedging Activities”).

Figure 25. Portfolio Swaps by Interest Rate Risk Management Strategy

			March 31, 2021
												Weighted-Average												December 31, 2020
dollars in millions			Notional Amount			Fair Value						Maturity (Years)			Receive Rate			Pay Rate						Notional Amount			Fair Value
Receive fixed/pay variable — conventional A/LM (a)			$	25,785		$	344					2.7			1.4		%	.1		%				$	21,035		$	632
Receive fixed/pay variable — conventional debt			6,902			210						4.0			1.9			.1						7,787			415
Receive fixed/pay variable — forward A/LM			—			—						—			—			—						—			—
Pay fixed/receive variable — conventional debt			50			(7)						7.3			.2			3.6						50			(11)
Pay fixed/receive variable — forward securities			3,880			287						10.9			.6			1.0						2,080			21
Total portfolio swaps			$	36,617		$	834		(c)			3.8			1.5		%	.2		%				$	30,952		$	1,057		(c)
Floors — conventional A/LM — purchased (b)			$	5,000		$	11					.6			—			—						$	5,000		17
Floors — conventional A/LM — sold (b)			—			—						—			—			—						—			—
Total floors			$	5,000		$	11					1.0			—			—						$	5,000		17

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

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

(c)Excludes accrued interest of $127 million and $145 million at March 31, 2021, and December 31, 2020, respectively.

Liquidity risk management

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

Factors affecting liquidity

Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, global pandemics (including COVID-19), political events, or the default or bankruptcy of a major corporation, mutual fund, or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general, may adversely affect the cost and availability of normal funding sources. See Part I, Item 1A. Risk Factors section “IV. Liquidity Risk” in our 2020 Form 10-K for a discussion of how the COVID-19 global pandemic has impacted our liquidity and may continue to impact it in the future.

Our credit ratings at March 31, 2021, are shown in Figure 26. We believe these credit ratings, under normal conditions in the capital markets, would enable KeyCorp or KeyBank to issue fixed income securities to investors.

Figure 26. Credit Ratings

March 31, 2021			Short-Term Borrowings			Long-Term Deposits (a)			Senior Long-Term Debt			Subordinated Long-Term Debt			Capital Securities			Preferred Stock
KEYCORP (THE PARENT COMPANY)
Standard & Poor’s			A-2			N/A			BBB+			BBB			BB+			BB+
Moody’s			P-2			N/A			Baa1			Baa1			Baa2			Baa3
Fitch Ratings, Inc.			F1			N/A			A-			BBB+			BB+			BB+
DBRS, Inc.			R-1 (low)			N/A			A			A (low)			A (low)			BBB
KEYBANK
Standard & Poor’s			A-2			N/A			A-			BBB+			N/A			N/A
Moody’s			P-2			P-1/Aa3			A3			Baa1			N/A			N/A
Fitch Ratings, Inc.			F1			A			A-			BBB+			N/A			N/A
DBRS, Inc.			R-1 (middle)			A (high)			A (high)			A			N/A			N/A

(a)P-1 rating assigned by Moody’s is specific to KeyBank’s short-term bank deposit ratings.

Sources of liquidity

Our primary sources of funding for KeyBank include customer deposits, wholesale funding, and liquid assets. As of March 31, 2021, our consolidated loan-to-deposit ratio was 73%. In addition, we also have access to various sources of wholesale funding, maintain a portfolio of liquid assets, and have borrowing capacity at the FHLB and Federal Reserve Bank of Cleveland. Our liquid asset portfolio at March 31, 2021, totaled $41.0 billion, consisting of $25.9 billion of unpledged securities, $49.2 million of securities available for secured funding at the FHLB, and $15.1 billion of net balances of federal funds sold and balances in our Federal Reserve account. Additionally, as of March 31, 2021, our unused borrowing capacity secured by loan collateral was $22.7 billion at the Federal Reserve Bank of Cleveland and $9.2 billion at the FHLB. During the first quarter of 2021, our secured term borrowings decreased $1.4 million as advances were paid down. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or on-balance sheet liquid reserves. Conversely, excess cash generated by operating, investing, and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.

Liquidity for KeyCorp

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

At March 31, 2021, KeyCorp held $2.7 billion in cash, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.

Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. During the first quarter of 2021, KeyBank paid $375 million in cash dividends to KeyCorp. As of March 31, 2021, KeyBank had regulatory capacity to pay $975 million in dividends to KeyCorp without prior regulatory approval.

Our liquidity position and recent activity

Over the past quarter, our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of an increase in unpledged securities, which was partially offset by a decrease in cash held at the Federal Reserve. The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution.

From time to time, KeyCorp or KeyBank may seek to retire, repurchase, or exchange outstanding debt, capital securities, preferred shares, or Common Shares through cash purchase, privately negotiated transactions or other means. Additional information on repurchases of Common Shares by KeyCorp is included in Part II, Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities beginning on page 39 of our 2020 Form 10-K. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements, and other factors. The amounts involved may be material, individually or collectively.

The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the three-month periods ended March 31, 2021, and March 31, 2020.

For more information regarding liquidity governance structure, factors affecting liquidity, management of liquidity risk at KeyBank and KeyCorp, long-term liquidity strategies, and other liquidity programs, see ”Liquidity Risk Management” beginning on page 79 of our 2020 Form 10-K.

Credit risk management

Credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, provide financial and payments products, and enter into financial derivative contracts, all of which have related credit risk.

Credit policy, approval, and evaluation

We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves management credit policies and recommends significant credit policies to the Enterprise Risk Management Committee, the KeyBank Board, and the Risk Committee of the Board for approval. These policies are communicated throughout the organization to foster a consistent approach to granting credit. As a result of the current economic environment, our commercial loan portfolio is going through active portfolio surveillance which is described in more detail in the section entitled “Loans and loans held for sale — Commercial loan portfolio.”

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

Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan scoring processes.

We maintain an active concentration management program to mitigate concentration risk in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower.

Allowance for loan and lease losses

We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology used is described in Note 1 (“Basis of Presentation and Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 110 of our 2020 Form 10-K. Briefly, the ALLL estimate uses various models and estimation techniques based on our historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts and other relevant factors. As described in Note 1 (“Summary of Significant Accounting Policies”) of our 2020 Form 10-K, on January 1, 2020, we adopted ASC 326, Financial Instruments — Credit Losses, and as such, an expected credit loss methodology, specifically current expected credit losses for the remaining life of our loans and leases, is used to estimate the appropriate level of the ALLL. The ALLL at March 31, 2021, represents our best estimate of the lifetime expected credit losses inherent in the loan portfolio at that date.

As shown in Figure 27, our ALLL from continuing operations decreased by $188 million, or 11.6%, from December 31, 2020. The commercial ALLL decreased by $162 million, or 14.7%, from December 31, 2020, through March 31, 2021, driven by updated economic forecasts that reflect improved economic outlooks, as well as favorable commercial portfolio asset quality migration. Our consumer ALLL decreased by $26 million, or 4.9%, from December 31, 2020, through March 31, 2021, driven by updated economic forecasts that reflect improved economic outlooks.

Figure 27. Allocation of the Allowance for Loan and Lease Losses

			March 31, 2021												December 31, 2020
dollars in millions			Amount			Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans						Amount			Percent of Allowance to Total Allowance			Percent of Loan Type to Total Loans
Commercial and industrial			$	596		41.4		%	52.0		%				$	678		41.7		%	52.3		%
Commercial real estate:
Commercial mortgage			256			17.8			12.6						327			20.1			12.5
Construction			45			3.1			2.1						47			2.9			2.0
Total commercial real estate loans			301			20.9			14.7						374			23.0			14.5
Commercial lease financing			40			2.8			4.0						47			2.9			4.3
Total commercial loans			937			65.1			70.7						1,099			67.6			71.1
Real estate — residential mortgage			100			7.0			10.2						102			6.3			9.2
Home equity loans			157			10.9			9.1						171			10.5			9.2
Consumer direct loans			126			8.8			4.8						128			5.3			4.7
Credit cards			80			5.6			1.0						87			7.9			1.0
Consumer indirect loans			38			2.6			4.2						39			2.4			4.8
Total consumer loans			501			34.9			29.3						527			32.4			28.9
Total ALLL — continuing operations (a)			$	1,438		100.0		%	100.0		%				$	1,626		100.0		%	100.0		%

(a)Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $33 million at March 31, 2021, and $36 million at December 31, 2020.

Net loan charge-offs

Figure 28 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 29.

Net loan charge-offs for the three months ended March 31, 2021, increased $30 million compared to the year-ago quarter. For the remainder of 2021, we expect net loan charge-offs to average loans to be between 35 to 45 basis points which is in line with or below our long-term financial targets.

Figure 28. Net Loan Charge-offs from Continuing Operations (a)

			2021						2020
dollars in millions			First						Fourth			Third			Second			First
Commercial and industrial			$	65					$	104		$	92		$	66		$	55
Real estate — Commercial mortgage			34						1			11			2			2
Real estate — Construction			—						—			—			—			—
Commercial lease financing			3						19			10			3			2
Total commercial loans			102						124			113			71			59
Real estate — Residential mortgage			(1)						—			(1)			2			—
Home equity loans			1						—			1			1			2
Consumer direct loans			6						6			6			8			10
Credit cards			4						5			7			10			9
Consumer indirect loans			2						—			2			4			4
Total consumer loans			12						11			15			25			25
Total net loan charge-offs			$	114					$	135		$	128		$	96		$	84
Net loan charge-offs to average loans			.46		%				.53		%	.49		%	.36		%	.35		%
Net loan charge-offs from discontinued operations — education lending business			—						$	1		—			—			$	1

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

Figure 29. Summary of Loan and Lease Loss Experience from Continuing Operations

			Three months ended March 31,
dollars in millions			2021			2020
Average loans outstanding			$	100,728		$	96,174
Allowance for loan and lease losses at the end of the prior period			$	1,626		$	900
Cumulative effect from change in accounting principle (a)			—			204
Allowance for loan and lease losses at beginning of period			1,626			1,104
Loans charged off:
Commercial and industrial			73			60
Real estate — commercial mortgage			35			3
Real estate — construction			—			—
Commercial lease financing			4			2
Total commercial loans			112			65
Real estate — residential mortgage			—			—
Home equity loans			2			4
Consumer direct loans			8			12
Credit cards			6			11
Consumer indirect loans			7			9
Total consumer loans			23			36
Total loans charged off			135			101
Recoveries:
Commercial and industrial			8			5
Real estate — commercial mortgage			1			1
Real estate — construction			—			—
Commercial lease financing			1			—
Total commercial loans			10			6
Real estate — residential mortgage			1			—
Home equity loans			1			2
Consumer direct loans			2			2
Credit cards			2			2
Consumer indirect loans			5			5
Total consumer loans			11			11
Total recoveries			21			17
Net loan charge-offs			(114)			(84)
Provision (credit) for loan and lease losses			(74)			339
Allowance for loan and lease losses at end of period			$	1,438		$	1,359
Liability for credit losses on lending-related commitments at the end of the prior period			$	197		$	68
Liability for credit losses on contingent guarantees at the end of the prior period			—			7
Cumulative effect from change in accounting principle (a), (b)			—			66
Liability for credit losses on off-balance sheet exposures at beginning of period			197			141
Provision (credit) for losses on off-balance sheet exposures			(19)			20
Liability for credit losses on off-balance sheet exposures at end of period (c)			$	178		$	161
Total allowance for credit losses at end of period			$	1,616		$	1,520
Net loan charge-offs to average total loans			.46		%	.35		%
Allowance for loan and lease losses to period-end loans			1.42			1.32
Allowance for credit losses to period-end loans			1.60			1.47
Allowance for loan and lease losses to nonperforming loans			197.5			215.0
Allowance for credit losses to nonperforming loans			222.0			240.5
Discontinued operations — education lending business:
Loans charged off			$	1		$	2
Recoveries			1			1
Net loan charge-offs			$	—		$	(1)

(a)The cumulative effect from change in accounting principle relates to the January 1, 2020, adoption of ASU 2016-13.

(b)For the period ended March 31, 2020, excludes $4 million related to the provision for other financial assets.

(c)Included in "Accrued expense and other liabilities" on the balance sheet.

Nonperforming assets

Figure 30 shows the composition of our nonperforming assets. As shown in Figure 30, nonperforming assets at March 31, 2021, decreased $147 million from December 31, 2020. This decrease was primarily driven by the completion of the sale of a large commercial OREO asset at a small gain during the first quarter of 2021.

Under the CARES Act as well as banking regulator interagency guidance, certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by the COVID-19 pandemic may not be reported as past due. Refer to Note 4 (“Asset Quality”) under the heading “Nonperforming and Past Due Loans.”

See Note 1 (“Basis of Presentation and Accounting Policies”) under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” and Note 1 (“Summary of Significant Accounting Policies”) of our 2020 Form 10-K for a summary of our nonaccrual and charge-off policies.

Figure 30. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations

dollars in millions			March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Commercial and industrial			$	387		$	385		$	459		$	404		$	277
Real estate — commercial mortgage			66			104			104			91			87
Real estate — construction			—			—			1			1			2
Total commercial real estate loans (a)			66			104			105			92			89
Commercial lease financing			8			8			6			9			5
Total commercial loans (b)			461			497			570			505			371
Real estate — residential mortgage			95			110			96			89			89
Home equity loans			148			154			146			141			143
Consumer direct loans			5			5			3			3			4
Credit cards			3			2			2			2			3
Consumer indirect loans			16			17			17			20			22
Total consumer loans			267			288			264			255			261
Total nonperforming loans			728			785			834			760			632
OREO			12			100			105			112			119
Nonperforming loans held for sale			47			49			61			75			89
Other nonperforming assets			3			3			3			4			4
Total nonperforming assets			$	790		$	937		$	1,003		$	951		$	844
Accruing loans past due 90 days or more			$	92		$	86		$	73		$	87		$	128
Accruing loans past due 30 through 89 days			191			241			336			419			393
Restructured loans — accruing and nonaccruing (c)			376			363			306			310			340
Restructured loans included in nonperforming loans (c)			192			229			168			166			172
Nonperforming assets from discontinued operations — education lending business			5			5			6			7			7
Nonperforming loans to period-end portfolio loans			.72		%	.78		%	.81		%	.72		%	.61		%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets			.78			.92			.97			.89			.82

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

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

(c)Restructured loans (i.e., TDRs) are those for which Key, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance.

Figure 31 shows the types of activity that caused the change in our nonperforming loan balance during each of the last five quarters.

Figure 31. Summary of Changes in Nonperforming Loans from Continuing Operations

			2021						2020
in millions			First						Fourth			Third			Second			First
Balance at beginning of period			$	785					$	834		$	760		$	632		$	577
Loans placed on nonaccrual status			196						300			387			293			219
Charge-offs			(135)						(160)			(150)			(111)			(100)
Loans sold			(13)						(9)			(6)			(5)			(4)
Payments			(37)						(83)			(83)			(29)			(31)
Transfers to OREO			(3)						(3)			—			—			(3)
Transfers to nonperforming loans held for sale			—						—			—			—			—
Transfers to other nonperforming assets			—						—			—			—			—
Loans returned to accrual status			(65)						(94)			(74)			(20)			(26)
Balance at end of period			$	728					$	785		$	834		$	760		$	632

Operational and compliance risk management

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

We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules, and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.

The Operational Risk Management Program provides the framework for the structure, governance, roles, and responsibilities, as well as the content, to manage operational risk for Key. The Compliance Risk Management Program serves the same function in managing compliance risk for Key. The Operational Risk Committee and the Compliance Risk Committee support the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. Both the Operational Risk Committee and the Compliance Risk Committee include attendees from each of the Three Lines of Defense. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance Risk Management functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Risk Management Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior

management and the Risk and Audit Committees and independently supports the Risk Committee’s oversight of these controls.

Cybersecurity

We maintain comprehensive Cyber Incident Response Plans, and we devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, shut down access to systems for ransom, or cause other damage. As the threat landscape continues to evolve, critical infrastructure, including financial services, remains a top target for cyberattacks. The emergence of COVID-19 has created a unique situation globally with many more employees and third-party service providers working from home, which inherently introduces additional risk. Cyberattacks may include, but are not limited to, attacks that are intended to disrupt or disable banking services and prevent banking transactions, attempts to breach the security of systems and data, and social engineering attempts aimed at tricking employees and clients into providing sensitive information or executing financial transactions.

Cyberattack risks may also occur with our third-party technology service providers and may result in financial loss or liability that could adversely affect our financial condition or results of operations. Cyberattacks could also interfere with third-party providers’ ability to fulfill their contractual obligations to us. Recent high-profile cyberattacks have targeted retailers, credit bureaus, and other businesses for the purpose of acquiring the confidential information (including personal, financial, and credit card information) of customers, some of whom are customers of ours. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. We may also incur expenses to enhance our systems or processes to

protect against cyber or other security incidents. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by us and our clients. To date, Key has not experienced material disruption of our operations, or material harm to our customers, as a result of the heightened threat landscape or cyberattacks.

As described in more detail starting on page 72 of our 2020 Form 10-K under the heading “Risk Management — Overview,” the Board serves in an oversight capacity ensuring that Key’s risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board’s Risk Committee has primary oversight for enterprise-wide risk at KeyCorp, including operational risk (which includes cybersecurity). The Risk Committee reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, including cyber-related risk. The ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk (including cyber-related risk) and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Committee reports to the Board’s Risk Committee.

GAAP to Non-GAAP Reconciliations

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

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

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

of results as reported under GAAP.

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

						Three months ended
dollars in millions						3/31/2021			12/31/2020			9/30/2020			6/30/2020			3/31/2020
Tangible common equity to tangible assets at period-end
Key shareholders’ equity (GAAP)						$	17,634		$	17,981		$	17,722		$	17,542		$	17,411
Less:			Intangible assets (a)			2,842			2,848			2,862			2,877			2,894
			Preferred Stock (b)			1,856			1,856			1,856			1,856			1,856
			Tangible common equity (non-GAAP)			$	12,936		$	13,277		$	13,004		$	12,809		$	12,661
Total assets (GAAP)						$	176,203		$	170,336		$	170,540		$	171,192		$	156,197
Less:			Intangible assets (a)			2,842			2,848			2,862			2,877			2,894
			Tangible assets (non-GAAP)			$	173,361		$	167,488		$	167,678		$	168,315		$	153,303
			Tangible common equity to tangible assets ratio (non-GAAP)			7.5		%	7.9		%	7.8		%	7.6		%	8.3		%
Average tangible common equity
Average Key shareholders’ equity (GAAP)						$	17,769		$	17,905		$	17,730		$	17,688		$	17,216
Less:			Intangible assets (average) (c)			2,844			2,855			2,870			2,886			2,902
			Preferred Stock (average)			1,900			1,900			1,900			1,900			1,900
			Average tangible common equity (non-GAAP)			$	13,025		$	13,150		$	12,960		$	12,902		$	12,414
Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)						$	591		$	549		$	397		$	159		$	118
Average tangible common equity (non-GAAP)						13,025			13,150			12,960			12,902			12,414
Return on average tangible common equity from continuing operations (non-GAAP)						18.25		%	16.61		%	12.19		%	4.96		%	3.82		%
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)						$	595		$	556		$	401		$	161		$	119
Average tangible common equity (non-GAAP)						13,025			13,150			12,960			12,902			12,414
Return on average tangible common equity consolidated (non-GAAP)						18.37		%	16.82		%	12.31		%	5.02		%	3.86		%

(a)For the three months ended March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, intangible assets exclude $4 million, $4 million, $5 million, $5 million, and $6 million, respectively, of period-end purchased credit card receivables.

(b)Net of capital surplus.

(c)For the three months ended March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, average intangible assets exclude $4 million, $5 million, $5 million, $6 million, and $7 million, respectively, of average purchased credit card receivables.

The cash efficiency ratio is a ratio of two non-GAAP performance measures, adjusted noninterest expense and total taxable-equivalent revenue. Accordingly, there is no directly comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset amortization from the calculation. We believe this ratio provides greater consistency and comparability between our results and those of our peer banks. Additionally, this ratio is used by analysts and investors to evaluate how effectively management is controlling noninterest expenses in generating revenue, as they develop earnings forecasts and peer bank analysis.

						Three months ended
dollars in millions						3/31/2021			12/31/2020			9/30/2020			6/30/2020			3/31/2020
Cash efficiency ratio
Noninterest expense (GAAP)						$	1,071		$	1,128		$	1,037		$	1,013		$	931
Less:			Intangible asset amortization			15			15			15			18			17
Adjusted noninterest expense (non-GAAP)						$	1,056		$	1,113		$	1,022		$	995		$	914
Net interest income (GAAP)						$	1,005		$	1,035		$	1,000		$	1,018		$	981
Plus:			Taxable-equivalent adjustment			7			8			6			7			8
			Noninterest income (GAAP)			738			802			681			692			477
Total taxable-equivalent revenue (non-GAAP)						$	1,750		$	1,845		$	1,687		$	1,717		$	1,466
Cash efficiency ratio (non-GAAP)						60.3		%	60.3		%	60.6		%	57.9		%	62.3		%

Critical Accounting Policies and Estimates

Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical – not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”) beginning on page 108 of our 2020 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. Note 1 (“Basis of Presentation and Accounting Policies”) of this report should also be reviewed for more information on accounting standards that have been adopted during the period.

In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance or require us to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may prove to be inaccurate, or we may find it necessary to change them.

We rely heavily on the use of judgment, assumptions, and estimates to make a number of core decisions, including accounting for the ALLL; contingent liabilities, guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities that involve valuation methodologies. In addition, we may employ outside valuation experts to assist us in determining fair values of certain assets and liabilities. A brief discussion of each of these areas appears on pages 91 through 96 of our 2020 Form 10-K. During the first three months of 2021, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.

Accounting and Reporting Developments

Accounting Guidance Pending Adoption at March 31, 2021

Standard			Required Adoption			Description			Effect on Financial Statements or Other Significant Matters
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 Early adoption is permitted.			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, the 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 is not expected to have a material effect on our financial condition or results of operations.
Reference Rate Reform (Topic 848)			December 31, 2022			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.			Key has established an enterprise-wide program to identify and address all LIBOR related issues and will assess the impacts in conjunction with the reference rate transition as it occurs over the next two years.

European Sovereign and Nonsovereign Debt Exposures

Our total European sovereign and Nonsovereign debt exposure is presented in Figure 32.

Figure 32. European Sovereign and Nonsovereign Debt Exposures

March 31, 2021			Short- and Long- Term Commercial Total (a)			Foreign Exchange and Derivatives with Collateral (b)			Net Exposure
in millions
France:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			1			1
Nonsovereign non-financial institutions			$	1		—			$	1
Total			1			1			2
Germany:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			—			—
Nonsovereign non-financial institutions			33			—			33
Total			33			—			33
Italy:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			—			—
Nonsovereign non-financial institutions			17			—			17
Switzerland:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			1			1
Nonsovereign non-financial institutions			—			—			—
Total			—			1			1
United Kingdom:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			$	375		375
Nonsovereign non-financial institutions			—			—			—
Total			—			375			375
Total Europe:
Sovereigns			—			—			—
Nonsovereign financial institutions			—			377			377
Nonsovereign non-financial institutions			51			—			51
Total			$	51		$	377		$	428

(a)Represents our outstanding leases.

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

Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; these exposures are actively monitored by management. We do not have at-risk exposures in the rest of the world.